Analyst Darin Newsom discusses the volatile commodity markets with host Mike Pearson.
Pearson: This is the Friday, August 17, 2012 version of the Market Plus segment. Joining us now is Darin Newsom. Darin, welcome back.
Newsom: Thank you Mike.
Pearson: Glad to have you here. One of the things we didn't get to talk about on the show and I would like to touch base on just a little bit is cotton. What do you see? We had an up week this week. Where do you see that going forward?
Newsom: Cotton has really had a tough time lately. You know it did tick up a little bit this week but by and large it is still caught in this sideways trend. We still have got some bearish fundamentals hanging out there. News that China, Chinese demand is actually going to be going down instead of increasing. This is one of the few markets where we actually see demand slowing and so there is just this weight on the cotton market right now that these little rallies that we see are going to be very difficult to maintain. We don't have a great deal of investment money coming in that is interested in cotton. So, I think the bigger picture, the long term picture in cotton, is one that this is a market that is going to struggle. It is going to struggle against the other grains. It is going to struggle against the other ag markets in general and I think this will be one the traders are willing to sell.
Pearson: All right. Ok. So as we head into these little rallies, sell into them?
Newsom: I think so. If you are a producer and you see these rallies, see these spikes in the market maybe following something else, following some of the market, I think you can use that to your advantage and you get some - you get some price protection on it.
Pearson: All right. And with regards to China is there a reduction in demand? Is that based to a slowing in their economy or is it - is there anything that could happen over there that could help cotton?
Newsom: Well, they're actually looking at replacement. We get to these points where we have replacement products that move in and right now they are looking at replacement products for cotton. You know cotton from other areas -- other types of cotton and these sorts of things. And it is just, you know the overall picture now just continues to grow more bearish and this again one market- this is one of the few markets that we see that in and certainly it doesn't bode well long term for the cotton market.
Pearson: All right. Well, let's talk about something where really it is the producers here with the basis. We mentioned just briefly aflatoxin in the corn supply. What do you see that having an effect on basis for the producers out there?
Newsom: You know there are a lot of things out there that point - we are going to have a stronger basis going forward and I really think that we will. You know cash market is going to be strong because of this tight supply, but when we start dealing with the aflatoxin issue and aflatoxin is expected to be - it is suppose to be a larger problem this year because of the drought. The issue is we are going to have those bushels. Yes, we can't use them anywhere else. We don't have any exports. We are going to have reduced bushels. We are going to have reduced production. But the bushels that we do have aren't going to be able to use for feed and at least exports. So, now we're going to have these bushels that yes, they are smaller but now we can't use them. And so I think we're going to see a deduction put on those bushels to try to move them into the system and that deduction in price is going to be reflected in possibly a weaker basis. So, I understand the argument that the overall tight supplies are going to strengthen basis and I don't disagree. But when we get to talking about aflatoxin, in particular possibly localized where it might be heaviest, I think those areas could see a little bit of weakness in basis due to this problem.
Pearson: All right. So for producers out there should they be taking steps to protect the basis that is out there now or should they risk it and see how things look as harvest rolls around?
Newsom: There are some things that they can do. They can go in and forward contract but again it is the same problem. How much do you forward contract because you don't really know what your production is going to be. You can use DTN index futures that are traded on the Minneapolis Grain Exchange. They are cash based and you can use those against your hedges in the other futures market, in the Chicago Futures Market, and this is a way of locking in basis as well. So, there is some ways of going about it to protect yourself and then waiting to see what type of - how large this problem actually turns out to be. You don't want to get overexcited. Just like with anything else you don't want to get overexcited about locking in this basis because it could firm because of the tight supplies as long as demand holds it together. But if you are concerned about your area, concerned about the aflatoxin issue, there are some avenues you can take to protect yourself.
Pearson: With regard to the basis growing stronger, what sort of time frame are we looking at on there to get an answer as stronger or weaker?
Newsom: I think here in the next 30/45 days is going to be - probably going to be the key to the market because this is where we're going to see our yield numbers coming in. A time of year normally at harvest we see corn basis, soybean basis, whatever get weaker, I don't think we're going to see that weakness this year. I think we're going to actually see basis firm as harvest goes along because the yields are probably going to be more disappointing than some are projecting right now. That is going to last about 30/45 days. Then we're going to get into the issue in corn of demand starting to back off, continuing to back off and then I think that could start to weaken basis. Well, the key to basis at this point, we have seen exports are already slow, we have seen feed demand already slow, ethanol demand has really been what is supporting - domestic ethanol demand has been supporting the basis. So as long as that holds together, I don't think basis is going to collapse. If that starts to come back, get whittled away, that is when basis could start to come under pressure.
Pearson: All right. I would like to talk a little bit about what you see going forward is the important things to look at, and you mentioned under - during the show one of the market segments, you are concerned with the spreads. Could you explain that a little bit? Kind of go into a little more detail what you see going forward and how it is going affect -
Newsom: One of the keys to the way I study the markets is to look at these futures spreads, the trends of these futures spreads, how these prices of any market line up. I put more reliance on those for a picture of what the actual fundamentals of the market are rather than anything that is in the USDA reports or any government report. So, if we look at these futures spreads, we talked about the sharp -- in other words the nearby contracts much higher priced than the deferred in soybeans. Similar situation in the corn market and even in the deferred wheat we are seeing that which goes back to that discussion that we had about at some point Europe is going to run tight and the business is going to come to the U.S. So, watch the trend in those spreads. As long as we see that inverse continuing to strength or holding in place that means there is still concern this market is going to not only support the futures price but should support the cash price as well. We usually see a strong cash market in inverted futures spread situations. So, to me that is the key. As long as those hold in place, we should have a strong market. When those start to change, start to soften a bit, that is when we could be looking at the different problems in the cash markets as well.
Pearson: All right. Well, we have got a couple questions here from Twitter. We did have Jason in Iowa asking will demand destruction beat the price of corn back down to seven dollars and if so what is the timeframe on that?
Newsom: You know seven dollars really, if we look in the grand scheme of things, it isn't that far away. I mean we are trading at eight right now. Technically, just from a technical point of view, we could drop this market back to seven without really blinking an eye. That can happen in just a matter of days. You know the early threat was if we blow up demand completely that we would take it back down to the two and a half to three dollar level back where we were before this whole demand market started. I think that threat has been muted a great deal by the way the market has behaved here of late. So, I don't think we are going to go that low. Could we get back to seven? Yes. If so I am going to guess maybe late 2012/early 2013 before we get into this rush, before we get into this fight for acres in the spring of 2013. So maybe hit a little over the winter. Longer term could we pull back maybe even as far as six? Outside chance, yes. But again the overall tight supply situation and demand methodically or in a well-organized manner coming down, I think is going to provide support.
Pearson: All right. Any final thoughts you have got to wrap up the show here?
Newsom: You know this is one of the more interesting years. One that we will talk about for - a long time, for years to come. I think what is going to be important is how these markets - again how these spreads react and how the investment money comes back into these markets. We talked about some of the bearish factors that could push soybeans lower. All of them being investment related. If they are still willing to buy in at these levels, I think it changes the nature to have these markets trade, they are not really as scared of volatility as what we once thought, and they are not as scared of buying at record high prices. So, what that would tell me? Supply and demand is coming back to the forefront which is something that we haven't seen off and on for many years now.
Pearson: All right. Well, thank you so much Darin. Appreciate you being here and join us next week.