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Market Analysis: Feb 23, 2007: Virgil Robinson, market analyst

posted on February 23, 2007

Wheat futures are above last year's prices which may make planting decisions more difficult ... particularly for those on the fringe of the corn belt considering a jump on the corn for ethanol bandwagon.

For the week, March wheat jumped 16 1/4, while the nearby corn contract gained 13 1/4.

Soybeans also continued to trade higher. For the week, nearby beans gained more than 11 cents. The March meal contract gained $1.60 per ton.

In the fiber market, March cotton gained $1.33.

In livestock, USDA's Cattle on Feed report released late this week included a smaller placement number than the trade guesses and we can talk about that a bit later in the markets. But for the week, the February live cattle contract was up 27 cents. Nearby feeders lost 85 cents. And the April lean hog contract lost $1.75.

In the financials, Comex gold gained $14.30. Nearby crude oil prices gained $1.75 cents per barrel. The Euro gained .0025 basis points against the dollar. And the CRB Index gained more than 7 points to close at 314.

Here now to lend us his insight on these and other trends is our senior market analyst, Virgil Robinson. Virgil, welcome back.

Market Analysis: Feb 23, 2007: Virgil Robinson, market analyst Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, Virgil Robinson. Virg, good to have you back.

Robinson: Thank you, Mark. Nice to be with you.

Pearson: Okay, let's start with this wheat market. Of course, we've got to kill the wheat crop, what, four more times before we harvest it. But we might be killing, we might be tearing up some wheat in some spots and going to corn. What is your take right now on this wheat market, on the price that we've seen? Obviously we're down a little bit from the peak we had last fall but wheat prices look pretty darn good.

Robinson: They do, they're strong, Mark, and before I forget your piece on the CRB index, if I'm not mistaken, that is the highest level ever since the inception of that contract on the CRB index and I think helping to drive that index higher has been the recent strength in energy and certainly the recent strength in the food sector.

Pearson: Absolutely.

Robinson: And it is an attraction to the index group, index commodity fund group as well as the directional fund group, Mark. So, those are helping underpin values as we visit tonight. To answer your question on wheat ...

Pearson: I forgot I'd asked you one, Virgil.

Robinson: Sorry, Mark.

Pearson: You want to talk about the CRB that's fine, I'll ask you about that. But wheat market as we pointed out strong prices, Virgil.

Robinson: Yeah, they are. Mark, I went back two months ago tonight to the day we had our last conversation and at that point I wanted to make sure I'm not starting necessarily with a clean slate -- minimum price contracts were our theme that evening in wheat, in corn, in soy as well as in livestock and as we visit tonight, Mark, for fear of being redundant I don't sense any change in that attitude. I still think there's the prospect for much higher prices in an array of commodities to include wheat. Its association with corn and/or coarse grains is clearly one of the reasons why. This five dollar mark is attractive from a historic comparison and for those who have sold absolutely nothing I would certainly encourage selling something. But those who perhaps did sell and buy their calls and have their calls in place I would retain those, Mark.

Pearson: Alright, let's talk about the corn market since that's what is driving virtually everything thanks to ethanol. We had President Bush talking again about ethanol and cellulosic and biorenewable fuels. He was part of a panel yesterday. Corn market started going higher September 15th, has not looked back. Virgil, we've got a big report coming up at the end of March that will give us our first real indicator of what's ahead for the 2007 growing season for corn. How important is that?

Robinson: I think intentions report might be the most important report of my career, Mark, which is in excess now of 30 years. Interestingly, though, as you mentioned the biofuel evolution and the ethanol evolution it should be noted however too, Mark, our corn export sales base to date has not been deterred at all by higher prices. We are on pace, I believe, to exceed current USDA forecasts for the year. So, let us not lose perspective of that. We're seeing quite a number of Southeastern Asian countries originating corn here in the U.S. that up until recently originated most if not all of their corn out of China. So, big story there as well. But corn is clearly underpinned by, as you mentioned, the biofuel evolution as well as good, solid export demand as well as good domestic feed demand, Mark. I am beginning to see a little rationing take place, at least I think, in the poultry industry, both broiler and egg laying bird sets have been down consistently of late, beginning to see weights decline, live weights in both cattle and hogs. So, we are probably rationing corn use to some extent as underscored by those factors, Mark.

Pearson: Why are those Asian countries buying from the U.S., buying their corn needs from the U.S. instead of China?

Robinson: Well, I think Chinese corn stocks are precious, Mark, and as they continue to ramp up their livestock industry to accommodate increased edible protein demand by a populous that is becoming a bit more affluent year over year the need for protein both in the form of corn and vegetable protein to accommodate their pork production, their poultry production as well as their aquaculture and dairy continues to consume huge quantities of both corn and vegetable protein. I see no change in that trend in the foreseeable future, Mark.

Pearson: Virgil, as we look at this corn market exports look good. A little bit of rationing on the feed front in poultry. And like you say we'll talk more about livestock in a minute. And we have this renewable fuels demand, this ethanol demand out there. So, what is a producer to do? Obviously these are attractive, I'm 50 years old, Virgil, I can tell you $4 is a darn good price for corn.

Robinson: Mark, again, as mentioned two months ago tonight the price of corn was 50 cents lower than tonight. We talked about minimum price. I'm going to stick with that strategy and I know that options are not inexpensive, that's true, they are not, they're relatively pricey. But I think, Mark, the perspective or the potential in the corn market, I dare to say this I guess, could well be another dollar higher. Another factor that is beginning, I think, to influence price discovery is the concern about what might be a wet, cool spring and a dry, warm summer. So, clearly that wouldn't be the right combination here when we're talking about the yields that need to be at or above trend line to sustain current demand forecasts, Mark.

Pearson: Obviously there is concern of the El Nino, La Nina situation that you're referring to that I've heard the market talk about. What about these in flows from these funds? Are people still just throwing money into commodity funds or going into Chicago, Virg? Is this still driving this thing too?

Robinson: Well, I think there's still a significant infusion of that type of equity available to the commodity market, Mark, again as portfolio managers are convinced that commodity, the investments in commodity has a place in their diversification and in their portfolios. So, to answer your question I don't sense any significant slowing of that type of equity. And as mentioned earlier the CRB index will probably do nothing but stimulate additional interest in basic food stuffs and commodities, the likes of which we're talking about tonight.

Pearson: Okay, so corn potential dollar up side, it's huge right now but maybe go with your minimum price strategies, get started there and start making some sales. What about on soybeans, Virgil? We've got a flip side thing going there, a totally defensive market don't we?

Robinson: Well, the 30th of March, Mark, we'll get a glimpse of what the USDA is forecasting here in terms of a shifting away from soy and into corn. And, of course, the market is of the opinion it could be as large as 6 to 10 million acres which would be unprecedented in my memory in a single year's time. So, I think it's that concern, the concern of fewer soy acres in the U.S. over the course of the next few years in combination with yet some economic uncertainty in the Brazilian communities, Mark. The value of the Brazilian real is at a multi-month high and, of course, that is a factor. The weather has been okay but there's concern about too much rain in parts of central and northern Brazil curtailing deliveries. The infrastructure in that country to accommodate a significant growth in soy hectares year over year or within the next couple of year is also a concern. So, to assume they're going to pick up all the potential acres that are lost in the U.S. in my opinion is probably a bit of a misconception at this point in time.

Pearson: Okay, soybean producers, sales opportunities in here?

Robinson: Mark, to look back and, again, I use the minimum price strategy, I still think there is the potential here for what could be significantly higher prices. I am reluctant to finalize the price of either corn or soy. I would prefer to create minimum price or floor prices and let time evolve before making that final decision.

Pearson: Real quick on cotton, Virgil. We're talking an acreage shift down there into corn this week. What do you think cotton prices -- are they going to get more defensive?

Robinson: Mark, you know, old crop cotton supplies have been adjusted since last we talked due to an adjustment in particularly China, an increase in cotton supply. My analysis two months ago was wrong, market hasn't in fact worked toward $60 but the work that I keep and the system that I believe in still suggests that either the May or July cotton futures contract has an awfully good chance of trading to $60. We're well below that. I'm reluctant to finalize sale in old crop cotton and in new.

Pearson: Let's talk livestock, Virgil. Cattle on feed report Friday afternoon, what was your take on that? They're talking pretty bullish impact on the deferred contract.

Robinson: It was surprising, placements, Mark, were significantly smaller than most had guessed pre-report, total on feed smaller than most had reported, Mark. So, it probably validates the fact that those deferred live cattle futures as we visit tonight are life of contract highs. Demand for product, demand for red meat remains strong. Commercial red meat production in January '07 was five percent larger than one year prior to that yet cold storage inventories while they did grow month over month were significantly below one year ago. That underscores the strong demand for red meat, beef and pork. I don't sense that's going to change, Mark. I think the American consumer is relatively affluent, relatively in good shape economically and continues to buy each of those two products and will continue to do so. I don't want to finalize the price in live cattle. Again, the best and most viable strategy to me protecting a relatively decent price is to put some type of put strategy or vertical put strategy in place and allow the market more time, Mark, and the opportunity, I think, to move higher.

Pearson: Alright, calf market suffered a little bit this week with, again, the strength in the corn market. Longer term, Virg, we've had a nice bounce back in this feeder market though.

Robinson: Yeah, but total supplies I think year over year, both Canadian and U.S. will be lower, Mark. Deferred cattle futures as we just mentioned are contract highs, appear to be headed higher. I think feeder cattle values will creep higher into the spring, early summer of '07.

Pearson: Real quick on the hog market, Virg, as you look at that are we starting to see some liquidation in the sow herd?

Robinson: I don't see it noticeably, Mark, I'm seeing it more in the Canadian communities than I am in the U.S. But, again, live weights are beginning to decline, Mark, and that is a function of higher feed values. But, again, it's hard to be real bearish when you look at the deferred live, excuse me, lean hog futures at or just below contract highs. I think they're headed higher, Mark, and as a result I care not to finalize the price in those deferred lean hog futures contracts and/or cash commodity. I think we are going to creep higher cash wise into the mid to upper 40's over the course of the next couple of quarters.

Pearson: Alright, as usual Virgil, some great insights and we appreciate your input so much. And that will wrap up this edition of Market to Market. But if you'd like more information from our astute analyst on just where these markets may be headed visit the Market Plus page at our Market to Market Website. And remember you can download audio podcasts of our market analysis and Market Plus segments free at our Website. And, of course, you should join us again right here next week. So, until then, I'm Mark Pearson, thanks for watching. Have a great week.

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