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Market Analysis: May 09, 2008: Sue Martin, Market Analyst

posted on May 9, 2008

The Agriculture Department released its latest supply and demand estimates Friday, and the numbers were friendly to corn, but pressured wheat prices.

For the week, May wheat lost 45 cents, and the nearby corn contract gained more than 16 cents.

The government's reduction in soybean ending stocks supported "beans in the teens." For the week, May soybeans gained 57 cents, while the nearby meal contract was up $1.30 per ton.

In the softs, cotton finally pulled up from its downward spiral as the December contract posted a gain of $2.39.

In livestock, the June cattle contract was up $2.40. Nearby feeders gained $1.70. And the May lean hog contract posted a sizable gain of $6.82.

In other markets of interest, the Euro gained 66 basis points against the dollar. Crude oil gained a whopping $9.64 per barrel. Comex Gold lost more than $30.00 per ounce. And the Goldman Sachs Commodity Index gained more than 50 points to close at 783.00.

Market Analysis: May 09, 2008: Sue Martin, Market Analyst Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Sue Martin. Sue, good to have you with us.

Martin: Thank you, Mark.

Pearson: Well, let's talk first, Sue, every week it seems like has this thing peaked? Has this commodity price spiral up, is it about to go under? And then here we see record oil prices again, almost $126 a barrel. Gold is softer. What is happening here? We had the dollar strengthen last week. What do you see, Sue?

Martin: Well, I think in the past two weeks there's been a lot of rhetoric over Bloomberg and other news media about the commodity bubble possibly being burst. I'm not sure I totally believe that. I think maybe it's settling for a moment because, you know, how high is high? You can't just go straight up and keep pushing and there's a lot of talk about food shortages and this type of thing that's got everybody on edge. And so I think for the moment the market is maybe temporarily resting. We're seeing some hedge funds pull their money out of commodities. Maybe had like a 17% ratio of commodity investment, moving it down to 2%. We are seeing some of that. But all in all there's still other money coming back into the market. And when I look at the crude and it's at new all-time highs, you know, just this past week Goldman Sachs came out and estimated or forecasted that crude oil in the next six to twelve months could reach $150 to $200 a barrel. Well, they're very well respected and they have a good track record behind them. If that occurs, well, I have to believe that rape seed and soy oil are going to be very much, again, in big demand and breaking out to the up side, which it appears they did so on Friday.

Pearson: So, no end near-term to this rally, this bullishness?

Martin: I don't think so. I think that this crude can still move a little bit more. What we're seeing is, is a little bit of a slow down in usage in the U.S. which is a positive and maybe on the longer term that helps but as long as we're going toward the Olympics I think there's just been so much that has geared around the Olympics and the growing economies in India and Asia and China. That's where a major portion of the world's population is and they're fighting for the same commodities we are.

Pearson: They're not fighting as hard for wheat. It's softened up some.

Martin: Well, it has. The USDA, of course, on Friday came out in a supply-demand report and showed the stocks down a little bit for old crop but in new crop for 2008-2009 expecting, or I should say '07-'08 crop the winter wheat and the soft red wheat stocks are estimated to be considerably higher. But what's interesting is feed wheat usage was increased and came out at 230 million bushels for U.S. wheat and I think that is the highest in eight years. So, we know that wheat is going to garner some demand back. World stocks are supposed to be record high. But we have to remember this is the first year that we're growing our stocks back. Demand will still be good. So, we're probably going to see some ebb and flow in prices. But we're very seasonal right now with wheat and I suspect we will continue to be seasonal and I suspect that by the time we get into June or so we'll probably have wheat prices down or around Memorial Day, something like that. Eventually I think wheat prices can get down to $7.50, $7.20 and we'll see how they react at that time.

Pearson: Would you make some sales now before we hit that?

Martin: No, I'm not going to. Even Minneapolis wheat I think is the better one on the board. It's the one that has, you know, for the five year average I think ending stocks have been around 142 million bushels and they don't look like they're growing stocks well enough. I think that is going to be your best wheat category. But, no, I don't think I would. I think there will be some better times yet down the road here as we got through the summer.

Pearson: Let's talk about the corn market. What do you see happening on that front? You mentioned the protests, they seem to be focusing on corn. We're still going to have close to a billion bushels of corn leftover this year, not exactly a shortage.

Martin: Well, I think that when you look at the carryout in corn for the '08-'09 we came out with a carryout of around 780 million bushels, something like that and that was larger than what the trade was expecting. But here again the USDA lowered feed usage by 850 million bushels. That's a whopping number but very telling of the livestock industry and what they've been going through. And I think that when I look at the corn market we have big problems in getting crop planted. What was interesting was the USDA came out with a bushel per acre average yield of 153.9. Well, that was only down one bushel from the February outlook as opposed to a year ago they dropped 2.5 bushels from the February outlook and had a number of around 150.9 at the same time and yet we're farther behind last year's pace. It doesn't make sense. But I think that the USDA is fearful of putting out too low of a number at this time. One, we have good moisture and last year we had a lot of areas that were dry coming into the season. So, I think they're very fearful of putting out too low of a number below trend because we're talking about food shortages and we don't want to create any more problems. I think that when you look at this coming Monday and the planting progress will probably be around 42%, maybe 45%. The states that have progressed are Nebraska, Indiana and, of course, Illinois has done quite well. Minnesota has gotten a little done but very little. The problem areas are Minnesota, Iowa, Missouri and South Dakota and those areas still caught rain this week. So, they aren't going to show good progress like we would like them to see for this week because we have to remember the week before and this past week were two of the biggest weeks of planting that you normally see in a crop year. So, I think that when we look at the corn market we're looking at a market that can still go higher. It's having some problems. I've talked about it the last time I was on the show, the $6.28 to $6.32 mark and that's back where we are but it's held us for quite a while in a sideways range since about April 9th. I think that if you can get this market through $6.40 basis July corn you now open the door for the $7.00 mark, $6.94, $7.04, something like that. And if you get December corn up around $7.04 to $7.25 I would really become more aggressive in cash sales because that's our third count on the up side and that usually gives us a lot of trouble. I'm not saying you can't go higher with time but this market is going to be on edge all summer long with weather.

Pearson: Of course, that goes for soybeans as well. And are we going to see more soybeans, too? You mentioned all those key growing areas, the time is starting to run out. We probably have another week yet.

Martin: Well, I think at the moment I'm going to still say no. I think that when you dollar up corn looks pretty good yet and I think that the producer, if nothing else, he'll opt for a shorter variety, shorter term varieties and if push comes to shove in some areas you may see prevent plant taken rather than going to beans. Now, some will opt to go to beans but I think that will be a last resort, I mean a very last resort. So, our weather forecasts are going to be real important as we go through Memorial Day. But having said that, I'm very friendly to soybeans at this time. I believe beans -- and I was before the government report came out today -- we have the Argentine strike going on with the farmers. You know, they're not selling anything, they've really slowed up in their sales so therefore exports are slowing up. But the government had a 44% sliding scale export tax or duty on soybeans and soybean oil and meal. Well, they wouldn't have 44% on that if they really wanted to see exports going out the door. So, no wonder they weren't real willing to give into the farmer and say they would lower the sliding scale. I wish they would have come up with some other alternative maybe in subsidies or something like that to help the farmer out because he is shouldering a chunk of that increase in export duties. However, that isn't the case and so demand is going to come to the U.S. and Brazil. And, of course, Brazil will probably catch the lion's share of it mostly at first because of the fact that they're in harvest and they have a good, ready supply. But Brazil has been sold ahead more aggressively this year than last year and so if they go ahead and market a lot of beans now that takes them away from our competition through the summer. I'm very friendly to beans. I think this next week we'll take out the April highs, that's $14.15 and I have a high due around May 15th, 16th. I look for a break into the first week of June, maybe around June 5th, June 6th and then I think it's going to be interesting to see but I look for a rally to start from there. And we'll see, it may be that we could see a market that rallies because of the energy side of things and the breakout in soy oil and rape seed that we've seen this week it may be such a thing that we see new all-time highs in beans.

Pearson: So, not in a hurry to make sales there either.

Martin: No, and my recommendation is to use the options and buy at the money puts and then sell for the out of the money puts and roll them down that way. This way you leave your up side open because you could see $20 beans.

Pearson: There you go, $20 beans. Let's talk about livestock, Sue, for just a minute. Fed cattle market, some interesting things happened this week. Have we started to turn the corner on livestock?

Martin: Well, I think we have. We've gotten some fund buying into the cattle market. Of course, we've got South Korea, even though there's a lot of riots going on in South Korea also but we do have them back in our export market which now we're hoping to get Japan to change some of their rules on the age limits and that type of thing and then we're hoping to get Mexico as well. And so we hope by mid-summer we have that. Well, but the thing is we're starting to also see the cattle numbers and the weights starting to come down and so that is dropping tonnage and you're starting to see a bigger, more robust export market and boy if we can get our grilling season back in a nice way this market looks like it's going to be pretty good most of the summer. And, of course, there's targets of $120 on these late first quarter of next year's market. I will say this, if you get December cattle up to $108.40, we're not very far from that, about 80 points, I would be selling. That's my third count on the December cattle.

Pearson: Anything on feeders as you look at this calf market?

Martin: Well, I think feeders are going to be drug along with the fat market for now. I will say this, it was interesting, the feeder market looking at August feeders today on the charts it appeared like we may have a major head and shoulders bottom underneath this market. And if that's the case that could send you back up to test the all-time high.

Pearson: Alright, that dovetails with you've been talking about this reduced feed demand and fewer numbers out there.

Martin: Well, it's also worldwide too and that's the situation.

Pearson: And good export potential out there. Let's talk about hogs, too. What do you see now for the hog market?

Martin: Well, the hog market, we still have plentiful supply in front of us. We're working through a very good supply of hogs. But the bright side is we have an excellent, robust export market and that is the plus side. Here again, just like cattle, as we get further out in time we're going to be very tight supplied, low amount of feeder pigs, feeder pig prices are going to be very high. We're going to see extremely high prices with pigs next year, for hogs. But the thing is the market is already anticipating it and with the fact that we're starting to slow up ever so slightly our slaughter and seeing a good export demand market I think that that's what is driving this market too. We could see the June hogs go toward $79, $80.

Pearson: Well, as usual outstanding insights, Sue Martin. Thank you so much. 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 please visit our Market Plus page, it's at our Web site. You'll find streaming video of our program there as well. And you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free right there at the Web site. And be sure to join us again next week, we'll examine whether corn should be used for food, fuel or both. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices markets news wheat