Iowa Public Television


Market Plus: Jul 23, 2010: Darin Newsom

posted on July 23, 2010

Market Plus: Jul 23, 2010: Darin Newsom Pearson: Welcome to the Friday, July 23, 2010 version of Market Plus. Thanks for joining us here at our Market to Market Web site, look forward to you joining us here every week. With us this week, Darin Newsom, always has some great thoughts on the market. Darin, everybody is talking about the wheat market. It looks to me like, now this is just an outsider, but it just looks to me, as someone who is observing from the outside, that the funds were all short wheat, they just thought there is a gob of wheat everywhere around the world, good crop in the U.S., this thing is a no-brainer, it's heading south. All of a sudden, and this happens to the people that know it all, all of a sudden, boom, Russia drought, Canada problems, you mentioned Germany, forgot about that one, some problems all around the whole Baltic region there and here we go with the big rally. I talked about truisms about the show on Friday and we'll do that today on Market Plus as well. Short crop, long tail. Is that what we're seeing in the wheat market? Is this the big move?

Newsom: It could be. I think this is a big move. I just have such a hard time seeing this as a short supply situation. The latest WASDE report certainly showed the world is not running out of wheat, the USDA supply and demand we have almost a 50% ending stocks to use domestically.

Pearson: Biggest in a decade.

Newsom: Oh yeah, I mean, this is the biggest going back decades. And the fundamental components of the market itself isn't showing this to be a short supply situation. We've got the carry strengthening in Chicago, Kansas City and Minneapolis wheat future spreads. We've got basis levels in all three classifications of the three major classifications in wheat crumbling. The hard red winter, the futures market is just taking off and running. But the basis is at historically weak levels. Cash growers, producers in Kansas are saying what is wrong with this cash market. We see these futures markets, we hear all this talk of the situation and this market just skyrocketing yet our cash market just gets worse all the time. What's going on? Well, the problem is commercial traders do not believe the situations as tight as what everyone is talking about and they are letting their feelings be known in the carry and the future spreads and in the basis. They are simply not going to pay up for the cash if they don't have to.

Pearson: Darin, as we look at the futures market, we yak on about it here because it's hard for us to talk about cash markets because people watch us all over the country so the basis values in the area may be totally different. But by and large, in Kansas, in the heart of the wheat belt basis levels are terrible, have been for ages, even the big rally in '08 we still had horrific basis values down there.

Newsom: Right, yeah, the way I like to look at it is D-10 puts together a national index which shows the national average cash price which helps to kind of solve the argument of what area are we looking at when we're talking about basis. So, if we look at the national average basis this is where we're seeing this $1.40, $1.50 under and it's a normal relationship between basis and futures when futures rally for basis to weaken. But what is really unusual is for the hard red winter basis to collapse like this. This means that there is quite simply too much wheat right now and the price is far too high. We've got one of these huge divergences in the market that almost always leads to some sort of a break and the futures need to come down to match where the fundamentals are saying that the market should be priced. When that occurs we don't know because we have seen a great deal of buying coming in, we've seen non-commercial short covering in Chicago and adding to their long positions in the other two classifications. So, until that buying dries up, until the market realizes maybe the wheat situation isn't as tight as what we're seeing or hearing this market is going to stay rather tentative, it's going to be a very nervous market and the larger that gap gets between the two markets the worse the fall could possibly be.

Pearson: So, if I'm at Fort Scott right now I've got a $1.50 basis roughly. So, I'm looking at a $6.00 plus price in Kansas City and I'm really looking more at $4.25, $4.50, something like that.

Newsom: Yeah, and if we look at the old crop, let's say the September is in that $4.50, I mean $5.50 to $6.00 we're talking about $4.00, maybe even sub $4.00 wheat. When you're seeing and hearing all of these news stories and seeing the futures market in Kansas City just explode it's hard to sit there and say why isn't my cash wheat appreciating as well? Well, the problem is the cash market itself is saying the wheat is simply just not worth that much, we've got a runaway futures market and basically a broken market at this point, similar situation Chicago faced a couple of years ago, it's an unusable market for the most part. And until we see the type of snapback that is required the market is going to stay that way.

Pearson: One last truism, the oats knows. What has the oats market been doing?

Newsom: You know what, I've got to be honest, I've actually lost track of the oat market here in the last couple of weeks.

Pearson: It's just usually been in this kind of trading range similar to corn.

Newsom: It has and that's the thing, it's similar to corn. Now, a couple of weeks ago we did see a huge move in the oat market and everyone was wondering if corn was going to be able to follow, we really didn't. So, now we'll see if oats can start to lead the way or if that old truism maybe has died out with the advent and taking over of electronic trade.

Pearson: That's all the truisms I got for today. It's going to be interesting to see. Volatility is the key word and that's what we're going to see. Are we going to have a chance of a normal harvest season for corn and beans?

Newsom: I think it's going to be an early harvest season. I think it's going to be a very volatile market during harvest season because you're going to have so many different market factors coming together all at the same time. But I do think it's going to be here very soon. This corn crop is maturing very quickly, soybeans running closer to average but I do think the corn harvest is going to be coming around very soon and then we're finally going to see what type of crop we've actually got out there.

Pearson: Final market truism for you, Darin. Plant in the dust and the bins will bust. Plant in the mud and the crop is a dud.

Newsom: My dad used to always tell me the first one and we had plenty of chances to plant in the dust down in Kansas.

Pearson: That's true. Darin, we appreciate it, appreciate your insights. Thank you for joining us here at our Market Plus page. By the way, now is a critical time. Public television stations are making decisions about what programs they are going to run or not run. If you'd enjoy seeing Market to Market on your local PBS station, our full live version, by all means now is the time to contact your local public television station wherever you are in the country. Pick up the phone right now and call your local public television station and make sure you're going to be able to continue to watch Market to Market on your local PBS station. So, do that today. For all of us here on Market to Market, I'm Mark Pearson. Thanks for joining us. Have a great week.

Tags: agriculture commodity prices markets news