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Market Analysis: Nov 23, 2007: Market Analyst Sue Martin

posted on November 23, 2007


Most of the commodity markets closed early Wednesday for Thanksgiving. While the corn market traded in a sideways fashion during the holiday-shortened week, declining crop ratings pushed wheat prices sharply higher.

As of Wednesday's close, December wheat gained 54 cents, while the nearby corn contract moved two cents higher.

Talk of additional sales to China supported soybean prices. For the holiday-shortened week, the January contract gained 6 cents, while soybean meal lost nearly 5.00 per ton.

In the softs, cotton declined again this week, with the December contract posting a loss of $1.15.

In livestock, the December cattle contract gained $1.05. Nearby feeders were up 78 cents. And the December lean hog contract had its first winning week in recent memory gaining $3.23.

In other markets of interest, the Euro gained 184 basis points against the dollar. Nearby crude oil prices gained $2.20 per barrel. Comex gold gained $11.60 per ounce. And the CRB Index lost nearly half-a-point to close at 351.44.

Market Analysis: Nov 23, 2007: Market Analyst Sue Martin Pearson: Here now to lend us her insight on these and other trends one of our regular market analysts, Sue Martin. Sue, welcome back.

Martin: Thank you, Mark.

Pearson: Well, a wild week and let's start off first with wheat and this December contract, the nearby. No one has wheat available right now so it's still an extremely volatile market and concerns about what is happening with the current crop, with the '07-'08 crop is also on people's minds.

Martin: Well, that's true. The stocks are very tight around the world, not only around the world but in the U.S., and so all it takes is one major producer or exporter like the U.S. to have a little bit of an issue starting. And, of course, crop condition ratings for the hard red winter wheat are quite low especially for the poor to very poor category, I think 16%. Excuse me -- so I think that's part of it that helped turn the market around this week and it started to kind of actually turn around the week before. The market has reached some targets to the downside and also we've got some pending demand here for the next ten days, some business that is going to be coming into our market so I think that also is underneath the rally here and I think there's a little more of it yet to come.

Pearson: Alright, well with that idea in mind then you're not in a big hurry to make wheat sales?

Martin: Not right now. We're recommending hold off here, let's take another look in a couple of weeks. I think futures on the March should get up around $8.50 and probably maybe $8.78 and then let's take another look and start to think about doing some sales on old crop. On the new crop if you can get futures up around $7.43 there is some resistance on the July KC at around $7.35.

Pearson: A little froggy, that's alright.

Martin: Yeah, I've got a frog in my throat. But also $7.60 is another spot that there is resistance and I would start making some more cash sales there.

Pearson: Alright, we look at all these commodities, this continuing weak dollar, had it again this week, the Euro gained, the dollar lost ground again. Just generally speaking, Sue, going forward in these commodity markets what do you see the impact being? I want to go to corn in just a minute but just generally, obviously wheat is a factor here but more of a supply driven factor. Both corn and soybeans are really long-term demand driven.

Martin: Well, they are. Corn and soybeans are demand. You also have countries that are starting to talk about building reserves, India, Pakistan, but those are two countries that probably won't chase the market, they'll wait for setbacks and step in and then buy. In the meantime you've got China looking at building some reserves there on soybeans and we've noticed that in their buying. They have bought -- we're looking at about 14 cargoes of beans bought in the past week from the U.S. and not to mention all that is coming out of South America. A lot of rumoring this week about China and they are a very important part of our markets right now as they are trying to curb some of their inflation which is kind of giving you some heads up as we get closer to the Olympics. They're going to really slow that economy down. But at the present time this past week we noted that they put, the government put a freeze on lending. There is talk for government agencies that are buying for the government that they can maybe do away with the VAT tax which is 13% at this time, also talking about the first quarter of 2008 doing the same thing they did here this past quarter where they'll lower the import duty from 3% to 1%. But they've been buying great guns anyway -- what it says is the demand should stay with us out of China. Their prices are extremely high and, of course, they are huge importers of soy oil out of South America and I think that when we look at this market, you know, you're going to have some reserves being built but all in all I think it's also part of the dollar dropping. The dollar is getting low, we look for the dollar to continue to decline. I think the cash is around 75, 150, something like that. We're looking for this dollar index to get down around 74.140 to 74.200 and we look for a nice response from that level.

Pearson: Alright, so maybe we'll see that dollar turn around once we hit that low.

Martin: Exactly.

Pearson: Let's talk about the corn market and as it relates to all that and what's happening with demand. Export demand has been extremely strong. You mentioned China. China is a big player on so many fronts in agriculture right now but corn is another factor. What do you see ahead now for corn prices as the trade tries to buy acres to take care of demand for 2008?

Martin: Well, the one thing we have to look at, now, granted at the end of December we'll have a stocks report, a quarterly stocks report and we suspect that there could be some revisions in that, we hope, because we think in the last one at the end of September that there were some acres that came out of the south, some production, early harvest that got stuck into old crop and we think that was a mistake. But we'll see if the market or the government changes that. However, beside all of that I think we have to keep in mind we do have a bigger carry out this year going into next year and that is going to somewhat keep this market a little subdued and we think that when you look at the ratio between corn and beans maybe we don't lose as many acres of corn as what we would think. I think -- I would tend to think that we're in a corn market that's going to be more sideways in nature. I look for actually that kind of a market behavior straight into May. I think that you'll have a little bit of an upward bias to that but all in all I think whatever this March contract does on the corn so will the May. And so I think you can have some hopes of getting some better prices but I sense that the market is going to be more sideways and the basis will be what attracts corn out of the farmer's hands and maybe enhances them to think they ought to be selling, also maybe looking at more corn acres.

Pearson: And especially with all the additional on-farm storage basis is becoming extremely critical as we get to spring.

Martin: Exactly.

Pearson: Sue, at this stage of the game you're not anxious to make corn sales? Lower end of your range do you think?

Martin: I think that I'm not real positive on corn right at the moment. You know, we can get a little higher here but I sense there is a sell off coming. I think that when we get into the month of December we will not probably take out these November highs that we have seen so far on the March contract which has been full seven and a half as even I speak and I think that we'll get a little bit of a correction before we turn and come back out and take those highs out, don't have to but I think we will take those highs out. It's just that when you get up around $4 you're going to see a lot of resistance I think psychologically.

Pearson: Alright, soybean market obviously you're back to record prices, prices we hadn't seen in decades. What is ahead for beans? Is this the start of the big rally?

Martin: Well, I think, you know, we've noted that of late even the bears have now turned bullish and so everything, the story is believable, it's believable for everybody. Now we're starting to get a little concerned. I think, not that I'm a contrarian because I do think there are better prices yet in the offering as we go into next year, but I think there is a sell off coming before we make substantially higher potential prices. The market is being supported by, you know, too much rain in Southeast Asia which is a sign of La Nina. It's also being supported because it's trying to buy the acres in Brazil and Argentina and we're hearing out of Solaris that they are probably 60% planted in Brazil and maybe with 8% more acres expected this year. That's an increase, they were talking 6%-7%. So, that is a plus but we have to keep in mind they lost 11% a year ago. So, we're not getting back everything that we need to have and the demand continues to grow. You've got demand growing back for the biodiesel industry now over in Germany. They are utilizing rape seed pretty aggressively now. You've got the dollar falling which continues to make our products cheap. And in the meantime interest rates are low which helps sponsor that demand and off set some of those high freight costs. You've got inflation, just the fear of inflation and one lesson I learned from back in the 70's when I got in this business was that beans are an inflationary market right along with the gold, the silver, that type of thing. So, I think you've got the energies driving the bean oil, you've got South America expected to be exporting a lot of soy oil but I think all of a sudden that is going to change out of Argentina, one of them being such aggressive soy oil exporters they're probably going to turn that into biodiesel and export it into Europe or the European Union.

Pearson: Alright, so at this stage of the game you're not in a hurry to sell soybeans?

Martin: We have our clients, we have recommended to our clients and producers on radials that they get 50% marketed at this time. Nearly everybody should be able to have $10 beans and we think that's a good price. That's on old crop. On new crop we've got sales up to 20%. Now, what we're recommending is that we do believe you will see a sell off in this market before it does make much more of a bigger leg up in this market. Any weather hints and we're already starting to hear just little tidbits of talk of getting dry in southern Brazil and Argentina, that is a sign of La Nina. If we get into January now you're going to have the market real interested in that and now you've got reasons to take this thing substantially higher. But without that I think we have a sell off coming first and that sell off could be as much as a dollar.

Pearson: Okay, well, keep that one in mind. Let's talk about the livestock industry, Sue, the flip side of all these high input costs, of course, for the cattle feeder out there. Markets, cash markets seem to be hanging in there, $90 to $94 on fed cattle. Are we going to hold that through the end of the year and into the first quarter of 2008?

Martin: Well, I think that for the next two weeks we have the potential to hold and maybe firm a little bit. I think the cattle market has done a fabulous job considering all that it has endured with the fact of less demand overseas. I think the cattle industry has done a very good job of hanging together. However, I think that when you get February cattle futures up around 99 cents should they tag a dollar if we're lucky enough? I think you sell them. I think you hedge them because I think we're going to have pretty good supplies and another sign of a La Nina is milder weather through the plains which means you could bring on some more weight as you go through the winter and we don't want to see that because that could be detrimental to us. But I think I look at this cattle market, it feels like it hasn't gone really anywhere. You know, every time I look at December cattle it's like you're around 96 cents. But I think that I would use rallies in the next two weeks to get sold. Usually around the 8th of December, the 5th to the 8th can be kind of a high time.

Pearson: Alright, other side for the cow-calf producer out there, this feeder cattle market as you take a look at that and what your thoughts about what the corn market might do. Are there some opportunities out there for the cow-calf guy going forward?

Martin: Well, first off I think that the cow-calf man and even the feedlots need to look at on this next sell off to maybe lock in some protection for feed. But I don't see the feed market running away either. And in the -- as far as feeders, locking in for feeders I think you need to have a little bit more of a rally here and then I would entertain that too.

Pearson: Alright, about 30 seconds Sue, this hog market has been unbelievable. These kill numbers have been huge, we're exceeding our intended slaughter capacity every day. What do you see now for the next three months for this hog market?

Martin: Well, I think here we have a market that has probably put in a low. We've got good export demand picking up but they should with the dollar doing what it's doing. And, of course, the need to keep cheaper food prices in China, I think that China would be coming in and just starting to become pretty aggressive buyers on pork. I think that when I look at the hog market that December has put its lows in, I think that we'll see probably, well, we've almost had a $5 rally in a couple of days, I'm looking for close to $10.

Pearson: Alright, Sue Martin, why don't we leave it right there. 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 visit our market plus page at our Web site where you'll find streaming video of our program. You can also download audio podcasts of our market analysis and market plus segments free at our Web site. And be sure to join us again next week when we'll examine the outlook for U.S. agricultural trade. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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