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Market Analysis: Sue Martin

posted on March 15, 2013

The Dow's epic run this March gives the index a gain of about 10% during the first quarter.  And that bodes very well for the rest of the year.  Going back to 1950 there have been only twelve times when the bellwether advanced more than 8% in the first quarter.  Amazingly, the Dow closed out the year in positive territory each and every time.  Grain prices also rallied this week, albeit more modestly.  For the week, May wheat gained 26 cents, while the nearby corn contract moved 14 cents higher.  Soybeans bucked the bullish trend this week as the May contract lost 45 cents.  Nearby meal prices stayed with the bullish trend falling 16.45 per ton.  In the softs, cotton continued its weekly rally as the May contract gained $5.62 per hundred weight.  In the dairy market, April Class III milk held steady, while the deferred contract moved 12 cents lower.  Over in livestock, April cattle lost $1.78, nearby feeders were off $2.25 and the April lean hog contract posted a weekly loss of $2.35.  In the financials, the Euro gained 51 basis points against the dollar.  Crude oil rose by $1.50 per barrel.  Comex Gold advanced by $15.60 per ounce.  And the Goldman Sachs Commodity Index gained a little more than 2 points to settle at 650 even.

Market Analysis: Sue Martin

Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Sue Martin.  Sue, welcome back.

Martin: Thank you, Mike.

Pearson: We've got a lot of news going on in the markets this week with the Dow and its 10 day record setting streak.  We also, we talked a little bit earlier about ethanol.  There was some news in the ethanol markets earlier this week on about Wednesday with regard to RINs, the credit that producers get for producing and blending ethanol.  We saw a big price spike there.  Can you tell us what happened and what effect, if any, that has on producers in the field or ethanol plants?

Martin: Well, RINs did spike higher.  In fact, they made, I believe, the highest level that they have ever been.  And they did it sharply and then the next day they turned around and gave half of that back.  That was from Wednesday to Thursday and then kind of settled out from there.  So, but even still with the rally we've seen in RINs, ethanol production hasn't come on as strong yet as what we would think it should.  And so production is down a little bit, but in the meantime, you know, we're using ethanol as well.  You go to the pump and, of course, gasoline is what spurred this on, this move towards ethanol to bring demand back was because mainly gasoline was just so much higher than ethanol, maybe in some cases by 70, 60 cents a gallon.

Pearson: Okay.  All right.  And do you see gasoline prices staying in this area for a little while?  What should folks expect?

Martin: I think gasoline prices are going to still come back and try to be stronger.  They've had a good correction off of that high that they got to and crude oil, you know, reached the levels of up around 98, fell quite hard and is now hovering a little over 93.  So I still think that we're just kind of weaving away here, just narrowing in, killing time but as we get closer in towards the driving season I think you're going to see the gasoline prices hold quite strong.

Pearson: You mentioned crude oil falling back from that $98 level.  One of the things we've mentioned for a little while now is how crude oil is traded in dollars and the rise in the dollar was helping bring those crude oil prices down.  Can you talk to us about where the dollar has been in the last week and your thoughts on where it might be headed?

Martin: Well, the dollar had a tremendous rally.  It got to seven month highs.  And then it fell for two days.  In fact, it set back about 30, I think 30 cents the first day and then Thursday 38, or I should say today I think we were down 38 and yesterday, on Thursday we were down 30.  So a 68 cent pullback off of the high which was a pretty hard setback for a correction here for the moment.  Do I think the dollar is done moving?  No, I don't.  But in the meantime it's due, it is long overdue for this correction and when I compare it to other currencies be it rather it's the Canadian dollar, Australian dollar, the Australian dollar is coming down, the Canadian dollar has broken since January, ultimately really started as break last fall, late last fall around late October, November but then got a lift into January and has fallen off since then.  Well, about a week and a half ago it put a low in and rallied even though the dollar was lifting along with it.  But now this hard break, if this is a continuance, if we were to see this continue for a week or two, it just might have an impact where one, it slows up cattle imports.  We're seeing a tremendous uptick in cattle imports and that, it could have an impact on that.  Exporting meat overseas, it could have an impact on that.  You know, Brazilian corn, or soybeans are much cheaper than ours right now.  They're in their harvest.  I would call it the gut slot of their harvest.  They're probably about 59% harvested and I think Mato Grosso is probably over 85% harvested.  So they're really having a lot of product moving to port.  So that is keeping a little bit of pressure on their product along with the fact they can't seem to get it out very fast and so there's pressure there on that price level there.  So the dollar falling would be a little bit helpful against that.

Pearson: Certainly.  Let's talk grains.  Let's look at the wheat market.  We did see a bit of a rally this week in wheat.  What is driving that?

Martin: Well, I think part of it is the fact that last week, a week ago we had the Burlington Northern Santa Fe Rail lower their cost per car appreciably actually so that they could entice soft red wheat moving from the eastern part of the Corn Belt and move it into hard red wheat areas, eastern, or I should say western Kansas, Texas, that type of thing and it appears that's working.  So that has given the wheat market a little boost because there's an added incentive of demand there.  The USDA did show that feed usage in soft red wheat was going up at the expense of declining in hard red.  The other thing is, is that I think, you know, we look at some export demand has been picking up for U.S. wheat, that's been good.  In fact, we're really narrowing in on that estimate that the USDA had us targeted for, granted their crop year ends June 1st, but we're narrowing in on that estimate of where we should be for this time of year and some were doubting that that could occur.  So I think it has had those kind of situations expecting that wheat is replacing corn at the present time into feedlot areas and it certainly is.

Pearson: Looking at those facts on the ground where do you see prices headed here in the next week or so?

Martin: Well, the one thing I noticed about Kansas City wheat, we have targets that we, wave counts that we talk about and wave 4 was $7.09 and three-quarters and I think we got around $7.20 or something like that.  So we certainly got close to a window and have put a low in.  The other thing too, you look at Chicago wheat and it is also, well with the March contract to March contract we were running a little under price of wheat under the price of corn very abnormal and of course that entices the shift as well.  But as we ended out the week the May futures of Chicago was a little bit over the price of corn which is a good thing.  Still, I think that, you know, you look at the lows of last year, you know, we haven't been super far away from that but we seem to be trying to now make a little pattern of higher highs and if we can continue that, usually wheat, in a year similar to this, will put lows in, in March, sometimes May, or I should say April and then work their way up into May, June.  I think we need to see this crop, we've had some moisture, we need to get past this now and get a better look once we get into April we'll see how good is the moisture, how well is it helping the crop and where we stand with crop conditions because they have shown some improvement.

Pearson: Certainly.  Speaking of moisture, let's look at corn.  We saw another, a decent rally this week in corn.  Where do you see us headed, what is your take on new crop corn conditions?

Martin: Well, I think new crop corn, you know, we've gotten down to about $5.45, $5.45 something like that. We did have a wave 4 count at $5.51, it depends on how strong of a count you want to start with.  And so that was important.  $5.22 is another target.  What's more important is, in the corn is we have a huge gap sitting over us on this Dec corn that goes up to $7.12 and I do think that that gap will be filled, if not with this year's Dec contract I think it will definitely be filled with next year's and probably by early July of next year but it wouldn't shock me if it was this year's contract because I went ahead, I've never seen these, but I did figure up what 5 counts, what wave 5 counts would be just so that we kind of know what they were when the market, if it got there because as negative as everybody is on this crop this year -- and we have to realize it's March and we still have a long ways to go, one, to get the crop pollinated and two, to get towards December.  So somewhere in here, if we keep falling like we've been, well where are we going to be?  We'd be well under three, or four dollars and I don't think that is the case because wave 5's, one of the counts comes up at $4.50 and a half, another one comes up at $4.37 and another one at $4.08.  What wave 5's are, like I said, I have never seen them and I've done this for quite a while.  But they do exist, you know, the potential is there and so I just wanted those out there because end users need to be very cognoscente of those should the market get down there and $4.99 and a quarter was last year's contract low and $4.99 the low of this year's Dec contract.  So those are certainly price levels that you want to start locking up, if nothing else buy call spreads.

Pearson: Sure.  Let's talk soybeans real quick.  We saw turnaround, comparison from corn, we saw beans drop this week.  What is happening in soybeans?  Was it export news?  What caused that drop off this week?

Martin: Well, I think what it was, first off, was the fact that there was rumors and talk that China had cancelled Brazilian beans and everybody was thinking oh my goodness, this is a sign that crushers aren't making as much, maybe they have enough there as it is so their stability in what they have, they don't need to be importing as aggressively, that they would cancel shipments up front.  I think what it was is they flat weren't getting them fast enough, even though they are cheaper than U.S. beans, and I think this is a sign they may even go over and buy Argentine beans but they may come back to the U.S.  I think that -- but that started it and then you had the March going into expiration and the March on the day of expiration broke hard but the day before expiration on Tuesday the market fell 25 cents.  That was a real bad omen right there.  And then so the narrowing of that spread between the March and the May was a little disappointing.  But there's this attitude by the trade that well, by the time we get to the May contract in delivery we are going to have so many beans at us that the May won't have quite the impact.  They might find out they're wrong but for now we're setting back.

Pearson: All right.  So real quick what's your price targets there in soybeans?

Martin: Well, first off, in November beans I did the same thing and certainly around this $12.19 level there's, you know, good support there.  There is a wave 5 count, I came up with two of them at around $11.20.  So should the market on November beans ever get there, remember we're in the $12 ranges now so long time between now and November and beans move so it's just an FYI, should they get there don't become bearish.  It's, you know, we'll be bearish, we'll hear everybody and their dog saying how low this market is going, just don't buy into it.

Pearson: All right.  Well let's look at livestock.  Quickly, where do you see live cattle headed?

Martin: Well, the cattle market is really having some issues and, you know, it was all market dressed up and then all of a sudden it didn't have any place to go, you know, and it was dressed up because of all the tight numbers everybody was expecting.  But what we were finding was, is that the huge carries to the cash market was certainly allowing the producer to put a lot of weight on those cattle.  Now that has changed.  All of a sudden we're seeing these weights starting to drop, one, because of weather through the Plains.  I think the latest was about three pounds down, maybe a little over that and we expect that to go further.  The next thing that is going to help enhance that weight loss is the price of corn and the ability to get a hold of it.  And so we think that all of a sudden with not making money in the cattle industry, the fat cattle is losing money and with that happening they aren't going to be as anxious to feed these cattle as heavy.  Then you had an early Easter and that created demand to fall away right about the time you had Russia saying that they were going to ban imports of U.S. beef and pork because of ractopamine and then, which is kind of an interesting thing in and of itself because now they've been found to have horse meat DNA in their meat.  So all of a sudden maybe the U.S. product just doesn't look so bad.  So that would be one good thing.  But until we get that business coming back it's still kind of a bad nomer and then on top of it the sequestrence, sequestration, I'm trying to say that, I think everybody is so concerned of what that means for federal meat inspectors but if you look at it, if they furlough them one day a week you can still work on Saturday and have a 40 day kill week.

Pearson: Right.  So that's what we're looking at there in cattle, generally rather bearish.  Let's talk hogs real quick.  Where do you see hogs going in the next week, Sue?

Martin: Well, I think you're going to still get a little softer in the hog market.  Hogs I tend to be a little more friendly than the cattle market.  First off, you've got China with some issues.  Food inflation is supposed to be a little over 3% there, 3.2%.  That's, if that continues that's a little high for a country of that size and so that means they'll import.  Secondly, they've got hog disease, they've got some blue ear pig disease but they also have hoof and mouth disease and the number of dead pigs showing up is getting to be quite numerous.  So what they report makes you wonder if it isn't way even bigger yet.  That means they're probably, even though they say hog prices are falling, I think they're going to be importing pork.

Pearson: Thank you so much, Sue, appreciate you being with us.  We'll talk about feeder cattle and get more in depth on hogs in the Market Plus segment.  That wraps up this edition of Market to Market.  But if you'd like more information from Sue on where these markets just may be headed visit the Market Plus page at our website.  Now, before we go, we'd like to remind you one last time that public television stations across the country are conducting their annual fundraising activities.  So if you value the information and the analysis you receive each and every week on Market to Market please contact your local PBS station and make a pledge.  We appreciate your support.  Until next time, thanks for watching.  I'm Mike Pearson.  Have a great week.

Tags: agriculture analysis cattle commodity prices corn cotton drought economy hogs markets Mike Pearson soybeans Sue Martin wheat