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Market Analysis: Feb 06, 2009: John Roach, Senior Market Analyst

posted on February 6, 2009

Private estimates of reduced grain production in the Southern Hemisphere appear to be tightening global supply figures, but not enough to stimulate a rally.

For the week, March wheat lost more than 10 cents, while the nearby corn contract fell nearly two cents.

Predictions of dramatically reduced production in South America were friendly to soybean prices. For the week, March soybeans gained 21 cents while the nearby meal contract was up $6.30 per ton.

In the softs, cotton flirted with the 50-dollar mark again this week as the March contract moved 45 cents higher.

In livestock, February cattle gained $1.65. Nearby feeders were up $3.35. And the February lean hog contract lost $2.20.

In other markets of interest, the Euro gained 151 basis points against the dollar. Crude oil lost more than $1.50 per barrel. Comex Gold declined more than $14.00 per ounce. And the Goldman Sachs Commodity Index lost nearly 4 points to close at 334.20.

Market Analysis: Feb 06, 2009: John Roach, Senior Market Analyst Pearson: Here now to lend us his insight on these and other trends is our senior market analyst John Roach. John, good to have you with us.

Roach: Thank you, Mark.

Pearson: Well, 2009 is rolling along and so far it has been fairly volatile, it's been fairly soft and it looks like there is a lot of head winds for commodities, particularly with the pull back in crude oil, the strength of the dollar, slowing exports. What are your thoughts generally on the world of commodities at this point?

Roach: I think maybe we've seen, at least over the shorter run, I think maybe we've see near term lows. We actually are higher than where we were back when we printed the lows in the early part of December and we're still in a period of time where everybody is very concerned about the economic health of the United States and other countries around the world and we haven't yet gotten stimulus packages through, we really haven't seen any of the good news yet. I think we will see some good news as we march along here over the next upcoming weeks. And so I think we're at a low ebb and I think the market is actually starting to ratchet a little higher although you didn't really see it in the corn and the wheat this week.

Pearson: Not so much this week. Let's talk specifically about the wheat market and what you see ahead there. Obviously we're going to grow a lot more wheat around the world in 2009 or at least that's what they're telling us for acreage wise. How do you see the supply situation globally as we look at wheat?

Roach: I actually think our wheat numbers will be pulled down here in 2009 as we see what the winter kill situation has been. We're worried about China, in their primary wheat area they have had considerably drier than normal weather. Some of their wheat is irrigated and they tend to have dry weather during their winter months in that particular area but people are a little more nervous about it than in other years. We've seen the wheat estimate pulled down in Australia. We think that the former Soviet Union crop will be smaller. So, we really think as we look forward that we have some positive news to come and certainly in the United States we've been extremely dry down in our winter wheat area although we're just now starting to see some rains coming in. But we think that those numbers have been as big as they're going to be and likely to get smaller.

Pearson: Of course, as they get smaller hopefully prices are higher so you're holding off on making sales.

Roach: We're holding off on making sales. We think the market can rally as we start to take wheat out of the dormancy stage here in the northern hemisphere, it's just around the corner. We think the wheat market is ready to ratchet itself higher.

Pearson: Any price targets at this point?

Roach: Not really. Rather than looking at price targets we really look at momentum in the market. We pay close attention to the slow stochastics and when we get that market up into an overbought stage then we think that will be the time to be making sales.

Pearson: Let's talk about the corn market, of course, a lot of questions looming there in the world of corn, particularly as producers try and line up their input costs and see just what their expenses are going to be as they go forward and what the demand looks like for corn versus soybeans so we've got an acreage battle to work through. What are your thoughts at this stage of the game? We've been on this show for over 30 years and I know this is not the time of year you like to sell corn.

Roach: It really is not. This is the time of year that we normally look for a weak spot to be accumulating some additional feed needs to carry into the summer. And we think that that's what we've just passed. We've just gone through a timeframe here where we wanted to accumulate feed needs. On further weakness we would be back accumulating feed needs. One of the things that has really hurt our corn market is that the export sales and shipments have been way behind last year's levels. Last year we got off to a very strong start with very strong demand, this year we got off to a really puny start and the major reason for that was the competition from the former Soviet Union countries where they had extremely large crops. Now, the last three weeks in a row we've had much better export sales numbers on corn and we've seen basis values strengthen in the former Soviet Union so we think that's really a signal that they have sold most of their surplus out that they wanted to get sold and now the business comes to the United States. So, we think that the increase in the export business -- we also think that just the concern about raising the crop -- one of the things that has happened in South America is they have lost about 400,000 bushels of corn production with their winter drought that they've had and we think that sets us in a better position worldwide than what we expected to be in. They are the first area to be producing, they've had problems, that makes the production in the United States and the rest of the northern hemisphere just that much more important.

Pearson: Alright, so a couple of pieces of good news there. You talked about the bad news that we've had in wheat. Some of the other bad news has been the government reducing and the concern that we're seeing in the whole biofuels arena.

Roach: That's another concern that we don't see that at the moment. The margins to process corn and ethanol are about as tight as they have been for a while. There is no opportunities out forward to put any of the crush on so it's a spot market. Everybody is struggling. We saw reports out this week that maybe as much as 20% of the capacity has been idled. So, we need to see some improved demand for ethanol which will spill over into the corn market as far as demand is concerned but so far we haven't seen that.

Pearson: Corn sales, it's not the time when you want to make them.

Roach: We're just coming off the period where we're actually buying corn for feed needs so we really like to focus our sales in March through June, we're just not there yet, we think the market is trying to stage a recovery, we've pressed up against the 20 day moving average on nearby March corn this week and we haven't been able to penetrate it but we're bumping against it. We think the market will have an opportunity here. There is money flowing into commodities again and some of that money is flowing into the corn market as well. So, we think we can get a further price surge.

Pearson: Is money flowing into the soybean market as you look at that one?

Roach: Maybe even more into the soybean market than the corn market because the soybeans South America is the largest region for production and they have had weather problems so the money flowing into the commodities probably first of all has gone into energies, from what we understand, precious metals but then also the agriculture commodities as well.

Pearson: What is your take on soybeans at this point?

Roach: Well, the crop in South America was reduced by about, at least the current estimates are down about 400 million bushels from what the government estimated, from what the USDA estimated would be their crop size in their estimates back last fall. So, if you put that in comparison for the viewers, 400 million bushels compares to the total ending stocks currently forecast in the United States of 225 million bushels. So, that is a substantial reduction -- if the current estimates are correct -- that is a substantial reduction and that tightens world supplies and at the same time we have China showing greater appetite than anybody anticipated. The Chinese have taken bigger numbers from the United States than anybody anticipated. Their total imports are bigger than was anticipated. They are also buying their own domestic stocks trying to build a stockpile of six million tons. So, all of these are positive news for soybeans and perhaps we have the most positive news in the soybean market with less positive news in the other grains.

Pearson: Let's move over to the livestock side, John, and just talk about where we're headed. You mentioned getting some feed needs covered so you're definitely in that camp.

Roach: Yes. We think that the feed component, of course, in the livestock business is about as important as anything else.

Pearson: Fed cattle market I know you've talked about the fact of a very small cow herd out there. We continue to restrict supplies but there seems to be a demand problem here.

Roach: Well, the difficulty we have is being seen at the restaurant trade. We're just having a slow demand. Exports are not bad. The exports of beef have been fairly good but we're just seeing a slow demand and with the bad economic news nobody is very optimistic about that demand changing very quickly.

Pearson: What is your outlook then for fed cattle?

Roach: Cattle producers have reduced their numbers in the feedlot so we're seeing smaller supplies out forward. We think that as we get the supplies back in line with where the demand level is we think we can have a good springtime rally. So, again, we think prices have bottomed and are on their way back up and so we're patient at this point. If you're looking to put any replacement cattle in shop carefully. But we think this is probably a pretty good time to do that. When losses are substantial coming out of the feedlots frequently that is your best opportunity to be buying feeder cattle.

Pearson: And as you look at that relationship and you mentioned exports that certainly was critical in 2008 for the hog business. What is your take on pork prices as we go forward?

Roach: The hog business for year after year after year saw increasing export demand. It's really a very bright story. But the 2009 demand has not been very good. A lot of our business went into China, Russia and Mexico, all three areas struggling so the pork export demand is worrisome and our outlook in the hog market because of that is a little bit worrisome. But, once again, we're in the time of the year where we think the demand side is being played down about as much as possible because of all the economic concern that is around. We think that's about ready to change. The news is about ready to get better on the economic side. We think so much of it is perception and every day in the news we hear just how tough it is out there and we think once we get a stimulus bill passed we'll start hearing better news out there. If nothing else it will be just publicity and so we think hog prices can rally up into the summer.

Pearson: John Roach, as usual great to have you with us, our senior market analyst. That's going to wrap up our edition of Market to Market. If you'd like more information from John on where these markets just may be headed visit the Market Plus page at our Web site where 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. Of course, you'll want to join us next week when we'll examine a California program that is linking established farmers with young entrepreneurs. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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