Market Analysis: Darin Newsom (May 3, 2019)

Market Analysis: Darin Newsom (May 3, 2019)

May 3, 2019  | Ep4437 | Podcast

Podcast

Wet fields, an announcement that a trade deal was close and a lower priced South American product were a mixed bag for the grain markets. For the week, July wheat fell a nickel while the nearby corn contract bounced a dime higher. Another week promising the end to the trade war, coupled with lower priced Brazilian soybeans continued to drag prices lower. The July soybean contract plunged another quarter. July meal lost $5.50 per ton. July cotton fell $2.02 per hundredweight. Over in the dairy parlor, June Class III milk futures improved 23 cents. The livestock market returned to mixed conditions after last week’s sell-off. June cattle dropped $1.62. August feeders shed $6.47. And the June lean hog contract rebounded $4. In the currency markets, the U.S. Dollar index lost 49 ticks. June crude oil retreated $1.02 per barrel. COMEX Gold cut $8 per ounce. And the Goldman Sachs Commodity Index slumped nearly three points to finish at 441.20. Joining us now to offer insight on these and other trends is one of our regular market analyst Darin Newsom. Darin, welcome back.

Newsom: Thank you, Delaney.

Howell: Darin, Kansas is the topic of discussion, apparently there we just had that cover story, and they also have been hosting the Kansas Wheat Tour this week. What have you been hearing from that tour?

Newsom: I haven't been hearing anything because I wasn't paying attention to it. But I do know that at least through the grapevine the crop is supposed to be better than it has been over the last few years. But we've had moisture, looks green, so that's one thing in its favor. So it sounds like we're going to be starting harvest here before too very long in the far southern reaches of the Southern Plains. It sounds like the hard red winter crop is going to be larger than it has been. We'll see how the market takes that news long-term.

Howell: Yeah, it has really been one of the commodities that has been thriving in all of this wet weather. The opposite, the counter partner there, the spring wheat crop has not. When we look at planted acres we're at 13% in the latest report versus 33% on the five year average. When do we start to see some of those acres switch to corn or soybeans or another commodity?

Newsom: Well, if we do then is it 13%? Or is it 50%? Maybe 67% has actually been planted. So the percentages are, as I tell everyone who asks me, the percentages are completely irrelevant. The real concern is, and you're absolutely right, is that we've got two very distinct situations going on here where we may have a larger hard red winter crop and we have no idea what's going to get planted or what size the hard red spring crop is going to be. But what's interesting is that if you look at the new crop July Kansas City and the new crop September Minneapolis contract the patterns are very similar. They both went to new contract lows this week, they both are really struggling at this point and if we look fundamentally at the July Kansas City, regardless of what anyone says the crop size is going to be, right now we've got a 71 cent carry in the July contract, from the July contract through next May. That's huge. And so it's bearish.

Howell: And that carry indicates what to you, Darin?

Newsom: That carry indicates to me, right now what it tells me is that nobody wants you to sell any wheat nearby, new crop wheat, they don't want it nearby. Everyone says oh yeah, well it's bullish because what they're saying is they'll pay you more later on. No, they don’t want to pay you anything now for it. And if we use the standard amount of carry it's actually above total cost of commercial carry, it's 104%. But we have this funny thing called variable storage rate in the wheat and we've argued about that here before, that makes it only 71%. That's still bearish. It's still a 70 cent plus carry. It's a bearish situation. The market knows there's too much wheat on hand and that we're going to grow more.

Howell: Okay, Darin, let's continue with this weather discussion when it comes to corn and soybeans. We've got a great question here from @FarmerDave1853 on Twitter. He said, we're seeing the Mississippi River bids spike due to high water conditions on the mid-Mississippi. What advice do you have for folks still setting on old crop corn and soybeans? And also what are your thoughts on developing a new plan for marketing new crop corn and soybeans?

Newsom: Well, I don't know all the facts about the first part of that question for the old crop. If they're hedged let's say and they've rolled their hedges on and on and on and they're out sitting in the July contract at this point, the game is now how much longer will basis in both old crop corn and soybeans continue to push higher? We are seeing some river problems. I saw something where the CME is declaring force majeure along some ports along the Mississippi River and Illinois River. This could cause a short-term spike in basis. Others are saying, it's one of those things some are saying it's going to cause a spike in basis, others are saying it's going to wreck basis. I think right now we could continue to see some basis appreciation. So if I'm sitting on some hedged grain, old crop grain, I'm probably going to roll the dice, see how much I can milk out of this thing and can let it continue to appreciate into my hedges. If I'm unhedged what we have to hope for here is the old rule of basis thin spreads and then the futures, hope for some sort of futures rally. We started to see a short-term move in corn and old crop corn but we're not seeing anything in the old crop beans right now. So if you're unhedged you're going to have to try to get some sort of rally in this futures market and then just unload. As far as new crop, we could sit back because if you sell now you're basically selling in a hole. Again, Nov beans went to a new low this week. What you would be betting on if you're going to change your game, your strategy right now, is some sort of weather scare. Maybe we don't --

Howell: Are we having that? When will we have that weather scare?

Newsom: Maybe it is right now because of the flooding. It's very possible this is our weather scare. So this could be our opportunity. And, again, we went to a new loan in November beans because of all the talk that we're going to see more bean acres planted. If we can get Dec corn moving higher, and we might again next week, it certainly looks like at least on the short-term daily charts that it should move up. So I think it's going to provide us some opportunities. Could we approach $4 again? It's an outside shot, but depending on how excited everybody gets and if we start to see some serious non-commercial shortcovering then yes, we could possibly make that run at $4 again.

Howell: Old crop corn this week moved off of that July low. Is that indicating to you that maybe we are factoring in the weather concern? Or is that just, that was really the only positive this week when you look at the grains.

Newsom: Yeah, the old crop July is not going to really reflect the weather all that much, except for the flooding and the port closings and all of that sort of thing because there's going to be a push to try to buy some nearby grain to get supplies to meet what little demand there might actually be out there and we continue to see our export pace slow down from week to week. So I think it's a real tricky game right now. I think it's a short-term uptrend on the futures. Fundamentally old crop corn is still bearish. We see a stronger basis only because everyone is holding tight. But once folks start to let go of that cash corn it's going to be who sells less because whoever holds it the longest is probably going to pay the price.

Howell: Could that possibly be the funds then?

Newsom: No, the funds are perfectly comfortable being short and if we go back to the March 29th quarterly stocks report where USDA said 8.6 billion bushels, the funds know it's out there, they can look at the old crop spreads and they can see that the market, the commercial side of the market is bearish as well. So they're perfectly comfortable. We could see a little bit of covering over the next couple of weeks. But they are very comfortable in their short position right now. And until we get through the old crop market, once we get into new, that might be what triggers some selling if we continue to see some commercial buying coming in the new crop.

Howell: Okay, Bearin, let's talk about -- that's a thank you to Ed Duggan by the way.

Newsom: Yes, that was very good.

Howell: Let's talk about old crop soybeans. They posted four or five closes down in a row here on the session. How much more downside potential does old crop have?

Newsom: I'm going to surprise everybody here.

Howell: You're going to be bullish today?

Newsom: I am going to be extremely bullish, well at least by my, exactly, in saying that we may have seen, we may have seen the low this week and it's all from a technical point of view because we look at the fundamentals, soybeans, old crop soybeans should continue to go down, no doubt about it. They're bearish, they're going to stay bearish, they're not going anywhere. But from a technical point of view we may be seeing the possibility, and it's going to depend on what happens next week, of a two week reversal, bullish reversal. And the reason why I say that is because we fell down to a new low this week, we closed near that low and often that is the first step that you have to see from a technical point of view for a two week reversal is to get that new low and close,, near it, then the next week you rally and close near the high. We've got stochastics, weekly stochastics that are in sharply oversold situation. This could start to bring some money in or some shortcovering in except for the fundamental problem. We have so many beans on hand. It's going to take some shift in the perception of the old crop soybean market.

Howell: Which could be maybe a trade deal.

Newsom: No. I don't think so. I think that ship, that's kind of a pun, that ship has sailed. I don't think an announced trade deal right now is going to have any effect on the old crop soybean market and I don't think one is going to happen. The next talk is June.

Howell: It's hard to keep track honestly.

Newsom: Exactly, I've kind of lost track. So I'm not really sure that's going to be it. I think we have to see some sort of dramatic decrease in expected U.S. ending stocks. But then we get into the problem of okay, if we see that the spreads are still bearish. So who's right? They could both be right. We could still lower our ending stocks projections and still stay bearish the market. So I think that's probably the most likely scenario is that we start to bring our ending stocks guesses down, that's certainly seasonally what tends to happen with USDA guesses starting with next week's report because everybody is focused on new crop, on the initial numbers that we've already seen before a couple of times, and they lose focus, they lose sight of the old crop numbers and that gives an opportunity for USDA to continue ot lower its old crop ending stocks.

Howell: Okay. Darin, let's save the cotton discussion for Market Plus. We've got to talk about the cattle markets, live cattle and feeder cattle have had nine to ten straight closes lower. How much lower are the trends indicating now?

Newsom: I think there's still some room to the downside. We took care of a lot of the technical space in there this week in both the June live cattle and August feeders. But I still see some room to the downside. We can lose, well I've forgotten my chart targets, but we've still got some room. We're not oversold yet, which is a key thing to me. But if we can find some buying, if we can rally, if we can hold this week's low and start to rally, it might give us a chance to bump up for a couple of weeks then turn down to new lows. So I think next week is a very important trade. If we can keep the cash market, if we can start to firm the cash market again that might be enough to bring some buying back into the cattle market, particularly the live cattle market. At that point we might get this little recovery bounce then head off to a new low here within the next two or three weeks.

Howell: Why did we see this trend start to head to the downside in the first place?

Newsom: We've got a lot of cattle. We've got the spreads --

Howell: Are we just now kind of maybe pricing in this wall of cattle we keep hearing about?

Newsom: It's very possibly because we look at the June-August spread and it's not bullish. We're seeing the June lose ground to the August contract. We've seen the actual cash market start to soften in some markets. The monthly cattle on feed reports continue to show a 3%, 4%, 5% increase over last year and last year's numbers were huge. So we've got plenty of cattle on hand. We still have strong demand, there's no doubt about that. We've still got a lot of disposable income. We've got a lot of domestic demand. We've got foreign demand. So if we continue to sell off, I'm not looking for it to be long-term, pull it back here over the next month or so, then maybe get some late summer buying coming back into the market.

Howell: Okay. Darin, there is this notion that has been floating around, I'm interested to get your take on it because beef is usually the premium cut, it's at a premium to pork. But what has been going on in the lean hog markets? This week we had another rebound. Will lean hog prices help pull back up cattle prices?

Newsom: I'm not convinced that they will. I think what we're seeing in the hog market this week is what we'll probably see in the cattle market either next week or the week after that. So they're moving in very similar patterns were we've seen a sharp selloff in the hogs, we kind of ran out of selling and that allowed them to rally back at the end of the week. So I think next week hogs probably stay stronger, see if the cash market comes in and helps support it again. Then, again, it would not surprise me to see the hogs turn lower, cattle follow a couple weeks higher and then move lower as well. I'm not sure that we're going to, that this rally in the hogs is going to directly affect the cattle market other than the fact it kind of shows them what way to go.

Howell: Okay, but lean hogs you think holding steady for another couple of weeks before we see them head down again?

Newsom: I think so. I think next week we could trade hogs higher again, maybe even one more week after that, get into mid-May would not surprise me for the market to start heading lower.

Howell: Even with the African swine fever taken into the equation?

Newsom: It's built in. How much worse is the story going to get coming out of China? We don't know that, it could get worse. But we had the big emotional spike, which looks to me, it's the same thing that we used to see in grains when it would get hot and dry for seven to ten days. It's just a normal short supply spike. And those usually don't last very long, you get them to pull back, then you have to see if the next wave comes in. If we get this next round of scares, this next round of headlines it drives it even further, brings the buyers back in. Right now we're not seeing it.

Howell: Okay, Darin Newsom, thank you so much for your analysis today.

Newsom: Thank you, Delaney.

Howell: That wraps up the broadcast portion of Market to Market. But we will keep this conversation going on Market Plus where we’ll answer more of your questions. You can find it on our website at Market-to-Market.org. Did you miss part of the discussion this week? Subscribe to our YouTube channel and get notified when the program and Market Plus are online. Join us again next week when we’ll explore how high school students manage the local grocery store. So until then, thanks for watching. I’m Delaney Howell. Have a great week!

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