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Market Analysis: May 12, 2006

posted on May 12, 2006

The report brought out the bulls in Chicago -- especially in the corn and wheat pits. For the week, nearby wheat futures were up more than 32 cents while the May corn contract moved more than 17 cents higher. Estimates of smaller ending stocks helped bean prices continue their upward trend. For the week, May soybeans gained more than 5 cents per bushel, but the May meal contract declined by $2.50 per ton. In the fiber market, nearby cotton prices trended higher, with the July contract gaining $1.74. In livestock, the June live cattle contract gained $3.55. Nearby feeders were up $2.60. And the May lean hog contract lost 10 cents. In the financials, Comex gold gained more than $27.00 per ounce. Nearby crude oil prices were up 1.85. The Euro gained 120 basis points against the dollar. And the CRB Index gained more than 11 points to close at 364.50. Here now to lend us his insight on these and other trends is one of our regular market analysts Virgil Robinson. Virgil, welcome back.
Market Analysis: May 12, 2006 Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson. Virgil, welcome back.

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

Pearson: Well, good to have you. Let's talk about this wheat market, Virgil, I was down in Oklahoma about a month ago, down in Stillwater, great time, but boy a lot of horror stories about this wheat crop and now we're starting to see that confirmed by the USDA as well as the state of Oklahoma. Obviously, much smaller crop, smallest crop since 1957 and otherwise a great year for agriculture, but not a good one for growing wheat.

Robinson: Hard red winter in particular, Mark. And you mentioned abandonment which is kind of the same thing in cotton, particularly in the state of Texas. To answer your question, I came away today with the theme in U.S. and world or global wheat with simply smaller production, smaller consumption, but most importantly, smaller ending stocks, Mark. Pencil the stocks to use ratio, global stocks to use ratio as projected by the USDA, a little over 17% which is the tightest ratio, and in this instance, I'm using this to refer to supply in the last 30 years, Mark. So clearly the market is underpinned by supply concerns. In addition, I think we should add tonight, that rice production globally is projected, I think, at $417 million tons, while consumption is projected at 422. So, a year over year decline there as well. So, the two primary food grains, wheat and rice, both showing pretty significant declines year over year, and also in the last several years, Mark. So those markets are firmly underpinned by those concerns and likely to move irregularly higher over the course of the next several weeks.

Pearson: Won't be long and we'll be headed into harvest. Are you making wheat sales right now, Virgil?

Robinson: Mark, you know, old crop wheat, I looked on the "Market to Market" Website archive and when I was last with you, did in fact sell old crop wheat, both Chicago, Kansas City, and Minneapolis. But did also mention, Mark, that repurchase in some form of an option strategy was probably appropriate. Anyone that followed that advice, I would sell those options, as we visit tonight, capture that gain, and now concentrate on the 2006-2007 crop. To answer your question, I've already begun both Chicago, Kansas City, and Minneapolis to the extent I'm probably 25% theoretically sold. I'd add another 15% to that at the market.

Pearson: Alright, let's talk about the corn market, which, again, had an uplifting week, and again, smaller supplies.

Robinson: Exactly, Mark. Corn and coarse grains, same theme. U.S. global, smaller production, larger consumption and smaller ending stocks firmly underpinning these markets. The association with energy is clear evident. The USDA projecting that in the 2006 crop year, we will consume about 11.6 billion bushels of corn, Mark, significantly higher than we're projected to produce. So, the supply scenario is strong. Now, I think we should also add that today's balance sheet was calculated by using the March intentions, planting intentions numbers, Mark, and I think there's a strong argument that corn acres have grown since the March intentions report, perhaps a million acres, maybe more. Now, in the same breath, I am a little concerned about the calendar as it pertains to Minnesota, the Dakotas, and Indiana. Unusually wet, unusually cool, there are some concerns regarding timely planting, emergence in growth, Mark. So, we have a combination of several things here, including the prospect of perhaps some corn exports to China, or some additional corn exports to China, underpinning the corn and coarse grain market.

Pearson: Virgil, I've talked to a lot of producers throughout the week and you do too but you look at the '07-'08 corn crop prices, boy that looks pretty attractive north of three bucks.

Robinson: Well, anyone that can calculate with some degree of confidence their input costs in either or both of those two time frames, Mark, selling futures and assuming a basis through each of those two time periods is an attractive price measured by historical standards. But I think the underpinnings of this market are unique and unlike any that we've experienced as this biofuel boom continues to ramp up here, Mark and I'm a little reluctant to go much beyond maybe 10 or 15% in terms of sales that far in the future.

Pearson: Alright, let's talk about soybeans, Virgil. Again, interesting scenario shaping up in soybeans. It seems like there's plenty of soybeans around, Virgil, I mean -- and really the world study really kind of confirms that. A lot of soybeans in South America, a lot of soybeans in the United States, potentially a lot of soybeans this year. And yet we've got $6 beans.

Robinson: And we've got the biofuel, the biodiesel fever here, Mark, not only here but in Europe as well. And clearly that has been a driving force in the value of soybeans and psychologically to the value of soybeans. I think there are about 65 plants currently in capacity or in operation in the United States and another 50 or thereabouts scheduled within the next 18 months, Mark. So clearly, they are going to need feed stocks, they're going to need stocks to fuel those plants, and soybean oil is a very, very strong candidate. So it's underpinning the market in contrast to what you just mentioned a supply argument that seems to be quite bearish. Brazilian -- in Brazil, Mark, again the controversy of the central northern Brazilian farmer and his or her effort to resist moving soybeans to market because of economic issues. That has not been resolved. It appears to me to be pretty strongly embedded within that culture. I don't sense any change there. It's conceivable, and this week's export sales report showed a pretty nice year over year gain in expert soybean sales, Mark. So, perhaps we're benefiting by that. I think beans will probably -- futures now, bean futures have in my opinion the opportunity to trade another 25 to 40 cents higher within the next couple of weeks.

Pearson: And you'd make sales?

Robinson: Mark, I've made some sales and covered some of them with option strategy. But for those who have not, certainly old crop sales I think are warranted here, and some percentage of new as well.

Pearson: Alright, let's talk about livestock, Virgil. Finally an updraft in the fed cattle market, at least on the board this week. What's your take now on this fed cattle market? You turned a little bearish last fall and boy, that first year it hit, and you combine poultry with it and a lot of pork around and beef market is taking it on the chin. So, we at least saw the board come up this week.

Robinson: Yeah, nice recovery in futures, Mark. I'm not sure where the bulk of the cash market traded this week to be honest with you. But I think there's some additional recovery in the futures market. I took a look at the USDA's forecast and projections this afternoon, Mark, and they're of the opinion that beef production will increase in the balance of the second quarter and in the third quarter, peaking in the third quarter for this year. So, clearly we need to be concerned about the balance of sales this quarter, the third quarter, and the last in 2006. Having said that, Mark, I think August cattle futures trading back into the $81 area, less a dollar basis, which I'm assuming to be ballpark for our listeners, equates to about an $80 live. I think that's about as good as the market is going to be, Mark. And in the fourth quarter December futures in that 86 to 88 area, less a couple dollar basis, would equate to about an $83 to $85 live. Those are my targets and I've used futures to hedge given the current supply scenario, beef and total meat picture wise.

Pearson: Alright, and of course a lot of that third quarter beef supply peaking, that goes back to those dry wheat conditions and pulling the calves in early and taking them off the wheat pasture. So, it's all a big circle. I want to talk about pork though, Virg, in the time we have left. And again we've seen this pork market recover some. A lot of concern about what the expansion has been this year. We've seen a little bit of a step up. What's your thoughts now as we go forward in the pork business?

Robinson: Well, pork production continues to ramp up as well, Mark, and will peak assumedly here in the third quarter, which leads me to believe we need to be cognizant of hedging opportunities the balance of this quarter, third quarter, and fourth. In that context, I would use the August lean hog futures contract, that $67 mark or higher less a normal basis for southern Minnesota and northern Iowa, would equate to about $41 to $42 live hog price. I'd capture that. The December futures, Mark, fourth quarter production scheduled to be the largest of the year, I would use futures there, $57 to $59 for hedging purposes.

Pearson: Excellent. Some great insights as usual. Thanks, Virgil. That wraps up this edition of "Market to Market." But if you'd like more information from Virgil on just where these markets are headed be sure to visit the "Market Plus" page at our "Market to Market" Web site. And be sure to join us again next week when we'll examine how U.S. agricultural trade stacks up in a global market. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news wheat