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Market Analysis: Feb 11, 2011: Sue Martin Analyzes the Volatile Commodity Markets

posted on February 11, 2011

Other factors propelling the grain markets higher this week were poor weather and reduced yields in South America.

For the week, March wheat gained 14 cents, while the nearby corn contract rose 28 cents.

Disappointing export numbers and a stronger dollar pushed soybean prices lower. The March contract lost nearly 18 cents. Nearby meal prices followed suit with a loss of $5.10 per ton.

In the softs, the March cotton contract traded in record territory all week before settling Friday with a gain of $22.00.

In the dairy market, February Class III Milk futures gained 44 cents while the deferred contract moved 30 cents higher.

Livestock also have been riding a wave of higher prices that started midway through 2010. The April fed cattle contract lost 32 cents. Nearby feeders gained just over $1. And the April lean hog contract continued its run of higher prices with a gain of 72 cents.

In the financial markets, the Euro declined 45 basis points against the dollar. Crude oil wrapped up a another volatile week with losing $3.45 per barrel. Comex Gold gained $11.40 per ounce. And the Goldman Sachs Commodity Index lost six points to close at 649.50.


Market Analysis: Feb 11, 2011: Sue Martin Analyzes the Volatile Commodity Markets

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, Mark.

Pearson: We are in bullish times. Everywhere I go, every farmer that I talk to says, you know, when is this thing going to end: what's going to happen with land prices; where are we headed; what's the weather; what's the bad thing that could happen; where's the rationing going to start? We'll talk about that here on our show, but let's start first talking about the wheat market. Now, there's been one bullish thing after another after last august when we got the numbers on the former Soviet Union and the black seed wheat crop was abysmal, and then Australia gets flooded and flooded again. Our crop doesn't look all that great. Where do you see this wheat market headed, Sue?

Martin: Well, I had originally thought that we would see Kansas City wheat, which I think is the best one on the board and, then it's Minneapolis and then last comes Chicago wheat. But I had thought that we would go to $10. Now, we hit $10 this week on every contract of K.C. other than the March contract, and it was close. I think that the market is still going to push stronger, and it wouldn't surprise me with time that we can get up to $11. Now, the key will be when the U.S. crop comes out of dormancy, which isn't too far away, all eyes are going to be peeled on how good of quality or how good that crop really is and how the weather is. Does it catch moisture to bring it, because wheat can kind of revive a little bit. But all in all, we think that there's going to be some abandonment of acres that will probably be planted into something else. And what's going to draw those acres, corn or beans. Then on some of the back side of wheat, you'll get double crop beans. But I think that the weather is going to be very critical as we start to go into March and all eyes will be watching our wheat market. The U.S. has the best quality wheat I think in the world right now, and then Argentina has got some wheat to export too. But all said, it appears like France is pretty much almost out of wheat. In fact, they dropped their import tariffs on feed grains until, I think, like, the end of June, basically because they need feed grains and they've been exporting their wheat.

Pearson: Ten, eleven dollars, pretty fancy prices for wheat, Sue. And again, we're talking the board. Now, cash prices, have we still got kind of a disconnect there? Can we get those prices or is basis still under a lot of pressure?

Martin: Basis is maybe a little better than it was a year ago in some areas, but still not as good as what you would think. I think it's going to take some time, maybe some vulnerability to tighten up those basis levels, but still I think we have potential yet to push this market higher.

Pearson: What are you telling farmers? Should we be making sales here?


Martin: Absolutely. In fact, on our web site we recommended our first cash sales for this year and recommended that if the may and the July K.C. contracts hit $10 to pull the trigger on 25 percent of your old and new sales.

Pearson: All right. So that's where we are on the wheat market. Let's talk about corn. Obviously the USDA supply/demand estimate, which most analysts were saying was going to be a nonevent, did turn into an event with that, again, reducing the carryout.

Martin: Well, it is, and it certainly indicates that we are not rationing this crop. You have world coarse grains at 50-day supply and, of course, the tightest since 1973. U.S. corn days of supply is 18, with a stocks-to-usage ratio that's about 4.9, 5 percent. That equals the tightest we've ever been in history of 1995 and '96. In the meantime we still have our year to go through, and you've got Argentina looking vulnerable because some of their crop did get hurt and they're turning back hot and dry. So as they go through March, it's going to be very critical to watch their weather, one for the later beans, the double crop beans, and two for the later corn as to how they end up faring out of their crops. And I think that, of course, Argentina is number two exporter in the world, a distant number two, and then Brazil is number three. But in the meantime I'm not too sure we're going to see Argentina export corn this year.

Pearson: That's going to be interesting to follow. Mexico had some problems this week with the cold weather, so we're not off to exactly a perfect start in 2011.

Martin: No. And you have, you know, food shortages starting to become -- let's put it this way, food inflation is becoming a concern in Mexico as well. I think I read where there's been, like, 5,000 tortilla bakeries go bankrupt in Mexico. And in the meantime you've got China, Shandong Province is a major corn producer and wheat producer. It's the epicenter of drought. If they don't catch rain through the month of February, by the time they get into March, they could be the worst droughts in two hundred years. This is a major thing that we're looking at, and we haven't even rationed. And, of course, because prices of livestock are so high, poultry and livestock producers aren't -- they don't like high prices like they're seeing, but they're not complaining because they've got some profitability, so they're still happy. And of course, exports of DGGS is just phenomenal.

Pearson: All right. When we spin all of this back to buying acreage, you were just talking about $11 wheat, so we're not going to buy a lot of spring wheat acres it looks like for corn and beans up in the north, or can we with the 7.50 corn --

Martin: You might. I think what's going to happen is if we see a pretty good abandonment of wheat acres out of hard red winter wheat, then that's going to prop the markets up a little bit more aggressive, and then Minneapolis wheat is going to compete and probably draw acres away from soybeans.

Pearson: All right. So that being said, what kind of a corn number acreage wise do you think we need? Is it 92 or 93 million, is that what we need?

Martin: I think we need at least 93 million. You know, you look at the ethanol usage, and it's better than what we were expecting. The decline in stocks in that past week's report show the 75-million bushel carryout decline, and 50 of that came out of ethanol. I think we now need about a 5-billion bushel target -- 5 billion bushels of corn towards ethanol and so we have to have a good crop this year. Just think how these numbers will change so quickly with very little change in our yields. It's not going to take much to hurt us this year. The one thing is -- the good thing is we've come into spring in very good shape for the producer, for the farmer. He's got a lot of work done, inputs put on, but the difference from this year to last year was last year the ground wasn't froze under all that snow, so it melted in nicely and then it turned dry and, boy, farmers got the crop in early. This year we're frozen. It may be that we see some flooding in some areas with the runoff of snow, but in the meantime we probably may be a little bit delayed getting in. It's a late April Easter this year, the 24th of April. The old saying, late Easter, late spring. Who knows. But in the meantime I think it's going to -- anything that gets in late this year, we can't afford to have it late. We may be vulnerable for a late summer heat.

Pearson: I've talked to a lot of producers in the Central Corn Belt who are talking about trying to buy 104-day corn, trying to catch that September mark. What are your thoughts on that?

Martin: I think they're smart. If they can get it in nice and early, I think they're very smart to do that because I think your ethanol plants are very concerned about August and September. You've got cotton pulling corn acres away in the south, and that's your early corn that normally would be harvested, like last year in august.

Pearson: May not be there.

Martin: May not be there. So basis should be excellent in August to September.

Pearson: All right. So what are you telling producers? I mean these are $7. We've got to sell some of this, don't we?

Martin: Yeah, we do. This week also on corn and on beans, we recommended cash sales of what you had remaining of old-crop corn. If we got to 698 to pull the trigger on 25 percent. Also on Dec. corn as well. So we got that. Now, to put Dec. corn in perspective, this year's Dec. corn contract, the high of last year was 605, we hit it, fell back a little bit, came back, took it out. The contract high of Dec. corn was actually made on July 15 of 2008, two weeks after the top came in up front, and that high was 660 1/4. So I think the market is headed for that. I think it is justified to go there and probably -- and perhaps even take it out. If it does that, I think you're looking at a 7 in front of Dec. corn. So someone might say, well, then why were you selling. Because we've got to get going. We need to have a floor, at least a start, going toward our expenses because they are high. In the meantime -- and cash rents are high. And these are record -- all-time record-prices for this time of the year. So I think it's prudent to start some, but we are in a year of many variables, a very precarious year, one that -- I've been in this business thirty -- I almost hate to say this.

Pearson: It's safe to say it, a while.

Martin: A long time. But this is the first time I've ever seen this where we've had such a crucial, critical situation around the world. And you now have, after you've seen governments being overthrown, you are now seeing other countries that believe they could be vulnerable stepping up to the plate and in protectionism starting to decide they're going to build reserves. China is going to build reserves too. That means we're not going to ration here immediately. They're going to start coming at us. They get those coffers filled. Then they're going to take a look at our crops. And if our crops are not good, well, then they might become more concerned. But if they're good, they'll go hand to mouth, and that might be how we break on the back side.

Pearson: That might be the rationing -- let's talk about soybeans, Sue. Again, very tight. This acreage thing is really all we've got to focus on between now and the end of March, prospective plantings report and what that's going to look at. I don't see anything. And you've talked about it, cotton robbing corn acres down in the south with the huge numbers that's happened in the cotton. And soybeans again, my benefit -- like you say, for maybe tearing up the wheat. But an acreage number for beans, where do you think we need to be on that one?

Martin: Well, I think we need to be around 78 million acres. One thing we did have was I think last year about 5.3 million acres of prevent plant, so those are acres that will come back. We do have some acres, although they're not your better acres, of CRP land, although the USDA would like to get those back, surprisingly. I'm sure they must have a reason. But I think it's a concern. We're really going to see some real interesting times here this summer, and it isn't going to take anything to send the market running. If you get a correction and all of a sudden they start to talk about the forecast changing or whatever, the market is going to go flying. But I do think that once we see -- if we get into that March 31 report and it says we have 93 million acres -- now, if it says we have 91.5 or 7, the market is not going to stop. It's going to keep pushing again. But if we have 93, I think it will take a sigh, and then we'll see how the spring planting goes. And then you get into June and then the market is going to say, okay, now we're talking weather. And you have another final plantings report coming out, and then that might be from there where you start to get some spikiness in the market. Depending on whether, if the weather turns out to be cool and dry, you won't have near the effect on the upside that you normally would, otherwise. One thing we have to remember in the the bean market -- and right now we're getting some jitters. We closed lower for the week on beans this week on old crop, but we have to remember that South America is getting their harvest underway now. They're way behind a year ago at this time because of late plantings. But the one thing we have to remember is our export sales -- everybody was so worried that china was going to cancel. Well, this did roll some beans this week into new crop, but they're worried that they're going to turn and go to South America. They talked that last year too. It didn't happen. I don't think it's going to happen. I think that we're getting the jitters of new-crop harvest. And you've got softer basis levels in Brazil, naturally at harvest time, so they're a little more profitable than we are right now. But, you know, what, that's a little way of maybe rationing us for the moment, because we've got 89 percent of our beans that were targeted for export by the USDA for the whole year already sold. And so we need to slow our pace up a little bit. Half of the year is still here.

Pearson: Sue, with these bean prices, you've got to make sales here too, don't you?

Martin: Absolutely. We pulled the trigger when we hit 13.98 this week on November beans for about 20 percent. We missed our trigger on the March beans when we said to sell old crop 25 percent of what you have left if you touch 1458. Unfortunately we got within 2 1/2 cents and we didn't get it. But I think it will come back. In fact, I'm almost tempted now to pull that sell recommendation on old crop and step back because now if we come up after a lower weekly close and look at that level, we're probably going to go higher. So I think we still have some better times yet.

Pearson: All right. Real quick, cotton market. This old crop cotton market, is something going to happen here? Are the regulators going to step in? What's going to happen?

Martin: Well, I think, you know, we have to remember that of the world's population, 40 percent is living in countries that have a growth of 8 percent or higher. That's huge. They also like cotton clothes. So I think that's putting a push on cotton. Cotton is also an oil seed, and demand for oil seeds is huge. So I think cotton is doing a mission where it's trying to ration. What it's trying to do is set the stage to actually see acres come, and it's going to happen. I think that the front month of cotton, I'd like to see how it reacts when it gets to 202. It may do that here very soon.

Pearson: That would be wild. All right. Let's talk about livestock. The fed cattle market has been on an upward March. The hog market has been on an upward March. Calf market on the board this week was higher. Where's the whole meat sector heading?

Martin: Well, it's been phenomenal. And you look at the cattle market and, of course, what's been driving the cow slaughter has been mainly hamburger demand, and it's the families. And if you look at these families, they're being squeezed. You know, milk prices are jumping. Hamburger is over $3. Their heat bills are high. Gasoline may be going higher as you go toward spring. Some say not. I don't know if I recall too many springs when you weren't seeing gasoline prices going up. They're being squeezed. But in the meantime, one way that this market could change things, the picture, something has to change to slow up the cow slaughter. It started to slow a little bit. We think that the -- we're in a little trading range here for the moment on the April futures. You've got June cattle prices higher than April's. That's not common for this time of the year. I think that tells you that they're thinking the demand is going to be pretty good or the supply is going to be pretty tight going in towards June time frame. According to USDA numbers, you get into the third quarter and I think production slows down 3 percent. And in the fourth quarter, 6 percent, that's pretty phenomenal. But in the meantime where do you go to get beef to import if you were going to? Well, the Australian dollar is much higher than the U.S. dollar, so the exchange rate isn't so good. But really the best place to get beef right now for supply might be out of Brazil. But Europe doesn't like Brazilian beef too well because of concerns about disease, that type of thing. I think what could happen is even if the dollar starts to rally, we could start to see beef be imported, because you get these cuts so high priced, hamburger so high that they import. And our biggest percentage of usage in beef is hamburger. I think they could import just -- and still make money on the product.

Pearson: All right. So you want to take advantage of that in the cattle industry before this thing backs off. What about on the hogs?

Martin: Well, the hog market has had a fabulous move. In fact, we've seen new all-time highs on Junes. I think it may take a little bit, but I think we're headed for a time when hog prices may roll over into a higher range. We've had a high set at around the 99-100 mark for a long time, but right now it appears like we've got a fair amount of hogs coming to us. Demand is pretty good. Export picture for everything seems to be pretty good, but the hog market might be at a spot where it slows its pace down for a moment, but summer month hogs don't look too bad to me and I wouldn't want to hedge them.

Pearson: All right. So you're not in a big hurry to hedge those hogs. Maybe see a little bit better opportunities there down the road. And cattle hedging opportunities are take them as you can get them as this opportunity comes?

Martin: Yeah, I think you do but I --

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 high flying 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.

And, of course, join us again next week when we will examine outlook for U.S. crop production in the months ahead... Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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