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Market Analysis: Darin Newsom

posted on February 3, 2012

Market Analysis: Darin Newsom

Pearson: Here to lend us his insight on these and other trends, market analyst Darin Newsom. Darin, good to have you with us.

Newsom: Thank you, Mark.

Pearson: A lot of stuff going on at the visit on a Friday evening in February in the Heartland. One of those is the situation with Israel and Iran and where that could head and what that could leave for energy prices was not much reaction, surprisingly, Friday afternoon in the oil sector.

Newsom: No, there really wasn't. We have to keep an eye on both the Brent Crude Market which is more at the International West Texas immediate. But you're right, there wasn't a lot of reaction today. I think what we'll see is what happens over the weekend. What the headlines are, particularly as we get into Sunday and see where the overnight trade starts off with on Sunday evening. We're also moving into that time of year when the energy complex as a whole, excluding natural gas, starts to move higher, so that could factor in as well.

Pearson: All right, of course, natural gas has been unbelievably cheap. Crude has hung in there close to a hundred dollars a barrel, so the energy front is a pretty confusing place right now.

Newsom: It can be, because we've really didn't see our seasonal selloff over the winter. So we're starting from a higher point than we normally do. If we look at crude oil, heating oil, Eurobob gasoline, these markets are starting from a much higher place. Spreads are relatively tight, indicating that there are some supply and demand issues possibly brewing. This could really be pointing to a much higher market or a very strong seasonal move as we head into the spring. Obviously, very warm conditions for much of the Midwest. Prompt a lot of Owen Taylor's comments, state climatologist, as to what that could mean down the road. That's weighing on people, on producers.

Pearson: You and I were in Wisconsin this week and talked to a lot of Wisconsin corn, soybean, and pork producers who are concerned about all these issues. Let's take it point by point. Let's start with wheat, because that's going to a bellwether here soon. All this talk about the Ukraine, Eastern Europe, cold temperatures, there's a lot of wheat around, but wheat can be a challenging crop in that region.

Newsom: It can. Just like here, we have to kill the crop seven, eight, nine, ten times. However many it takes until we actually know what type of damage was done. What they're looking at over in Europe, that kind of where the heart of the feed wheat comes from, and all this talk over the last few years with the high price of corn in comparison to wheat was that wheat was going to replace corn in feed rations. If we lose some of that feed wheat crop, that's going to not only make the U.S., the domestic supply, that much more attractive on export market, but it's also going to take that competition out of the corn market and help push up that corn demand as well. Certainly a lot of attention being paid to the wheat market right now. We have a pretty good handle on what's going on in South America with corn and soybeans, so wheat seems to be moved into the spotlight.

Pearson: Do you think there is a danger perhaps of Russia, the Ukraine, Kazakhstan, those countries coming together and suspending wheat exports? Is that a possibility?
Newsom: I think it's a possibility. There's been a lot of talk recently about export duties and certainly that seems to be gaining momentum. We haven't really seen the market explode like it's a done deal, but certainly, it has the market's attention. We've seen the carry in the March futures spreads. We've seen in the Chicago futures spreads weaken, and that's indicating commercial traders are getting more concerned. I think it's time that something may be coming.

Pearson: All right, well, that's going to be an interesting one to watch. From a producer's standpoint, what should we be doing?

Newsom: You know, if you have any wheat left, and most of them don't have much 11-12 wheat left, you can certainly use these rallies to make a few sales. Kind of clean out the bins as we head into spring. Seasonally again, wheat puts its top here in February, and it really doesn't go much further after that. Now, as we look at new crop, it's so hard to say get out and do a lot of new contracting because of the issues. You mentioned the ongoing drought in the Southern Plains, that's really not showing many signs of letting up. If you're going to do a forward contracting on the new crop, don't over do it, because you simply don't know how the weather is going to turn out.

Pearson: So 10, 15 percent maybe?

Newsom: I probably wouldn't go much more than 15, 20 percent all told we needed to be end when you have a better feel for what you may have there in the ground.

Pearson: So that's your old, new crop scenario. Okay, let's move over to corn. There's a lot of issues there. The Argentine situation. Obviously, as you pointed out, the situation the Black Sea. That region is going to be a factor. A week ago I drove to Sioux Falls, South Dakota with the top down in a convertible and a tank top. These are strange weather conditions.

Newsom: They really are. They are, and it certainly does have the market's attention. There's a lot of talk of what does this mean for spring. What does this mean for summer? The pure fundamentals of it are it looks like we're going to have an increased demand for the tight supplies we already have for 2011 -- 12. So--

Pearson: We still got the old crops story first, so let's talk about that.

Newsom: Those who are still holding old crop. It looks like--

Pearson: And there's a lot of them.

Newsom: And there's a lot of them. There's certainly is.

Pearson: There's a lot of farmers holding old crop.

Newsom: You go from meeting to meeting and ask that question, there's a lot of hands that come out. I think we're going to see some opportunities to sell. Now, what could happen is everyone holds on just a long, all try to move at the same time., that's going to crush basis. It's certainly going to bring the spreads down and start to weaken the future market. There's going to be come a tipping point this spring, possibly early summer, where we're not focused on the old crop anymore. We've pushed it as far as we can, and that attention automatically jumps over to the new crop. That's got a whole different set of fundamentals.

Pearson: All right, so let's talk about those. The old crop, sell the rallies, is that what you're saying? Give me a price, Darin. Where do you think we're going to sell crop

Newsom: The new crop --

Pearson: The old crop.

Newsom: The old crop, excuse me. I think we're going to make a run toward the highs. Right now we've got corn in 6.50s. I think we're in the 6.40/50 range. If we can get it up in a nice 6.70, 6.80 range some outside chance of hitting the $7.00 range, I still think it's a there's a pretty good opportunity for that this spring and summer. So I think there's going to be some decent opportunities for sales. Basis is pretty strong as well.

Pearson: All right. Okay, and that's a good precursor for the market doing something. Now, new crop corn. What are you thinking? Where do you want to make sales? I know you've made some.

Newsom: Made some.

Pearson: What's the outlook going forward?

Newsom: We've been holding some sales for a while now, but I still think, like the others, new crop corn is going to be able to ride the coattails of the old crop market. So if we can get say the new crop contract lets say near $7 -- I don't know that we can get it much past that. But up in that 6.80 range, I think we're going to put more sales on it. A lot of it's going to depend on when this happens. I think we're going to have some opportunities. We're going to have our weather rallies. We're going to have all these issues. But if the 95 or whatever -- the 8 million acres comes to pass, that is going to be that tipping point that we talked up about earlier. That's going to be the focus, and probably start to push the market back down.

Pearson: All right, it's going to be interesting seeing how things unfold for the 2012 growing season and how we wrap up 2012. You know what everybody's thinking. Everyone that we've talked to in the last couple of days is the last couple years you want to be sitting on corn come July, because that's when things got really hot and sweaty.

Newsom: This year, it may be the same situation. Again, if the second-largest export in the world, Argentina, sees the decrease that many are talking about, that's going to push more business with the United States. So we get into that May, June, July timeframe and cash corn could still be looking pretty good.

Pearson: All right, you bring up South America. Let's talk about soybeans, because that's where the focus is on the growing crop down there. The beans look pretty good in South America, correct?

Newsom: Yes, the losses they're talking about in beans are not nearly as steep as they're seeing in corn. Similar situation to what we see here all the time. They get the rains late in the summer, and it's enough to salvage the soybean crop, but damage to corn has already been done. We could see some increased demand for the U.S. soybean situation. The fundamental situation just isn't as tight globally or domestically, so yes, we saw a nice run this week. Soybeans outperformed the other grains. I don't know how long that's going to last. I think at some point corn moves back into the driver seat. Soybeans go along for the ride. Again, old crop probably still have a good chance of a rally with increased demand. At some point, and it could start to lose some momentum in here.

Pearson: All right. I want you to put the prices real quick on your old crop bean target and your new crop bean target. Where do you want to be?

Newsom: I've got to be honest with you, Mark, I haven't even checked my charts for awhile, but I do think we've got some at times there.

Pearson: Do you think we have a chance to go back to the highs in beans, as we did before?

Newsom: I don't think we're going to get as close to the highs in beans that we will in corn. I think we've got a better chance of testing highs in corn than we do in beans. Beans will be a decent follower.

Pearson: 12.5, maybe?

Newsom: I think we're going to get that 12.5, 12.70 range maybe a shade above that but not a lot more.

Pearson: Okay. But shift gears totally. Let's talk livestock. We just saw the feature about cattle. You talked about the cattle inventory report earlier. As you take a look at the beef business today, and there's some demographics out there: rancher and cow calf, man wise, and other wise are going to impact this business as well. Look at the small herd, but big carcasses. We kind of get confused. We start going well, there's fewer head of cattle out there. There's a lot of beef out there on the fewer number of cattle that are out there. We need keep that in mind when we talk about these low numbers being out there. But in fact, there hasn't been much growth with this herd. This 11-2012 calf crop is going to be in big demand.

Newsom: Yes, there is. And as the piece mentioned, we're at a 60 some year low as far as herd size. It is going to be big demand. I think we are going to see increased command. I think we've still got -- we're going to have a hard time rebuilding this herd anytime soon, so I think all these things are going to help support the cattle market. It looks like it's going to stay strong for quite some time, well past the midway point of 2012. So I think we get deeper into 2012, and we're still going to see higher prices. At that point, maybe we start to back off. I don't think we're going to see this herd all of a sudden grow, but prices may start to ease a little bit later on in the year.

Pearson: All right, obviously export dependent. The dollar, your thoughts there, Darin? Where are we headed?

Newsom: The U.S. Dollar Index, it's kind of getting some mixed signals in here. We've had a nice run. It certainly looks like it wants to continue higher, but it's getting a little bit over done. At this point, we're seeing some more of bullish economic news coming out. That takes some of the steam out of the dollar. We've recently seen the Federal Reserve say they're not going to do anything with interest rates until 2014. That takes fundamental support out of the dollar. I think once the situation in Europe calms down a little bit and we start to get a better feel for that, the euro may start to gain some strength. That's going to put pressure on the U.S. Dollar Index. I wouldn't anticipate it to be long-term, maybe over the spring see it sag a little bit and come back later in the year.

Pearson: That can impact that calf market. It could impact the fat calf markets, I should say, in a big way. It's going to have a big impact on pork. This pork business has become very export dependent.

Newsom: It is. It's nice to see that type of business that we see that type of export demand that we have. You know, visiting with other analysts and listening to other opinions, it seems like pork is the one concern right now. Most want to keep getting sales on, because they are afraid it's going to go all of a sudden -- and we have bigger numbers. And there is some concerned that -- and the hog market likes to sometimes break away from cattle. Yes, it's getting a lot of spillover support from the cattle industry as a whole, but if it starts to break it's going to break in a hurry. Don't let this opportunity get to waste. We've got some very nice prices going on in that hog industry. Sometimes it could be looked at as a bit shakier demand, so certainly get some sales on, get some protection on and then let the market do what it wants to do.

Pearson: Overall, livestock has actually should have a pretty decent year in 2012 it looks like.

Newsom: I think so. I think it's going to be a strong year for livestock as a whole. They're going to be dealing with higher feed prices for much of the marketing year, much of the year, but maybe ease a little bit in the last quicker.

Pearson: We will see what happens. We appreciate Darin Newsom's insight very much. Thank you, Darin. That will wrap up this edition of "Market to Market." if you would like more information from Darin 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, and it's all free at the "Market to Market" webpage. Of course, be sure to join us again next week when America's first later lady brings her "Let's Move" initiative to the Heartland. 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