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Market Analysis: Feb 25, 2011: Market Analyst John Roach

posted on February 25, 2011

It was another wild week in the commodity markets as the trade pondered the impact of socio-political unrest in parts of Africa and the Middle East.

For the week, May wheat lost nearly 45 cents and has shaved nearly a full dollar off prices just two weeks ago, while the nearby corn contract rallied 25 cents on Friday to cobble together a weekly gain of 2 cents.

Soybean prices trended slightly lower with the May contract giving up 6 cents. Nearby meal prices followed suit with a weekly loss of $1.30 per ton.

In the softs, cotton fell $10.70, and yet the May contract still managed to settle Friday at the historically unheard of level above $184.

In the dairy market, April Class III Milk futures lost 21 cents while the deferred contract declined more than 50 cents.

Over in livestock, the April fed cattle contract lost $1.05. Nearby feeders declined more than a dime. And the April lean hog contract lost more than $2, but still closed above $90.

In the financial markets, the Euro gained 60 basis points against the dollar. Crude oil wrapped up another highly volatile week with a gain of more than $8 per barrel. Comex Gold advanced nearly $21 per ounce. And the Goldman Sachs Commodity Index gained 33 points to close at 691-even.

Market Analysis: Feb 25, 2011: Market Analyst John Roach

Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, welcome back.

Roach: The wheat market came under a lot of pressure including the announcement that China was raising interest rates again was what initial catalyst started the price down. That occurred last week and initially it didn't have maybe the huge impact, but then we added to that the problems of the ongoing situation that's going on in the Middle East and that's enough to tumble everything down. The wheat market was also seeing some which are coming into China, which has been worrying people. And we saw some estimates in the Australian - Argentine raised slightly. So those are the underpinnings that tumbled our market lower. Wheat is struggling at the moment down at the lower side of the range.

Pearson: All right. Who knows what weather is going to do. Fundamentally, it is still a relatively tight situation as far as we're concerned.

Roach: We are in a relatively tight fundamental situations early on all of our crops. So we're going to have a big competition to see what crops get planted on the available acreage this year. But until we see solid signs of good new crops in the Northern Hemisphere, we're going to hold markets that are relatively high prices.

Pearson: Do you have some signals on wheat?

Roach: We did a week or so ago when prices were higher. we have no cell signals on anything. In fact, we have some buy signals on soybean meals.

Pearson: Take advantage here. But on the wheat market going forward, what are we telling producers? Are we close to being wrapped up for old?

Roach: At the moment we are idling. we are just waiting for the next recovery of the market. we think we still have bullish underpinnings in the markets, that unless something unusual happens in the political agreement that we're going to have the run back up to higher price levels and all the greens and we think we can participate in mind as well. So we think at the moment producers need to be relaxed a little bit and waiting for the next rally. And on the next rally, we think you have to make serious sales in the inventory and your bids as well as making contracts for the next coming out this summer.

Pearson: Will you retest the old highs?

Roach: There's a possibility we can. One thing that stimulated the market higher was weather problems in the southern hemisphere. We were just sure that Australian crop was worse than it seemed to be. We were more concerned about the Argentina crop and we needed to be. So those other issues have disappeared. They are wrapping up our base in all of those areas or have already wrapped up our base. Now we have to shift to the Northern Hemisphere and see what we have. If we have good crops, starting into the growing season, it should take winter wheat out and my guess is the wheat market will have trouble getting back to its prior highs.

Pearson: Let's talk about the corn market. What do you see happening there? Obviously, we heard the former president weighing in on ethanol in the 13 million bushels going into the ethanol production. It is the driver on the cornproduct. And we are hearing lack of support now in the house, in the U.S. House with other people saying the food thing can misinterpret what is happening in this world. Are you concerned about what could have been there, John? Do we need to step up sales of corn?

Roach: The first thing we need to understand is corn is the market that has the highest set of fundamentals. The majority of corn is based in the United States, the biggest producer by far. And as a consequence, the condition of this year's crop was the size of this year's crop is going to be extremely important. Ethanol is the usage production, the usage of corn into ethanol has been increased in the last several reports. you saw them increase the numbers lately. And we just heard in the recent past couple of weeks just started to see ethanol production slowed down a little bit, but we are still on target to have a very strong production and consumption of corn. The key here becomes the availability of corn as you get to the end of the season. I mean, you have to look at corn in one of two ways. Either you have enough to get through to the new crops or you don't have enough. If we don't have enough to get through, and even if we do, it is located in the wrong spot. When you get down to the very tight supplies coming down to a maybe a three-week inventory, corn seems to be in the wrong place. So you have to pay money to get it to move to a different location. We also have a problem with the hedging on corn, where you have a huge discount as soon as you go past the July contractor. In the following month, you start having a discounted future markets, which takes away hedging opportunities. So a lot of elevators will have most all of their corn gone before they get finished with the July futures contract because they have no way really to hedge it. There's too much risk involved. As we get down to the end, we'll find out whether do we do have enough, whether it located in the right location, whether the ethanol company processors can get their hands on the corn. If they can't, they need to slow down production or maybe even start production, in which case if you do that, we have enough to get around. So the jury is still out on that. Meanwhile, the futures market showed a very strong performance on corn. We dipped beneath a 20 day moving average this week for one day of and it immediately board back the challenge and contract types. So the corn market will have strong fundamental underpinnings with strong technical underpinnings. It has a whole group of people who want to bet on it going higher. And so, every time we see it fall off, it doesn't fall off for very long and comes roaring back. That's the close of the week we close in on a firm note in a market that has strong fundamentals. I think that's really the only way we can read them right now. And we need to have a big crop this new year in order to satisfy demand.

Pearson: How sold are you on the old?

Roach: We are virtually out. We made sales when we shouldn't have made sales. I wish we would've sold a pound of corn in the latter part of last summer. But we didn't and we are virtually out of corn. People are following our advice and we think we'll have two more subtle signals here between now and summer time for those that are still holding inventory and will be as those signals also to contract pieces as well.

Pearson: What price up what you start filling the new crop?

Roach: We just want the pendulum to swing back up and give us another cell signal. At the moment, and is starting to spring up that away from it. We think will be a new contract high when we get the next cell signal.

Pearson: In the world of soybeans, John, another good demand market, what are you seeing?

Roach: It is flowing a little bit and soybeans. We saw a real rush on the part of China prior to the new year to get good inventories on hand, make sure they are plenty soon for the holiday period. They are now coming back to work-in the Chinese green industry. And so, we think the demand may pick up a little bit, but it's been very sluggish year since the beginning of the Chinese New Year. Remember also the big crop in soybeans is raised in South America, Brazil and Argentina production numbers are the ones most important in the world. Although we were very worried about Argentina's crop during January, it turned out not quite as bad as we feared. The rain came in the nick of time. The Brazilian crop continues to get better. We saw numbers of 72 million tons of the Brazilian crop. We had a weather scare, weather problem and then the rains came and now you have a bean markets struggling. So it is performing the way you would expect it to perform, although it is in a bullish commodity environment, it's impacted by the uncertainty of the political situation in North Africa and the Middle East.

Pearson: All right. Bean sales.

Roach: Bean sales sold progressively into the market. We had a cell signal to wrapped up about a week and half ago. We still have two more increments want to sell, but most of our customers have most of the beans gone. We want to step up sales of the new crop and we think that you have to use string through the spring. While we are worried about the U.S. crop to get major sales made over to the high price environment.

Pearson: What prices do want to see those at?

Roach: I don't think so. I think the bean markets as they are in a solid weather scare market tomato if we can get that back until -- unless we have a weather scare in this country.

Pearson: Let's talk livestock. Obviously, the cotton market is that phenomenal levels.

Roach: Cotton up 7 cents today. We are seeing a continual speculative end-user kind of demand, even though it's trying to slow it down, seems almost impossible to get the job done until we get the crop planted, give it up to a decent card and get through this period of speculation we are dealing with.

Pearson: Nice in the cattle market. Lastly, we talked about a killer bowl that sold for over 1 dollar a pound. These are interesting times, John. Good to see the cattle.

Roach: We thought cattle traded as high as $1.12, so we are getting 20% above where we were a year ago. And we see economic earlier in the show that the economy is growing at a slower pace than people anticipated. And we still have the uncertainty out there with the geopolitical risk that is going on in the higher energy prices that will take extra money into people's pockets. So we have some different crosscurrents in here, but meanwhile we have a very strong cattle market and really no sign that the market is ready to give up. We have a strong carry in the futures market, so we think the market is on relatively solid footing here, but again we have cautions out there, economic kind of cautions that could cause us some problems. We think you have to look the profitability levels than we think it makes sense to lock in when you reach profit that satisfy you, try to figure out exactly where this market is going to take out as an impossibility as of the inside factors.

Pearson: Are there hedge able opportunities out there?

Roach: There are. Once you look at the cattle crash, once you get into the fall months, you get upwards of 90% of the best margin in the cattle crash that we've seen. So any longer-term feeding, where you have the corn available, even at these corn prices, there is still possible opportunities.

Pearson: All right. Calf market. It isn't like we are growing much.

Roach: We are not. We may be our starting a little bit in some areas, but we are still seen a lot of people just happy to get balance sheet. It's very hard to get it.

Pearson: Let's talk about the hog market in which you see happening. That is become very sensitive.

Roach: It has the experts have been a bright spot. Pork exports have been strong, particularly in recent weeks and it's kind of void the market back. The market was strong, backed off and noticed on the way, going back up again. Went to get out passage in contract, bumping against their life or contract highs veered so there is very solid optimism in the market place going through.

Pearson: Millions of dollars going through this commodity markets we talk about bad features in soybeans, cotton cattle, hogs. These other markets have been passed to talk about oil first. Crude oil is over $100.we touched on several times for now is in the impacted consumers with dollars disappearing, maybe making it more for the state. What do you see ahead on crude oil? Minus the geopolitical situation, but as we go forward, it's going to be the one to watch.

Roach: It really is. It's going to be the market word is most reflective of what is going on. And when we see the unrest in an add-on fee being thrown out, Saudi Arabia is just right there, close. And so far, the revolutions have occurred in countries that are relatively minor energy players. Libby had been the one exception. But it is so far. And what is happening there is very unusual in all of our lifetimes, as they try to predict what is going to happen there, I think it's a possibility. But it appears to me that we are going to continue to have people trying to overthrow the kind of leaders that they have been experienced team for this last generation or two. So I think we have more excitement on the energy market coming ahead, even our production levels will not have you think we deserve higher prices, I think that the political issues will bring more money into that market and bring prices higher.

Pearson: And also precious metals.

Roach: The precious metals market has really become one of -- a type of currency. It is no longer just a metal that people speculate and then try to hold the storm. It is actually currency. And so it is changed, just over the period of the last two or three years has become the new entity out there. In this paper currencies become troubling, then people feel more comfortable maintaining their money in that shiny yellow metal.

Pearson: All right. It's been interesting to see these changes John Roach, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from John 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, of course, join us again next week when we'll examine the impact of higher prices for everything from crude to food... Until then, thanks for watching. I'm Mark Pearson. Have a great week!

Tags: agriculture commodity prices markets news