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Market Analysis: Mar 31, 2006

posted on March 31, 2006

The report had bullish implications for corn and wheat markets, despite the fact an accompanying stocks report indicated more than ample supplies. For the week, nearby wheat futures were up more than a nickel while May corn posted an impressive rally of more than 17 cents. Increased acreage coupled with a bearish stocks report depressed soybean prices. For the week, May beans dropped over 2 cents, while the May meal contract declined by 70 cents per ton. USDA's estimate of cotton acreage had little impact on cotton prices, and the May futures contract gained 15 cents. In livestock, the April live cattle contract lost nearly $3.00. Nearby feeders fell by $3.50. And the April lean hog contract declined by $1.37. In the financials, Comex gold climbed $21.80 per ounce. Nearby crude oil prices were up another $2.37 a barrel. The Euro fell 80 basis points against the dollar. And the CRB Index gained 7 points to close at 334-even. Here now to lend us his insight on these and other trends is our senior market analyst John Roach. John, welcome back.
Market Analysis: Mar 31, 2006

Roach: Thanks, Mark.

Pearson: We've got to talk about this prospective plantings report first. Five percent reduction in corn acres, that was astounding. Obviously there is energy issues out there, corn is a higher energy crop to produce and there was concerns really about subsoil moisture. Give us your take on this report. Obviously the market had a huge response to it.

Roach: Yeah, the market was surprised. The market expected to see the acreage come down a little bit, perhaps 1.5 million acres or so and saw it cut considerably more than that. But this is the beginning projection. Corn acres will be determined not only based on what farmers plans are but also based on what kind of weather situations they face as they are planting and also determined on how prices relate as we move further into the planting period. And the job of the market now is to move corn prices up enough to stimulate some more corn acres and push bean prices down enough to discourage some bean acres.

Pearson: Alright, so if you're a producer out there -- we've heard from a number of them here on Market to Market through the Website and so forth who have said, hey, in Illinois they've planted more wheat or they're switching over to more soybeans or we're trying to do a double crop. People are looking at and making different decisions partially based on energy and fertilizer expense. And, of course, like you say partially based on this market. What is your strategy right now for a corn producer with the rally that we've just had? Are we making old crop sales? Are we cleaning those up? What is your new crop strategy?

Roach: Well, we're in the time of year when we like to make sales. The majority of sales that we like to make are in the months of March, April, May and June and so we're well into that selling season. I think we'll have a further strengthening in corn next week. I think we'll get into a sell signal next week and I think we'll have an excellent opportunity to be making old crop and new crop sales on corn and I think producers should do that. We should probably get two, perhaps even three different opportunities to make sales over the period of the next three months and I would divide up the inventory that I have left into maybe two increments or perhaps three and I'd sell an increment on each one of these surges that we have when the market gets into an overbought condition. I would also be willing to sell new crop corn but a little less willing to contract than normal. So, if a producer normally contracts, let's just say half of the new crop corn during the spring and early part of the summer and then does the balance, covers the balance with puts, that is our recommendation is you do a percentage as a contract and a percentage you insure. We're changing our percentages a little.

Roach: We want to contract a few less bushels and use insurance on a few more bushels. And the reason for that is if we were to get into some sort of a weather problem, a legitimate weather problem -- we've got a scare going on now, we had one in February already because it's so dry -- but if we get into a legitimate weather problem during the growing season there is so much money, as you saw the gold market up $13 this week I think, we have so much money that can go into the corn market that I want to be able to have a little more flexibility than normal to give the market a little opportunity in case we get into a little weather problem.

Pearson: Alright, you gave our viewers a heads up on this new money coming into the Chicago Board of Trade last fall, 100 billion dollars coming in January. That increased volatility, is that part of what your thinking is there?

Roach: That's absolutely what is going on. We have a lot of money that is flowing into the marketplace. Most of that money is coming in owning commodities. The CRB index has doubled since 2001 and there has been a lot of money made and there is a lot more money wanting to come in, pension money, individual people buying indexes to participate in really one of the strongest markets out there.

Pearson: Alright, so at this stage of the game that is your -- and relatively conservative at this stage of the game because, you're right, we've got a long way to go for this growing season.

Roach: Well, we still have the whole season ahead of us. Now, I'm not so worried because I think things are in very good shape to get the crop planted and get it up and growing and so forth. But if we were to run a little short on moisture, regional areas such as we had last year, the market will be much more explosive this year because of all this hot money.

Pearson: Okay. It's explosive in corn. We talked about the government saying fewer acres, but we have a lot more acres of soybeans?

Roach: What producers are doing is they are shifting back toward a more normal rotation. We pushed a lot of extra corn acres into the ground here over the past couple of years and now we're rolling that back a little bit. But we're also increasing our bean acres into some of the areas a little more outside of the main growing area. What our thought process is, is that we're already in trouble in beans, we have 10% more of them in the bin, we used 10% less of them this winter and now we're going to increase the acreage in addition. So, we have a lot of competition out of South America. So, the bean market is really going to have to struggle here, it's going to have a difficult time being able to make much upside progress unless we have some kind of unusual thing come along.

Roach: We also have the worry of bird flu out there that takes people away from the market because of that big unknown.

Pearson: alright, so soybean producers are sitting out there and just to make the point, we are seeing really more of a normal rotation is really what is occurring in the key parts of the corn and soybean belt, but if you're a soybean producer out there what is your strategy going to be for making sales? It would look to be fairly attractive right now. Again, as you say, it's going to take some anomaly out there to occur to drive soybean prices higher with the ample supplies we have.

Roach: Well, be ready. Something like that can come along at about any time. And when it does you have to be prepared to make aggressive sales on the balance of the old crop and also make commitments out on the new crop. And I think that producers need to look backwards a little bit and realize that the weather scare in South America gave us our best pricing opportunity in a long period of time back there right at the end of December, first part of January. We want to be prepared for that again next year. Meanwhile, old crop beans are within 20, 25 cents alone in most areas. So, there is not that much risk for most producers. Most producers did not take the LDP on soybeans so they can still take out the loan. And so I think that patience is probably the thing to do right now. But meanwhile, understand that we're getting all this bad news on the soybeans, seemingly all at the same time.

Pearson: That's right. So, again, be alert and be ready. Let's talk about the wheat market. There have been so many factors with wheat. First of all, very low plantings according to that acreage report we just talked about. And, of course, we've had crop development problems. We've had problems in the southwest, the panhandle, Oklahoma, Texas, in through Kansas, extremely dry for the hard red winter wheat crop. We had a nice little rally, it's kind of fallen off now, certainly in Chicago it never did really get much of a rally. But the Kansas City market had a strong rally. You were of the opinion it was definitely a sell signal. What is your take now? Would you clean up old crop wheat sales?

Roach: I think the market will surge again. What the market is trying to do is to get more spring wheat planted. The spring wheat acreage needs to grow. We need the high quality wheat. We have plenty of soft red winter wheat. We had good moisture that came in through the areas where we produced the soft red crop. The hard red crop got rain at the last moment. So, we had a legitimate weather rally and it was a very strong weather rally with good rains that came and stopped the deterioration of the crop and started giving a little more optimism about what yields could be.

Roach: Our attitude is that we'll be back pushing up near the highs on the Kansas City wheat and the same with the Minneapolis wheat and we'll have some opportunities perhaps as quick as this next week to be making some sales there and we would do that because we've already gone through one weather scare and now if we move up here on a second scare we may only have one more scare left throughout the growing season. And so we want to take advantage of the market, we get up into an overbought condition, we'd like to be making sales.

Pearson: Okay, let's talk just real quick about cotton. Not much of a surprise in terms of acreage. China is the big player in cotton. What is your take on cotton prices here as we forward? We've seen prices certainly slack off since -- for the entire month of March.

Roach: If you look at the May futures contract you can see that it's really been swinging three different times here in the last twelve months from about 51 cents up to 59 cents a pound. And we came from 59 cents a pound back in, or 58 I guess, back in February when we had the rally in most all the markets and we've slid all the way down to 52 cents. The market started to stabilize and actually surged on Thursday because of the best export sales report for the entire year. They had the best weekly sales and the government on the March 10th report reduced the carry over slightly. So, the numbers are starting to improve in cotton until we saw this acreage report today and it was a little bigger than people thought, mark it back down again. But there is good, solid support in this 52 to 51 cent area. I think that will hold the market. We're going into the growing season. I think there will be some better opportunities here to price as we move through the growing season and have periods of weather worry.

Pearson: Alright, let's get over to the livestock market. Fed cattle market has struggled. The whole meat sector has struggled. Obviously you mentioned it, the avian flu situation, there's plenty of poultry out there at very low cost and it looks like a ski run, this April fed cattle contract, John.

Roach: It certainly does. It's been a straight down kind of affair since back right around the beginning of the year. The problem has been one of just too much red meat production. The month of February we produced 2% more red meat than we did in the prior year and we've had a poultry market that has been terribly discounted because of the slackening in demand overseas. It's hard to export the poultry so we end up moving it in this country at very discounted prices and then that stumbles into red meat complex that also has too big a supply. And so that is what has ratcheted the market lower. February we had the largest pork production ever in the month of February. So, we just have had a lot of things coming at the whole meat complex, most all of them negative. And certainly we have yet to get the trade re-established into the eastern countries. So, we're just struggling here. The cattle on feed report that was out a week ago, we've got nine percent more cattle on feed. We just have too many numbers here. If you look at the slaughter levels for the last week it has run somewhere between 10 and 11 percent more cattle and the average steer weight is up 24 pounds, the average heifer weight is up 31 pounds from a year ago. So, it's just tonnage and the only thing that I can see in the cattle business that we would need to look back at is last year. This was the bottom week in the dress beef trade last year. We surged up from this week. So, maybe we have all the bad news here upon us. That is my best hope. But I don't really have anything I can point to that would suggest that this market is going to have a turn around and some kind of a sustained higher move. I believe if we have rallies in the market, the rallies are meant to be sold.

Pearson: Alright, real quick, you mentioned hogs and, of course, hog numbers, we've had expansion there too. And, of course, they are impacted by the total supply of red meat and we've seen just kind of a similar issue with hogs.

Roach: Hogs and pigs report out today shows about a 1 percent expansion across in all the categories. It's about what the trade expected. But what is happening is the profitability in the pork business has been, the increased production has been slowed down because it has taken time to get all the paperwork done and so forth to be able to put up construction and now that is occurring. So, we're getting increased numbers and we're going to continue to have more numbers as we go forward.

Pearson: John Roach, thank you so much. Some great insights as usual. That will wrap up this edition of Market to Market. But if you'd like more information from John on just where these markets are headed, be sure to visit the Market Plus page at our Market to Market Web site. And, of course, be sure to join us again next week when we'll examine how some in the beef industry are using animal ID as value added marketing. Until then, thanks for watching. I'm Mark Pearson, have a great week.

Tags: agriculture commodity prices corn markets news wheat