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Market Analysis: Feb 10, 2006

posted on February 10, 2006


On top of the crop inventory report came news from USDA on Friday that net farm income is forecast to be just over 56 billion dollars in 2006. That's down by over 16 billion dollars from last year. Contributing to that decrease – is no surprise. Higher fuel and fertilizer prices and the expected reduction or elimination of certain government payments all contribute a projected fall-off in farm income this year. On that cheery note, all the grain futures finished the week lower. The nearby wheat contract was down 1 and a quarter cents. March corn fell 3 and three-quarters. March soybean were down 1 and a quarter and soybean meal dropped $3.50. Cotton prices crept up ever so slightly – up two cents on the March contract. In livestock, prices seemed unaffected by reports out of Japan on Thursday that 45 cows on a single farm were suspected of having mad cow disease and will be destroyed. The February live cattle contract was up 63 cents. March feeders were up $1.83. And the February hog contract us up $3.53. In the financials, Comex gold was down $17.20 per ounce. Nearby crude oil prices declined $3.53 cents per barrel. The Euro lost just over 147 basis points against the dollar. And the CRB Index fell more than 5 points to close at 338.50. Here now to lend us their insight on these and other market trends is one of our market analysts, Doug Jackson and Walt Hackney. Welcome back.
Market Analysis: Feb 10, 2006

Hackney: THANK YOU, MARK.

Pearson: IT'S GOOD TO HAVE YOU HERE. DOUG, LET'S TALK ABOUT THESE GRAIN MARKETS FIRST. I KNOW THERE'S ALL THIS NEW MONEY COMING INTO THE PITS OF CHICAGO, THESE MANAGED FUNDS, THESE -- PEOPLE TRYING TO GET EXPOSURE TO COMMODITIES AFTER ALL THE EXCITEMENT LAST YEAR. AND I KNOW THAT'S BEEN EXCITING. WE ACTUALLY SAW THE MARKET SOFTEN UP JUST A LITTLE BIT THIS WEEK. THEN, OF COURSE, EVERYONE HAS THEIR EYE ON THE WEATHER. LET'S TALK ABOUT THE WHEAT MARKET FIRST. AND THE SOUTHERN PLAINS IS WHERE A LOT OF THE WEATHER PROBLEMS SEEM TO ORIGINATE.

Jackson: WE DO HAVE A FASCINATING SITUATION, MARK, ON THIS WHEAT. WE'RE OFF TO A VERY POOR START. CROP RATINGS ARE CERTAINLY WAY BELOW AVERAGE, PARTICULARLY IN TEXAS AND OKLAHOMA. WE HAVE A SET OF SUPPLY/DEMAND ARITHMETIC THAT, AGAIN, IS VERY INTERESTING, A HARD RED WINTER WHEAT SUBCLASS SITUATION. IF WE HAVE JUST A REPEAT OF LAST YEAR'S YIELD, WHICH WAS A RELATIVELY GOOD YIELD, AND LOSE SOME ACREAGE TO ABANDONMENT, WE'LL STILL HAVE ONE OF THE SMALLEST HARD RED WINTER WHEAT CARRYOUTS NEXT YEAR. AND IF WE HAVE ANY KIND OF A YIELD DECLINE BEYOND THAT, OBVIOUSLY ANYTHING CLOSE TO A 2002 SCENARIO, WHICH WE DON'T HAVE TO GO BACK INTO HISTORY TO FIND A DISASTER, YOU WOULD ACTUALLY HAVE A ZERO CARRYOUT ON HARD RED WINTER WHEAT AND PUSH PRICES TO DEMAND RATIONING LEVELS. NOW, THE PROBLEM, MARK, IS THAT THAT'S GOING ON WITHIN THE CONTEXT OF THE VERY LIKELIHOOD OF THE LARGEST SOFT RED WINTER WHEAT, OR CHICAGO TYPE WHEAT, CARRYOUT EVER NEXT YEAR. SO THE WHOLE TOTAL SITUATION ISN'T NECESSARILY BULLISH, BUT WE HAVE A DRAMATIC, DIVERGENT SUBCLASS SITUATION WHERE WE SHOULD SEE KANSAS CITY GAIN SHARPLY ON CHICAGO. AND WE ALSO HAVE A GENERAL SET OF SUPPLY/DEMAND ARITHMETIC IN THE UNITED STATES THAT, MARK, AGAIN, IF WE WOULD GO BACK TO A 2002 SITUATION WHERE YOU WOULD HAVE A RARE SIMULTANEOUS THREAT TO BOTH WINTER WHEAT AND SPRING WHEAT, THEN WE COULD SEE U.S. STOCKS IN TOTAL PLUNGE TO, IN FACT, VIRTUALLY ZERO AGAIN IF WE HAD A 2002 STYLE TOTAL WHEAT YIELD. AND THE FUNDS, OF COURSE, SEE THIS. THEY'VE BEEN LONG IN RECORD AMOUNT IN KANSAS CITY FOR MONTHS. THEY FINAL GOT LONG A LITTLE BIT OF CHICAGO THIS PAST WEEK BUT, AGAIN, THAT'S AN IMPERFECT PROXY TO A BULLISH KANSAS CITY SITUATION. BUT THEY CAN'T BUY ANY MORE OF THAT. WE HAVE A VERY DYNAMIC SITUATION IN WHEAT, VERY DELICATE. ANY PROBLEMS IN WESTERN EUROPE, WITH THE SMALLER CROP IN RUSSIA AND THE UKRAINE, ANY PROBLEMS IN THE U.S. IN THE SPRING WHEAT COUNTRY, AND WHEAT PRICES COULD BE EXPLOSIVE BY SUMMER AND FALL.

Pearson: ALL RIGHT. SO AT THIS STAGE OF THE GAME, YOU'D OBVIOUSLY TELL THE PRODUCER TO HOLD OFF.

Jackson: WELL, THESE ARE HIGH PRICES, MARK. ONLY ABOUT 20 PERCENT OF THE TIME ARE KANSAS CITY VALUES HIGHER THAN THIS, SO THIS IS A RISKY THING TO SAY NOT TO SELL THESE KIND OF VALUES. YET WITH THE WEATHER THE WAY IT IS, THE INCREASED CHANCES OF A DROUGHT IN A LA NINA SITUATION, IT COULD STILL MEAN A LOT HIGHER PRICES WITH THE FUNDS WILLING TO CHASE THIS THING EVENTUALLY.

Pearson: EVERYONE IS TRYING TO FIND A METEOROLOGIST WHO'S GOING TO BE RIGHT IN 2006, WHETHER IT'S WHEAT OR CORN. LET'S TALK ABOUT CORN. YOU TALKED ABOUT THE VERY TIGHT SITUATION WITH WHEAT. THE CORN MARKET IS OBVIOUSLY A BIG CARRYOUT FROM LAST YEAR. I THINK THE LATEST NUMBER WAS 2.3 BILLION BUSHELS LEFT OVER FROM THE '05 PRODUCTION. BUT WHAT'S AHEAD FOR THIS CORN MARKET, DOUG? AND AGAIN, WHO KNOWS WHAT'S GOING TO HAPPEN WEATHER WISE?

Jackson: THE FUNDS HAVE BEEN STIMULATED BY THE ETHANOL STORY WHICH, OF COURSE, HAS BEEN IN PLACE, BUT IT'S STARTING TO ACCELERATE. ETHANOL USE FOR CORN COULD BE UP 400 MILLION BUSHELS NEXT YEAR. THE FUNDS HAVE ALREADY GOTTEN LONG 150,000 CONTRACTS. BUT INTERESTINGLY, DESPITE THAT PERSISTENT FUND BUYING THAT WE'VE SEEN IN RECENT WEEKS, WE WOULD ONLY SEE DECEMBER CORN, GOING HOME OVER THE WEEKEND, MAYBE ONLY 5 TO 10 CENTS OVERVALUED, BASIS OUR MODELS. WE COULD SEE A SITUATION HERE WHERE THE FUNDS STAY LONG, HYBRID ANTICIPATING A DROUGHT THIS SUMMER, AND TRADE IN A 5- OR 10-CENT RANGE ALL THE WAY INTO SPRING. AND THEN IT CERTAINLY TURNS OUT THERE WOULD BE NO MORE OR LESS THAN IF WE HAVE GOOD WEATHER WE'D GO DOWN. IF WE HAVE THE SLIGHTEST WEATHER PROBLEM, WE'D GO UP. WE'RE GOING TO HAVE AN 11.3-BILLION-BUSHEL DEMAND BASE NEXT YEAR. AMAZINGLY, YOU'RE GOING TO NEED 155 YIELD, THE SECOND HIGHEST EVER, TO KEEP STOCKS STABLE. AND THE FUNDS ARE GOING TO STAY AND THE SPECULATIVE MONEY IS GOING TO STAY IN THIS MARKET UNTIL WE PROVE THAT WE HAVE GOOD WEATHER. THE CORN MARKET IS A FASCINATING EXAMPLE OF SIMULTANEOUSLY INCREASING DEMAND AND PARALLEL EXPANSION IN PRODUCTIVITY. TRADE YIELD COULD BE 157 SO WE'RE GOING TO HAVE TO SEE WHETHER THESE INCREASED CHANCES OF DROUGHT, YOU KNOW, LA NINA ENVIRONMENT, COME TRUE OR NOT.

Pearson: OKAY. AND AT THIS STAGE OF THE GAME, IT'S ANYBODY'S GUESS. AGAIN, YOU MENTIONED THE BIG FUNDS. IS THAT WHAT'S PROVIDING THESE PRICES OUT THERE? I MEAN LOOK OUT AT DECEMBER CORN, '06 LOOKS PRETTY ATTRACTIVE, '07 LOOKS PRETTY ATTRACTIVE.

Jackson: WELL, WE HAVE PEOPLE -- WE HAVE PRODUCERS SELLING THOSE LEVELS, MARK, BUT THEY'RE ONLY A VERY SMALL PREMIUM OVER THE DECEMBER '06. IN OUR OPINION, IF YOU HAVE A GOOD CROP, THE DECEMBER/DECEMBER SPREAD COULD GO OUT TO 50 CENTS, LIMITING THE DOWN SIDE ON THOSE DEFERRED CONTRACTS. AND THERE'S FABULOUS PROFITABILITY LONG TERM IN ETHANOL AND OTHER USES. WE SEE PEOPLE MORE INTERESTED IN BUYING THOSE DEFERRED CONTRACTS THAN SELLING. SO WE HAVE A SITUATION HERE WHERE THE DOWN SIDE POTENTIAL IS RELATIVELY LIMITED UNTIL YOU PROVE YOU'VE GOT A NEAR RECORD CROP MONTHS FROM NOW.

Pearson: WILL WE SEE MUCH ACREAGE SHIFT FROM CORN TO SOYBEANS, DOUG?

Jackson: WE'LL HAVE A, OF COURSE, MARCH ACREAGE SURVEY FROM THE GOVERNMENT. BUT THE NEXT THING COMING UP WILL BE AT THE END OF NEXT WEEK, FEBRUARY 16/17 WE'LL HAVE THE AG OUTLOOK CONFERENCE IN WASHINGTON. THERE WILL BE SOME PRELIMINARY ESTIMATES GIVEN OUT THERE FROM THE USDA ECONOMISTS. RIGHT NOW THE INDUSTRY IS THINKING LESS THAN 2 MILLION ACRES SWITCHING AWAY FROM CORN AND 2 TO 4 MILLION ACRES MORE BEANS. AND WE'LL SEE WHETHER RECENT PRICES HAVE ADJUSTED THAT THINKING OR NOT.

Pearson: ALL RIGHT. REAL QUICK OVER TO THE SOYBEANS, DOUG. AND AGAIN, ALL -- ALL THAT WE'VE HEARD SO FAR HAS BEEN SOUTH AMERICA. IT LOOKS PRETTY GOOD.

Jackson: EIGHTY PERCENT OF THE AREAS HAD RAINS. THIS DOES NOT NECESSARILY LOOK LIKE A REPEAT OF THE LAST YEARS -- TWO YEARS DROUGHT. THE MARKET IS STILL SORT OF NERVOUS ABOUT 20 PERCENT, PARTICULARLY IN SOUTHERN BRAZIL, WHICH BURNED OUT LAST YEAR, BEING DRY. RIO GRAND LOST ABOUT 5 MILLION TONS LAST YEAR IN THAT STATE ALONE. BUT IF WE CAN GET SOME KEY RAINS NEXT WEEK AND KIND OF PUT THAT TO BED, THEN THAT'S NOT GOING TO BE A MARKET DRIVING FACTOR. IT REALLY HASN'T BEEN THIS YEAR. PRICES HAVE BEEN RESILIENT BECAUSE OF THE COST OF PRODUCTION IS SO MUCH HIGHER IN SOUTH AMERICA. U.S. FARMER SELLING IS LIMITED ONLY 30, 40 CENTS OVER LOAN. BUT WITH A 550 RECORD CARRYOUT PROJECTION FROM USDA THIS WEEK, THE UPSIDE POTENTIAL IS LIMITED. WE COULD DRIFT SIDEWAYS TO LOWER LONG TERM UNTIL OR UNLESS WE HAVE A DROUGHT PROBLEM NEXT SUMMER IN THE U.S. IF WE HAVE NORMAL WEATHER NEXT YEAR, U.S. STOCKS BUILD EVEN TO GREATER RECORD LEVELS. SO THE BEANS HAVE THE MOST ABILITY TO TOLERATE A WEATHER PROBLEM AS WE GO INTO SUMMER. BUT WITH THE DUAL THREAT OF ASIAN RUST AND THE POSSIBILITY OF A DROUGHT, PARTICULARLY IN A LA NINA ENVIRONMENT AS WE SAID, EVEN THAT MARKET IS GOING TO BE RELUCTANT TO SELL OFF DRAMATICALLY UNTIL WE KNOW WE'VE GOT A CROP MADE IN NORTH AMERICA NEXT SUMMER.

Pearson: ALL RIGHT. SO YOU'RE NOT IN A HURRY TO SELL BEANS?

Jackson: NOT REALLY BUT IT'S THE QUICKEST THING TO SELL IF YOU'VE GOT INVENTORY. THE ARITHMETIC IS BETTER ON THE WHEAT AND THE CORN.

Pearson: ALL RIGHT. DOUG JACKSON, THANK YOU SO MUCH. LET'S MOVE OVER TO LIVESTOCK NOW. WALT HACKNEY, THE CATTLE MARKET, IT HASN'T BEEN REAL GOOD, 2006, SO FAR FOR FED-CATTLE PRICES. A LOT OF PEOPLE ARE FEELING THAT THIS CATTLE CYCLE HAS FINALLY TURNED AND WE'RE SEEING THE EXPANSION. YOU TALKED ABOUT IT, I THINK, THE LAST TIME YOU WERE ON. WHAT'S AHEAD FOR FED-CATTLE PRICES? WHAT KIND OF PRICES CAN WE HOLD THE NEXT 60 TO 90 DAYS?

Hackney: IT WOULD APPEAR THAT WE MAY HAVE HIT THE SLUMP IN OUR FAT-CATTLE MARKET THIS WEEK. WE SAW A DRAMATIC TURNAROUND AS WE SPEAK TODAY, MARK. THIS MARKET COMPARED TO YESTERDAY WAS $3 TO $5 A HUNDREDWEIGHT HIGHER. CATTLE YESTERDAY THAT WERE GETTING BID $1.41 IN THE MIDWEST TODAY SOLD AT $1.45. AND SO I THINK THE WHOLE COMPLEX HAS OVERPLAYED THE ISSUE OF THE JAPANESE BAN AGAIN ON OUR DRESSED BEEF AND SO FORTH. I THINK THAT WE'RE FINDING THE DOMESTIC USAGE IS STILL GOING TO BE THE DETERMINING FACTOR IN OUR CASH MARKET, AS IT WAS TWO AND THREE YEARS AGO WHEN THAT BAN ON BEEF WAS PUT INTO EFFECT. WHERE DO WE GO FROM HERE OVER THE NEXT THREE OR FOUR WEEKS PARTICULARLY? I SUSPECT THAT WE'LL HOLD FROM $1.45 TO $1.48 DRESSED ON MIDWEST CATTLE. I EXPECT TO SEE $95 FAT CATTLE AGAIN NEXT WEEK IN THE SOUTHWEST. THE FEEDLOTS DOWN THERE TODAY AGAIN WERE VERY RELUCTANT TO SELL ANY CATTLE AT 92, 92.5, WHICH WOULD HAVE PUT THEM A COUPLE OF DOLLARS UNDER A WEEK AGO. SO THE POINT HERE BEING WE'RE NOT OVERLOADED WITH FAT CATTLE IN THE COUNTRY. WE DO NOT HAVE AN EXCESS OF TONNAGE IN THE BEEF COMPLEX. WE AREN'T EXCESSIVELY KILLING THAT MUCH BEEF. WE'RE LOOKING AT AROUND 590- TO 600,000 CATTLE A WEEK, WHICH WILL PROBABLY CATCH US AGAIN THIS WEEK. THE WHOLE COMPLEX IS ACTUALLY IN BETTER SHAPE THAN WHAT THE PSYCHOLOGY WOULD HAVE PREFERRED IT TO BE. SO I THINK THE CATTLEMEN MAY WIN THIS ROUND. THE FACT THAT CATTLE SOLD AT 92 YESTERDAY, $1.41 TO 43 YESTERDAY, I THINK THAT'S A BYGONE PROBLEM THAT SOMEONE ELSE INHERITED. TODAY WE'VE GOT 3 TO 5 BUCKS A HUNDRED MORE MONEY. AS FAR AS WHERE WE'RE GOING SIXTY DAYS FROM NOW, MARCH WILL STILL BE IN A FAIRLY CURRENT FEEDLOT POSITION. APRIL... WE'RE GOING TO HAVE A FAIRLY LARGE AMOUNT OF FED CATTLE TO COME TO THE MARKET IN APRIL. THERE AGAIN IT'S ALL TONNAGE. IF THEY WORK OUT SOME EXPORT AGREEMENTS THAT WE DON'T HAVE TODAY, THOSE AGREEMENTS COULD HELP TAKE OVER THE OVERLOAD THAT WE'RE PROBABLY GOING TO HAVE.

Pearson: WHAT KIND OF PRICES, WALT, WILL YOU ANTICIPATE?

Hackney: I'M LOOKING AT $94 TO $96 FAT CATTLE AS WE GO TO APRIL. NOW, APRIL IS KIND OF A MISNOMER AS WE SPEAK. IF WE'VE GOT PRETTY GOOD OUTLET ON THE BEEF EXPORT WISE, WE COULD MAINTAIN OUR CASH MARKET. IF WE DON'T, THEN THAT MAY -- THE TONNAGE MAY TEND TO OVERLOAD OUR DOMESTIC USAGE.

Pearson: ALL RIGHT. THIS CALF MARKET HAS BEEN STRONG, WALTER. THESE FEEDERS OUT THERE, WE'VE HAD AN AWFULLY GOOD RUN. IS IT GOING TO CONTINUE IN 2006?

Hackney: THERE'S NO REASON TO BELIEVE THAT IT WILL NOT CONTINUE. AS WE SPEAK, YOU KNOW, WE TALK ABOUT HERD EXPANSION, MARK. THAT'S TWO YEARS AWAY BEFORE THERE ARE REALLY ANY COUPONS TO BE CLIPPED OFF OF THOSE HEIFERS THAT WERE KEPT FOR BREEDING. SO I DON'T SEE ANY EXPLOSION IN NUMBERS TO COME. I DON'T KNOW WHERE THEY WOULD COME FROM UNLESS SOMEONE INCREASES IMPORTS OF LIVE CATTLE FROM MEXICO OR CANADA. RIGHT NOW THEY'RE NOT A REAL PROBLEM FOR US. SO I FIND NO REASON TO BELIEVE THE FEEDER MARKET ISN'T GOING TO STAY LUCRATIVE AS IT HAS BEEN FOR THE NEXT -- THROUGH THE FALL OF 2006.

Pearson: ALL RIGHT. LET'S TALK ABOUT THE HOG MARKET. ALSO IT'S HAD A BETTER WEEK THIS WEEK, BUT IT'S BEEN A ROUGH START TO 2006. A LOT OF CONCERN ABOUT EXPANSION OR TWEAKING BY THE LARGE INTEGRATORS. AND OF COURSE, YOU TALK ABOUT TOTAL TONNAGE IS WHAT THE ISSUE IS WHEN IT COMES TO PROTEINS. WHAT'S AHEAD FOR HOGS?

Hackney: WELL, AS YOU'RE AWARE, MARK, WE'VE HAD THE LARGEST HOG SLAUGHTER, OVER TWO MILLION A WEEK EVERY WEEK OF THIS YEAR SO FAR, SIX WEEKS OF 2,000 -- OR TWO MILLION HEAD PER WEEK. THIS WEEK PROBABLY WILL BE THE SAME. WE'LL PROBABLY HAVE A TWO-MILLION-HEAD KILL AGAIN THIS WEEK. THAT ISN'T HELPING US AND PEOPLE HAVE MISSED THEIR -- THERE HAS BEEN MORE EXPANSION THAN WHAT SOME FOLKS HAD AGREED COULD BE IN OUR WHOLE MIX. GENETICS HAVE INCREASED THE CARCASS WEIGHT ON THESE HOGS. WE'RE LOOKING AT 271 POUNDS PER HEAD. YOU THROW THAT, AGAIN A TWO-MILLION-HEAD OR BETTER KILL, THAT IS A PHENOMENAL AMOUNT OF PORK PRODUCT TO BE MOVED NATIONALLY AND INTERNATIONALLY. HOPEFULLY WE CAN INCREASE THE EXPORT. HOPEFULLY IT WILL HELP MAINTAIN THE PACE WE'RE AT. IF IT DOESN'T WANT TO GROW, IF IT WILL JUST HOLD STATUS QUO, WE'LL BE OKAY. WILL WE HIT CASH HOGS IN EXCESS OF 45 CENTS A POUND, THAT'S A DEBATE. FORTY-FIVE CENTS THE HOGS CAN MAKE MONEY. THEY'LL CONTINUE TO SHOW A PROFIT TO THE PRODUCER. IF WE DON'T GO TO SOME ELABORATE EXPANSIONS, WE'LL BE OKAY IN THE HOG COMPLEX.

Pearson: ALL RIGHT. WELL, ON THAT POSITIVE NOTE, WALTER, ON BOTH HOGS AND CATTLE THIS WEEK AND, OF COURSE, THE ONGOING QUESTION OF WHAT'S AHEAD FOR THE GRAIN MARKETS FROM DOUG, IT'S GOING TO BE AN EXCITING YEAR AGAIN. SO WE APPRECIATE YOUR INPUT. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." BUT BE SURE TO JOIN US AGAIN NEXT WEEK. UNTIL THEN, THANKING FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK.

Tags: agriculture commodity prices Mad Cow markets news USDA