Sue Martin discusses the commodity market with Mark Pearson
Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Sue Martin. Sue, welcome back.
Martin: Thank you, Mark.
Pearson: Well, a lot of stuff going on as we begin 2012 in earnest, and the USDA Report, that was a big market mover, concern about the dry weather down in South America. Sue, big lingering problem continues to be the situation in the euro zone. What do you see happening over there?
Martin: Well, I think that it is a concern. I think that there is getting to be an attitude that Greece will probably default and fall away. And the concern over that is I think everybody is accepting that that and it's being priced into the market. I think what the problem is everybody is concerned it's going to be starting to create a domino effect. You've got Spain with an unemployment number of a little over 22 percent. That's huge. Spanish bonds I think brought in about 15 percent return. That's quite high too. And then you've got Italy coming up behind that, but there's others also. There's Cyprus, there's Ireland, there's others, Slovenia, there's other countries that will come into play as well and probably be in the same situation. So it is a concern, but I think the market is handling it better this go around, probably because there's so much more focused being split in the media between the euro zone and also the elections and the Republican nominee who is going to be there and President Barack Obama campaigning.
Pearson: It's going to be an interesting year. It always is in a presidential election year too, which can cause a lot of strange things to happen. This strengthening dollar, now we're seeing a little bit of a fallback in the dollar, obviously, the feds --this easing continues. It may not be QE3 but a lot of cash out there and not touching rates until 2014. This is pretty spectacular stuff.
Martin: Well, it is and when you look at the money they've been printing --and it isn't just here that money's been printed. It's overseas too, but the money that's been printed -- and you see all the investing that's coming in, money leaving Europe, leaving China, coming to the U.S. It's going to be pushing, and they've investing into the dollar, but what's happening is, is that it also is, with all this money being printed and cheap interest rates, at some point I think we're going to get an inflationary feel out of this, and it will pick up a kind of a bullish attitude.
Pearson: All right. Well, let's get down to some specifics. Let's talk first about what you see in the wheat market, and kind of the general commentary has been that there is a lot of wheat available around the world. There's been some rumblings maybe not as much wheat in that Black Sea area as they thought.
Martin: Well, there isn't. There's a concern over the Ukrainian wheat. It's thought that the estimates range anywhere from 26 to 33 percent of that crop is going to have to be planted in the spring with something else. You've got Argentina lowering their estimate of wheat by about 1 million metric tons. At the end of the day, when you look at it all, you could be losing about 5 million metric tons of feed grain. That's a huge number. And then you look at our situation, and not all the soft red wheat got planted and you've got the weather still, while we're catching some moisture across, and wheat does look good in the plains in many areas, the jury is still out on that crop yet.
Pearson: Yeah and so there's still some concerns wheat could still be a surprise. It certainly worked its way into a lot of rations, particularly in the west.
Martin: Well, it has and the other thing I think too is the basis is starting to improve on wheat. So, the wheat market has picked up and, of course, in December we had a huge -- I think it was almost record short position by funds. And so when you get to that situation, everybody knows the story, they're on board, the markets usually turn and give you a bounce, and that's kind of what we're seeing right now is that type of situation. There's not a lot of snow cover. So if we were ever to catch a really cold forecast, it might create a little flurry there too, but for now, demand has picked up a little bit for wheat, and I think the market is less enchanted with the short sign.
Pearson: It's a freaky weather system out there right now, and you talk about the Grain Belt, the Wheat Belt particularly, going out to the Northwestern Iowa, and I was looking at the map of Southwest Minnesota and on up through Eastern Dakotas, Western Minnesota, and there's not much snow up in North Dakota either. Are you worried about the weather issue this year?
Martin: Well, I think what's going to be interesting is to see does the La Nina continue to weaken. Right now it's my understanding that it is starting to weaken, and if that is the case and it continues to weaken as we go towards early summer, then we may start to catch a little bit of rain. It depends -- or if you were to make the transition into an El Niño, then you may turn warm and dry. We are fairly dry in the upper Midwest, and I think that if we go into spring, the one good thing that we have to look at in North Dakota is those were areas that were so wet for the past three years. So they're going to be able to get corn planted this year, and that will be good, and then farmers are ready here in Iowa, Illinois, Nebraska. There is so much fertilizer on and corn on corn that farmers are ready for spring. So, if the weather is conducive or helps them out, they'll get this crop planted pretty fast. And that old saying, plant your corn in the dust and your bins will bust, could be a year like this one.
Pearson: We will see what happens. Let's talk about the corn market. What's your acreage number at this point? Do you kind of go with Informa over 94.5, 94.8?
Martin: I think so. I think we're going to hit 95, especially in the spring will have something to do with that with the weather because if farmers get in and they've already got a lot done, the ability of getting seed will be one issue, but you'll be able to get seed; it's rather what kind of quality it is. But once they get planting, it will go in easy, they'll plant more than what we think and then do more than what you think. They love to plant corn. So I think we're going to get the acres, corn still is -- pencils out much better when you take all the expenses and, you know, infuse except land, you make way more money on corn than you do on soybeans, and you look at that ratio, 2-1, and right now we've got the ratio behooving corn being planted. And the fear is, of course, we don't know yet what the South American crop is really like. We hear lots of estimates, you know, Brazil basically, Río Grande do Sul, I've heard some of the early corn planted there or harvested there is coming out around 50 percent down. We've seen pictures of ears of corn out of there, and it doesn't look good at all, tipped back ears, small ear size, small kernels. Argentina, of course, is the one we're real concerned about, our number two exporter. So we're hearing production around 22 million metric tons on corn. USDA sits on 26 now. I look for them to lower about another million and a half to two million metric tons --
Pearson: They're always a little bit skittish on that, aren't they, early on?
Martin: Yeah, they're slow to come around, but I think it will happen.
Pearson: All right. Corn price, if we plant 95 million acres, let's say that we harvest 88 or so, and we get good weather --
Martin: You're going to have a carryover over 2 billion bushels.
Pearson: Then what's the price of corn going to be?
Martin: It's going to go down. I think that we're in a year -- I look at the year 2012 as a year that's mildly bearish; let's put it that way. Some people may be more rampantly bearish, but I think we've got a year where we are in negative trend, but we're not ready for that dump and dive type thing. I think that we have a market that is pacing himself. You've had the highest basis level for a month of January in ten years. I think that farmers are probably holding at least 50 percent of the crop in their bins. They're not interested in selling anything now until summer. They want to see what the weather is like. In the meantime, ethanol plants in some areas covered all the way into the end of March. Well, what about April or May, when they're busy and they sure aren't going to entertain hauling corn to an ethanol plant. They're going to have to be bidding to get some grain stuck behind them so that they will be okay. I think that when I look at the market, I think basis will be good even in through spring. But beyond that, I think as we get into summer, if the summer weather is good, they'll just pretty much go hand to mouth because of farmers being able to sell more grain and they'll have to get their bins ready for fall. If they're looking at a big crop, they will have to move grain.
Pearson: Yet it could be a tale of two crops, where we're running out of the 2011-2012 crop. We haven't got the 2012 in the bin or started yet. Could we run into one of those scenarios? That would go with your cash corn situation.
Martin: Absolutely that could happen and I think that, you know, again, you get in -- it depends on the South too, how early they're able to get in and harvest. So there's lots of little factors here that are going to make a difference. But at the end of the day, I look for us to break prices down this year into about October-
Pearson: What kind of prices is that?
Martin: New crop could get to 449.
Pearson: Do you want to --do you want to buy some puts in here? Do you want to get some insurance? What are we going to do, Sue?
Martin: Well, for now I've been kind of holding off. We've had a nice rally back off of the government report, so that's been a godsend, but it's all because of Argentine weather and a little bit of Brazilian weather. There is a ridge, a high-pressure ridge that's kind of centered over Central Brazil and they're watching that because if it starts to set in place, it will block rain from coming into Southern Brazil and Central Brazil.
Pearson: They've had relatively good conditions up till now.
Martin: Very much. So I think that until we know more of what this crop is really like, but I think pushing it down to 20 or under is getting a little overambitious. I think that corn, to be good about this, if you look at beans and corn or wheat; none of them have taken out a previous major high. So that said, we're still in a bear trend until we do that. The 666 level on March corn is a major resistance. It stopped the December contract. So far it stopped March. We have to get through that. You get through it, you'll go up and test the 685, 695 are, $7 will be psychological.
Pearson: 6-6-6, all right. Let's move over to the beans. Sue, we don't have a lot of time left. The soybean market has kind of been mirroring corn and again, obviously concerns about South America. The third leg of that stool is what is China going to do this year? What are we going to see?
Martin: Well, I think China is --I'm in a different --I'm starting to turn my attention into a different mode. I think that we've been so accustomed to this just-in-time inventorying that started back in the '90s and has become so aggressive here in the 2000s, and I think what's happening is that if we start to see good demand this year -- and, of course, it could be even more next year -- I think what's going to happen is that they will be rebuilding their reserves. I think that they have watched what's happened around the world with food supplies tight. And we don't have a burdensome carry right now on much of anything. I think that we're going to start seeing this trend go back to having reserves. That will give us some good demand for a while, but down the road -- longer term yet, but down the road that's not going to be a good thing for farmers.
Pearson: All right. You don't think that will happen in the United States; you think it will happen in China?
Martin: I think China will be doing it. You know, there are 32 countries that are having elections, presidential-type elections this year. That's a real important thing, and we're going to see lots of changes, I think and China, of course, has their change of guard, whatever you want to say, in November --so October, November. That's going to be very important to see also and there's a lot of unrest happening in China. You don't hear a lot about it, but it is, and food prices extremely high. In fact, I looked at a chart on my way down here today that showed wheat prices -- cash wheat prices in China are actually the highest that they've been in over ten, twelve years.
Pearson: That's right. Still regarding our crops is cheap. Sue, ten seconds, bracket me; bean prices, what are we going to do? Lousy weather year. Good weather year.
Martin: Well, I think that we're still going to try to push this market a little bit higher. It's acting pretty sluggish at the moment. We're banging up against a hundred-day moving average. If we can get through that, you might move this market up to around 1255, 1260, something like that.
Pearson: And you'd sell that?
Martin: Oh, yeah.
Pearson: All right. Low side?
Martin: The low side, I think we still have a chance for beans to go down before the end of year and check out the 985 to 1020 area.
Pearson: All right. Let's move on to the livestock. A brighter picture there. Cattlemen there really kind of confirmed that. What are your thoughts on these numbers? It still looks like maybe a little bit of increase in the breeding herd finally, or is that just placement on average?
Martin: Well, the interesting thing was that the total cattle and calves was basically that inventory was the tightest or smallest since 1958.and then you look at the cows and heifers that have calved, and that number came in down 2 percent, milk cows up 1 percent, heifers held back for beef replacement, up 1 percent, which says we're starting that pullback, which means meat gets tighter, numbers of cattle get tighter, and that should be pretty friendly as we go down the road here for the April, May, June, July, August period.
Pearson: So you are friendly to beef.
Martin: Very. But here's the thing, it's all about supply. We know the supply. Our thing is what about demand? It's is going to continue to hold. I do think domestic demand is going to be good, but what happens with China and other parts of the world if they continue to really contract.
Pearson: All right. There is the concern and pork exports are going to be critical there in the hog business?
Martin: Well, it is. And again, this winter weather has been pretty ideal, actually. It's not backed anything up, so we're very current. Packers are looking at a current supply. They are buying hogs. The demand for pork has been pretty good. We need to see how much China has been buying. I think consumption of meat is slowing down in China, and so that may be a concern for hogs, but I think overall, you're looking at two bullish markets. They may go for a setback first and then come back again.
Pearson: Sue Martin, thank you so much. That wraps up this edition of Market to Market. But if you’d like more information from Sue 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 factors contributing to the smallest U.S. cattle herd in six decades. Until then, thanks for watching. I'm Mark Pearson. Have a good week.