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Market Analysis: Darin Newsom

posted on December 16, 2011

Market Analysis: Darin Newsom

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

Pearson: There's some of the air coming out of the commodities. $119-per-ounce decline in gold prices. People are looking at that, saying that the bloom is coming off commodities. Obviously the huge move in the dollar against the euro is going to be another factor we are going to have to deal with going forward.

Newsom: Yeah, that last chart that you showed of the CRB Index really tells the story.
There's a lot of money coming out of commodities right now. As you pointed out, much of it is due to what we are seeing in the dollar. The dollar has had a nice rally here over the last couple months. It's pushing up against some technical resistance, up around the 80.7, something like that, somewhere in there. So what we're seeing is money coming out of commodities into the dollar. It's hard to call the dollar a safe-haven play but it certainly seems to be with no fresh real news in commodities in general that that's where the money is wanting to flow, money wanting to move there until we start to get some fundamental news in the grains and energies. As you said, in gold, there's really nothing in there. Until we start to get some news in there, we're just going to back out of commodities for a while.

Pearson: We have a viewer in Canada named Phil. He says when is this -- when are those noncommercial, all those big funds, when are they going to come rolling back into the commodity markets. Where have they taken their ballgame? Are they buying dollars?

Newsom: I think so. I think that's where the money --

Pearson: Spanish debt?

Newsom: It could be going anywhere right now. All I know is all we're seeing going on in the commodity industry right now, the huge questions about how safe it is, what's it going to be long-term. We're seeing money just, again, move out. There's no fresh news to drive. There's no reason for this traders to be getting excited about commodities right now. Now, when could this change gears? I'm guessing it's probably going to be closer to the spring. We're going to have to fight our way through this winter with really no news whatsoever. Once we get closer to the spring, I do think interest starts to come back into the commodity markets, into energies, into grains, and that could start to bring the money with it again.

Pearson: All right. Well, let's talk some turkey here. Let's talk specifics. Let's start with the wheat market. Again, as you look at week and you look at the world situation, plenty of wheat everywhere. There's a lot of crummy wheat out there.

Newsom: There is. You know, we've been fighting this bearish global supply and demand situation for wheat for years now, and it just doesn't go away. It doesn't matter if the U.S. had a poor crop, poor quality crop, but I think maybe later on in the 2011-2012 marketing year; let's say we get into the springtime, that April/May/June time frame. We might actually start to see some of that fundamental bearishness come out of the market because there is a lot of bad wheat out there you can only sell low quality wheat for so long, so there may be a push later on. Right now, though, short-term, I kind of like the wheat market. It's oversold. It's been beaten up. Noncommercial traders are holding a very large net short futures position, quiet time of year. They could look to step back in, cover some of those positions, and with no sellers out there, might see a little bit of a spark in the wheat market.

Pearson: Okay. So we have to wait to see that occur before we make more sales; is that what you're thinking?

Newsom: Yes, I would not make any sales where we are right now. We're down near some technical support. If it breaks through, we may have to change our tune a bit. But if we look at the Chicago market, Kansas City, down near some levels that really need to hold, then I think we're going to be able to move out here after a while before we make our next round of sales.

Pearson: All right. Let's talk about the corn market, which really gets hit more with the poor quality of wheat out there. We saw Australia selling some of their poor-quality wheat as a feed into China and other countries, so that's going to weigh on the corn market and the corn demand. We've already have a lot of pressure in this corn market, and yet our stocks are still very tight.

Newsom: They are. I think that's the big picture. It seems like the market has gotten used to talking about a tight domestic supply-and-demand situation. It's very tight world supply and demand situation. It's just not fresh news. So for that reason, we're seeing the futures market drift back down. The market seems to be targeting its long-term technical price target of about five and a half. I think it's around about 580, 585 right now, so we've got a little of room to come down. But again, as we get closer to the spring, I think that we're going to see this market really heat up again. I think corn is probably going to lead the way.
Because the global supply-and-demand situation is as tight as it's been since 1973, 1974, not much room for error when we start talking about the weather and the planting and the growing season next year.

Pearson: That will be our catalyst maybe for some stronger prices. How much lower can we go, Darin, at the rate we're going?

Newsom: I really don't think we're going to see the nearby contract go much below five and a half. I don't think we're going to see a lot of pressure on the new-crop December contract as well, maybe 15 to 20, 25 cents down worst-case scenario in the new-crop Dec. At that point I think the Dec. is going to start to get some interest because of all the questions heading into the 12-13 marketing year.

Pearson: The last couple years it's paid for farmers to hold onto grain. We saw it this year in 2011, 2010. Is that kind of the ballgame that's being kept, because everywhere I go, every group I talk to, very few people have sold anything.

Newsom: Yeah, and that's kind of a problem that the market is facing right now. We go back four to six weeks ago, the carry in the future spread was very weak. There was a lot of anticipation for a strong market later in the spring and early summer. What's happened is that carry has strengthened over the last few weeks because the commercial side of the market now realizes all that grain that wasn't being sold that's sitting tight in a bin is going to come on the market later. So they are going to be supplies at the time when they thought it was going to be tight. So that could keep a lid on the type of rally that we see this spring. Normally we rally about 20, 25 percent as far as prices go. So they could keep a lid -- kind of keep us held in check a bit.

Pearson: Let's talk about the soybean market. Really underpinning all this -- we had a tweet from one of our viewers that asked the same question that I was thinking about, and that is the impact of the mf global situation. How much has this played into these prices?

Newsom: You know, you can make an argument that it's been one of the reasons why we've seen all this liquidation coming in the market and we have seen all three grains, see a great deal of noncommercial selling. A week ago, not this Friday but a week ago, we saw that the soybean net long futures position was only about 8500 contracts. That's the smallest it's been since early 2010, a real threat to going into the negative numbers here this week. But that money started to come back in.

Pearson: Was that an action -- was that in reaction to MF Global, or was it seasonal?

Newsom: I think it's a combination of both. I think there isn't that kind of news to keep everybody interested. We've got the dollar doing things. I think MF Global is affecting the markets; it is affecting the flow of investment money. But will it be long-term, I don't think so. I think the money is going to come back.

Pearson: Let's quickly move onto the bean market there, and what are your thoughts there? A little bit of a pullback this week in beans. Really these prices are attractive prices.

Newsom: They are. Again, I wouldn't really want to make any sales in soybeans right now. We tested support near 1070. We held that support of the January contract by getting ready to go into delivery. So the focus is going to shift toward March. But either way, it looks like the bean market is set to rally. Low volume -- excuse me, low volatility. It could become attractive to traders again. We saw them building, starting to rebuild their net long futures position this week. That can provide some support, push up through some resistance, maybe get a decent rally in here over the next few weeks.

Pearson: All right. Maybe wait into January for that rally to occur? I mean I think that's holding on for a lot of people right now.

Newsom: You know, I would actually be willing to sit back quite a while on soybeans and on corn and wheat for that matter, because, you know, seasonally, we see corn and soybeans push into June and July before they top out. Be very cautious with them, but certainly I think we can give this market some room. See if we don't start to build some interest again.

Pearson: Real quick on the cotton market. A pullback this week. A lot of eyes are watching what's going on with cotton as kind of an indicator with what's going on globally, and it hasn't been too positive.

Newsom: No, it hasn't. And one of the things that we've seen happen in the cotton market is that bullish futures spreads showing a bulling commercial outlook. It's starting to back down. Now, again, like the other markets, maybe we can see that start to build in again, start to build some support back into those nearby cotton contracts but, more importantly, after the new-crop contracts.

Pearson: All right. Let's get to a more buoyant area, and that's been livestock. Ever since the corn market has been dropping, we see feeders take this big jump. We've got a bred cow and a bred heifer market that's on fire. What's your outlook for fed cattle?

Newsom: Fed cattle, you know, I still think the cash market wants to stay strong. Again, I look at the future spreads, and it looks a little bit bearish to me, but we're able to hold onto these cash markets. The fed market is strong. The live market is strong. I think we want to stay high for a little while. Now, if we start to see some shifting going on in the other commodities that could cause some problems. But right now there's really no signs of weakness coming in the cattle market, say, as opposed to what we're seeing sometimes over in the hogs. So I think we're going to see the cattle market relatively well supported.

Pearson: And the calf market is strong too?

Newsom: I think so because I think we're going to be looking for some replacements. Now, the problem in the cow/calf area is that we've got such high feed -- high hay costs, say, going into the Southern Plains and so on. That's actually going to probably help the cow/calf markets elsewhere. But overall, that market you're going to have to watch very closely to see if the replacement demand stays strong.

Pearson: All right. Hay has been crazy. It's a commodity we don't follow on the show. There's no futures market but it's been huge and the differential has been huge. Real quick, the hog market, what do you see there?

Newsom: The hog market I'm a little concerned about because it's getting a bit more volatile than the cattle market. You've seen some wide swings, which is normal for the hogs. But if cash starts to go away -- if cash support starts to go away, that market could come down fairly quickly.

Pearson: So do you want to hedge off in here or not?

Newsom: I think if we get kind of a riding the coattails of the cattle rally. I think it is going to be an opportunity to get hedges in. Seasonally not a real strong time to be doing that, but if we can get, say, the first half of 2012, get a portion of those hogs, a portion of that production covered, I think it's going to be a really good opportunity for us here in the next couple of weeks.

Pearson: All right. Well, Darin, we'll see what transpires. A good chance to cover some feed needs with this break in corn.

Newsom: I think so, yeah. It's given us an opportunity.

Pearson: Darin Newsom, thank you so much. That wraps up this edition of Market to Market. But if you’d like more information from Darin 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 impact of record drought on Texas cattle. Until then, thanks for watching. I'm Mark Pearson. Have a good week...

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