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Market Analysis: Mar 07, 2008: Record Commodity Markets Continue

posted on March 7, 2008

The March corn contract established a new record high briefly this week but trended lower by week's end, while nearby wheat prices trended higher.

For the week, March wheat gained almost 20 cents per bushel, while the nearby corn contract lost more than 12 cents.

Bearish export numbers pressured soybean prices. For the week, March soybeans lost more than a $1.80 per bushel, while the nearby meal contract lost almost $37 per ton.

In the softs, cotton managed to squeeze a little more out of the market as the December contract posted a gain of 8 cents.

In livestock, the April cattle contract lost almost $4. Nearby feeders were down a little more than $3. And the April lean hog contract declined just a touch over $2.

In other markets of interest, the Euro gained 161 basis points against the dollar. After rising over a record breaking $106 per barrel mark on Friday, crude oil settled back gaining $3.31 per barrel for the week. Comex gold gained $3 per ounce. And the Goldman Sachs Commodity Index gained almost 15 points to close at 693.25.


Market Analysis: Mar 07, 2008: Record Commodity Markets Continue

Pearson: Here now to lend us their insights are two of our senior market analysts, Sue Martin and John Roach. Folks, welcome back.

Roach: Thanks, Mark.

Martin: Thank you, Mark.

Pearson: Good to have you here. Sue, let's start with you and let's talk about what happened in wheat. Wheat a little bit higher for the week. A wild market this year, incredible demand, record prices. I'm assuming we're going to start growing wheat everywhere we can grow wheat around the world, Sue.

Martin: Well, we are, we already are. And, of course, the one thing we have to keep in mind is that the Kansas City wheat, the hard red winter wheat is about to come out of dormancy and we need to watch that and see what the weather forecasts are like once that occurs. And I think that's why the KC wheat has softened a little bit against the soft red and then demand is also coming towards the soft red even though we have tremendous acres of soft red wheat and it looks basically good. I think the wheat market has got its eyes peeled to this next week looking at the Minneapolis March contract and to see how that expires. The open interest is extremely thin and it's a thin contract anyway but I think all eyes in the wheat pits are watching that contract to see what happens. Then stocks are going to remain tight and I suspect that May contract of Minneapolis wheat runs into something similar that we've seen in the March. So, when I look at the wheat do you sell it? Boy that's a tough call. I think you just have to look at contracts and say is this profitable for me and be happy.

Pearson: Alright, and John as you look at the wheat situation, obviously we see these record prices, is it hard not to say sell?

Roach: It's hard not to say sell at these kind of price levels but we're on a sharp break in the market particularly in spring wheat. And we still have to figure out how many acres we're going to plant and we still have to get that hard red winter wheat out of the ground growing well and it's dry, it's very drop. The crop condition ratings down in the hard red winter area are troublesome and so we're starting this year in a little bit of a worrisome situation. Even though we know there's a lot of wheat being planted around the world we're starting off in a worried situation still.

Pearson: And you mentioned we did a break this week so is that something that we should be closely attuned to and hold off sales for the time being?

Roach: I think we have to pay attention to the market. What it's telling you is that we've got wheat and corn and beans all up to a price level that they ran out of gas. We just didn't have more buyers and when it turned down, it turned down precipitously. So, the Chinese have backed away from the bean market. So, we have some issues here of concern. But at the moment I think this is really temporary and I think the break will find a bottom and we'll start a recovery after we do that.

Pearson: Let's talk about the corn market. On that one John I'll start with you first. What do you look ahead now at this corn market? Again, a little softer this week on corn but some record prices.

Roach: Yeah, we had record prices made and then the back off on corn really came somewhat reluctantly. The bean market had a big run to the down side before corn actually started to break. I think people are realizing that there's been a fairly big shift occurring from corn to beans for this planting season. I think when the government gave us their corn numbers at the outlook conference on the 22nd of February they said 90 million acres of corn and that's only down a little over three million acres from what we planted last year. I think that surprised people, it was a little bigger number than people anticipated. But now this week we're starting to see people talk about considerably smaller numbers than that and as I've worked with farmers in this last week traveling around doing meetings I'm finding farmers are afraid to plant as many acres of corn not because of profitability but because of cost of production. It's just so much money to put into the ground this spring and so much risk to take I think farmers are shifting over to some beans because of the lower cost of production.

Pearson: Sue, you talked about this shift last time you were on the show, calling for a lot more of a shift than what USDA at their outlook conference predicted.

Martin: Exactly, I was looking for a reduction of eight to nine million acres. I think since that time it's become a little bit more sexy that we will be down around eight to nine million acres. And so there's been that shift and that has helped stoke the December contract of corn along with the front. But the one thing we have to keep in mind is you're seeing some ethanol plants coming off the drawing board, you're seeing some shut down, some are slowing down production and I think that's a little bit of a subtle change in demand. I also think you've got the poultry industry kind of backing off. You've got, of course, liquidation in the hogs. And you've got the cattle industry saying we're not going to feed these cattle as heavy as we once did. So, suddenly there is kind of a softening of demand domestically. But exports are good for overseas and I think that will continue. I think the big thing we need to watch here is there's so much talk about this week the hot news was the commercials, Bungee, ADM, Cargill, you know, maybe moving away from forward contracts to basis contracts. Well, what that tells me is everybody was kind of nervous about it and thought it was bearish but what it actually told me was they must be pretty bullish or they would say no, if the market is going to go down we're going to stay with these forward contracts because their portfolios would increase quite nicely. So, it tells me they're bullish. And I think that's a good feel. But also on the flip side of it too you've also got the funds, the hedge funds who the banks are kind of not closing in on their lines of credit because they are so double what they should be and extended and the banks are getting nervous on these lines of credits and they're cutting them back because everybody is taking a protectionistic view right now on the financial side and some of these funds have also been involved in sub-prime debt. I think that has had a bigger stand this week than anything. And China, you look at China and they say well, we're going to take 400,000 metric tons of veg. oil and put it on the domestic market. Well, in my view two weeks ago we were hearing the government agency opened up an agency just to handle increasing their reserves and they were going to be importing veg. oil for that purpose. Now, all of a sudden they're taking 400,000 out and putting it onto the domestic landscape to try to put prices down when they've already got price controls in tact. To me that makes the situation much tighter and as we go down the road I expect the demand is going to be that much greater. And, of course, the corn production, our ag attaché says that the corn production is actually around 137 million metric tons rather than the 148 or 147 that they were previously saying.

Pearson: You made a good point about the country elevators and that cash forward contracting which we saw a lot of producers do it. And they looked out at the '09 and '10 and we talked about those high input costs and people are saying maybe I need to get some coverage out there. Well, they're going to have to do that on their own now. Is that the way you see it?

Roach: That's the way it is today. Very few buyers are willing to buy crops that far out. And the reason that they're saying is that the cost of margins is such that they really just don't want to make that commitment. I think it might also be that they're able to get away with it. If the competition is not buying then it makes it a whole lot easier. You're going to originate the grain that you're going to originate anyway. Well, what it does do is it prevents a lot of producers from making sales in the marketplace and so we won't have some of that selling pressure out there in the distant months that we would have had otherwise. So, I do think that is significant and it is an upward kind of a situation as far as the market is concerned. The Chinese situation on oil, we're hearing things a little differently. We're hearing that the Chinese actually don't have any oil, the government doesn't own any oil to put out on the market. Now, I don't know whether that's right or wrong but that is what we're hearing. And the other thing that is happening there that is causing the most trouble they implemented price controls which affects the soybean oil market and then went on a big buying campaign, a big buying binge and bought a lot of beans and boosted the bean market sharply higher. The processor now has high priced beans and a price fixed oil. And so their margins disappeared. So, the processor in China is suddenly caught in a situation where they can't make the beans work. And then in addition to that the government is saying it's excess speculation that is causing this problem and that caused a flight away from long positions in the Dalian exchange.

Pearson: Okay, enough about oil, we'll get to beans here in a minute. Real quick right now let's jump to March. Based on what you're thinking, Sue, on corn do you want to make sales now or not?

Martin: I think corn is going higher. I look for the July futures to get to $6.33. If you make sales here I don't think there's anything wrong with making some cash sales here. I think you need to cover some costs but I do think we're going higher. You look at the type of spring and Illinois should be putting on anhydrous by the middle to the third week of March and they're not. It's too cold, too wet. We could have a late spring coming here and that could send that corn market higher too.

Pearson: John, you've been selling some corn. Do you want to sell corn?

Roach: We've been aggressive selling corn and if you haven't sold any corn at this approximate price level I think it makes sense to do so. These are just very good prices. But we're selling incrementally and we think we'll have at least two more sell signals this year and if we have any weather problem at all they'll be at higher levels than where we are right now.

Pearson: Let's talk about the bean market. Beans sold off this week, Sue, is this scaring anybody?

Martin: Oh, I think it is scaring a lot of people. I think the producers are thinking oh my goodness ...

Pearson: I missed it.

Martin: They think they've missed it, we've had tons of calls that way. My recommendation to producers -- I was at the commodity classic and I talked about this -- is that rather than buying puts to floor yourself because you're going to have to go out of the money to make them reasonable and then you take the basis off of that our recommendation is to go over -- and now that we've had this break it makes it even better -- to go over and buy veg. oil calls, soy oil calls in the July and buy the 65 cent calls. You're probably going to have an outlay of around $5000 because you have to do two to one and then for every 5000 bushels of beans you sell I would cover them in the veg. oil because that is what's going to lead you back up out of here. But I would sell some cash if you want to get some cash sold. I don't think our top is in for several reasons. One, the funds I think that you'll get this settling down of the hedge funds situation and then we'll come back. You haven't had the dicey moves, we're limit up, limit down. And I know in our office people have been very careful and cautious not to really get caught this time. And the emotions have been kept in check. I think that this market still has higher to go. I would say you're going to see $16 plus and probably $18 beans.

Pearson: John, what is your thinking right now on beans?

Roach: We had a sell signal on beans and sold into the market. We no longer do after the market came down yesterday. We'll wait for the next sell signal. But I'm going to be a more than willing seller of beans. We're right on the verge of harvest here in South America, we're actually well into it, but the bulk of the harvest is just right ahead of us. Their profit is better than we thought it was and so the next rally back up I'm just going to sell beans. And coming back and buying soybean oil or something like that to try to squeeze another dollar out of a $15 bean market I don't have much interest in doing that. I'm much more interested in getting sales made and looking at these price levels as a great opportunity to make some significant profits on the farm and let it go at that.

Pearson: Real quickly to both of you, cotton market, this week again we've been robbing acres from cotton based on that outlook conference what the USDA is anticipating. What do you see ahead for cotton prices as we tighten on our production here in the U.S., Sue?

Martin: I'm very bullish cotton. I think that, one, cotton reacted because it put fourteen dollars on in a week and so it kind of retracted back simply because it is in essence an oil seed as well. And so with this break in soy oil and the beans it fell back. But I'm very bullish cotton. I think we're losing acres. It was interesting, on Monday we were hearing talk that there were some cotton producers that were going to plant beans now switching back to cotton. All of a sudden I think that's been changed again. But I think that cotton has the potential to go back to $1.10 to $1.15 and that is near the all-time highs and that is basis the December contract. I'm very friendly cotton.

Pearson: John?

Roach: I'm in the same camp. Cotton has to compete for its acreage. The Chinese demand should be strong. And so I'm of the opinion cotton has another life to it yet.

Pearson: You guys have been talking to a lot of livestock producers here in the last couple of weeks all over the country. And they're not happy campers. They're looking at a real squeeze here, these high corn prices we've been talking about, high bean meal prices, a break this week. Should a livestock producer be using this for some coverage?

Roach: The interesting thing we had the front months of both hogs and cattle down threatening or making new life on contract lows while the back months were making new life on contract highs. So, see what's happening is the nearby situation, we just have too much meat. We're producing considerably more meat than what the market can take at these price levels. We may be near a bottom. I don't want to say that we go lots lower but we're pushing lots and lots of meat into an economy that is struggling. The National Restaurant Association has an index where they monitor the profitability of restaurants, it's as low as it's been since April of '03. So, we're really talking about a meat industry here that is struggling and we're talking about higher priced grain coming right back again. So, we think that if you've got profitability and longer term hedges we would be taking that home just to maintain although we have to be very optimistic on the long-term. Once we get through this supply issue we're going to go to record meat prices and that is what the distant futures are telling you.

Pearson: Alright, and hopefully we're going to get those slides up there of our live cattle nearby charts and our nearby hog charts as well as our feeder cattle charts. Sue, feel the same way? Longer term you're bullish or friendly on those deferred months?

Martin: I am very friendly to the deferred months but I think that in the cattle on the April contract I think you get these down this next week, April futures down around under 90 cents to around 89.20. I think you're going to hit a wall. I think the market is about sold out enough to settle down there and I would not want to be hedged at that time. I would be taking my hedges and moving them away from the market at this time. If you're still bearish buy some puts and capture all the cash that you have made on the hedges. In the feeders, you know, one thing we've got going for this cattle market is the fact that coming off of wheat pasture you don't have near the cattle on wheat pasture this year that you've had. That in the past has been kind of a little bit of a negative to the April cattle as well as feeders and I don't see that this year. So, that combined with lighter weights I think and the fact that JBS is trying to bid on some of the packers I think is a very good thing because it's going to help us in our export market for beef. I think that the cattle producer has some good things coming on the horizon, they're getting a break in the feed costs here in the near term. I think that the cattle market has got good things coming as well as the hogs.

Pearson: And John, real quick, your comment on the hogs?

Roach: I'm more cautious. I think it's going to take longer to get out from underneath this issue. I'm more concerned about the supply. I'm more concerned about the health of the economy and the consumer. I think the consumer is scared. I think even though a consumer might be in strong financial position and didn't refinance their house and so forth, they may have the same house they had fifteen years ago I think that they're concerned. I think that the news that we're getting just keeps getting a little worse. I haven't seen any good news yet.

Pearson: Alright, so let's start getting some good news, Sue, you'll feel better about the meat markets?

Martin: Well, I think that when I look at the hog market here again I think we're about to settle down this market and seasonals are that you should stabilize the June hogs even here by I would say the end of March.

Pearson: Very good. Sue Martin, John Roach, thank you both so much. That will wrap up this edition of Market to Market. But before we go we want to let you know that Market to Market may be airing in different time slots on some stations in the weeks ahead due to PBS fundraising efforts. Now, if you value programs like Market to Market please consider phoning in a pledge and investing in a service providing you with accurate information and timely market analysis. Until next week, thanks for watching, I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat