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Market Analysis: May 27, 2011: Sue Martin, market analyst

posted on May 27, 2011


Despite reduced export estimates, wheat prices moved higher this week, as the trade pondered weather that included drought in the southern plains, too much rain in the eastern Corn Belt and severe storms near Joplin, Missouri that spawned the nation's deadliest tornado in half a century.

For the week, July wheat gained 13 cents, while the nearby corn contract moved a penny lower.

Soybeans also traded sideways as the July contract moved fractionally lower, while nearby meal prices settled Friday with a weekly loss of $5 per ton.

In the softs, cotton gave back about a third of last week's rally as the July contract lost nearly $3 per hundredweight.

In the dairy market, June Class III Milk gained 50 cents, and the deferred contract moved nearly two-bits higher.

Over in livestock, where Texas officials predicted drought-related losses will exceed $4 billion in the Lone Star State if the dry spell stretches into June, the August cattle contract lost $2. Nearby feeders were off $3. And the July lean hog contract fell nearly $4.

In the currency markets, the Euro gained 70 basis points against the dollar. Crude oil settled Friday with a weekly gain of 49 cents per barrel. Comex Gold advanced nearly $15 per ounce. And the Goldman Sachs Commodity Index gained 7 points to close at 698-even.

 

Market Analysis: May 27, 2011: Sue Martin, market analyst

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.

Pearson: Lots of stuff to digest in the commodity markets this week. Let's start with a couple of them. Again, we've had this stronger dollar, weaker commodity prices. This wasn't -- didn't really finish out that way. But it probably was a part of what we had to deal with this week.

Martin: Well, it was. I think that what really weakened the dollar off here on Friday was the fact that China indicated that they're probably going to pick up some of this debt this is seen over in Greece and parts of Europe. And I think that sent the dollar on maybe a needed corrective selloff, but certainly -- it's like this situation overseas in Europe keeps percolating, you know, between Portugal and Ireland and Italy and Greece and Spain. And if Greece defaults, you're going to see others go right along with it. And this is what I think we're fighting. But China stepped up to the plate this morning and said they would probably step in and pick up some of that debt.

Pearson: Well, the currency situation and the debt situation particularly in Europe, it doesn't look like it bodes well long term for the euro, does it?

Martin: No, it doesn't. It really does not. And, of course, it probably doesn't help us either mainly because we have stepped up to the plate through IMF and backed some of that debt ourselves. We can -- we have so much debt of our own, we can't afford to be picking up everybody else's problems. And so, you know, and that gets us into other issues: like if they default, how do you sell them grain; you know, how do you extend them credit? It's kind of a hard thing.

Pearson: It's going to be something interesting perhaps to see. Hopefully not. But China will be holding all the cards, which might be interesting diplomatically, as far as certainly our defense issues are concerned. So that could be interesting as well. Well, let's talk about specific cases here. Let's go to the wheat market first. Again, interesting week, as usual, in all the markets. Wheat was one where kind of some disappointing news in terms of export volume, but prices came back a little bit.

Martin: Well, I think wheat is being supported by the problems in Europe -- in Northern Europe. France and Germany both are having extended drought and some -- really issues are arising with their crops there, not only in wheat but in oil seeds as well. And then you've got, I would say, Manitoba and the southeastern part of Saskatchewan, where a quarter of the wheat plantings is not going to get seeded. So there is some issues and that's putting support under this market. And then, of course, those same problems in Canada are coming back to haunt North Dakota and parts of Minnesota, and you're not seeing wheat -- spring wheat and durham getting planted there. So that's supporting the Minneapolis wheat, which made new contract highs. And then, of course, it just rubs off on into -- the next one is the hard red winter wheat, KC, because of the hot, dry temperatures we're going to see in Kansas, all the way down to Texas this weekend. And then, of course, soft red wheat is Chicago wheat. It's had its share of issues too with losing some conditions and getting toward harvest as well.

Pearson: Oh, yeah. There's certainly some issues there and certainly in Southern Illinois and parts of Indiana and Ohio. So with that in mind, what are you telling producers on making sales on wheat?

Martin: Well, I'm telling them to hold off just yet. I do think once we get into June, we're going to have some periods where we will want to enter the market on the short side or do some hedging, making some cash sales, but I think they're going to have a chance to do it at higher money. Then, of course, from there, I tend to think I'd look at clear out into the fall. This is an interesting year. The weather is horrendous this year, and it's not just horrendous in the U.S. it seems to be in many parts of the world. China is dealing with a massive drought themselves, and that's a big player. So I think I would probably be looking at, yes, on the rally that we're getting currently and probably will get into June, I would use that to sell some grain. The problem is, you know, some of these places don't know what they're going to even have for a crop, if much. So I guess I would have to say maybe at that time they start looking at puts -- buying puts too. But stay as close to the money as you can.

Pearson: All right. Let's talk about the corn market. Obviously challenges there. Fewer acres. Everyone is talking about now closer to 90 million acres for corn plantings, and people are talking about lower trend line yields, sue. And when we saw what happened in corn this week, they seemed to reflect that.

Martin: Well, I think it does. The one thing we have to remember is that in Indiana and Ohio, you know, those two states -- if Ohio has gotten -- I would say if those two states got -- well, let's just say, Ohio, maybe they've got 20 percent planned now -- they didn't have a big window -- and you've got Indiana maybe 48, 50 percent planted. Well, you're looking at two pretty good producing states, especially Indiana. And I would have to say that you're looking at a June 5 prevent plant date on insurance. To me that's like a magnet and it's drawing on the market trying to drag it higher into that date. But when you look at it, are these producers going to continue to plant corn? The market says we have to have corn, and it's trying to get them to have the incentive to do so. But then the producer has to ask himself, you know, at $500 prevent plant, that pays for his machinery, his seed, and his chemicals. It almost makes it -- and he doesn't have to pay that out, and he could take that money in. It almost makes it worthwhile saying I'm going to take the prevent plant because if he doesn't, he really stands the risk of a drop in yields. That goes on his ten-year average for crop insurance.

Pearson: Right. It's definitely counterintuitive for a producer after the 5th of June to go ahead with corn. So, Sue, with all that in mind and with this acreage shortfall, is corn high enough yet?

Martin: I don't think so. I think we're going to see higher highs. December corn did put in an outside range month here for the month of May. We took out the contract highs for Dec. corn that were made in April. And we also took out the lows in the earlier part of the month, and then this week we made new highs. I think Dec. corn is justified to have a 7 in front of it and without any weather issues, so to speak. And so I think we're going to see Dec. corn move up to 715, possibly 742. But I also have some counts that come in right around 774 to 776.

Pearson: All right. Some targets to be watching. Let's talk about the soybean market, sue. And, again, a lot going on there and still some delayed plantings on soybeans as well.

Martin: Well, I think that on the soybeans, again when you look at Europe, you've got in Germany rapeseed problems. It looks like their crop could be down anywhere from 10 to 20 percent. You know, France and other parts of Europe are very dry and are having issues. But I think that -- again, you look at Canada and another place where they're having issues getting rapeseed, canola planted, I think that all comes back and supports soybean oil and pushes that market higher. In the past November beans have tended to rally $1.75 over the last, I want to say, four years for a summer rally. So I think that prices are going to go higher. Over the last had 42 years there's been a tendency in years when July beans have made new-contract highs in the month of February, they tend to come back and make new-contract highs again before expiration in July. I think we're going to see some higher highs here in June, and probably coming up right in front of us.

Pearson: All right. Let's talk real quick about cotton. A big -- obviously a huge rally this spring. Now kind of struggling. Demand is falling off a little bit, at least with those prices. What's ahead in the cotton market?

Martin: Well, I think cotton needs to be watched because this is another market that can all of a sudden bite you, and it could do that. But we do know that cotton acres are also coming out just like everything else with all this flooding. We're losing some cotton acres, but it does seem like around the world, cotton acres are kind of tending to start growing. And we note that China it looking at an increase and demand has been pretty good. So I guess I tend to think that cotton prices might give us a little bit of a bounce here they're next week, maybe into the middle of June. The real key will be if it's truly that tight in supply and demand is that good, you might get a little bit of a harder push in July.

Pearson: All right. Let's talk about livestock, fed cattle market. You were very friendly the first quarter this year. You got less friendly. Where are you now on fed cattle?

Martin: Well, the market has had a pretty good break. In fact, it's almost gone too far too fast. And we've had about a two-month decline. And we -- I do wave counts and we've already met wave three and even exceeded wave three, both in feeders and fats, so it looks to me like the market is due for some bounce here. And my timing indicators and percent are very low and turned positive. The weekly chart closed out with a doji on the candlestick charts, which is positive.

Pearson: A doji?

Martin: Yeah, that's candlestick charting. But it's a positive indication, so we'll see. But I think if nothing else, the market is due for some bounce. The one thing I'm looking at, Mark, and it will affect cattle as well as other meats too, as well as grains, but I'm looking at the weather patterns starting to shape up after we get past a week from now. I think that once we get more into -- past that -- into that first week of June around June 7 and beyond, I think our weather patterns are going to start straightening out and be more mild or kinder to crops. If that is the case, it just might let us have finally a good grilling season. And that might be very helpful to the cattle market. But the problem is we've got -- I think the final clincher was when they came out with the cattle-on-feed report and they showed placements in April at 107.8 percent, maybe even a little higher than that, of a year ago. It just took everybody by shock. Of course, it gave us that blow-off down on the cattle market, and then we caught and started to bounce back. Packers had a good week. Their wholesale prices increased and they dropped the cash price by four bucks, so they did okay. But exports are fabulous. It's the domestic consumer. As we've seen in our cold storage report, we had one percent less meat in cold storage -- beef in cold storage from a month ago, in other words from the month of March, but still well above a year ago. And that's not a good thing. That shows the domestic consumer is not consuming in the fashion he should. However, the cattle that were being placed, gosh, 23-percent increase in 600 pounds and under, I guess we had to stop and think, hey, where were we. If the conditions are that bad on winter wheat, we had to know pasture wasn't any good. Those lightweight calves were going to move to the feed lots. So when we get into august 1, we're probably going to have a historic record of the amount of calves -- or not calves, but finished cattle, coming in that have been on feed 90 days or more.

Pearson: That's going to be very interesting to see. Talk about the hog market too? Obviously robust export demand has kind of been the story for the meats, as you alluded to, and that seems to be holding up. But a lot of weakness on the board this week in hogs too.

Martin: Well, the hogs too have had their share of issues and, of course, we note that the slaughter was up 5 percent this week from a year ago, where cattle was down one percent from a year ago. We seem to have good numbers. But also the cash market is premium to the futures -- yeah, premium to the futures for summer months. And that's kind of abnormal for this time of the year, so something is going to give here. Either the cash is going to start to fall back, or the futures are underpriced and they're going to come forward. The one thing we've got going here in the hog market -- and this is what they're fighting -- is extremely cheap poultry prices. And because they have extremely cheap poultry prices and the price of corn is still ebbing higher, unfortunately, the hog producer is being squeezed a little bit and they're losing some money right now because of the way this situation is. Again, the domestic consumption is going to the cheaper meat, poultry.

Pearson:Sue Martin, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Sue on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

Pearson:And be sure to join us again next week when we'll examine the market impact of diverse weather patterns. Until then, thanks for watching. I'm Mark Pearson wishing you a happy and safe holiday weekend.

 


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