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Market Analysis: Dec 24, 2010: Don Roose, market analyst

posted on December 23, 2010

Grain markets were closed Friday for the Christmas holiday. But the bulls received a little something extra in their stockings earlier in the week as prices continued their upward trend.

For the abbreviated trading week, March wheat recovered all of last week's losses -- and then some -- with a gain of 26 cents, while the nearby corn contract moved 17 cents higher.

Soybeans also posted solid gains this week as the January contract jumped 50 cents and nearby meal prices advanced more than $12 per ton.

In the softs, cotton traded in a wide range before settling below $150 Thursday with a weekly loss of $2.

In the dairy market, January Class III Milk futures gained 60 cents while the deferred contract moved about a nickel lower.

In livestock, the February fed cattle contract gained $3.00. Nearby feeders were up nearly $3.75. And the February lean hog contract rose about $2.75.

In the financial markets, the Euro lost 62 basis points against the dollar. Crude oil advanced $1.77 per barrel and closed above $90 for the first time in two years. Comex Gold was up $1.30 per ounce. And the Goldman Sachs Commodity Index gained 18 points to close at 628-even.

Market Analysis: Dec 24, 2010: Don Roose, market analyst Pearson:Here now to lend us his insight on these and other trends is one of our regular market analysts, Don Roose. Don, welcome back.

Roose: Thank you.

Pearson: Let's talk about the short week that was. And a dramatic move in the livestock sector, which we'll get to in a moment. Dramatic move really in soybeans, dramatic move in corn, and dramatic move in soybeans and we only had four trading days, don. Who knows what could have happened if we'd been open Christmas Eve after all. What's going on? Let's talk about the wheat market first. There's currency issues. There's all kinds of -- there's crude oil. There's all kinds of stuff happening here. But fundamentally on the wheat market, are we overpriced?

Roose: Well, you know, I think you're right, Mark, for one thing, is that we've had upward pressure -- positive pressure on most all commodities this last week. You know, as far as wheat, it actually was one -- it acts like it's a little more mature at the present time. So consequently, it went up to these old highs, but it still hasn't been able to take those out. As we're starting to harvest wheat in Australia, the crop is a little bit suspect from quality. But we are harvesting wheat, and so that is putting a little bit of pressure on us.

Pearson: Then they had problems. They had the rain. They've had droughts. Now it's rain. It's like we just had wheat problems again all around the globe, except in the U.S. where we are decent numbers. The condition of the crop, the winter wheat crop for 2010-2011, what's your feeling on it?

Roose: Well, you know, there's a concern with the U.S. wheat crop because, you know, we went into dormancy dry. At the same time there's concern with the Chinese crop because of the same issues. But at the same time what we've seen is in the last crop report we had the ending -- world ending stocks went up. So, you know, at least we're starting to change that profile just a little bit, and I think the market is respecting that.

Pearson: Commodities just continue to be flavor of the month for most investors. Talk about the wheat market in terms of sales. Are you recommending sales here? What are you telling producers?

Roose: Well, I think, you know, number one, I think you have to say what happens with the world weather, because if we turn -- if we have favorable weather in the U.S., in China, and also in the FSU, then when you look at Chicago wheat between 8 and 825, you know, those are good sell levels. The same thing with new-crop wheat. When you're in this 850 zone, you know, those are opportunities. You know, these are levels that you haven't seen often in history. So, you know, I think you have to be respective of where you are at with the time that you're dealing with.

Pearson: Is there still frustration about basis levels in wheat? Is it still pretty wide, or have we started to narrow this gap some?

Roose: No, it's still pretty wide, you know. That continues to be an issue for all the reasons but, number one, you know, we still have some fairly big stocks in the U.S. and we just haven't been able to deal with that.

Pearson: Let's talk about the corn market, where stocks are a good deal tighter. And the concern, again, you know, global weather as the report of dryness in Argentina, I mean that's going to become a big weather market for us this year. It's not like we ever get out of a weather market. We go from the summer -- U.S. growing season whether market right into the South American growing season market. What's your take on corn? Again, it was an up move this week. Do we make sales here, don?

Roose: Well, again, I think what you look at is when you have substantial up moves, which we've had -- and we're back into those November 9 crop production days when we had a key reversal down. We're back into those areas. We finally retraced. We're overbought. We've been up six days in a row, so these are opportunities to make some sales again,. You know, intermediate tops, you know, is what you're talking about. And we're focused very much on the Argentine weather as they're pollinating corn now. And, you know, we've been talking about the demand, but now we're back talking about, you know, what's the supply going to be.

Pearson: All right. And that's going to -- and acres are -- we're already talking big time about acreage, and we're in December. So on the corn front, do you want to -- if you haven't done anything, should we obviously make sales here? And what about 2011 sales? Do you want to see how the weather shakes out?

Roose: Well, you know, I think the first thing you have to say is we've never been at these prices ever in history this time of year. You've got profitability on new-crop corn and soybeans that you've never seen, you know, this time of year. So you have to ask yourself are these prices going to be here down the road. You're kind of playing musical chairs, because we're talking about all the things that can go wrong, all the positive things, and that's why the market is up here. But we have to remember that those same things that are positive, those turn into negatives, you know, at some point in time too. You know, whether it's sooner or later is the question Mark. So sure, these are places that you make some sales. If you don't like them, you know, use different types of contracts.

Pearson: All right. That would include new-crop sales.

Roose: I think new-crop sales, yeah.

Pearson: All right. Soybean market, again, 50-cent move, Don. A lot of concern about, again, what's going to happen in South America, but also it seems to be continued good demand.

Roose: I mean, we had just unbelievable demand. And I tell you, the unbelievable demand continues to come from China. You know, again this week export sales on Thursday, 23 million bushel sales to China. You know, it's just almost at an unsustainable rate, and that's the real issue. So I mean all eyes are on China. All eyes are on this South America weather. So this week we had upward pressure from the Chinese buying. We had upward pressure from the Argentine crop maybe shrinking now, although it's early. So, you know, that's really the focal point this last week.

Pearson: On the soybean front, sales wise, where are you on that front? Continuing to clean up sales? We've had some basis improvement in soybeans too. Should we make cash sales, and what about 2011?

Roose: Well, I think the first thing you have to say for a lot of these markets, particularly when you look at the soybeans, we're certainly at the upper 10 percent of our value that we're going to have for the year. So these are opportunities are short term. If you don't like that, you can have re-ownership at the same time you make cash sales. But, you know, this is a place to transition.

Pearson: Real quick, cotton is at 150. These are unbelievable levels too. Backing off a little bit. What's your take on cotton and should producers be making sales there?

Roose: Well, cotton retraces key reversal from a few weeks ago. Then we spiked up and we put an island top in, which is a significant top. We dropped two days limit the last two days so, you know, those could be the big top. That's what we look for. India is starting to sell cotton back into the market. China is starting to back off a little bit from their purchases. You know, they recognize high values also. So, you know, we're up here at some lofty levels with some poor chart activity at the end of the week.

Pearson: Relatively speaking we're at some lofty levels in livestock. What happened on the board this week? This was a big move in fed cattle. This is not a seasonally normal time for fed cattle to move like this, or hogs or feeder cattle.

Roose: Yeah, I mean commodities in general are going up. But, you know, the cash market on cattle did spike up $4 this week, but it looked like it was really pushed higher by a lot of fund buying on Wednesday that caused cash cattle to trade $4 higher. At the same time the boxed beef was going lower throughout most of the week, so the packer margins are being pinched. But it looks like, you know, we're probably going to soften from here on the cash values. We've got a cold storage report came out on Wednesday, and it told us we have 6 percent more beef around this year than last year. So, you know, it was probably more to the future where things tighten up again,.

Pearson: All right. Going forward into 2011, what are you looking for fed cattle and for hog prices?

Roose: Well, first on the cattle market, I think that the one thing that we have to do with the overall feeder cattle probably first is we have to try and make sure that we don't liquidated the breeding herd any further, so we're going to have to keep values lofty. It's going to take two years now, you know, before we bring new beef back into the market. So, you know, there's nothing wrong with the supply side of the market. It's going to stay tight throughout the year. It's really going to be the demand: can you push this high priced value over to the consumer, and will they accept it? So it's going to come back to the consumer. The exports are picking up and they're still strong.

Pearson: Generally do you feel the economy strengthening?

Roose: It feels like the economy is strengthening, but it's still pretty fragile, mark. I think when you look at it in a big perspective, you've got some things that are really concerning, and that's crude oil going up and your energy costs going up.

Pearson: Which could transpose into a weaker dollar. We depended a lot on exports in hogs the last couple of years.

Roose: Well, our exports on hogs, you know, have been just terrific, you know, strong. You know, that's a real -- a real plus for the hog industry. And, you know, that's really absorbing a lot of the meat at the same time. Our pork in cold storage this last week also, you know, 9 percent under a year ago. Of course, we had big supplies last year, but we've worked those off. And a big hog and pig report will be coming out on Monday. It will give us some further direction.

Pearson: All right. We'll see where the markets head as we look ahead for next week, but that's going to wrap up our discussion this week. I want to thank Don Roose for being with us. And again, thank you for joining us as well.

Don Roose, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Don 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 be sure to join us again next week when we'll examine the outlook for commodity prices in the New Year. Until then, thanks for watching. I'm Mark Pearson wishing you the best this holiday season...

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