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Market Analysis: Feb 24, 2006

posted on February 24, 2006

Wheat prices had a fair bit of profit taking mid week – but by week's end there is a hardly any bragging rights from last week's close. The March wheat contract was up just a quarter from last week. The strength in wheat helped corn prices recover. The nearby corn contract inched up one and a quarter. March soybean rose 24 cents and the nearby soybean meal contract gained $9.80. After a nearly buck-fifty gain last week, March cotton fell by a third of that this week – down 51 cents. In livestock, the February live cattle contract ended the week 12 cents up, with March feeders down 1.12. Nearby hogs also fell with the April contract down 1.75. In the financials, Comex gold ended the week up $1.60 dollars per ounce. Nearby crude oil prices were down just under a dollar. The Euro gained 25 basis points against the dollar. And the CRB Index fell nearly 12 points to close at 326.75. Here now to lend us his insight on these and other market trends is one of our market analysts, Virgil Robinson. Welcome back.
Market Analysis: Feb 24, 2006 Pearson: Here now to lend us his insight on these and other market trends one of our senior market analysts Virgil Robinson. Virgil, welcome back. Let's talk a bit about what's happening with the wheat market to get things started. The situation down in the plains, panhandle of Texas and Oklahoma extremely dry this year, spreading into Kansas. What is your take on wheat, wheat demand in the U.S. and overseas?

Robinson: Wheat stocks, Mark, are projected to decline year over year, not so much in the United States but globally. In addition to that rice stocks are projected to decline year over year. So, two primary food grains, Mark, were stocks in contrast to most other commodities are scheduled to decline. That has certainly been underpinning the value of U.S. wheat both soft and hard varieties. However, this week I did note in the Kansas City and Minneapolis futures markets some price behavior that leaves me a bit defensive, at least short-term wise, Mark. So, for our viewer's benefit I think both of those futures markets are positioned for a little pull back in value. However, I think over the course of the next 30 days both will move higher, Kansas City into that $4.75 to $5 region, basis either the March or May futures contract and the Minneapolis in that $4.30 to $4.50 zone at which point, Mark, if folks have not sold wheat, old crop and/or new crop to this point in time I would use those price suggestions to do so. Soft red wheat I think has the opportunity to push into the $3.90 to $4 level either the March, May futures contract at which point I'd also make sales.

Pearson: Okay, so again we want to be getting ready to pull the trigger here on this wheat market, we want to be ready for it.

Robinson: Mark, I pulled the trigger seven weeks ago but we did bring to the attention of viewers it's always a pretty good idea to repurchase with some type of option strategy should the dry weather concern, and certainly to this point that has been vindicated.

Pearson: Conditions have been tough down there. Now, there's also concern in many parts of the Corn Belt. Last year we had the drought in eastern Iowa and central Illinois. We had adequate subsoil moisture going into the 2006 crop. And in many areas that is not the case. What should a producer do on this corn market? We've had a nice little rally here.

Robinson: Mark, you've noted I think part of the reason, part of the underpinning of the corn market. In each of the last six weeks export sales have exceeded a million tons, a real surge in exports, Mark. Within the mix of course has been our best customer, Japan, but several southeastern Asian countries, the likes of South Korea, Taiwan, Vietnam and others have been sourcing corn from the U.S. in contrast to them sourcing it from China which leads us to the conclusion or at least I think a valid conclusion that China is protecting what corn inventory they have to accommodate the growth in their feed industry, their bio-fuel industry and it is conceivable and now perhaps more arguable that in the near future they may be a net importer of corn. That has underpinned our corn market and changed the dynamics of it pretty significantly since last you and I spoke. Chief economist Collins suggested last week in the ag forum that there would be fewer corn acres sewn in 2006. It's likely that production will decline to somewhere near 10.7 or 10.8 billion bushels while consumption, Mark, is forecast to increase and approach 11.5 billion bushels. So, a year over year deficit production versus consumption and a subsequent draw down in stocks and that certainly has been underpinning in addition to weather concerns here in the U.S. as well as other parts of the globe, those new crop corn futures contracts, 2006, 2007 both now in position, Mark, I think to push yet a little higher the 2006 contract towards $2.70, the 2008 contract towards $2.80, all areas that traditionally have proven to be pretty good areas for making sales, Mark.

Pearson: Alright, another one that we need to keep an eye on. Let's talk about soybeans. And, again, it seems like, you know, burdensome supplies would seem to be the word in soybeans. Everything I hear and I want you to talk about it from South America has been big crop down there, maybe the switch from corn acres to soybean acres here in the United States this year is going to add to the pile. What is driving this soybean market? What is keeping it strong?

Robinson: Well, product demand has been relatively good, Mark, and again, we're in that window of time where in each of the last two years the Brazilians experienced some pretty significant drought conditions. Now, that doesn't appear to be the case this year but as we talked about a few moments ago there is clearly a stronger change in the dynamics, a more favorable change in the dynamics of the course grain, feed grain markets and I think soybeans have benefited to some degree by that. However, it should be noted supplies are large and projected to remain large for the foreseeable future, Mark. And in that context old crop soybean futures have really struggled to spend any time at or above $6. That appears to me to be a very significant barrier. We do know also that March and April are traditionally the periods of time where Brazilian cash sales, cash movement are their largest. So, we need to be abreast and aware of those factors, Mark, and old crop soybeans I'm inclined to sell them, Mark, and for those who wish to retain ownership some type of a bull call spread, vertical call spread, maybe using the August futures, for example, buying the $6 call, simultaneously selling the $7 call at a premium or total debit of around 25 cents would be I think a viable and good repurchase strategy.

Pearson: What about making some new crop bean sales?

Robinson: Well, I'm always hesitant to finalize new crop sales at this point in the calendar. But into the $6.30 to $6.50 area I would make a cash forward sale or at the very least a minimum price sale.

Pearson: Virgil, let's talk quickly about cotton. Big pull back this week, we've seen the rally and, of course, China dominates that one too.

Robinson: Yeah, cotton inventories are projected to be about unchanged year over year, Mark, and about 10 million bales larger than two short years ago. This $58 area has proven to be pretty stiff resistance in old crop futures. However, I think it's going to be broken and I think we're headed to $61. So, for those who have not made a sale, still lugging old inventory target tonight at least in my work near $61, new crop cotton above $60, I like the minimum price strategy.

Pearson: Okay, let's talk livestock. And it's not been a real buoyant year for the fed cattle market to get things started with in 2006. And, you know, you can see from the chart a little bit of a bounce up last week, some pressure this week. What do you think is ahead for this fed cattle market? Have we turned the tide? Has the cycle ended? Are we now going to start seeing lower highs and lower lows?

Robinson: Cattle on feed report today, Mark, as you mentioned earlier in the show does bring to our attention some concerns because of the weight break down particularly I believe in the 3rd quarter of 2006 when live values could trade to or fractionally beneath $80, Mark. Beef movement remains relatively strong, the export issue remains an uncertainty here. But we do know that year over year beef production in the U.S. projected to grow 5% while per capita consumption grows 2% which is good. But I think, Mark, at this point I would be of the opinion live cattle values throughout the balance of this calendar year will most likely hover in that mid 80 to lower 80 dollar value.

Pearson: Alright, of course, that translates over, maybe some pressure on these feeder cattle which have been phenomenal.

Robinson: Yeah, it's been quite a market, Mark, but it does appear we could argue that futures have in fact made a high, made their top. I would suggest any recovery in the cattle, excuse me, in the feeder cattle futures back into the $110 to $112 zone I'd use that price zone to make short hedges or protective hedges on live inventory.

Pearson: Alright, good point. Virgil, let's talk about the hog market. Again, a lot of pressure since the first of the year. Seems to be plenty of red meat out there right now and hogs have enjoyed such a run and we're seeing some pressure now around the $62 area. What is your take on hog prices going down the road?

Robinson: Your statement, plenty of red meat, Mark, year over year projected total red and poultry meat production will increase about 3% per capita consumption increase about 1.5%. Hog production, pork production up 3%. Mark, there is plenty of pork, the recent cold storage report underscored that fact. It appears to me the period of most concern based on the recent pig crop report would be the 4th quarter of 2006 where we could, I think, briefly fall below $40 into the upper 30's. On average through the balance of this calendar year I think mid-40 to low 40 dollar cash values probably as good as we're going to do at least in 2006.

Pearson: Alright, Virgil as usual some great insights. We sure appreciate it. Virgil Robinson, but before we go we want you to know that Market to Market may be airing in different time slots on some stations in the weeks ahead due to PBS fundraising efforts. Now, if you value programs like Market to Market consider phoning in a pledge and investing in the service that provides you with accurate, unbiased information and analysis. Thanks very much, that will wrap up this week's show. I'm Mark Pearson reminding you to have a great week.

Tags: agriculture commodity prices markets news wheat