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Market Plus: Virgil Robinson

posted on August 23, 2013


Pearson: This is the Friday, August 23, 2013 version of the Market Plus segment.  Joining us now is Virgil Robinson.  Virgil, welcome back.

Robinson: Thank you, Mike.

Pearson: One of the things we didn't have an opportunity to discuss on Market to Market was cotton.  The past couple of weeks we've been watching a very rapid run up in prices, roughly $4 or $5 a week.  This week we gave it all back with that $9 plus loss.  Talk to us a little bit about the dynamics there.

Robinson: You know, sometimes it's hard to explain that kind of a price behavior in a short period of time, Mike.  But I think one of the factors was India announced that the will, in fact, increase cotton production from what we had expected as recently as a month ago and that I think came at a time where prices were high.  Secondly, last week the sum of good and excellent cotton, that crop rating number that comes out every Monday afternoon, did increase the sum of good and excellent cotton I think four or five percent.  Now, in some it's at 46 or 47% so it's not historically a potential bin buster but it did come at a time where prices had risen pretty significantly.  So the combination I think of those two events triggered a mass exodus from the futures market.  And when you pile in some speculative exuberance that is driven by various algorithms or other calculations and those calculations turn from up to down they don't hesitate.  It's out the door.

Pearson: They can do it in a hurry and we've seen it time and time again.

Robinson: And often times the trend following systems will turn abruptly from up to down and they follow that trend from up to down by establishing new short positions.

Pearson: Now, with that being said, looking at the global picture economically speaking, internationally the demand for cotton is relatively stable.  Do we have much upside here as we look to the remainder of the year?

Robinson: It's kind of interesting, world cotton production is forecast to decline year over year, Mike.  But despite that, ending stocks are forecast to increase about 8 million bales year over year.  So at face value that would suggest demand has waned.  Now, certainly over the course of time that can change.  But as we visit tonight my best opinion would be there's price risk to the downside in cotton.  So from a management's perspective I would acknowledge that and deal accordingly.

Pearson: Take steps to protect yourself in case.

Robinson: Now, another story we didn't get a chance to talk and Ben in Elberon, Iowa is asking the question, livestock producers, looking at it from an end user, end corn user perspective, with the volatility potential that is out there with the late crop and this heat dome and potential for early frost and so on, how do you best prepare for feed costs?  What sort of indicators would you be looking at before you went to pull the trigger?

Robinson: You know, the first thing I'd probably ask Ben is where are you?  Where are you located?

Pearson: Central Iowa.

Robinson: Central Iowa, which, you know, is one of the areas unfortunately that has been suffering from an extended period of dry weather and our crop prospect is not nearly as bright as it is in other regions of the state and other regions of the Corn Belt.  The thing he might consider here is if he is going through some type of crop, excuse me, some type of livestock budget and can calculate his cost of gain with some degree of accuracy then perhaps he foregoes the idea of trying to time his feed entry but rather manage it from a crop, from a livestock budget perspective would maybe be the best advice I could give him.  If he's trying to time the market, even with the concerns that we have and the potential reduction in crop size from last month's report, I still feel there's some downside risk here, Mike, so I would defer on laying in all of his feed needs for the next several months.

Pearson: But push that pencil and be ready to maybe make a purchase when the margins are there.  He was asking, you know, wait for $3.00 corn?  Maybe be a little more conscious managerially.

Robinson: And I know he'd like to hit a home run on every pen of cattle that he finishes.  Sometimes that's difficult to do.  Some type of call strategy would at least create a ceiling in the futures market.  Now that doesn't create any kind of a ceiling in the cash market but that might be an opportunity for him as well.  Beyond that, I guess I would defer to that budgeting and management type philosophy.  What is your objective?  What metric do you use to measure success on these cattle?

Pearson: You bet. 

Robinson: If it's return per pen and you have the opportunity then take some of it.

Pearson: Take it.  And now your comment leads right into Austin in Kansas' question, for corn is the path of least resistance for the December contract up or down?  And what is sort of the long-term general consensus in your dealings in the market?

Robinson: Right now I would answer that question by saying I think the path of least resistance remains yet lower.  Mike, I'm not convinced that we have a crop disaster looming.  Now I'm clearly not oblivious to the weather concerns that have surfaced.  There are genuine concerns.  But at present even if we were to reduce production this year by 300 or 400 million bushel versus last month's report, you can still project a pretty healthy carryout and supply.  So to answer his question tonight I would say there is yet significant risk to the downside here.

Pearson: Okay.  And that kind of feeds into Kristin's question in Wisconsin.  She's saying, FSA posted their prevent plant acres a week or two weeks ago, as those get incorporated into the USDA's reports could that create a price spike if they, depending on how those acres are -- what is the trade expecting I guess is the question on those USDA --

Robinson: Right now the industry is of the opinion they'll trim both planted and harvested acres between now and that October report, Mike, by as much as one to two million acres.  And I understand the logic in that argument.  I still think the real X factor here is yield.  If we'd happen to push back towards 160 and not towards 150 like most would want to argue tonight then, again, the supply situation is quite adequate.  So as mentioned earlier, this is a moving target and really difficult to define and handicap.  But I do think even with fewer harvested acres if we were to sustain this 155 bushel yield or something there higher there's plenty of corn supply.

Pearson: There will be a lot of corn coming out of these fields potentially.

Robinson: That would be my opinion tonight, yes.

Pearson: Alright.  Now one of the things we didn't get a chance to have you expand a lot on during the show was hogs.  And we talked about how disappearance has been increasing.  Just could you maybe elaborate a little bit more on sort of your general thoughts on the lean hog contract?

Robinson: Well, right now the spot contract discounted pretty significantly to the cash index so that is to me not a very attractive hedging opportunity.  The December contract and the first quarter contracts I think there is some risk there, Mike, to the downside only because I think we'll have an adequate slaughter supply from this point through the balance of this calendar year.  So I don't sense a supply shortage by any stretch of the imagination.  But as aforementioned if we in fact trim this beef supply and trim it pretty significantly then the demand for protein or edible protein shifts somewhere and it is likely to be pork and poultry.  So I'm kind of reluctant to finalize the price of fourth quarter and first quarter lean hogs.  I would prefer at this point some type of a put or put spread strategy and create that floor.  The number of gilts that are being held back I think, at least the work I've been witness to, is beginning to creep up a little bit which would suggest an effort is underway to grow the hog herd.  So that is certainly something we need to pay attention to over the course of the next several months.

Pearson: So the push/pull is going to be between potentially growing herd versus increased beef prices leading to increased pork consumption -- which one is going to pull the market one way or the other and hence the put spread.

Robinson: Right now if I had to, if I were forced to answer that question I really like the prospects for demand to improve, Mike, in the next several months both domestically and I think in the form of export sales.  The world economies are not blistering hot by any means but they are continuing to show relatively steady, slow growth and I am encouraged by that.  So the demand base of the course of the next many months I think will continue to grow larger.

Pearson: Alright.  So just keep an eye on herd size.

Robinson: That's one of the primary factors and then create some type of objective and how do you measure success in your hog business.  Return per hog?  If it's available I'd capture some of it.

Pearson: Certainly.  Alright.  Thank you so much, Virgil, appreciate you being with us tonight.  And thanks to all of you for sending in your questions via Facebook and Twitter.  Please continue to do so and we'll continue to get expert analysis for you.  Have a great week.


Tags: acreage agriculture analysis basis commodity prices corn economy markets midwest new crop grain soybeans USDA Virgil Robinson weather wheat