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Market Analysis: Dec 04, 2009: Senior Market Analyst John Roach

posted on December 4, 2009


As winter frost descends on much of the grain belt, freezing conditions could help farmers harvest the remainder of their crops from previously wet fields. Over in the commodity pits, most grains were modestly lower.

For the week, December wheat lost nearly 14 cents, and the nearby corn contract fell more than 18 cents.

Soybeans followed suit as the January contract lost nearly 12 cents, while the nearby meal contract was up $2.90 per ton.

In the softs, cotton dropped below the $75 barrier this week as the December contract posted a loss of $1.40.

In the dairy market, January Class III Milk futures were down 42 cents, and the deferred contract fell by 33 cents.

Over in livestock, December cattle lost nearly $2.70. Nearby feeders were up a nickel. And the December lean hog contract advanced almost $1.75.

In other markets of interest, the Euro lost 310 points against the dollar. Crude oil fell $2.49 per barrel. Comex Gold fell back this week with a drop of more than $18 per ounce. And the Goldman Sachs Commodity Index fell 14 points to close at 502.50.

Market Analysis: Dec 04, 2009: Senior 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: Thanks, Mark. I'm glad to be here.

Pearson: A lot of things happened this week that we're glad you're able to comment on. One of those is the global economy. What do you see happening there? We've had some mixed signals. We certainly have some strength in the dollar for the first time in a long time when you talk about the dollar strengthening. How is this playing out and what's happening in the world?

Roach: The world economy has appeared to be improving a little bit, in general. We've seen some interest rates raised in some areas where they feel like the economies are doing better. Down in New Zealand and Australia we are seeing economic activity happening there. We're seeing good economic activity occurring in China. So, the numbers are all being raised a little bit. A little more positive attitudes out there. The dollar is a little bit difficult to understand. I mean, most people believe that we're going to continue to weaken the dollar over time. And we have everybody piled onto that side of the trade. It's become just a real common thought amongst people as the dollar is just going to weaken because of all the deficit spending and the debt that we are running up in this country. But at the end of the week, suddenly the dollar staged a major rally. Some people like to say well it's because the unemployment numbers were better than what were anticipated and that may in fact have been the reason. But once you get everybody on one side of a trade, the market typically shakes them out and the market moves in the other way, in the other direction. And in the case of the dollar, we've had everybody on the short side. And so it just makes sense when they shake them out a little bit and that's what happened today.

Pearson: Is that what happened to gold?

Roach: Well, the gold is the other side of it. As the dollar strengthens, then gold tends to weaken. In fact, this is the same with all commodities. They're priced in dollars and so as the dollar moves, then they move inversely. So if the dollar goes down, grains and metals tend to go higher and as the dollar goes up, grains and metals tend to go lower. So that certainly was a stimulus that started to move it down in today's trait.

Pearson: You don't think this is a new direction for the dollar?

Roach: Well, until we start to see the fundamentals change in the outlook for the U.S. economy, it's hard to imagine that the dollar really turnes the corner and goes stronger for any length of time. We just don't have too many questions out there about how are we going to pay for all the costs of government in the stimulus programs and so forth? And until that's settled, people are going to be negative on the dollar, I think, in general.

Pearson: All right. Well, it certainly had an impact on the grains this week but if the dollar resumes a downward spiral here as commodities go higher. What about the wheat market? What do you see happening there? A lot of fundamental issues there.

Roach: Well, the fundamental issue on wheat that producers need to understand is that there's plenty of it. In fact, it's the problem with wheat price – wheat prices and corn prices. We have too much wheat. We built surpluses following the record high prices we had in 2008. We've seen increased production really all around the world and the most of the numbers, most of the production numbers are actually inching a little bit higher. And so we have plenty of wheat. It's being substituted for corn in the feed grain in the rations, the feed rations. And that's putting pressure on the market. On the other side, wheat is kind of a darling of the speculative trade. They point to where the highs were in 2008 we are way off of those prices. So those people who are afraid of paper money are happier putting their money into a food product and wheat is one of those favorite products for them to come into. So that's the balancing act. When we had the dollar weakening and we had speculative fever running, the wheat market was moving higher, but it wasn't happening because of tightening supplies.

Pearson: All right. Would you make sales in here with the counter-rally? We were off a little bit this week but you want to make sales?

Roach: We made heavy sales. I shouldn't say heavy -- we made in increments of sales back a couple weeks ago. We had cell signal indicators that signal a green light to make sales. If a person has made no sales – I would say even with a lower market be willing to make some sales in here, not any kind of panic sale or anything of that nature, but knowing the surpluses are largest what they are then I'd be willing to make some. Part of the other things – something I forgot to mention is a problem getting it all planted and then because of the late harvest in the eastern part of the belt, that with the hardest he enabled to make a little bit of progress than the attitudes are maybe will get some of the rest of those planted. That was another reason for the week today.

Pearson: Still struggling to finish up the corn harvest. So for corn out there, John, what is your take on the corn market?

Roach: Freezing weather, frozen ground allowing fields to be harvested that we couldn't get into just a few days ago. That's probably the best thing that can happen for the producer that still has grain to be harvested. And there's snow on the way. That's going to be a little bit worrisome, but we should have a few days search make some fairly significant progress before the snow comes. The thing – in all these markets – I'm going to back up a little bit for an overview. One of the things that's interesting as we look across all of the grain markets, we keep track of the open interest across corn, wheat, beans, soybean oil, soybean meal. The open interest peaked five weeks ago. That was the buying and the speculative fever that we had coming at the marketplace. And since five weeks ago, open interest has come down considerably. And so, what that says is that since we made the peak in open interest the subsequent rally we've had really over the last month almost, a lot of that has been actually short covering. It's actually been people who are short in the market, who finally said uncle, I quit, get me out which meant they bought. And on the other side people who are long in the market is that okay, that is enough profit, take me out. And so when a buyer gets out and the seller gets out, then the open interest drops by that one contract. And that's what's been happening for five weeks. Open interest has been coming down. So part of the reason we've been moving higher has been we scared the short out. Well now he's got a more comfortable position. So now we're going to work on the other side. We are going to see if we can't scare the bulls out a little bit and see if this market won't back off a little bit further. We expect that in next week's report that the corn feed numbers going to be reduced. Most people are thinking 100 million bushels about. That will probably go right under the carryout. So we start to see carryout numbers on corn this upcoming fall being larger than what were anticipated just a month ago.

Pearson: So, sell time for corn or do you want to hold off? This is not a typical time of year when you want to make sales.

Roach: We've been real sluggish in corn sales. We like to make corn sales March, April, May, June. We think the speculative fever in general will still be around for another six months or so. I mean, we don't know for sure but we're counting on it. We've been fairly aggressive on bean sales, fairly aggressive on wheat sales and more reluctant on corn sales.

Pearson: Okay, you mentioned soybeans. What is your outlook for the bean market?

Roach: The bean market has been in a bullish phase because of the speculative demand, because of the weakening dollar and because South America is virtually out of soybeans. The short crop in Argentina because of the drought this past year, they sold all their crop out. We became the only store in town and then it was hard for us to get our harvest done. So we had lots of things kind of all coming together, giving us a bullish move in soybeans. We think now we're on that flip side of that. We think now with the harvest pretty well getting wrapped up will be getting wrapped up here over just really this weekend. We'll probably just see pretty good progress made and then we think that we start to see some pressure coming out of South America. They've gotten a substantial percentage of their crop planted in both Brazil and Argentina. It's off to a very good start. They're getting moisture. So we think the market is going to struggle a little bit more until we see another round of speculative buying coming in.

Pearson: All right. Let's talk about livestock, John, and what's happening over there. Not much, are you seeing a trading range on cattle, is that how you describe it? Or are we starting to build? What's your outlook for 2010?

Roach: The cattle market actually was hit pretty hard. The description is kind of sick market. The live bids were down a couple of dollars, the dressed beef was down. It looks that we're kind of backing up some cattle, some weights are inching up. Just kind of a real tough situation, partially a holiday kind of driven situation. But we're just slugging it out in the beef business. Although everything is about as negative as we can imagine it right here at this moment, some of the beef buyers that sell to the retail establishments that we talk to they think we're down in an area where it's time to accumulate. So, they are a little more optimistic about demand picking up here, they read this unemployment number a little more positive and so there is some demand underneath of it. But right about now the market looks awful puny going from here to the end of the week.

Pearson: All right. The hog market, you know, we've had record losses and a lot of equity getting consumed out there with these poor prices. What's your outlook? Who's going to blink in this hog picture?

Pearson: Well, we think producers already have. And the numbers have come down. We've seen smaller numbers on the quarterly hogs and pigs report. If you look at the February futures, I mean, we're up about $15 off the bottom. So, the market has had a pretty good recovery. We run into kind of a tough spot price wise but in general we think the market does better over time. We think demand numbers start to come back a little bit and so we have a longer term ray of optimism, if you will. We think the worst is behind us.

Pearson: All right. John, right now for cattle feeders or pork producers, securing some feed needs, do you want to take care of some of that? This is typically when we do that.

Roach: We typically do. This year actually we've been kind of – we did some early feed buying before our harvest really got underway and we thought we'd buy more at harvest. Well, we didn't get the break. We actually had strengthening into the harvest period. So, we've been just hand to mouth buyers. But we'll be looking for an opportunity over the next couple of weeks on weakness to begin that accumulation process. We'd like to own corn going into the spring of the year because of the seasonality.

Pearson: Very good. John Roach, glad to have you with us. That's going to wrap up Market to Market. If you'd like more information on where these markets 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 get the 4-1-1 on 9-1-1 when it comes to rural firefighters. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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