Thursday's post-report rally proved to be short-lived as the course grains gave back most of their gains on Friday. For the week, December wheat traded fractionally lower while the nearby corn contract moved three cents higher. Soybeans also headed south this week as the November contract settled with a weekly loss of 29 cents, while nearby meal prices declined by $6.00 per ton. In the softs, cotton also traded lower as the December contract lost 13 cents. In the dairy market, November Class III milk futures gained 9cents, while the deferred contract moved 44 cents higher. Over in livestock, December cattle lost 70 cents. Nearby feeders were off nearly $2.00. And the December lean hog contract gained $1.82. In the financials, the Euro lost 63 basis points against the dollar. Crude oil gained $1.98 per barrel. Comex Gold declined by $21 per ounce. And the Goldman Sachs commodity index gained nearly 10pointsto settle at 665.75.
Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Mark Gold. Mark, welcome back.
Gold: Nice to be back, Mike.
Pearson: It's good to have you here. It's been a busy couple of weeks in the broader markets especially as we look at geopolitical events, especially in the Middle East. What do you see the events in Iran having what kind of effect on our oil prices?
Gold: Well, certainly what's happening in Iran we've got a lot of protests there, we have the people losing a lot of the value of their own currency, it has gone down by about 50%. The economic sanctions are certainly having a real impact on Iran. The protesters are in the streets. Is it enough to overthrow the regime? Probably not. They've got a pretty good control on things. I don't really see that happening any time soon. But certainly all of the turmoil in the Middle East has helped driven up the oil prices. Every time there is a problem between Syria and Iraq, Iran rather we have problems there. So if we can get the crude oil higher it's certainly going to help the ethanol market which has been really a drag with the crude oil back down around $90 a barrel. The fact of the matter is if things heat up in the Middle East crude is going to go higher, that is going to help the ethanol market. If things -- if the regime does change there then you can look for sharply lower crude oil prices in my opinion.
Pearson: Now, how far in advance -- how much are we going to be seeing these prices change going forward? Is it just headline driven? We're just going to have to keep an eye on the news?
Gold: You know, one day these grain markets hit the skids, the next day they come back. They’re back down again. A lot of the traditional, technical factors haven't done anything in these markets. So you've got to be very cautious about what you're listening to and how to trade these markets and to get maximum protection because the volatility is so extreme out there.
Pearson: All right. Another issue I'd like to talk to you about a little bit -- the Federal Reserves is continuing QE3 or QE Infinity. What effect is that having on the dollar as we go forward?
Gold: Well, the dollar is going to be a component certainly of QE3, it’s going to be a proponent of what happens in the election. Certainly if Romney gets elected I think that's going to be a pro-business stronger dollar type move. That certainly won't help our export market. If you look at the corn exports we're down to nothing as it is. But the fact of the matter is the dollar is going to have a key impact on corn, on wheat and to some extent the bean market. The Chinese seem to have an appetite for our beans regardless of what the price is. Every time we have a good break in the soybean market they step in and buy some. But the fact of the matter is the dollar will play an important part in long-term prices.
Pearson: Let's talk wheat a little bit. You mentioned it there just briefly. Where do you see wheat headed in the weeks coming?
Gold: Well, the wheat has got a couple of issues. First of all, we've got the continued dryness in the United States, particularly in the southwestern plains. We've got the dryness in western Australia. The report on Thursday said that Australia's crop is down about three million metric tons from previous estimates. That was part of what brought the world wheat carryouts down by about four or five million tons. Now, we harvest wheat somewhere in the world every month and the markets haven't responded well to some of the lower production estimates either from Australia or from the U.S. You know, you and I have been around this country a long time and we know the plant in the dust -- the beans in the bins are dust and we're certainly planting out of this week in the dust but hopefully we'll get the rains, we'll have the crops. I personally think that the wheat market can be a little soft in here. I don't see any other real problems around the world. They only lowered the Russian estimate by a million metric tons. It could have been a lot worse. Russia still may be a player in this export market. Everybody is expecting them to run out of exportable supplies and turn to the U.S. That hasn't happened so far. So I'm a little bit bearish on this wheat market for the time being.
Pearson: All right. So for folks with wheat stored out there, hold it?
Gold: Well, if you're going to hold it I would certainly consider putting a put option underneath to protect the down side. I think you've got to look in your own local market, see what the basis levels are. If you've got strong basis there's no real incentive to carry the wheat in that area, then go ahead and sell the wheat. You can always buy back a call option to replace that wheat if you still believe there is upside potential in the market. But certainly not only for the crop that you've got in the bin but you've got to be looking at these new crop prices as well. We've got $7.50 new crop prices out there, even higher for Minneapolis and Kansas City. You've got to look at protecting these prices because certainly this wheat market can turn around and be $5.00 wheat in a heartbeat and you don't want to leave these kind of great prices on the table.
Pearson: All right. So be aware. Keep track of your surroundings.
Gold: Manage this risk and don’t forget, even though we've been tight in all grains and in the soybeans over the last really eighteen months because of the weather, things can change in a hurry. The world will ramp up production and lower prices can certainly be out there.
Pearson: Let's talk corn a little bit. Corn had a big move this week. Yesterday we saw nearly limit up day for corn and today?
Gold: Back down another 25 cents.
Pearson: What is the market thinking?
Gold: I believe every time we've had one of these spikes in the markets whether it was the stocks report on the 30th, whether it was this production report, we get these spikes up in the market. After the first one in September we just kind of hung around there for about four or five days, couldn’t move higher and then broke. We were back -- before the report on Thursday we were back down to near the lows of this leg of the move. We had the bullish report on Thursday. Couldn't get limit up. I’ve always said as a trader, a lot of times it's what a market can't do that is as indicative of what it can do and we couldn't go limit up on Thursday which told me that there was some fundamental -- if this was another game changing report why didn't we go limit up? We've had two of these game changing reports now yet the corn market hasn't acted very well in the subsequent days. So, again, the reason I believe that is happening is every time we get to $7.50, $7.60, $7.70 corn we keep just destroying this demand base. Look at the exports, virtually zero on corn exports. We know we're hurting the ethanol demand out there dramatically. The one question mark is when will we cut back on domestic feed usage? It didn't show up in the September quarterly report, it may show up in the end of the year quarterly report. But certainly we're going to see liquidation. If you look around you see dairy producers hurting and going out of business, poultry producers going out of business because of the high feed costs. This is eventually going to cause some liquidation, some backing off of demand and there's more talk about importing corn from Brazil. There's another rumor this week of another 500,000 metric tons coming into the U.S. So one of the problems with these high prices is farmers and other ag users have figured out that there are other ways to feed animals and that can be a little bit of a permanent destruction on the demand base here is they have found other alternatives besides corn to feed. So, again, when a market can't react positively to -- when they came out they were considered two game changing reports. And what has happened? We've fallen back both times. Again, I think that is indicative of a market that may have a problem.
Pearson: All right. So with that in mind, for folks out there, maybe their yields are coming in better than they expected, they've got extra corn. What should they be doing? What do you think is the word for the producers out there?
Gold: Well, the word for the producers is there is no real carry in this market, no real incentive to hold this grain. I'd be selling it, looking for other opportunities. If you still believe, some of the bulls believe that we're going to run out of corn, February, March, in that timeframe then go ahead and buy yourself a March or a May call and try to stay in the game. Spend 20 or 25 cents on a call option to see if it's there. Cheaper than storing that grain for the next six months. So I would certainly be looking at some opportunities here. We had the nice rally, we're still well over $7 in 2012 corn. These aren't prices to turn your nose up at and something I would certainly take a look at and new crop as well. You've got new crop prices sitting out here around $6.50 a bushel. Again, just four months ago on May 1st and June 1st we were looking at $5.00 corn. Now we've got new crop corn at $6.50, nobody wants to protect that because the old crop went to $8.50. In the 40 years, almost 40 years I've been around this business, every time an old crop gets to an extreme high and drags that new crop up it has always been a phenomenal marketing opportunity. The only reason new crop 2013 corn has gone to $6.50 is because of what the old crop did. Take advantage of it. Buy some puts. Protect that down side.
Pearson: All right, plan for next year.
Pearson: All right, let's talk soybeans a little bit. Now soybeans we've been bearish a couple of weeks now on beans. Again yesterday and again today I should say. Where do you see beans headed?
Gold: I'll tell you, if they hadn't added the exports, they raised the exports 210 million bushels. If they would have raised it half of that we'd be looking at $2.50 carryouts in this bean market and beans would be a $12 item today. We found this bigger production. I believe it's getting even bigger and, again, here is a market that frankly couldn't act worse. We closed on Friday night at the lowest levels since I think July 6th in this market. Tells me we've got a problem out there. We're under some of the key moving averages. Funds are long. Yesterday the funds brought 50,000, or the open interest went up 50,000 contracts in corn. There's a lot of new longs in this market and they're looking at some pretty good losses here today. So beans and corn we've got the funds long, they should be short in my opinion, certainly on the beans and they're not. We've gotten two solid sell signals where the funds should be short. They're still long. That tells me that there's still more downside potential in these markets. There is a gap in the beans at $4.78. I believe they're going to try to fill that maybe next week then we'll see if we can hold it. Everybody is trying to look for this seasonal low to try to buy something in here. All I see is bigger and bigger production and Brazil, if they just have normal weather forget about 80 million metric tons, they're going to be a lot closer to the high end at 83 million metric tons. World soybean stocks are going up. Frankly I don't have a clue what beans are doing here at $15.50 and $16.00. I believe that there's tremendous risk out there yet in the bean market.
Pearson: So, guys harvesting right now, look to sell?
Gold: I would be selling them. Again, if you think there's higher prices out there, if you believe the bull argument that we're going to run out of beans -- let's face it, the carryout is tight at $1.30. If you believe that we're going to run out of beans until the Brazilians can get here then go buy yourself some March or May calls and stay in this game. But the fact of the matter is I believe we're still at least a bushel or two light on what the yield is going to ultimately be. Tack on another 75 or 150 million onto this carryout now that we've added the exports back in and I think you've got a problem out there.
Pearson: All right. Let's talk livestock a little bit. You mentioned some demand destruction going on. The corn side as folks look to liquidate we're not seeing much in the cattle market. Is that your impression?
Gold: Not only not in the cattle, we didn't see it on the hog numbers that were released on the quarter. Haven't seen the big liquidation that we thought we'd have seen which kind of justifies that those feed figures haven’t' really come down. I think that has got to change. We saw when the corn was up, limit up or near limit up on Thursday, feeder cattle took a big hit. I think the Jans were limit down. That is going to continue and if corn prices stay up at these levels we are going to see liquidation on cattle and hogs. We've already seen it in dairy and poultry. Now the question, I think the big question is probably the hogs. That is going to be, in my opinion, probably the easiest to liquidate and if we have that demand destruction that is going to hurt the corn prices as well. And I think the liquidation is starting to come in because we see these high prices on those mid-months starting in Feb and April hogs, we see some pretty big premiums in there which the market believes is a result of this liquidation.
Pearson: Let's come back to feeders a little bit. You mentioned limit down or nearly limit down on Thursday. What do you see in the near term for feeders?
Gold: I believe the feeder cattle and the fed cattle market are tied to two things. Obviously the price of grain and the second thing is the stock market and the economy. The stock market has been able to hang around this 13,500 mark, housing is a little bit better, things are picking up al little bit, unemployment apparently is down a little bit. That tells me that we've still got a pretty good demand. The box beef trade has been pretty strong, it backed off a little bit Thursday, Friday but we had some pretty good prices there. Cash cattle prices 124, 125 in that range, still strong. The charts are kind of in a no man's land here, they don't really want to seem to try to go for some new eyes. They don't want to try to seem to make new lows. So there's a little bit of a quandary from a technical standpoint. But fundamentally I think as long as the economy stays strong and we can work the grain prices lower cattle, both feeder and fed cattle will stay strong.
Pearson: All right. And you're looking for it to stay strong in the near-term and medium, longer term as we get out towards next year?
Gold: Let's see what happens with the presidential elections. I think that is going to be obviously key. If Romney gets elected I think we can look forward to strong dollar, better business environment, perhaps a better economy which will be good for the cattle market. If the President gets re-elected I have my concerns about what is going to happen with ethanol after the election and maybe after December 1st. Now that's just my own personal opinion on this. Certainly the President hasn’t' said anything about that. But I find it hard to believe that we're going to keep food prices high and the cost of all the food stamps and the government programs related to food -- if the President can do something about it and the easy thing to do is ethanol. All you have to do is cut ethanol by 500 million bushels, add that to the carryouts and now you've got acceptable carryouts and corn back at $4.00 or $5.00 a bushel. So those are the two things that I see politically. The election is going to make a difference for the American farmer.
Pearson: All right. Let's talk hogs a little bit. You mentioned we're not seeing much for liquidation there yet. Do you see that happening soon? What should pork producers be aware of?
You've got to watch these meal prices. Meal prices have come down. Technically again there is another chart that couldn't look worse. That gives me hope that maybe guys are holding off on this liquidation as meal prices have come down, as the corn prices have come down. So I believe we've got some positives in this hog market. The spreads kind of bother me. We've got some of the nearbys at pretty good discounts in here. I'm not sure, that would be normally indicative of liquidation but we haven't seen it. So maybe some of the October, December hogs are maybe a little cheap relative to the back months. But overall I think the hog producer has to watch these meal prices. If we can continue to keep meal under $500 a ton I think we've got a chance of pushing it even lower. That will be healthy for the hog market and I think it will encourage guys whether it is poultry, whether it's hogs that there's still some money to be made certainly in the livestock or the poultry arena.
Pearson: Sure. And now with that in mind how much of the economy is going to drive hog prices? Real quick, what are your thoughts?
Gold: I don't think the economy is going to be that big of a player. Much more so on the cattle market than in the hog market. Overseas we've got to see some more export demand but domestically I don't think the hogs will be nearly as tied to the economy as the cattle will be.
Pearson: Great. Thank you so much, Mark. That wraps up this edition of Market to Market. But if you'd like more information from Mark 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 market impact of the latest report on consumer spending. Until then, thanks for watching, I'm Mike Pearson. Have a great week.
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