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Market Analysis: Virgil Robinson and Walt Hackney

posted on December 9, 2011

Market Analysis: Virgil Robinson and Walt Hackney

Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Virgil Robinson and Walt Hackney. Gentlemen, welcome back. Thank you for being with us.

Hackney: Appreciate it.

Robinson: Hello, Mark.

Pearson: Happy holidays. Well, we didn't get much of a present from the USDA on Friday, Virgil. A little bit of a disappointing report is interpreted by the grain markets, although Walter is smiling about it. What's your interpretation?

Robinson: Well, Mark, I thought the data was most bearish with respect to wheat and then, secondly, soybeans. And, surprisingly, wheat futures closed steady higher on the day, not higher on the week, but certainly that would suggest to me a lot of this supply discussion has been factored in, Mark. Price discovery has done its work. So oftentimes there'll be a recovery in price in January or February in wheat futures markets, and I think that might be fueled this year by continued concern about the drought in the Southern, Southwestern part of the United States and secondly, the concern that I think will develop and grow with respect to the La Nina event as it pertains to Argentina and Southern Brazil. So I'm con -- I better retract that statement. I'm of the opinion there will be some price recovery in soft red wheat as well as the hard red and spring hard red wheat futures contracts in the next couple of months. At that point then make sales or create minimum price and think about perhaps even pricing some new crop wheat.

Pearson: There's no question there's been a huge shift of wheat in the last year - they all confirmed that. I'll get Walt's comment on that too. Talk a little bit about with that kind of a shift and that kind of demand, worldwide there's still plenty of wheat out there.

Robinson: Correct. That was, again, documented in today's WASDE data, Mark. The crop in Argentina, Australia, Canada, and China specifically all increased month over month. So wheat production outside of the United States was significantly larger year over year, and that accounts for much of the price pressure here in the United States.

Pearson: Do you have a target, Virgil, in February, January/February of where you think --

Robinson: Mark, I don't have any specific price targets tonight, but I do believe there will be some price improvement, and I'm not talking about a 25 or 30 percent price improvement. Something in the vicinity of ten to 20 percent. I would use that to create minimum price or make some sales.

Pearson: Let's talk about the corn market as well, because there's certainly a lot of interest in that one. Like you say, interesting report as far as the corn stocks were concerned. Apparently we're really producing a lot of ethanol.

Robinson: Near record production last week. You know, with the expiration of the blender's credit rapidly approaching, I think that's juiced that production a little bit, Mark. So we're using plenty of corn to produce ethanol. Export sales to this point, well, they haven't been terrible. They haven't been particularly strong. That's been a factor. As you mentioned domestically, the substitution of other feed ingredients for corn has taken a toll on disappearance.

Pearson: With that being said, Virgil, the pullback that we've had in corn, will we see a similar recovery in wheat in January and February?

Robinson: Well, it would be unusual if the two would diverge, but certainly the relationship between wheat futures and corn futures could change, Mark. We've had about a six- or seven-month period here where corn has in fact traded well above wheat futures. So certainly just a change in the spread relationship could bring wheat futures higher and leave corn relatively flat. But I think there will be some price improvement in corn as well. Again, I can't divorce myself from the weather concerns that at least I have with regard to the conditions here in the U.S. And there is still concern and a genuine risk of the La Nina that is having some affect on production in the Southern Hemisphere.

Pearson: And that's going to continue to be a concern during the growing season. There's been a lot of acreage estimates out there on corn, Virgil, 94 1/2 and 95 million acres. Are you in that camp?

Robinson: I've heard that numerous times, Mark. Again, and the rationale behind that projection is a lot of last year's abandoned acreage will in fact be -- something this crop season. And corn is a candidate as well as some CRP acres perhaps coming into play. The one common barometer that we can kind of watch routinely is that ratio between new crop soybean futures and new crop corn futures. At this point, Mark, it's encouraging more corn acres than not. So somewhere in that 93- to 95-million-acre estimate is rational.

Pearson: All right. I'm hearing a lot of comments that there is still a lot of farmer-held corn at this point, which is kind of scary because we had some pretty good prices in August, but a lot of people are concerned about what that crop actually was going to turn out to be. So not totally unheard of, but with all the corn sitting out there, Virgil, and some of the acreage issues, we are going to need some kind of a weather phenomenon to get things going. As we look at where corn prices are as we sit here tonight and we looking at what's happening out in 2012, where we are also seeing some weakness, what are you telling produces for next year?

Robinson: Well, I think a lot of them, Mark, first of all, have as strong a balance sheet as they've ever had, so the notion of them needing to generate in cash at the turn of the calendar is probably pretty debatable. I think they'll hold that grain for an extended period of time, one with regards to the weather concerns that have taken shape and, two, I think that demand, at least as measured by the stocks-to-use ratio, and I'll refer both to the U.S. and the global or the world, when you look at those and use those as kind of a proxy for supply and compare those to years past, they are not large, Mark. They are relatively small. So the margin for crop a shortfall globally or here in the U.S. is small. And as a result, that risk, in my opinion, should prompt some continued strong demand beneath this corn market both domestically, as well as internationally.

Pearson: So you are in no hurry to sell next year's corn.

Robinson: Well, Mark, gosh, I've got to believe that a lot of them have sold and made sales and what's left is perhaps the grain that they often times will kind of gamble with, for lack of a better term. And as mentioned, their debt to asset ratio are as good as they've been in many, many years. I just don't think there's a real concern for the need of cash right now. And with two or three genuine risks yet looming, I think they're going to be pretty strong holders of the grain for extended periods of time.

Pearson: Let's talk about soybeans. You said USDA Report was a little bit friendlier.

Robinson: Well, not particularly on soybeans, Mark. I thought it was most constructive to the corn market. Beans, they increased U.S. carryout by 25 or 30 million bushels, reduced exports, reduced crush modestly. Internationally they did increase ending stocks modestly, Mark. So it does continue to suggest that soybean supplies globally, particularly with the prospect and the possibility of a pretty sizable crop in the Southern Hemisphere, are fully adequate. Now, that doesn't eliminate the risk of weather concerns yet developing in South America and Argentina as mentioned. There are some areas beginning to get fairly dry.
So I think we'll hear more about that the balance of this year into the first part of next year. If you've not made a sale to this point in time, then clearly you are on guard here and fully alerted that any kind of a 30- to 50-cent rally, you better do something, even if it's just create a minimum price, Mark, and that's what I'd do in new crop. I wouldn't finalize any price at this point in the calendar.

Pearson: And you mentioned La Nina several times, and that's a big concern.
A big concern about the dry weather that we've been experiencing in big parts of the Corn Belt too.

Robinson: Yeah, I think that's true, Mark. All one needs do is look at the most recent U.S. Drought Index and it's fully documented. It's a genuine concern.

Pearson: You can sure see it. Also, Virgil, when it comes to terms of making sales, you're looking for that rally to sell old crop. Are you interested at all in any new-crop coverage for 2012?

Robinson: Mark, at this point in the calendar, I'll continue to suggest the minimum price. I still feel there are genuine production risks that will yet need to be factored into the marketplace and I think provide some opportunity. So if you can cover costs and have a pretty good grip on inputs in your crop budget,
I don't have any problem with creating a minimum price or some type of small percentage sale.

Pearson: All right. Real quick, Virgil, the cotton market. As we sit here tonight,
where are we headed?

Robinson: Cotton futures, Mark, are kind of stymied here between $90 and $100. It would be my best opinion those who have the opportunity here to go ahead and commit themselves to selling cash because the basis is really strong, at least the way I track it. It's unusually strong. I would take advantage of at least that strong demand signal. Make a cash sale and then replace it either with an option or some type of vertical call spread. I think leverage on your money is pretty significant here and a good opportunity in that regard.

Pearson: Let's move over to the livestock side of the picture. Walt Hackney is with us here tonight. Walt, a big selloff in the futures market on cattle, feeder cattle and hogs. That whole sector was under some pressure. Is there a fundamental reason here, or is this just some concerns happening?

Hackney: I don't believe it's as much fundamental as it is loss of confidence among the traders on the board. And then subsequently it filtered back to the CME. There was no fundamental reason for the Monday selloff that we had, for instance, this week on the futures. There was no fundamental reason except the lack of confidence. And then the question is when are they going to be able to recover, maybe even identify, the lost funds that seem to be involved in that bankruptcy.

Pearson: The MF Global situation.

Hackney: Yes.

Pearson: That's playing that big of a role in the market right now.

Hackney: I think it had a much bigger role than any of us realized. The futures trade this year on livestock has been tenuous at best. And there's been a lot of anxiety over should I hedge, should I not hedge. Some of them -- and we went ahead and we did a massive amount of hedging this year. The market maintained a better base. It was an affirmative raise in the Merck and on the board. You couldn't really go wrong by working ahead. Then all of a sudden that collapses in on the traders, and the traders and the identification of the lost funds simply sit that market on its ear, and it hasn't fully recovered as we speak.

Pearson: It has not. Let's move over and let's talk about the cash market and what you see happening for fed cattle here for the balance of this year and head into the first quarter of 2012. Walter, what do you see?

Hackney: Well, it's a known fact -- and we've discussed it on your show here before -- inventory availability is going to become more and more limited as we get into and through the second quarter of 2012. The price of corn, the involvement of corn market into the feeding rations is going to have a great deal of effect in this trade as we go forward. Right now the feedlots are maintaining a very manageable inventory of fed cattle, particularly when the packers are holding the kill at oh, 650,000 -- -60,000 head of cattle a week. The feedlots are able to continue supporting that kill. But then again, they are not under delivering on the cattle. The cattle in fact are actually lighter progressively from month to month than they had been for a long time. Now, if corn goes - let's use a heaven-forbid figure of $4.50, $5.00 a bushel, if it would happen to go there, you're going to find heavier cattle. You're going to find feedlots, regardless of the profit margin they've got in these fat cattle; you're going to have feedlots overfeeding. They are going to be bullish by design, and it may not be the thing to do.

Pearson: That's going to be interesting to see. If we do hit those kinds of levels, those breakevens are going to look better. But the heavier cattle are going to be what you're going to save. What's that going to do to us?

Hackney: Well, what it will do to us until, not unless but until, beef demand improves and we've got a sluggish, stagnant dressed-beef trade nationally and internationally and it isn't competing with import and it isn't competing with the poultry, it's sitting out here on an island of its own, and really the best movement that we've had in it are in the luxury cuts, interestingly, in the high-end restaurants. The consumer is laying back on a limited budget, buying cheaper pork and cheaper poultry.

Pearson: All right. Well, price predictions, Virgil -- or Walter, for the first quarter of next year? What do you think we're going to see?

Hackney: I think you can watch where the mercantile is, and I think that would be a realistic number. I think $1.20, $1.22 would be a top-side figure to expect going into next year. You've got to understand that while the Merck lost five bucks a hundred last week on fed cattle, we lost five bucks a hundred today on cash cattle in the feedlots. So it isn't to say that we can't lose it all back if we're not very, very careful in our marketing.

Pearson: All right. Well, take heed, folks. Feeder cattle market, your outlook there for this calf market for spring and fall? What do you think we're going to see in 2012?

Hackney: Well, as you go forward through those periods, then we're going to see a continued bullishness due to demand of feeder cattle on a limited amount of supply because of the cowherd that is sitting out there at a fifty-year low. And the replacement effort by ranchers and so forth just has not and is not picking up the slack. So we are going to have an availability issue as we get into the spring. As we speak, that run of feeder cattle for this year is primarily over with. And generally speaking, the ranch calves have moved. There at point of destination. The yearling cattle have been moved, very aggressive marketing, and rightly so with the profits producers had. They've moved those yearlings out, and it's like finding hen's teeth to get the right kind of yearlings right now.

Pearson: It's is always a disappointment too. Talk about the hog market and where you think we're headed there on the pork front.

Hackney: Well, it would appear that there is more bearishness in the hog market as we speak. Back early on in the mid to latter part of December, we were having an inventory issue of finding enough hogs. As we learned, the inventory was out there and those hogs were on the feeding force by the more corporate or mega unit operations that were designing a heavier hog for the foreign export trade. Now, that has actually done all that it was intended to do. And so there's been a gradual buildup of average market weights in these hogs. Last week we were 1/2 of 1 pound heavier. That doesn't sound like much until you throw that in 2.3 million hogs a week. So we have that issue of tonnage that we've got to be sensitive to. Packers are having no problem, as we speak, finding enough hogs to kill 430,000 head of hogs a day, possibly 180-190,000 hogs this Saturday. That in itself would put that kill well over 2 million head. Well, with the additional tonnage and with the ability or inability, if you will, of any of the other beef and poultry commodities to really compete with cheaper pork, it's going to be hard to get that market off high center.

Pearson: It's going to be interesting to see pricewise. What do you think we're going to see, Walt, for hogs?

Hackney: Welcome I think that your issue of 92, $93 hogs, maybe 94. The potential is there. But you have to remember we're going to set records this year on pig numbers per litter. We may not have as much expansion as a lot of people would have anticipated with some profit that the producers are making.
But we're producing a record number on pigs per litter; some are estimating ten pigs per litter. And that's going to add market hogs to our system.

Pearson: Absolutely. That's bigger than the old one-ton litters. Walt Hackney, thank you so much. Virgil, thank you very much. We sure appreciate it. Great insights from both of you, but that will wrap up this edition of "Market to Market." Now, if you'd like more information from Walt and Virgil on where these volatile markets just may be headed, visit the Market Plus page at our website. You'll find expanded market analysis, audio podcasts, streaming video of our program, and links to our Twitter feed and Facebook page. By the way, it's all free at the “Market to Market” website and be sure to join us again next week when we'll examine the outlook for agricultural land values in 2012. So until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture cattle commodity prices corn economy feeders hogs markets news soybeans wheat