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Market Plus: May 23, 2008: Darin Newsom

posted on May 23, 2008

Market Plus: May 23, 2008: Darin Newsom Pearson: Welcome to our May 23rd, 2008 version of Market Plus. We're glad you've joined us for Memorial Day weekend here at our Web site. A very exciting time in the commodity world and for those of us who have made a career out of following these markets, you know, we started talking about backing off from $6.50 corn down to $6.00. We talk about crude oil backing down from $135 to $127 back over $130. This is Disneyland. Darin, help sort this thing out. Oil has got to be driving this whole thing. Across the board you look at the biofuels demand, that hinges on where the oil price is. Food costs, everyone blaming biofuels when in fact the culprit most would agree, most academics will tell you is higher fuel costs, it all comes back to that.

Newsom: Yeah, you do. And that's a great point. You've got to take it to that next level, you've got to go past the biofuels or why are the biofuels, why are they in such high demand. It's because of the energy costs, it's because of the fuel costs and it has been a truly extraordinary week in the energy markets, just this unquenchable demand right now in diesel stemming in good part from Asia, particularly China as they head into the Olympics and they're going to make sure they've got plenty of supplies on hand. And this is increasing the demand for crude oil and so we're seeing this crude oil market just continue to go up even though people would argue it must be the supply of crude oil. Well, it's not. It's just the demand coming from heating oil for diesel that is pushing this thing higher. We saw the market go past $125, $130 this week, roll up to $135, back off a bit, find the buying again on Friday and that's what's interesting is that as we drop back down to about $130 the commercial traders were willing to step back in, say this looks like a good price. $130 per barrel, good price, commercial buyers step back into the market and help push us a little bit higher again on Friday. This is an extraordinary week at extraordinary price levels.

Pearson: Help sort this thing out for me because we heard the congressional testimony on the show, snippets of what was being discussed there. They're trying to find a bad guy here. Your point is that we're really talking about a demand driven market. It also seems that here in the United States we have become used to seeing bubbles, certainly we had the tech bubble, we've had the housing bubble here recently and bubbles have become part of our way of life. We've become bubble people. And a lot of people are saying that's what's going on in oil right now, it's just a bubble, we bubbled everything up. Could that be the case? Is the support not strong enough that we could see this thing collapse back sub $100 again?

Newsom: Sure we could. But what's interesting is that I don't quite agree with the levels the gentleman in the program was talking about as far as ...

Pearson: Oh yeah, 55 to 75.

Newsom: Exactly because if we look at the futures spreads and we look to see where the premiums are, the premiums have been in the nearby contract since July 2007. This is indicating commercial buying and those premiums have been in there until just this week as we crossed $130. And that is why when we crossed $130 and the premiums went to the deferred contracts that's where it finally said it looks like the commercial traders are getting out. The market went ahead on momentum, rallied up to $135 so if we had a bubble it was from that $130 to $135. We reached that level, came back to $130, there's where the commercial buyers stepped back in. So, I'm not as convinced that this market is overblown by speculation. Yeah, the speculators are playing a huge part, they're playing a huge part in all the commodities. But yes, it's a demand driven market and in the demand driven market we simply have to wait to find out the highs and lows that we're going to be dealing with from time. It's the same situation we've got in corn, we've been talking about the development of a demand driven market in corn and we've established a new price range. But crude oil is in the process of it as well. We're going to see these blow off tops, we're going to see these little peaks. It has to come back down and when we find the commercial buying, again, it indicates to us how overpriced it got at that time.

Pearson: You're right, this will be one we'll see in our rear view mirror. But your feeling is we're not close to that.

Newsom: I think, you know, as we come upon the summer Olympics and as they start to come to an end or as China gets all the purchases they need going into this thing the market may start to build a top. I keep moving my price target because there's really no way to say this is how high we think it's going to go. But if gasoline tends to top, you know, in early July, around the 4th of July weekend and crude oil might be getting some support from that and we start to see the markets back off some time this summer we could possibly reach our peak. I'm not saying we will, we're going to have to see this heating oil demand slow down. But when it does, when this heating oil demand, when this diesel demand goes away this market is going to have a long way to come down. How high could we possibly be? Well, right now I've got it targeted at $144 a barrel. We're hearing reports of $150 to $200 projections. Everyone is throwing their darts at this point. But we'll have to wait and see how this summer plays out.

Pearson: Bring this all around to our commodities that we typically follow on our show, wheat, corn, soybeans and, of course, the impact you're having on the livestock sector we'll leave for another time. But I said tonight and I got a little catch in my throat when I said we've got like a normal harvest wheat market because we haven't had a normal market behavior since the 15th of September 2006 when this whole thing exploded.

Newsom: Right. I was going to say, when was the last time you were able to say a normal wheat market but that's what we find ourselves in. Yeah, it's more volatile than it's been before, we're seeing huge moves but the market is acting as it normally does as we go into the harvest timeframe. The market is under pressure, every rally is met by commercial selling, hedging coming into the market driving it lower. Will we see the normal seasonal low come in late June? It's very possible because particularly if the other markets continue to run high that's going to switch some feed demand and everything over to the wheat market and all of a sudden we're going to have this new demand building. Supplies probably aren't going to grow by leaps and bounds this year so we could see a little bit of a tightening in the supply-demand tables and that could help push the wheat market higher. But, again, it is acting as it normally should this time of year which is somewhat refreshing to see.

Pearson: And, again, as we get corn and soybeans, as we get emergence of corn crop and the soybean crop we start to see some normalcy, we get an update on how many acres are out there, again, if everything goes along as normal this year could we take some of the heat off this commodity trade?

Newsom: Yes, we could. We could easily see -- let's say we're able to get through the growing season or get into the growing season relatively unscathed from this point on weather wise and so on. This $6.50 that we priced into the December corn contract that could be its seasonal high and we could start to see some money pulling out of this because they've traded the worst case scenario. Soybeans, you know, with these X amount of acres that we're supposedly going to plant this year and if production comes along the $13.70 or however high we push the November contract could be the high that we see and we could start to see the money start coming out of these markets. Where is it going to go? They're going to look for some markets that are undervalued, cotton, sugar, some of these markets that haven't rallied like the grain markets have could start to attract some of this spec money and this non-commercial money plus some commercial money coming in on the idea that these markets are undervalued and some of the grains may be overvalued.

Pearson: Alright, Darin, we're going to have to leave it there for this week. Thank you so much. We appreciate your expertise, Darin Newsom joining us this week on the show and, of course, right here on Market Plus. From all of us here on Market to Market, I'm Mark Pearson. Have a great Memorial Day.

Tags: agriculture commodity prices markets news