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Market Analysis: Virgil Robinson and Walt Hackney

posted on June 22, 2012

Market Analysis: Virgil Robinson and Walt Hackney

Borg: Here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Virgil Robinson. I said right off that it's a weather market, but also concerns about demand pushing higher. What's the bigger factor here? Weather?

Robinson: Well, you've kind of defined two elements of the market, Dean, one being demand. And regarding demand, old-crop demand has weakened of late. Export sales have been relatively poor. Ethanol economics aren't particularly good as documented by one of the larger plants going dark and several others reducing capacities. So old-crop demand has certainly waned of late while new crop, at least as measured by the new-crop corn futures contract traded about 50 cents higher this week.

Borg: What's the reason for the ethanol problem?

Robinson: Unprofitable. Can't cover variable costs at this point. 

Borg: Because oil prices are dropping?

Robinson: To some extent. And I think in many regions it's just terribly difficult to source corn. Those who are in areas of concern weather-wise and still possess old-crop corn are not willing to part with that at this point using that old-crop as kind of a hedge, should their new crop fall short of expectations.

Borg: I know the wheat crop is being harvested earlier than usual. What about the wheat market?

Robinson: A couple of things there. In the recent WASDE Report for the third consecutive time, the department reduced world wheat production. Concerns in parts of Russia, the Ukraine, Kazakhstan, and other wheat exporting regions, they are projecting this year carryover in this particular crop year of about 185 million metric tons, which is the smallest in the last four or five. That's a year-over-year decline inventorywise of about 5 percent, so that clearly has underpinned the value of wheat.

Borg: Corn?

Robinson: A couple things as mentioned.

Borg: Drought.

Robinson: That's one of them. Certainly the concern about weather east of the Mississippi, in particular. The Crop Conditions Report --and I would warn folks that the correlation between crop conditions and final yield this early on are not particularly strong. Clearly they could improve. By that I mean crop conditions with timely rain. But to this point there's growing concern about the state of the crop, particularly in parts of Illinois, Indiana, and other south, southeastern regions.

Borg: How should that be influencing people who have corn to sell.

Robinson: Well, if it's new-crop corn and they have not sold what they intended to sell by market plan, I think this is providing an opportunity. As mentioned, new-crop corn futures this week were sharply higher. To those who are technicians, and I profess to at least be somewhat knowledgeable of the technical behavior of the marketplace, I sense a breakout in the futures contract, which gives me a count up towards 585.

Hackney: Virgil, your point has become a great problem for the cattle feeding industry and, to a certain extent, the hog production industry. That is the uncertainty of this corn and the availability of the corn in the deferred months as we go ahead for feedlot or a hog operation to secure their cost of production. How do you address that?

Robinson: Do you know, Walt, I think in the western part of the Corn Belt -- and I’m kind of using that as a catchall here regarding feedlot operations and the larger feedlot operations, their prospect at present appears to be pretty good. I think the availability of cash corn at least as we know the prospect today is pretty strong, Walt, so if anything, I would be looking at the cash market rather than the futures market, particularly if they can lay in those feeders or those replacements and calculate or pencil any kind of a hedge four or five months down the road.

Hackney: Are you suggesting a futures contract hedge or an option type hedge?

Robinson: Again, in this instance, I think trying to geographically define our subject here, the western part of the Corn Belt; I’d look towards that cash procurement before I would the futures contract.

Borg: Is this also a time to be locking in fall harvest soybeans or selling?

Robinson: Good question. There again, new crop soybean futures traded within a couple of cents of contract highs this week, primarily based on weather concerns, Dean. Given the fact that supplies of old crop here in the U.S. as well as in the Southern Hemisphere are tight -- projected to be tight. It's pretty important that we grow a pretty large crop of beans here in the U.S. and again, there are some concerns primarily revolving around whether --

Borg: What are you advising if you had soybeans in the ground now that you haven't harvested them yet? Is this the time to contract for fall?

Robinson: You know, I think I’d defer finalizing the price, but rather use a minimum price where you in fact either sell the cash because your new-crop harvest basis is unseasonably strong and then buy and replace that with a call option or vice versa. If the new crop basis is poor, I’d buy the put and await the tightening of the basis. But I don't think right now I’d finalize the price of new-crop soybeans if I’d done nothing to this point.

Borg: What about the cotton market?

Robinson: Here again, world cotton stocks are projected year-over-year to grow about 10 percent, and that kind of defines the supply scenario. It's currently perceived to be quite adequate. Rallies based on weather concerns here in the U.S., for example, or China or Brazil or Egypt I think are opportunities to go ahead and make some kind of commitment to the cash cotton market.

Borg: Walt, you had a major cattle report out on Friday.

Hackney: We did, the cattle-on-feed report, the USDA Report, it was fairly well anticipated.

Borg: It didn't surprise you, then?

Hackney: Not exactly, except in the marketing. The marketing was only 1 percent over a year ago in May. We were as an industry anticipating maybe 5 percent extra marketing, which would have helped in regard to cattle-on-feed report that was suggestively bearish. They come out with the on-feed numbers, a couple percent over year ago. That was manageable, but they came back with 14, 15 -- 15 percent extra placement in May over a year ago.

Borg: Were cattle then yet anticipated?

Hackney: Yes. But the problem with that is we were thinking it could be 14 percent. It was 15, which is understandable, but they never really came out and explained why. The basic reason is that a year ago in May, we had just went through a huge liquidation of cattle in the southwest due to the historic drought. They all moved out earlier in May, so may, in the cattle-on-feed report a year ago, didn't show hardly any placements at all.

Borg: Is the demand there to take care of it?

Hackney: there is phenomenal demand for feeder cattle, but the demand for beef, the demand of the cattle feeding industry to buy these feeder replacement cattle at these current prices is very questionable. Yesterday is a good example. We lost $4-$6 in the live cattle market in the feedlot basis the cash cattle. And packers were bidding down cattle and cattle feeders were selling them, though.

Hackney: Cattle feeders had been pricing at $1.20-$1.22.that would be from West Texas to Illinois. $1.95 dressed was normal asking price all week long. Yesterday the packer came out bidding $1.14, giving some indication he might give 15.everyone sat back and said there will be no cattle sold. The fact is by last night, the majority of this week's show list were sold at those packer bids, and that shocked the industry.

Borg: So what do you expect in the coming week? Are there cattle that can be held in feedlots because they aren't at market week yet?

Hackney: We're a little bit light on carcass weights, which is indicative of a very current feedlot supply and also shows that the cattle feeder has done a good job of marketing and has kept his weight down. But if the cattle feeder next week decides to resist markets like 14-16 in cash, $1.14, $1.16 on his cattle, or $1.88 dressed instead of in the 90s, that could come back to haunt the cattle feeder because of the extra weight he's putting on.

Borg: What about the hog market? Does that look iffy to?

Hackney: The hog market may have worn out its welcome just a little bit.

Borg: That's what I was wondering.

Hackney: Since May 1 we have gained 25 percent in the value of the primal cutout value of pork. Well, the wholesale market, the supermarket has only gained five, and that's kind of a bad thing for the retailer to absorb and he's probably not going to.

Borg: Do you have a question?

Robinson: I did. This is kind of geographically specific, Walt, but I know that Missouri has experienced abnormally dry conditions and in some select areas drought-like conditions. Are you seeing any significant liquidation of the herd in that area?

Hackney: There is a small amount of cow liquidation off of Southern Missouri grass country. Now, that liquidation may be that they're selling an auction system and getting rid of a few of the older cows or they're moving them to areas where they can secure some decent grass pasture.

Borg: Walt, we're going to have to leave it there. Thanks, gentlemen, for your comments. Walt Hackney and Virgil Robinson, that wraps up this edition of “Market to Market.” But 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 all free at the "Market to Market" website. Many of you posted comments on those sites in recent days expressing your sentiments on the passing of Mark Pearson. We thank you for your support and want you to know that “Market to Market” will name a successor in the weeks ahead. The new host will be rooted in the same tradition as Mark and Chet Randolph before him, and we believe viewers will be pleased. So until next week, thanks for watching. I'm Dean Borg. Have a good week.



Tags: agriculture cattle commodity prices corn economy feeders hogs markets news soybeans Virgil Robinson Walt Hackney wheat