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Market Analysis: Jan 06, 2006

posted on January 6, 2006

A winter rally that helped 2005 end on a positive note in the grain pits may have run out of steam this week, as both wheat and corn trended lower. For the week, nearby wheat futures lost more than 8 cents, while the March corn contract was off a penny-and-a-half. Disappointing export projections contributed to declines in the bean pits as well. For the week, the January contract declined one-and-a-half cents. The nearby meal contract was down more than 2 cents per ton. Cotton prices, meanwhile, continued their upward trend. For the week, the March futures contract gained 86 cents. In livestock, the December cattle contract was down 32 cents. Nearby feeders lost 75 cents and the February lean hog contract declined 80 cents. In the financials, Comex gold advanced 22.60 per ounce. Nearby crude oil prices rose 3.17 per barrel. The Euro gained 325 basis points against the dollar. And the CRB Index gained 3-and-a-half points to close at 336.50 Here now to lend us their insight on these and other market trends are two of our regular market analysts, Darin Newsom and Erin Golly. Welcome back.
Market Analysis: Jan 06, 2006 Golly: Thank you.

Newsom: Thank you, Mark.

Pearson: Good to see you. Alright, well Darin let's start with the grains and talk about what has been going on in this wheat market. And we've had a nice rally in there. It's kind of backing off the first year with farmer's selling. What is driving this market?

Newsom: You know, the interesting thing we look at, you saw where the futures were down just a shade here at the end of the day but overall we lost eight to ten cents depending on the market. So, up until today we actually had a pretty nice rally going. The futures have been spurred, we saw with the CRB index in the gold we've got the initial talk, the initial expectation of all these hugs index funds re-entering the market and visiting with those before we've started to see some of this fund activity slowly working back into the grains. Now, not to the degree that we've seen in gold and crude oil but it did come over into the wheat market. We were able to... on the charts we were able to take some of the ______ futures higher through some resistance. And we actually saw some pretty strong cash markets as well which is rather unusual to see this type of move in the futures and yet to follow it along with the strength in the cash market was rather unusual. We saw the cash, Kansas City wheat bump up to almost three and a half before, it's backed off here in the last couple of ____. Kind of a warning noting here is that we're starting to see the March futures lose ground again through May. This could be indicating that the commercial traders are losing some interest here, that we are starting to see demand slow down. That last few export sales and shipments reports that have come out are simply confirming that fact. So, this is definitely something to watch. You ask about farmer sales. We have seen a pick up in farmer sales particularly in the hard red market where the basis was good, where the cash markets were firm, where the demand has been basically the last quarter. We have started to see, we do see some cash sales generated there. Those markets have started to slow down.

Pearson: Darin, it's hard to get too excited about production prospects and it always is, it seems like with winter wheat. But with the conditions that we have down in the central plains in Oklahoma and Texas, dry weather.

Newsom: It really is, you know, traveling down there through the holidays the wheat looked very thin. Now, I'm not one really to jump on the band wagon yet and say wheat is done. I've seen it too many times, we all have. you know, wheat is one of those things that you can kill it a million times and it comes back one last time and still produces a crop. But looking at the initial crop we're here in dormancy at this point it is a very thin crop right now and if we don't get some help in the spring with some moisture or over the winter we're going to be coming out of dormancy with the crop not looking too well. In that regard, you know, one thing producers can certainly be looking at is this run up that we've seen, this non-commercially led run up we've seen in the July Chicago wheat futures as a marketing opportunity, again, kind of a cross market hedge here against some of the hard red crops because the spread between those two is relatively narrow, it's been trading that fifteen to twenty percent premium, Kansas City rate. And what it should do, particularly if these crop conditions don't improve and if in the south the winter market is just a mess, so if we see some pressure start to build in Chicago we could see that spread of the new crop July spread really work out to about that 35 to 40 cent range again allowing those who hedged first in July to roll out at a better point in the hard red market.

Pearson: Alright, well there is an idea right there for producers maybe to take a look at or consider doing. Let's move on, let's talk about the corn market. And, of course, there is a lot of interest in corn, we've got all this commercial demand with ethanol, there has certainly been an improvement in basis levels, there were at least through the month of December. And now with what happened on the board this weekend again a little bit softer the first week of January. We're going to see some corn coming to town aren't we with this improved basis?

Newsom: We have and you're exactly right, the cash market has just really exploded. But if we look back where we started we were fifty cents under the December contract early September. That was historically low. So, we really had no, I guess you really can't say we had nowhere to go but up, but logically the basis was going to firm. Now, what are the commercial traders looking at in this market? They are still extremely bearish. Yes, we've seen the basis. Yes, it has created some cash sales. But in the longer term we still see out through the July, September 2006 contracts we see a very wide carrying relation to the nearby contract. This is indicating commercial traders just are not interested in owning this crop up front. They are completely confident in being able to source the supply they need to meet demands so they are going to pay someone 75-80% full commercial carry to hold it for them. This is an indicator to me that what we've seen, this rally that we've seen here from the beginning of December has been non-commercial, we saw front month futures drop down to where they were in the lower eight to ten percent of the shortened price range. This made it an attractive investment to some of these non-commercial traders. So, what did we do? We were able to run it up 20, 30, 40 cents on the futures but the March now being the _____ contract have not been able to bank through and close above $2.20, very important point because corn likes round numbers and with the inability to close above $2.20, we could draw it back to $2.10 and just consolidate in that range for a while.

Pearson: Now, if I go out and look at December corn that to me looks like a selling opportunity right now. Obviously we've got a long way to go to get that crop in the ground. Should producers start making selling decisions for '06 now?

Newsom: They really should. They should have something on the books. We were able to get above the $2.50 level so it's like we were talking about, it should, it creates some sales up there. With Dec. corn above $2.50, I think it got up almost as high as $2.55 that is near, at or near the upper third of historic price ranges for Dec. contracts. So, very attractive level to start getting some sales on now. At the end of the week we did back it off. This 2.4 whatever carry out that we're going to see next week, it's enormous and so it is going to be carrying over into the new crop. So, staying at these levels seems very unlikely right now, you know, the logical price range that we've seen would be the $1.90 to $2.35 pretty much the rest of the marketing year indicating that these contracts that are trading over $2.35, _______ these trading over that level will probably seem overpriced at this point.

Pearson: Talked to a lot of farm groups in the last 35-40 days and most of the producers I've talked to said they are reluctant to price anything. We had a great year in 2005 including key parts of the Corn Belt, the central Illinois, north central Illinois, eastern Iowa, suffering through a pretty terrific drought. But we also did have subsoil moisture going into 2005 and we don't have that in 2006 in key parts of the Corn Belt.

Newsom: And that is very important and it's a great point because you're right, that is what saved us last year, that is what made these second highest yields on record possible. We are entering, you know, we're coming into the winter, halfway through the winter, at some counts heading towards planting, a prospective planting report at the end of March without the benefit of having good subsoil moisture. So, if we don't see a dramatic change in the weather patterns, if we don't see some of this West Coast moisture starting to pull across into the Corn Belt and actually relieving some of these moisture problems we're going to be looking at a completely different situation through the early part of the growing season and that could drastically change our perspective on what prices may be possible. At this point we're going to have to stick with the history of the market saying that this is a pretty good area understanding that the weather could certainly come into play.

Pearson: Let's go over to the soybean market and, of course, what happened there. And, again, we saw a softening in the grains and oil seed sector this week. Sights have turned south down to Brazil. What is happening in South America? That seems to be what everybody talks about right now.

Newsom: That is an important point and there is not much to talk about in the United States right now. We've got a non-commercial led rally, we've got a cash market that, again, just like corn we've seen that, we've seen a very strong basis since October. But we've played that, we've talked about that. You know, the trend had turned higher now, it's starting to flatten and why is that. Well, we're focusing our attention down south and waiting on the latest forecast. It was dry in Argentina but we have to remember Argentina is not the big cart in South American production, that would be Brazil. Argentina production has, Argentine production has been a little more stable over the last few years where Brazil has dropped 12-15% over the last few seasons. So, we're going to really keep a close eye but at this point we don't see any huge reductions in South American production. This would indicate to the fundamental traders, and you can see it again in the spreads between contracts, that they are not overly concerned, again, about the supply longer term.

Pearson: Producers make sales right now?

Newsom: You know, if we're looking at the new crop or let's stay with the old crop. The old crop probably should be looking at making some sales. We had a nice run, basis firmed, that's only going to get softer at least for right now. New crop we were able to get above the $6.50 mark in the November soybeans, probably a good opportunity there to get some contracts on the book.

Pearson: Real quick, the rally continued in cotton.

Newsom: Very impressive market, again, driven by investments. We saw our fund month contracts approach the 57 cent level, they did back off a little bit late. We're still around 55 but the trends still seemed higher, a lot of non-commercial interest in this market. And as long as we continue to see this type of interest we could, you know, the 60 cent mark isn't out of range.

Pearson: Good, let's go over and talk livestock. And Erin Golly, this fed cattle market, interesting cattle on feed report. We were talking about the dry weather down in the plains and we really jumped the placements last month. What is your take on fed cattle? Where are we going now?

Golly: Well, cattle feeders and producers had a great year in 2005. We didn't quite reach my objective of dollar cattle that I forecasted last July but I'm not ready to give up on that quite yet. I think if we have some cold weather that comes back into play over the next 30 days we have a shot of reaching that level. Seasonally prices tend to rally after the holidays if we can get some cold weather but along with the Japanese market reopening up to U.S. beef last week, South Korea is visiting with U.S. officials as early as next weekend and opening up their market and Hong Kong opened up their market to U.S. beef. So, those are really three positive things that happened for the beef industry this past month and into December. Funds have been massively interested in the cattle pits and been very active and I look for that to increase in 2006 but I remain positive the cattle market, I think the declines will probably, in the cattle market, will happen between February/April. We'll probably continue to trade right around where we're at, around the mid-90's and see where we go from there. But I feel positive about it yet.

Pearson: Alright, so you think we'll get another chance maybe to put some hedges in if we get a weather rally anyway?

Golly: If we get cold weather, I do believe that though.

Pearson: Alright, now let's talk about this calf market which has been on fire, continues to be strong but obviously cheap corn is driving a lot of that. But also numbers aren't there. You know, I've heard about Canadian calves coming down and so forth. It seems like there is still a huge demand for loading up these lots.

Golly: There is huge demand for feeder cattle right now and demand is the key factor for the market. There were more calves placed on feeds this past fall of 2005 so there is going, there should be less feeders that took place this spring. So, look for demand to keep being a problem. Seasonally the price peaks are usually made in January on the feeder cattle and I think it's going to move lower from that point on through the March/May time frame.

Pearson: Alright, let's talk about hogs. Now, we've had three good years in the hog business really and that doesn't happen as a general rule, Erin, I mean, it doesn't happen. What is ahead now in this hog business? Are we expanding the herd yet?

Golly: Well, there were two key factors that were really looming over the hog market. the first one was the hogs and pigs report and that didn't come out with any surprises. and the second one was trade resumption with Japan for U.S. beef. Now that we've got those factors out of the way I feel that the hog market can start to push higher once we get past this post-holiday hangover. _______ and feeder pigs are in great demand right now. I've heard _____ selling for 60 and feeder pigs selling for 80. And I think those prices are really being shown by last summer's breeding problems that we experienced. Funds love seasonalities, technical seasonalities and tendencies and they love to be long. And seasonal tendency for hogs right now is to rally at the end of January and into the spring.

Pearson: Alright, Erin Golly, thank you so much. Darin, thank you. That will wrap up this edition of Market to Market. Now, be sure to join us again next week when we'll examine the impact of key USDA reports on the market. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news wheat