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Market Analysis: Dec 22, 2006: Virgil Robinson, Pioneer Hi-Bred International

posted on December 22, 2006


Corn and wheat producers received an early Christmas present this week as the coarse grains rally swung into high gear.

For the week, March wheat futures gained nearly 19 cents. The nearby corn contract was up 15 cents.

Soybeans continue to take their cue from the corn market. For the week, nearby beans were up two cents. The January meal contract gained 20 cents per ton.

In the fiber market, the nearby March cotton contract had another positive week, posting a gain of 82 cents.

In livestock, the December live cattle contract was up 62 cents. Nearby feeders lost $1.40. And the February lean hog contract gained 80 cents.

In the financials, Comex gold was up $4.10 per ounce. Nearby crude oil prices lost more than a buck. The Euro gained 31 basis points against the dollar. And the CRB Index fell more than four points to at 310 even.

Here now to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson. Virg, welcome back.

Market Analysis: Dec 22, 2006: Virgil Robinson, Pioneer Hi-Bred International Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts Virgil Robinson. Virg, welcome back.

Robinson: Thank you, Mark, happy holidays.

Pearson: Happy holidays back to you. Let's talk a little bit about what's going on, the holiday we've had in this commodity market. Corn and soybean goods have been phenomenal since September 15th when this wheat rally kicked off. Wheat was up again this week. What is your feeling on this wheat market as we're closing out 2006?

Robinson: Mark, the U.S. wheat market is not particularly strong if measured by export behavior. That has been to this point relatively docile. I think the market is concerned about the fact that U.S. acreage has increased as well as world acreage which sets the stage for a significant rebound in world wheat production in 2007. However, futures, as you mentioned, seem to be a bit oblivious to that fact as well as the fact that we had maybe one of the best patterns moisture wise through the winter wheat belt that we've had in quite some time. So, where there's smoke there's fire. I think the market is concerned that at any given time the likes of Iraq or others who periodically buy pretty significant quantities of wheats remain in the shadows, remain lurking. So, given that plus the strength in other coarse grains, primarily corn, the market is well underpinned. Again, we've surpassed the five dollar futures level in a lot of the new crop futures contracts, Chicago, Kansas City and Minneapolis. It's difficult for me from the old school to say that's not an attractive price, I think it is. So, given that, a minimum price structure I seem to always refer to that kind of strategy, Mark but I think it's appropriate here, leave the top end of the market open as we try and resolve some of these weather issues, some of these production issues the next month, create a minimum price and move forward.

Pearson: Okay, so producers maybe take advantage of these prices. Let's talk about the corn market, Virgil, and what you're seeing there. Now, this one is the one that I think is driving it all with this ethanol demand we referred to earlier in the program and obviously these prices up again this week. You know, we're nearing the end of the year, I kind of think we'd see more evening up but there on the by side again.

Robinson: Not been the case has it Mark? In that context probably worth noting ethanol futures, Chicago ethanol futures making this week a multi-week high having formed what appears to me in technical jargon to be a V bottom which is a very strong formation, Mark. So, that continues, I think, to underpin the value of corn at least as measured by ethanol and its value. Crude oil while it didn't do much this week kind of consolidated my best opinion would be it's positioned for some additional gain and all these energy related products at least as I view them are very supportive to corn and the ethanol notion. So, market very solidly underpinned by that, solidly underpinned by the fact that export sales, Mark, continue at a very brisk pace. Should be noted that at least in this week's export weekly sales mix, again, the likes of South Korea and Taiwan, countries that traditionally source and buy all of their corn out of China are here and buying corn at a price that is on average a buck and a half higher than it was a year ago. I think that underscores the demand and the solid structure of the corn market as we visit tonight. Some of the deferred futures contracts, 2007, 2008 contracts making new highs, new contract highs this week. It would be pretty silly for me to say the trend is down. Here again price is attractive as measured by historic comparison but, Mark, it appears to me the market is in position to continue to push on higher over the course of the next several months and as a result of that minimum price comes to mind. Finalizing price I'm reluctant to do that as we visit tonight.

Pearson: Alright, but start looking at some kind of protection. Why don't we get into '07 and '08, Virgil, I know it's a long way off, I know you don't want to sell the whole crop but should producers start looking out there maybe to get a little coverage in case things do go the other way?

Robinson: Yeah, very good point and there are some factors, Mark, that are very difficult to handicap. The new farm bill will the USDA relinquish or relax some of the current rulings applied to the CRP acreage that we have in the United States, these are all factors very difficult to handicap but certainly could come into play. If objectives are being met and I think that's been the case from quite a number of producers in terms of a dollar and cent number and return on potential field per field I would be foolish to talk anyone out of pricing some of that grain. But the question that is always asked of me, Mark, is this the high of the market? And I have to answer as best I can and give them the direction and the current structure of the market, I have to say no, I can't assure you or can't guarantee you or can't even give you a good 50/50 odds that it is. So, under those circumstances minimum price springs to my mind.

Pearson: Good way to attack, a good business way to go after it. Talk about soybeans then, Virgil, they were in this wave too.

Robinson: Yeah, soybean market is a bit different, Mark, in that supplies here in the United States and projected supplies, that is to say the southern hemisphere is projected to grow in Brazil and Argentina and Paraguay and Uruguay 100 metric ton crop or larger which would be the biggest ever. So, there doesn't appear at least on the near horizon any supply concern. However, it's the idea that in 2007 our producers reduce soybean acreage by anywhere from four, perhaps as many as up to six million acres year over year. Should there be any production difficulty given that kind of a year over year reduction in planted acreage, Mark, then we're talking about a balance sheet 16 months from now that is infinitely different and much, much tighter. So, the need to continue to provide some premium to expand hectares in the southern hemisphere with all due respect to the supply here in the United States and a growing global demand for soybeans and soybean oil I sense that the premium in those new crop soybean futures will remain at or very close to seven dollars for the next several months.

Pearson: That's going to be quite an incentive down there to plant. Let's talk about this cotton market. We talked this week about what cotton did and of course this one also is going to be impacted by acres and everything else and of course by China. What is your take on cotton Virg?

Robinson: I kind of like the theme in cotton, Mark, and that is production year over year is forecast to be about unchanged while consumption grows and world or global stocks decline about 3 million bales year over year. So, that to me is underpinning the market. We briefly outlined a little strategy or made a suggestion, not a strategy, on November 9th, Mark, referring to that May cotton futures contract. We had a target of around $58, didn't attain that. As of tonight we're within a stone's throw of that. I'm going to increase that. I think we can push above $60 at which point I'm inclined to make a hedge to arrive contract, attach a basis in the spring of the year and a cash return of somewhere around $59 or $60 or 60 cents which would be year over year an increase of about 12 or 13 cents a pound. I like that idea.

Pearson: Alright, let's talk livestock. What do you like in the fed cattle world?

Robinson: Cattle on feed report today, no major surprises aside from the fact that marketings were very aggressive, Mark. Beef production is nearly six percent larger year over year yet the price of live is really only off two or three dollars, Mark. I think the demand for beef remains strong. USDA would concur with that suggesting that beef production will increase year over year 2007 over 2006 but ending stocks will decline. Per capita consumption in the U.S. grows about a pound. Exports are projected to grow about 25% year over year. And ending stocks remain the same. I think the first, second and third quarters of 2007 live cattle price will be in the mid to upper $80 level. Right now those deferred cattle futures contracts at least in my opinion are in up trends. I sense no need to step in and short hedge as we visit tonight. I would prefer a put with the idea there is the possibility of higher prices. Let's create a floor around the mid-80's. I like that strategy from April on forward.

Pearson: Absolutely, with the price of corn this feeder cattle market has been under a lot of pressure. And yet these are still decent levels for calf prices.

Robinson: They are, Mark, and as mentioned if we're reading those deferred cattle futures contracts correctly and the trend of those contracts, at least in my opinion, remains and is up that's going to underpin the value of feeder cattle. I think feeder cattle prices are going to creep a little higher over the course of the next few months despite high priced feed.

Pearson: Real quick, hog market, what do you see happening there?

Robinson: Cash hogs, Mark, appear to me based on supply assumptions probably low, possibly mid-40's in the mid part to latter part of 2007. I'm interested in creating a short hedge basis the February futures contract in and around the $64 to $65 level, lean hog futures contract. Those deferred much like cattle in my opinion are all in up trends. Puts is in fact I think the safest and most logical strategy there.

Pearson: Alright, appreciate it Virgil very much, always some excellent insights. And that's going to wrap up this edition of Market to Market. But if you'd like more information from Virgil on 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 our market plus segments free at our Website and of course, be sure to join us again next week when we'll examine controversial efforts to regulate confined animal feeding operations. So, until then, thanks for watching. On behalf of everyone at Market to Market I'm Mark Pearson wishing you a happy holiday.


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