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Market Analysis: Dec 10, 2010: John Roach, Market Analyst

posted on December 10, 2010

This week's USDA Global Supply and Demand Report signaled higher ending stocks for wheat, corn, and soybeans but all arrived at or near previous estimates.

For the week, March wheat lost more than 3 cents, while the nearby corn contract moved less than a penny higher.

Soybeans were down for the week as the January contract fell 27 cents. The nearby meal contract followed suit with a loss of $14-even.

In the softs, cotton crept higher again this week with the March contract gaining $4.63.

In the dairy market, January Class III Milk futures fell 69 cents while the deferred contract dropped 59 cents lower.

In livestock, the February fed cattle contract fell $2.42. Nearby feeders lost 50 cents. And the January lean hog was down $1.42 for the week.

In the financial markets, the Euro lost 148 basis points against the dollar. Crude oil stayed below the $90-mark with a drop of $1.40 per barrel. Comex Gold lost $13.40 per ounce. And the Goldman Sachs Commodity Index lost nearly 5 points to close at 604.40.

Market Analysis: Dec 10, 2010: John Roach, Market Analyst

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

Roach: Thank you, Mark.

Pearson: USDA report, it was described to me today by my friend Bob Quinn as a yawner.

Roach: I think that accurately describes what we received. The numbers were very much what people had anticipated, maybe just a smidgen bigger but really insignificant numbers compared to what the estimates were.

Pearson: I want to talk about what is driving this market in just a moment but let's check individually here. Obviously if we look at market drivers what is happening in the currencies are a huge factor.

Roach: Currencies have been very big really for quite a period of time now. We bottom the dollar value against the market basket of currencies back on November 9th right after the QE2 was announced by the fed and at that same time we peaked the market, we peaked the wheat market, the corn market and the beans peaked three days later. So, when the dollar started to strengthen those grains then from those peaks fell until we finally caught and then started to rally back higher and now we're well up off of those lows right now but we aren't back to those highs with the exception of high protein wheat values.

Pearson: Let's get started talking about the wheat market and kind of what you see on that front, John. Obviously the big rally in August after the former Soviet Union and some various announcements, currently the impact of the drought over there, has been driving this market pretty much ever since along with the currency issue. Where do you see this wheat market going? What should producers be doing?

Roach: Well, the new driver now is Australia. The crop in Australia is not yet harvested. In the eastern part of the Australian Wheat Belt they have had just continuous rains. They are running four or five weeks behind normal and every day it seems that the quality of that wheat and the potential size of that crop is being reduced. That spurred quality premiums around the world. We saw Minneapolis wheat start the rally higher first and then Kansas City with Chicago lagging a little bit. We've moved now up into our sell signal areas. We generated a sell signal on all three classes of wheat on Monday. We have been maintaining that sell signal with the stronger markets and so we think farmers should be selling into the wheat here. The Argentine crop is actually improving just a little bit as they're coming through their harvest. We're seeing their numbers increase just a little bit. And so the world ending stocks numbers were increased today because production numbers were increased. So, we think that strength needs to be sold in the market. Now, the one thing that we think could happen is that the higher protein wheat, the scale of protein premiums could get better as they use the higher proteins to blend off the poorer quality. But we also think there's a caution for corn producers here in that percentage of the crop in Australia that turns out to be feed quality wheat, which some people think could be five to maybe as much as ten million tons, that will compete with corn in the world marketplace. But this has been traded now, we've been trading this for a couple of weeks and so the wheat market has surged up into areas that we think need to be sold.

Pearson: Corn market. You mentioned some concern about corn. Obviously the strong dollar as that continues is going to impact us from the export standpoint. From a fundamental standpoint and demand standpoint it sounds like some good news out of Washington regarding what's going to happen with the extension of the ethanol tax credits. But at the same time everybody is buying acres, everything is in short supply. So, on corn what are you telling producers?

Roach: The interesting thing, you mentioned everything is in short supply, what's really interesting is the picture that showed up in today's report and this has been an ongoing picture is that demand continues to be very robust. We really don't have all that tight a supply situation in the world. We certainly do in corn and I don't want to minimize that. But what is really significant is the demand structure continues to be very robust in corn, wheat and soybeans. Shifting over to corn we're in the fourth day of a sell signal in corn. The market pushed up to trigger our sell signal so we're suggesting producers get enough corn sold to cover their cash flow needs for the next 60 days. Everything is bullish. I don't want to minimize the tight supply and the need to have adequate acreage increases but we're putting big prices out there and what we'll find is that everybody in the world will figure out how to get a little bit bigger crop in their particular area of the world as long as Mother Nature will let them do that. So, we're right now looking at some of the tightest supplies and as we move through the growing season here in the southern hemisphere if the supplies are good, if we have good rains in Brazil and Argentina then that is going to be a negative factor. Certainly we could have a problem down there. We're worried about La Nina but that's already part of the price structure. If we were to get good crop situations occurring there then that would be a new negative to factor in. We're also going to see acreage increases in the northern hemisphere when it's all said and done and we'll have more capital available for people around the world to put more fertilizer on and get better yields. So, we think we're in maybe some of the tightest supply-demand values right now and we think that deserves some sales on the crop that is in the bin and the crop that you're going to be raising the next couple of years.

Pearson: So, you would be selling some 2011 and maybe even 2012?

Roach: We're selling -- all the way down the path. We think that when these kind of profit levels are available to a producer you've got to figure out ways to sell little pieces. We'll sell on this sell signal, we'll sell on the next one and the one after and have ourselves in a fairly well sold position by the time we get into the spring months.

Pearson: Soybean market, John, what do you see happening there? Again, these are strong prices.

Roach: Very strong prices. The Chinese, of course, have been buying throughout 2010, bigger quantities than people figured but they have recently slowed down their buying activity. This week's export sales report was notable in that the demand was the slowest that it has been in some time. The Chinese processor is caught with the government trying to reduce inflation, food inflation and so oil values and meal values have been pulled down in China and as a consequence the processor is struggling now, he's got negative profit margins. Up until a few weeks ago that processor was taking all the beans that he could get because it was making money to crush them. Now there's no profit to be made crushing. Some of the shipments are being backed off a little bit. There's a possibility we could see some shipments cancelled. So, again, we have soybeans in a sell signal and the soybeans of all three grains are the ones that are looking the toppiest right now. So, we're sellers of soybeans, again, for what is out of the bin, looking forward to 2011 and 2012. We know that the major factor going forward is going to be weather conditions in Brazil and Argentina and right now those conditions are really fairly good, a little bit improved from where they were just a short time ago.

Pearson: Real quick, John, the cotton market, again, rallied back up again this week.

Roach: Cotton market, of course, has gone to just extremely high prices levels. We saw from the government report today the U.S. crop was cut, they reduced the yield by about seven pounds per acre. The world crop numbers, however, were increased. The ending stocks were increased because of increased production out of Australia and out of Brazil. So, we think this cotton market is fully priced. But remember you're dealing with a very speculative kind of a marketplace, it's a very wild and erratic trade.

Pearson: Let's talk livestock for a minute, John. The fed cattle market has been a nice recovery there. If you look at the chart it looks pretty good. Cash markets are pretty strong in Texas this week. What is your take on fed cattle?

Roach: We traded cattle at $101 in Texas this week and in Kansas and down just a bit from where it was here a week ago. We think we're going to have a little more pressure in that market as we move out here over just the near-term. But the longer term outlook is good. We saw reports out from the restaurant industry and the index that people use to measure the profitability and the outlook for the next months in the restaurant industry moved up to the best level it's been since September of 2007. We're trading around $102 and anything over $100 on that index suggests that good times are ahead, at least in the opinion of the people that are doing that survey. So, we have positive news in the restaurant trade, we have positive news from the standpoint of the export business so we think longer term we have a positive kind of a market. But we also have very high prices and we have a market that we think is going to struggle here just over the period of the next few weeks so we think we're fully priced.

Pearson: Hog market, John, give us your take on that.

Roach: Same situation. We think that we have a lot of pork to come at us here over the next couple, three weeks. A week ago we had the heaviest hog slaughter weights that we've seen, record weights so we've got a little bit of a back log, we're not as current as perhaps we need to be and so we think we might have a little bit of softness in the cash market. But generally prices look good as we look out forward.

Pearson: John, real quick, the crude oil market, it came up to $90, a little over, backed off some, record demand it looks like for the last quarter, good worldwide demand. What is your take on oil?

Roach: Well, the oil market certainly has performed but it has struggled as we moved up over this $90 a barrel. We broke down the 20 day moving average which is a trend changer today and so we're a little bit concerned that that market has probably seen its high for a short time.

Pearson: Very good, John Roach, thank you so much. That will wrap up this edition of Market to Market but if you'd like more information from John on where these markets just may be headed visit the Market Plus page at our website. You'll find expanded market analysis, audio podcasts and streaming video of our program and it's all free at the Market to Market website. Before we go I'd like to take a moment to honor a dear friend and colleague. Pheng Chanthavong passed away following a brief illness. In his 16 years of service Pheng became an important and valued part of our family here on Market to Market. His smile and infectious genial attitude will be greatly missed.

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Tags: agriculture commodity prices markets news soybeans USDA wheat