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Market Analysis: Oct 01, 2010: Market Analyst Sue Martin

posted on October 1, 2010

USDA's September Grain Stocks report had bearish implications for the grain market this week. And, along with disappointing export numbers, and a rapidly progressing harvest, the week's developments hammered grain prices.

For the week, December wheat lost 65 cents. But the real impact of the report was in the corn market where the nearby contract closed limit down on Friday to cap a 56-cent weekly loss.

Soybeans hardly offered a safe haven from the bloodbath, as the November contract moved more than 65 cents lower, while the nearby meal contract lost $27 per ton.

In the softs, December cotton broke through the century mark briefly this week before settling Friday with a weekly loss of nearly $2.00.

In the dairy market, October Class III Milk futures declined 50 cents, while the deferred contract moved 68 cents higher.

In livestock, the October fed cattle contract lost 7 cents. Nearby feeders were off $3.18. And the December lean hog contract lost $3.58.

In the financial markets, the Euro gained 300 basis points against the dollar. Crude oil rose about $5 per barrel. Comex Gold advanced $21 per ounce. And the Goldman Sachs Commodity Index gained nearly 15 points to close at 549-even.

Market Analysis: Oct 01, 2010: Market Analyst Sue Martin 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: Well, sell off I guess would be the word this week if we had to say just one word and a lot of it hinged on what the USDA had to say. Also we look at what happened in the wheat market is it had this huge run and now we're seeing some pressure start to hit in the wheat. Let's talk about the wheat market first, Sue, and what you see happening there. Is this just a short-term setback or has the trend changed?

Martin:Well, I don't think the trend has changed. I think that what happened with the wheat market is technically it rallied so hard and so fast, it was loaded with shorts and nobody believed there was a story to the up side but when it happened it came out of there so aggressively that the market ended up pretty much spending itself out for the rest of the year. And therefore we're killing time to get us into December to end this year. And so I see wheat still declining. I think Chicago wheat will probably drop down somewhere around $6.00, maybe $6.05, possibly $5.95, maybe it gets a little lower but in that area I think we'll find some support and we'll just have to take another look at it. However, because we still have all of October, all of November and into December to go any good rallies in this market probably will not survive, we'll still set back. In the meantime, we do have good export sales going on, our export pace on wheat in the world market is much more aggressive than it was a year ago at this time and as we look into 2011 we're going to have a good demand market coming and you hear all sorts of talk out of Russia and the Ukraine about their exports and whether they are going to keep the ban on for exports. Some say the -- I think it was the Farm Ministry said, no, they were going to extend the ban to July 1 or 2011 but then another official will deny it. And so I think once we get into December it's going to be interesting to see how this market flows in there but I think you're going to have $10 wheat next year.

Pearson: All right. Short-term though would you want to make sales here on rallies?

Martin:Well, if you're a producer that needs to be generating some cash, yes, I would because we still have lower to go. But at some point here the market should catch and I think probably here in October somewhere we'll find a low and then maybe you can come back with some call spreads or something to retain ownership once you've got your money working for you.

Pearson: All right. Wheat wasn't the only place there was a pullback. USDA's report was very bearish, the market opened sharply lower Thursday and limit down on Friday the nearby contracts. What is ahead for corn? Again, is this a pause in the action or is this a game changer?

Martin:Well, I don't think it's totally a game changer. You know, it seems like markets always take the staircase up and the elevator shaft down and that is what occurred this week. I think that there's a lot of discrepancies but I think that there's been a lot of distrust or not believing the USDA. In fact, I can't remember the last time the USDA came out and stated, as they did on Friday morning before the markets opened, that they in no way had comingled new crop corn with old crop. Myself I don't believe that but that is just my opinion. I think that a to of elevators were full of corn ready to go old crop corn but they needed new crop to blend off with it and you had the south harvesting corn in August and you had Indiana and parts of Illinois harvesting corn. I think it would be hard to tell on those surveys whether some of that new crop got comingled or not. Now there is one thing, if the USDA said that no way did any new crop corn get comingled and we've added in 300 million bushels which is equivalent to about four bushels to the acre so if they want in this next report supply and demand report to drop four bushels or two bushels, well, we're not anywhere ahead of anything. And in the meantime what did they in essence say then, we're going to have bigger supplies in December? That December report is going to be a doozie.

Pearson: All right. Well, we're going to have to wait for that for the final word but in the meantime, Sue, you know how it is, we've had a big market up, everybody is holding out for higher money, we get a break like this, people start to panic and dump. What do you tell those people?

Martin:Well, I'm telling them that if you dump then find ways to come back to the marketplace, talk to your broker and find ways to come back because there are some good strategies to come back with in call spreads. If you don't want to be long the futures out into next year I would probably go out into May corn of next year and replace ownership or the July. I believe that we're going to have a demand market for corn. Corn has got to replace a lot of needs for feed grain and we're going to need about four to five million more acres of corn next year. We still have to fight for acres. Now, in the meantime we have to realize, corn had $1.85 and a quarter cent rally from the June low in less than three months. That was a lot awfully fast and if we're bullish, if we're right in our assessment that the first half of next year is going to see bull markets you've got to have some down time. And so I think this is very healthy, it gives the ones who have been caught short a chance to reassess their positions and it also gives the feeders, the producers of livestock a chance to say, hey, maybe I need to take some ownership. We're going to see lower lows this next week.

Pearson: All right. Now, the soybean market was also hit as well and the anecdotal evidence so far indicates beans have come out early better than the corn did. What is your take going forward on soybeans?

Martin:Well, my opinion is that, my own opinion is that the 44.6 or whatever it is that the USDA was at in the supply and demand report in September was our highest yield that we should see. However, I keep hearing this that people are pleasantly surprised at how good their beans are compared and yet I hear an awful lot of 44, 45, 48, some 50s and yet you do hear some 60s but boy it's a wide range. It makes me think that is there a possibility the USDA in this next report comes out equal to what we've seen in September for a yield or do they actually increase it a hair? And if they do the market is going to like take a, it's going to have a choke.

Pearson: Go south.

Martin:Yes, it's going to fall down that elevator shaft again. But I think that when we look at the bean market, again, technically the market rallied very quickly, we did exceed on the November contract last year's highs but no lead month this year has exceeded last year's highs. So, at the very worst you have an inside range year, higher highs coming next year and, Mark, we haven't even talked about the weather in South America. They are starting to catch some rains, that is kind of leaning on the bean market a little bit too but we've got plenty of time to worry about -- there's a strong La Nina out there and not to mention we've got 22 years without a drought pretty much in the Midwest and 23 is the longest we've ever gone. We've had drought in the southeast. You know, I think we've got a dicey year next year, the market is going to be wild.

Pearson: All right, so plan accordingly. Real quick, fed cattle market, Sue?

Martin:Well, we have a fed cattle market that has me -- we reached a wave three which normally can stall a market and we did it on every contract all through April of next year. But the market has been kind of hanging, the cash market is better than the futures which is abnormal for this time of the year, it ought to be futures leading the cash and in the meantime we've got cattle pulled ahead. The weights would indicate that. And I know talking to producers that feed cattle in the feedlots, a lot of those cattle are already gone that should have been here in October, even some maybe even getting late October, early November are gone. So, those are bullish things for this market and the export market is good. You have a currency situation going where the Yuan and the Yen and the Euro keeps gaining against the dollar but beware, this dollar, while it can drop down a little bit more, maybe 77.31, something like that on the December futures, maybe it exceeds it by a little bit. I wouldn't be too bearish on the dollar much longer and maybe that situation changes. But in the meantime, I think the cattle looks like it could be putting on a head and shoulders top here and we've got to be watchful of that. That could set us back a little further and then we'll see if this market doesn't catch and come back out of here. I have timing indicators on the daily that are extremely low and that has me a little concerned being too negative and yet the chart pattern doesn't look good.

Pearson: All right, thirty seconds, the hog market, where are we going?

Martin:Well, I think the hog market can have a little more down size too. I think the corn market helped the cause here on Friday. But I also think that we're killing two percent more hogs this week than we did a year ago and I also think that numbers should start to pick up a little bit as we go through October into November so maybe the hog market steps back a little bit.

Pearson: All right, so we've had a little bit of good news and, again, final reminder you told livestock people maybe to look at this pullback in corn to take advantage ...

Martin:It's an opportunity.

Pearson: Very good. Sue Martin, that will wrap up this edition of Market to Market. But if you'd like more information from Sue on where these 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 and it is all free at the Market to Market Web site. Of course, be sure to join us again next week when we'll examine the market impact of USDA's latest crop production estimates. So, until then. Thanks for watching, I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices markets news USDA