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Market Analysis: Virgil Robinson

posted on September 21, 2012

Market Analysis: Virgil Robinson

Pearson:  Lower than expected export numbers and better than predicted yields pushed the grain markets lower this week. For the week, December wheat lost 27 cents, while the nearby corn contract moved 34 cents lower. As news from the field revealed farmers were bringing in higher yields than expected the market responded by falling more than a dollar. By the end of the week, the November contract was down $1.18. Nearby meal prices followed suit, moving $39 lower.

 In the softs, cotton lost 2.65 per hundredweight. In the dairy market, October Class III Milk futures gained 61 cents, while the deferred contract moved 76 cents higher.

Over in Livestock, USDA’s latest cattle on feed report was released on Friday after the market closed. The report revealed the second smallest August cattle placement since 1996 when reporting first started. This week, however, prices were mixed. October cattle lost $1.53, nearby feeders gained 60 cents, and the October lean hog contract gained $1.78.

In the financials, the Euro lost 120 basis points against the dollar. Crude oil rose nearly $6.44 per barrel. Comex Gold advanced $5.30 per ounce, and the Goldman Sachs Commodity Index lost 32 points to close at 663.25.

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

Robinson: Thank you, Mike. Nice to be with you.

Pearson: Glad you're here. Can you tell us a little bit about the wheat market? Where do you see it headed?

Robinson: A good week in wheat futures. I think a couple things, Mike. There's some concern globally, the Black Sea Region experienced adverse growing conditions through the season. There's also some concern about unusually dry conditions in parts of Australia. And certainly we can't forget the Southwest here in the U.S. So there is some concern as far as weather is concerned. Export sales have been okay thus far. I expect them to improve, however, the second half of the crop year in wheat. So my thoughts about wheat and wheat prices, Mike, I think they're going to move irregularly higher over the next three to six months. Clearly there's an adequate supply of wheat. And having said that, I wouldn't object to someone wanting to put some type of floor, some type of option strategy beneath their wheat in hopes of higher prices down the road as we expect exports to improve, should that not happen. Then clearly they'd have the security of that floor.

Pearson: All right. Any particular price point that you could see them moving to in the future?

Robinson: We've got three different varieties of wheat, Mike, and I think all are capable of moving fifty to a dollar higher over the course of the next three to six months.

Pearson: So be safe and plan for the future.

Robinson: Conservative to the extent that if you have a concern, if your balance sheet is not as strong as perhaps it should be, insurance is always a good option. Balance sheets, speaking of that, you mentioned farm income, 2011 record high at about 135 billion. This year will be close to, if not greater than that. So there'll be a lot of folks I think with a little larger appetite for risk than in years past.

Pearson: All right. What do you see in the corn market?

Robinson: You mentioned export sales have gotten off to a slow start. Clearly there is some rationing under way in both the use of corn to produce energy, ethanol, as well as in the livestock sectors. We do have some stress in the dairy industry. We do have some stress in the swine industry. There is liquidation underway. Broiler production will be off 34 percent this year, so clearly few numbers there. So we're beginning to see with various reports, a portion of that rationing process in play.

Pearson: How low do you think prices are going to fall here this harvest season?

Robinson: Not a lot lower than where we currently are. As mentioned, I think once the corn that has been contracted has been delivered and once the corn that's concerning because of various toxins, aflatoxin, for example, has been delivered and moved to the pipe, I think it's going to be very difficult to buy corn in any quantity. So I would guess seasonally speaking, sometime in October. It is not uncommon to see corn prices bottom and then move irregularly higher into the spring of the following year. I see no reason why we shouldn't track in that direction this season.

Pearson: All right. Do you see any particular number corn might head to this spring?

Robinson. I don't really have a number, Mike. I think in many instances the strength of the market could well be a manifestation of their local basis, where you have dislocations, the likes of which we've not seen for many years. As a result of that, futures may be preoccupied with the European concern or Chinese concern or something of that nature and kind of flatten out and flop around. But cash, I think once the bin doors are closed, you're not going to see that quality grain for quite some time.

Pearson: Okay. Soybean market, what do you see going forward there?

Robinson: Well, kind of the same seasonal pattern there, Mike. And export sales to this point have been brisk. And, of course, China has kind of led that parade. A lot of things are happening and need to be acknowledged. There is some weather concern in parts of Northern Brazil as well as NorthCentral Brazil. Now, it's a little early to get way concerned, but certainly that is an issue. The department is likely to make some adjustments in both corn and soybean acres in their October report. Should they do that, I would not be surprised to see adjustments and disappearance as well. So I'm not looking for a huge netnet change here month over month. So to answer your question in soybeans, until about march or April of 2013, the U.S. Is the sole supplier of beans for the globe, so I don't envision them collapsing beyond this $2 that they've just recently declined? I think they're approaching pretty solid ground here, Mike.

Pearson: And you predict exports are going to stay pretty stable even at this price level?

Robinson: Well, I'm going to predict that tonight. Clearly China is the driver in that regard, Mike, and economically things have slowed down in that country. They've not collapsed by any means, but certainly they've slowed down. So certainly that can take some of the exuberance out of the market. But here again, I think it's going to be difficult to source that physical cache item, and the cash market, in my mind, will put together a seasonal low here very shortly and then begin to improve in price.

Pearson: Okay. Let's talk livestock here a little bit. We did have cattle on feed and cold storage come out today. What do you read in those reports? What do you see? How does that affect the market going forward?

Robinson: You guys did a good job of analysis with regard to the placement figures, so there's really not a lot in addition to say there aside from the fact that the supply of feeders in North America and I include Canada, the U.S. and Mexico is going to be limited. And I would expect placements to continue to decline year over year through the balance of 2012 and 2013. So it would stand to reason short of an economic disaster here that prices, both retail and live prices, will head irregularly higher.

Pearson: Even if corn prices also head irregularly higher, do you think we'll see enough demand for feeders to bring those prices up?

Robinson: Yes, I do, Mike, only because I think live cattle prices will also move higher. That's a good question and one that clearly is very debatable, but that would be my opinion here in September. The cold storage report, very quickly, total red meat supplies led by a pretty significant yearoveryear increase in pork supplies grew about 20 or 25 percent year over year. Total poultry supply is about unchanged year over year. So at present, at least as measured by that particular report, edible protein supplies are very ample at present.

Pearson: Okay. I'd like to come back to live cattle a little bit. As we watch the market move forward and as we watch these high corn prices fall toward their seasonal lows, should producers be looking to lock in next year's feed prices?

Robinson: I think they should, Mike. You know, I like the idea of a budget where you go through all of the variables as best you can before you think seriously about hedging. Unfortunately in many instances, we can't do that. We've got to do it kind of piecemeal, one piece at a time. So to answer your question, yes, in the next thirty days I would be actively looking to source that physical product, Mike. Again, futures help, you know, fray the expense of a sharply higher market, but you're going to have to have that physical product to move those cattle and finish those cattle.

Pearson: All right. Still in live cattle, where do you see prices headed for the next year?

Robinson: I think 2013 we'll move maybe another $10$15 higher.

Pearson: All right.

Pearson: Mike, very difficult to make that, you know, that number statement, but I see them many higher in 2013.

Pearson: And hogs, we've had some firming recently. Continue?

Robinson: Modest firming. As mentioned, there's plenty of supply on hand, but as the year progresses and this liquidation phase begins to flatten out and then cease, live hog prices conceivably you could see as much stress in 2012 as you've seen dating back to '98,and then 2013 maybe the best prices you've ever seen. So in the next sixteen months I see that cycle turning and changing enormously.

Pearson: All right. We've got a couple seconds left. Real quick, what's your pick of the week?

Robinson: I don't know about next week. I do know that there's some concern about a port situation in Paranagua, where they're having difficulty unloading a huge slough of ships. I think grain futures and fertilizer prices react because of that.

Pearson: all right. Thank you, Virgil. That wraps up this edition of "Market to Market," but if you’d like more information from 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, and streaming video of our program, as well as links to our Twitter Feed and Facebook account all free at the “Market to Market” website. Be sure to join us next week when we’ll examine the rural impact of highspeed rail in California. Until then, thanks for watching. I'm Mike Pearson. Have a great week.

Tags: agriculture cattle commodity prices corn drought economy Elaine Kub feeders hogs markets Mike Pearson Walt Hackney wheat