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Market Analysis: Apr 17, 2009: Don Roose, Market Analyst

posted on April 17, 2009

Grain markets continue to trade on weather developments.

For the week, May wheat lost a penny, and the nearby corn contract moved 14 cents lower.

Strong demand from China pushed soybean prices higher. For the week, the May contract gained 44 cents, while the nearby meal contract was up more than $15 per ton.

In the softs, cotton continued its upward trend again this week as the December contract posted a gain of $1.60.

In livestock, April cattle moved 80 cents higher. Nearby feeders were up just over $1. And the May lean hog contract was down $1.20.

In other markets of interest, the Euro lost 123 basis points against the dollar. Crude oil was down nearly $2 per barrel. Comex Gold declined $15.40 per ounce. And the Goldman Sachs Commodity Index gained more than 3 points to close at 376.25.

Market Analysis: Apr 17, 2009: Don Roose, Market Analyst Pearson: Here now to lend us his insight on these and other trends one of our newer market analysts, Don Roose. Don, good to have you with us.

Roose: Hello.

Pearson: Let's talk generally about the markets. We've talked about the weather and the weather seems to be pretty good going forward for the next ten days but I was in Enid, Oklahoma yesterday, Don, and I talked to some Oklahoma wheat growers who were saying you guys are not estimating nearly the damage that we had to the wheat crop in the southern plains across a good portion of Oklahoma. They're saying with that freeze they have got some real problems.

Roose: Yeah, and we think so too and the estimates possibly from that freeze could be anywhere from 30 to 90 million bushels which is just astronomical so big numbers. But I think when you counterbalance that what happens Mark is that is true the big wheat damage and it's a big issue but we also had some big timely rains in some of the wheat area and it has balanced it out.

Pearson: Some of those folks were talking they might switch over maybe and tear that wheat out and maybe replant something, maybe go with a milo or something although that can have repercussions I understand for the next crop year. So, barring that as you look at this wheat market from the domestic standpoint with that kind of a challenge offset with the good weather do you think we're about where we should be price wise?

Roose: Well, I think the wheat market put in a performance this week closing about unchanged in the face of corn coming in under a lot of pressure, soybeans pretty firm so I think what you're really seeing is the wheat market is trying to find a value down here. So, I don't think the down side is really all that great until we actually start to see the harvest. I think the trade is going to want to be pretty careful on pressing the wheat market until we see the yield results. So, probably down side is pretty limited, I'd say 20 to 30 cents.

Pearson: Okay, and maybe some up side in there. Internationally crop development pretty good on wheat?

Roose: You know, the problem with the wheat market is the fact that domestic supplies are large, the world supplies are fairly large, we're working off of those big supplies that we had from our record plantings last year so once we work through that we think next year the balance table will shrink mildly but it's still going to be fairly adequate.

Pearson: So, pricing, you want to make sales not at this point? Wait for some kind of a rally?

Roose: Yeah, I think now is premature to make sales unless you really need to make some catch up sales. I think you have to really see how the market is going to react at these price levels and see if we can get a push back up another 30 to 50 cents to the up side but technically the market is down in support, it's oversold so we should have some kind of a retracement.

Pearson: Six dollars a possibility?

Roose: It might be. I think part of it is going to be as we move closer to harvest what happens, what happens to the Red River Valley where the spring wheat from a protein content that's the one that's going to have to carry the load here so maybe but I'd be a little bit careful.

Pearson: All right. Let's talk about the corn market. You mentioned the week that corn put in, good exports, seems to be a lot happening on the plus side for corn but at the end of the week we were really about even.

Roose: Yeah, the problem with the corn market I think it's just too much good planting weather and that really was the dominant issue this week. Almost on a daily basis the soybeans tried to go higher, the corn tried to go lower. When you have a carryout of 1.7 billion bushels and you have a sizeable carryout potential next year our cushion of error is pretty large.

Pearson: So, for old crop sales basis where are we there?

Roose: Well, I think on old crop the one thing we've seen in the corn market is the tight basis levels two weeks ago told you that the producer wasn't selling, we've seen a more aggressive selling going on here lately, some pre-planting selling and I think to the up side on corn we're back down to an oversold condition, we're nearing maybe some support, it's tough resistance as you get up into that $4.20 to $4.30 level on July.

Pearson: Take us into new crop, Don, what are your thoughts there?

Roose: Well, I think the new crop adequate supplies there again, of course, a lot of it is going to be dependent on first of all we're going to have to take it one step at a time, what is the real acre going to be. I think we have an unknown with what happened to those phantom 7 million acres that we lost but I think when you look at new crop if we get timely plantings, we get adequate acres, it looks like we're going to have a decent yield, we're going to continue to take risk premium out of the market which is what we're doing right now so the corn market really struggles when you hit this $4.37, $4.38 area.

Pearson: So, you get up to that resistance point it may be time to part with some?

Roose: Well, I think you're going to have to look at the time of the year it is when we get to that level but I would say if the crop gets timely planted and the weather turns out like we are talking about right now you get rallies back into that $4.30, $4.40 area that's probably going to be an area that we're going to have trouble overcoming.

Pearson: You mentioned the 7 million acres, they didn't disappear, they're going to do something. We're looking at 1 3/4 bushel carryout and if we come into trend line yields, the last time you were on the show we talked about this, we could have a bigger carryout in 2010 and isn't that going to point towards some lower prices going forward? Should we be looking at these markets more aggressively, Don?

Roose: Well, I think so. I think the one thing we have when you look at marketing we still have the insurance support area at $4.04 on Dec. corn so you probably have that as your safety net but you have to probably market over your insurance rates more aggressively when we move to the up side in the areas that we were talking about. But I think there's a lot of question marks, we could have some of these phantom acres show up again, we've seen that before so I think that up side rallies are meant to be sold, down side there's probably going to be good support until we can actually put the fire out on the bull story in the soybeans.

Pearson: A little bit of a bull story occurring in cotton and, again, some of this goes back to weather conditions and some other issues but are these sales levels in cotton, Don?

Roose: Well, we're back up at the old highs on cotton and really what pushed us down to the low was the economy is so slow, a slowdown in the economy and now all that has started to reverse a little bit and the big thing that has been occurring in the cotton, very similar to what's been going on with soybeans, China has just been an aggressive buyer of cotton, they've been restocking their supply, if you will, and that has really been the driving force so you have to be careful, they are probably the big unknown what they're going to do so you're back at resistance, back at areas and you have to take a hard look at it again.

Pearson: You mentioned China on a buying spree and you mentioned soybeans, that's certainly been the case. From an export standpoint they've been huge in the U.S. market. Is that going to continue or are they front loading all of their bean demand for this year? What is happening there?

Roose: It is a demand story that you look around for demand stories in big bull markets that have a lasting effect and it's the soybeans and to put that into perspective how large is the buying by China they have purchased 57% of the total exports so far so just absolutely amazing. And what you have to be careful with, with China, because you have one big buyer and we've seen it before as the market moves up into resistance they've been on a stockpiling binge but also at the same time they're not opposed to selling back some of the soybeans and putting a big cap on the market. So, I think what you have to watch for signs that the buying pace slows down by China and probably the first evidence of that is going to be if their spreading starts to work in the market.

Pearson: Okay, so again these might be good times to be making sales.

Roose: Well, what we did on old crop beans this week we moved back to $10.64 in July, that is the 2004 high so what kind of a market, we're up at some pretty good levels barring last year's numbers so we're back at some pretty big areas. We're overbought on the soybeans. On Friday we did have bigger spreads starting to work a little bit and that meant that the up front soybeans started to lose in relationship to the deferred soybeans. So, without some technical support you don't want it to roll over here so I would say you're at some catch up levels on soybean sales on the old crop and maybe even new.

Pearson: So, maybe look at some new crop sales too?

Roose: Well, I think you have to look at it mildly here. You still have the insurance levels below us at $8.80 on November soybeans but I think in the big perspective of things it's going to be hard for November beans to move past the $10 mark. But, I tell you, there's a lot of unknowns for the soybean market yet, Mark. There is some in the trade that think that the carry over could be down to 110, 115 million bushels. That is razor tight and so our margin of error has really shrunk and so the dynamics are much different than they've been for a long time, a demand bull market is what you have.

Pearson: Wow, so certainly any weather implications could be dramatic.

Roose: Yeah, that is the big unknown and that's the question mark and the soybeans are probably going to keep risk premium in the market longer than you'd probably think because if anything goes wrong with either planting or any weather problems the market on the soybeans could be explosive again because, remember, South America had some problems, southern Brazil we're in a dry drought condition, Argentina they are about 50% harvested down there, yields just continue to sink.

Pearson: Let's switch gears and talk about the livestock sector. Equity markets improved in the last ten days and improved dramatically since the last time you were on which was near the low in the equity markets -- are we going to start to see it translate into a general stronger economy that might help out this beef price?

Roose: It might and I think what we saw this week is we did see the box beef move up sharply. In fact, mid-week we had the strongest day up on box beef that we've had since 2007 and we had a remarkable move in a week on the box beef. The packer break evens went from negative $50 a head plus to now he's about at a positive $1. So, a big move up and that really helps the overall demand.

Pearson: Are you in a hurry to hedge some cattle in here? Do you think we're going to see back into the 90s?

Roose: Well, I think the cattle market is very much dependent on the economy and I think the situation with the cattle it's not about the supply side, it's really about the demand because the supply side of the market actually is fairly tight. Our slaughter so far this year has been down about 4%, our total beef production and we expect to be down a half a percent for the year. So, I think what we really are looking at is this market probably is capped on these rallies as you get up into the high 80s.

Pearson: We've got about 30 seconds, Don, let's talk about the hog market and what you see happening there. We talked about reduced farrowings, reducing supply, we've had some huge kill numbers really for the last eighteen months, starting to see that shrink. What is your hope for the hogs? What is your outlook?

Roose: Well, I think we're carving in a bottom on the hogs. There's no doubt about it. But the slaughter this week down about eight and a half percent, we have been down about five percent on the year so far, a pretty big number, been down six and a half percent in the last three weeks. But the problem with the hog market is really anticipating that and the futures market has that dialed in. We're really pushing to the up side there and resistance.

Pearson: Don, we appreciate it very much, Don Roose, I want to thank you. That will wrap up this edition of Market to Market. But if you'd like more information from Don on where these markets just may be headed visit the Market Plus page at our Web site. You'll find streaming video of our program and you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free at our Web site. Be sure to join us again next week when we'll start examining the efforts to preserve barns in the Midwest. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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