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Market Analysis: Market Analyst Virgil Robinson

posted on October 21, 2011

Market Analysis: Market Analyst Virgil Robinson

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson. Virgil, welcome back.

Robinson: Thank you, Mark. Nice to be here.

Pearson: Well, a lot of talk about what's happening in Europe and the impact that's having on the dollar and the impact that could have on agricultural experts agricultural exports from the united states. Certainly all big issues out there. But we've still got some fundamental issues. We've got a wheat crop that has been getting planted finally. We finally got little bit of rain in parts of the plains. We've got a corn and soybean crop that people are in the midst of harvesting. So there's a lot of fundamental things that are happening out there as well. Let's get started first. Let's talk about what you see in this wheat market and where you see this thing going. I know last time you were on, you talked worldwide, globally there was plenty of wheat.

Robinson: Yeah, a couple things, Mark. The hard red winter wheat plantings, sowings, are a bit behind normal, and emergence is a bit behind normal as well, which leads me to the comment regarding the comment regarding the recent NOAA Weather Synopsys, if I might say that. The drought in the southwest remains in place, and at least the 90 day forecast shows little, if any, change, Mark. So clearly there are concerns there regarding the crop prospect. Aside from that, it's simply world production is forecast to exceed world consumption by a pretty significant margin. And that's kind of been the basis by which price discovery here in the United States as well as worldwide wise has been going through that process.

Pearson: The demand picture for wheat, strong. Again, amidst plentiful supplies, it's hard to tell.

Robinson: Mark, a couple things here I think we should inject. Seasonally speaking, the hard red winter wheat futures contract Kansas City, the Minneapolis Hard Red Spring Futures Contract have a pretty strong tendency to bottom in the October/November period of time and then move irregularly higher into the spring of the next year. I think the hard red spring market I'll use that for our illustration tonight, I think seasonally it has in fact made its cash lows. We've had kind of a double bottom type situation made in both August and September, and historically that's been a pretty good indicator. So I envision wheat futures, including soft red wheat, the Chicago Contract, moving irregularly higher, kind of trailing, if you will, and tagging along with the other coarse grains led by corn over the course of the next several weeks. I don't think this is the best opportunity to finalize a wheat sale.

Pearson: All right. So your outlook is for stronger prices, so you would not be making sales at this point.

Robinson: I wouldn't unless the market meets your crop budget objective and, clearly, I wouldn't argue with that. But if you are timing or trying to time the market, I would prefer to defer sales to a later point in the calendar.

Pearson: You mentioned corn. You think corn is going to strengthen. Obviously we're in the midst of harvest. We've got seasonality's there too.

Robinson: Right. Seasonably I guess we might as well speak about it. At least in the three and five year seasonals that I track, Mark, corn futures have a very strong tendency to bottom in September and/or October, and clearly we are in the window of time. I can tell you that many of the cash indicators to include the basis, which in select markets is as strong as I've seen it, this time of year ever in the last 37 years.
Caring charges, for the most part, have narrowed. And that, in my mind, is pretty indicative of a strong demand based commodity. So here again, Mark, unless you happen to be in one of those areas where you've made, for example, a hedge to arrive contract based on December futures and your intent prior to what's developed in your local market was to roll it forward and capture additional carry or something near full carry that hasn't materialized, the market is more or less telling you, hey, I want the commodity now.
So it presents an opportunity for those people in that particular contract situation.

Pearson: Absolutely. Make cash sales.

Robinson: Particularly, Mark, if you pay attention to your local basis and what that cash will do for you over that period of time, like a six or seven month period of time. There's opportunity costs involved historically.

Pearson: Absolutely. Let's talk about soybeans, Virgil, and what you see happening as far as the soybean market is concerned. We talked about South American sales which, again, we wouldn't normally see those kinds of things at this point as they clean up, getting ready for planting down there and growing their crop. As we are getting ready to harvest this crop and in fact finishing up harvest in the soybean crop here in the United States, certainly some seasonality there too.

Robinson: Again, Mark, I think it's worthy of us noting that basis levels in many, many areas are as strong or stronger than I've seen in many, many years here in this harvest window. So it would suggest to me that they are looking to source that commodity, that physical comedy. So make some kind of a calculation, if you're in position here to do so. What would soybeans be worth, six or seven months the road in comparison to what they're worth, perhaps, today, given a strong basis incentive that many markets have.

Pearson: All right. Maybe take advantage of that at this point. And looking ahead to next year, USDA Report came out, both corn and beans and wheat. As we look forward, again, relatively tight going forward so it's hard to get too bearish about any of these markets, is it?

Robinson: I think if we use the stocks to use ratios, Mark we speak of the frequently as a proxy of supply certainly in corn at 7 percent here in the U.S. and 14 percent worldwide wise, as you compare those to years past, those imply very tight supplies, so the margin for a crop shortfall and that opportunity is going to present itself here in the Southern Hemisphere over the course of the next few weeks. Clearly, we can't tolerate that, Mark. We need to produce a big crop of corn, a big crop of soybeans in the Southern Hemisphere.

Pearson: And we're going to see more corn down there. We'll see what happens. Virgil, talk about the cotton market now too. Obviously we've pulled back some of that one. It's had some extremely lofty There are areas we're seeing some pullback now. There's always a little concern about where the global economy is going. It seems to be growing at about 3.5 percent GDP, so we should be okay. But certainly, you know, fashion trends change and things are going to impact cotton.

Robinson: You know, the macros, Mark, relatively slow growth, as least defined by forecasts here in the U.S., and high unemployment are not traditionally two good indicators with respect to demand. That's precisely what we have at present here in the U.S. Again, another classical illustration of where world production world cotton production is forecast to exceed or be well in excess of projected demand, Mark. So even though we had a crop struggle down through Georgia, down through Texas, and areas in the South, Southeast, in crops were subpar, globally supplies are deemed very adequate, Mark. And as a result of that, prices have tumbled. Here again, we are speaking about a lot of seasonals, but I think it's worth noting them. In the last five years, cotton futures have had a tendency to bottom in the month of November
And then work irregularly higher into February/March. I think we'll follow that pattern again this year so, again, if you're in position financially to defer sales until the turn of the calendar or sometime in 2012, that's what I would suggest.

Pearson: All right. Good point. Now, let's talk about livestock. And I want to save some extra time here because where never I've been lately; I've been running into questions about what this cattle market could be like in 2012 and 2013. We've had a lot of problems. You mentioned the drought, the issues down there. Rebuilding a herd. Certainly supply side, we have to be herding, Virgil. The economy just noses along and here in the United States we see continued improvement. I talk to a lot of folks who are telling me this beef market could really take off. What's your thought?

Robinson: Well, again, as mentioned, Mark, we've got a couple of headwinds here that need to be noted, and that is projected slow economic growth in the U.S. and relatively high unemployment, so we need to at least acknowledge those from a demand perspective. This afternoon, Cattle on Feed Report, as well as the Cold Storage Report, Mark, a couple of caution flags popped up. Cattle on feed, at least in my opinion, the sum of cattle on feed, October 1 versus a year ago placements September versus a year ago and marketed in September versus a year ago, I thought was bearish, Mark, indicating again there's an ample supply of beef. Cold Storage Report, my take there was month over month frozen beef inventories grew about 5 percent. Year over year up 11 percent. That doesn't suggest to me any shortage of product.
Now, the export trade has been brisk and strong. That's been something of a function of a weak dollar. Now, I don't see that changing, Mark, but should there be some type of shock, whether it's in Europe or Latin America or the United States, then clearly the market changes fundamentally. So we need to understand that as well. I think the two reports I alluded to have set the tone at least for next week's market, and I think that will be lower, Mark. 2012 it's currently projected will produce 4 to 5 percent less beef than this year. That would suggest it has supported all time highs in cattle futures.

Pearson: Absolutely.

Robinson: So we have in fact done that. I think the market is fully in tune with that. What we need now is to see and sustain disappearance, and one of the best ways we measure that is in those weekly Cold Storage Reports.

Pearson: Keep tracking those. Maybe not see that explosive action next year that people are anticipating out there. We've had it now. We've got good prices now.

Robinson: Yeah. And I think again, Mark, it needs to be acknowledged. Beef exports are back at base levels. As a matter of fact, they're projected to be a 2011 record large. Can we sustain that moving forward? Well, clearly that's dependent on global economies, on, quote, no major shocks developing. I think it's a time to be cautious as you buy inputs. Feeder cattle are also at all time highs. And inputs clearly are a factor here as well, feed costs, Mark.

Pearson: Real quick, Virg, outlook on the hog market?

Robinson: Kind of shadow corn excuse me, beef to some extent. But again, the cold storage report I thought was bearish, Mark. Month over month frozen pork inventories went up 10 percent. Year over year they're up 20 percent. You need to sustain the export trade. Clearly need to improve did appearance here at home. I think through the fourth quarter of this year, lower hog prices.

Pearson: All right. Are we expanding the hog herd?

Robinson: Slowly, slowly. Technology and genetics is improving that and making that possible, Mark. I do see the, at least as we visit tonight, a very small inkling of sows being held back for breeding purposes.
Pearson: Virgil Robinson, thank you so much. That wraps up this edition of Market to Market. But if you’d like more information from Virg on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts, streaming video of our program and links to our Twitter feed and Facebook page-- all FREE -- at the Market to Market Web site.
And be sure to join us again next week when we'll examine the market impact of a rapidly progressing harvest. Until then, thanks for watching. I'm Mark Pearson. Have a good week...

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