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Market Analysis: Dec 29, 2006: Sue Martin

posted on December 29, 2006

The government's latest export report had bearish implications for the wheat market, while the corn market trended slightly higher. For the week, March wheat futures lost 13 cents. The nearby corn contract was up more than 6 cents. Soybeans rallied this week on fears that palm oil production may be reduced due to flooding in Malaysia. For the week, nearby beans were up nearly 25 cents. The January meal contract gained 10 cents per ton. In the fiber market, the nearby March cotton contract trended higher again this week, posting a gain of 41 cents. In livestock, the December live cattle contract was up $3.40. Nearby feeders gained $2.28. But the February lean hog contract lost $1.35. In the financials, Comex gold was up $18.90 per ounce. Nearby crude oil prices fell $1.36 per barrel. The Euro gained 68 basis points against the dollar. And the CRB Index fell nearly three points to close at 307.25. Here now to lend us her insight on these and other trends is one of our regular market analysts, Sue Martin. Sue, welcome back.
Market Analysis: Dec 29, 2006: Sue Martin Borg: Here now to lend her insight on these and other trends one of our regular market analysts, Sue Martin. Sue, welcome back to Market to Market.

Martin: Thank you, Dean.

Borg: Well, you know, a lot happens toward the end of the year, people tried with tax implications. Was any of that evident in the markets or is it ever in the commodities?

Martin: Well, I think there is. As you get into the month of December normally December is always known to be a tough market or month to trade the futures markets in because you've got traders thinking about the holidays, leveling positions, moving to the sidelines. So, you know, it's always about you have thinner volume, you don't chase the rallies and you don't chase the breaks. But this year we had the funds and, you know, the influence of the funds probably more aggressive than any other year. And, of course, this next year even more so as the amount of money coming in for index funds is going to be much larger. But I think the funds started to liquidate out of some of their positions especially like, for example, in soybeans in November and they finished it up in the first week or two of December. And so then we just kind of went into a mode where we were just, you know, moving back and forth, ebb and flowing. The trade got a little short, they'd cover it. And if it got a little long they covered that or liquidated that out. But if you take a market individually the stock market, for example, you know we had some liquidation of positions in the S&P's of course but the Dow held fairly well and really the S&P's didn't lose much ground to what their highs have been either.

Borg: As I was reading a moment ago the markets the report on exports had a bearish effect on wheat.

Martin: Well, it did. Wheat has, that's probably been the downfall for wheat regardless of the fact that we do know that wheat is gaining more acres. And so that has been a bearish implication that put kind of a black cloud over the wheat market and so prices softened once the wheat acres were planted. But we needed to feel like we had to ration the price of wheat to be able to have enough to go around after our weather market, Australia's weather market, Argentina's problems we felt that wheat prices if they moved higher we would be rationing and be okay. But the problem was we haven't seen the export picture like we thought we would see. I think we're about to hit the low of that. I think that our export picture probably after this next week is going to start to pick up and be pretty aggressive.

Borg: The surprising thing in the corn market was the upward trend during harvest. It was counter to everything we've experienced in the past. What does that portend now for the market in the future do you think? That is, is that going to continue to go up or have we taken the increase and we're going to level off now?

Martin: Well, I think that what it did was, you know, the market was so surprising to many this fall and it caught people, end users uncovered because they thought with a huge crop that they had time to get covered and it also caught people short the market and, of course, you know by surprise the funds were the ones, of course, to picket first and stepped into it on anticipation that we were going to have to have acres and the only way you get those acres it to outpace in price the amount of money returned for a product, basis corn this time, as opposed to soybeans or wheat. Now, when you look at the corn market we've had such a steep rally through the fall into November. I sense that, you know, nobody was bullish corn through the fall and so now it's a believable thing and everybody's friendly of corn. So, that tells me that the ascent going through the next quarter of the New Year is probably, it's going to have an upward bias but it won't be as swift as what we have seen.

Borg: Will the report that is due out from the USDA, crop production report, in a couple of weeks I believe isn't it Sue?

Martin: January 12th.

Borg: January 12th, effect on corn and soybeans?

Martin: Well, when I look at the report my anticipation is that the production from this past growing season is going to decline a little bit on corn in this report. If that occurs then that will rub off into the end result being the carryout declines again. Now, the ending stocks in the last report was 935 million bushels. That number will come down. If that number tightens that's going to be a little bit more powerful to the corn market, again, just resolidifying the fact we have to have acres. Now, we've also seen where because of the price of corn getting so high so quickly it slowed down the pace of expansion in the poultry industry. The last quarterly hogs and pigs report that came out this week showed that the expansion maybe has slowed in some parts of the country, not so much where there's plentiful supplies of corn. But I think that that's something we're going to see more and more down the road.

Borg: Would you advise those holding beans now, storing them to begin to sell or hold them?

Martin: Well, I'm going to tell them to hold them because I'm a very bullish person towards soybeans. I believe beans by the time we see the May expiration or the May contract expire off the board around May 14th I believe beans will be trading at $8.20 to $8.60 a bushel. And, of course, that could even maybe be higher if we end up with a weather problem in South America. Right now there doesn't appear to be any issues, so to speak, but if we start to pick up more and more hot, dry weather that subsoil moisture in southern Brazil and Argentina could change quite quickly. I sense this is more of a year after the turn of the year that we're going to start to hear a little more talk about Asian rust as we go through January towards February. The crop was a little bit late getting in and that was because they didn't have the financing as early as normal. So, that's why we haven't heard much talk about Asian rust. But when I look at the soybean market we're looking at a market that we're losing acres not only here in the U.S. but in other parts of the world. South America, Brazil lost acres, Argentina gained about two percent. But soybeans is an oil seed and world wide be it whether it's rapeseed, canola, cottonseed, they're losing acres to wheat and corn and coarse grains. That says at a time when the demand is escalating that by the end of this growing season coming up we're going to have extremely world tight supplies on oil seeds and soybean oil as well as the U.S. supplies.

Borg: Comments on cotton?

Martin: Well, cotton is a market that I think, you know, it was the first one last year to peak out and break and decline and it stayed in a bear trend for quite some time, got its prices pretty well worthy of world demand. Demand for cotton is very good, should continue to grow. I also believe that we're going to see some cotton acres go by the wayside probably towards some corn and so I think that that's a market that has a little more upside potential yet. Probably we'll see the May cotton get up around 62 cents.

Borg: Fat cattle?

Martin: Well, when you look at cattle here's a market that I think the cattle producer has just been utterly blessed this year. You know, we had a down spell into April, late April and then the market came out of it, had another little setback and then came back out of it again and here we are, fat prices up around 90 cents plus.

Borg: Has the weather at all influenced that especially in the Colorado and Nebraska area, Kansas?

Martin: To some degree yes because it's holding back the ability to get the meat, the processed meat out to the East Coast when at a time of the year when your high end cuts are so badly needed for the holidays. And, you know, we've seen a big storm right before Christmas and they didn't get the products out where they needed it, it backed up some meat. Now we've got another one again as we go into New Years, same thing is happening. But a lot of these storms seem to be tracking into cattle country and what's really going to affect the cattle prices I think and make the market escalate on these storms is the fact they have such high priced corn and because of that the fear that the weight gains won't be as good with all these storms coming through. High priced corn takes more feed and that seems to be jumping the cattle market.

Borg: Did the storms at all affect the feeder market? It would seem yes.

Martin: Well, it does a little bit, to some degree yes it does. But probably more impact, I would say storms will probably impact your fat market more than it will the feeder market. If you can get some setbacks in this corn market, we just came out of a 30 cent decline to come back to the highs, but on those declines that's when we brought the feeder market back up off of a nice break.

Borg: High priced corn, depressed feeder prices.

Martin: Exactly, high priced -- and just the fact that feeders were awfully, awfully high priced on their own. Now, we're looking at a time when supplies are getting a little tighter in Canada as well as the fact that once we get through January towards the February timeframe I think our cattle market might look at a little bit of a tighter supply as well. We may have been pulling cattle ahead a little bit.

Borg: There's lots, during this past week, been lots of predictions on tighter profits in the pork market because of high priced corn and expansion. Do you agree?

Martin: Well, I do agree, Dean. I think that this corn market has had a big impact not only, you know, corn, also soy meal starting to creep higher. It's had a big impact on the pork producer and, of course, especially on the poultry producer. So, when I look at the pork producer I know of some who have planned on expansions, they still maybe are expanding a little but not to the degree that they originally planned. Expansion is slowing. In the meantime, hog weights probably will start to sift downward a little bit as we go through the winter. Now, so far I would have to say our winter weather is off to a pretty nice start for us, it's pretty mild compared to what we're accustomed to. So, if that continues, and who knows, but we're looking at an El Nino year, that means in the central plains or central parts of the country our weather is usually milder, may have a little more moisture with it but the temperatures are milder, the bad storms seem to track more south.

Borg: Thanks, Sue.

Martin: Thank you.

Borg: Well, that wraps up this edition of Market to Market. If you'd like more information, I think you would, from Sue on where these markets may be headed visit our market plus page, that's on our Market to Market Website. And be sure to join us again next week. We'll be examining the government's effort to balance conservation plans and crop acreage demands. Until then, thanks for watching. On behalf of everyone at Market to Market, I'm Dean Borg wishing you a very Happy New Year.

Tags: agriculture commodity prices corn markets news wheat