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Market Analysis: Dec 30, 2005

posted on December 30, 2005


The December rally continued again this week, helping the grain markets finish the year on a positive note. For the week, nearby wheat futures gained nearly 5 cents. And the March corn contract was up nearly two cents. But soybeans gave back about half of last week's rally. For the week, the January contract lost 11 cents. The nearby meal contract was down more than 11 cents per ton. Cotton prices continued their move higher. For the week, the March futures contract gained 65 cents. In livestock, the December cattle contract was down $2.35. Nearby feeders gained $1.18 and the February lean hog contract was up 2 cents. In the financials, Comex gold advanced 14.10 per ounce. Nearby crude oil prices rose 2.61 per barrel. The Euro lost 29 basis points against the dollar. And the CRB Index gained 5 1/2 points to close at 333 even. Here now to lend us his insight on these and other market trends is one of our regular market analysts, Virgil Robinson. Welcome back.
Market Analysis: Dec 30, 2005 Pearson: Here now to lend us his insight on these and other market trends one of our regular market analysts Virgil Robinson. Virgil, welcome back.

Robinson: Thank you, Mark and happy holidays.

Pearson: Thank you. Right back at you. And 2006 all I hear about are all these funds that are going to come into the grain pits and the meat pits and the Merc and what is going to happen in the first of the year, Virgil, generally for U.S. commodities? It's been a good year in '05.

Robinson: May have arrived today, Mark, as we visit with the surge in corn and soybean prices at the end of the day. It remains to be seen, Mark, but clearly there is an underlying concern about the inflationary state of our economy I think as well as others to address that. The CRB index, for example, Mark, closed the year about 20% higher year versus year, year over year. So, you've alluded to gold and other precious metals on the show before. So, I think that is a genuine concern and certainly the market is expecting index funds as well as other fund driven equity products to be present and buying commodities at the turn of the calendar.

Pearson: Alright, well, we're going to be there Tuesday. Let's talk, Virgil, let's talk some specifics. Let's talk about the wheat market first. Again, we've seen a pretty decent rally since November. The wheat market has hung in there, hung in there this last week of the year. What is your take for wheat? The story is that we had a good crop in the U.S. and there seems to be plenty of wheat around the world.

Robinson: Well, one of the themes, Mark, is the plains in flames as the news has eluded to here of late and crop conditions for the hard red winter crop here in the United States are not particularly good. And, of course, worrisome and as a result of that in combination, I think, Mark, with some Iraqi business as well as other points of origin. Some crop concern in the Ukraine, parts of Russia and Europe as well, Argentina could be included in the mix. It caught the market short wheat futures in a significant matter, historically large manner and we have had a significant price recovery of late. Now, that being said, Mark, I think there are some targets we can talk about tonight assuming our viewers have done nothing to date. And those would be, in Chicago wheat futures March in particular, $3.55 and above I think is going to be met with very stiff resistance. July futures at about the same number. Kansas City spot futures above $3.95 I think represent an opportunity to make a cash sale. New crop, Kansas City futures, Mark, in that $3.85 to $3.90 area the same. Minneapolis $4.00 or higher I'd be making sales if I had made none in old crop wheat. New crop in that $3.90 to $4.00 area, I would be at the very least making minimum price contracts.

Pearson: Alright, so it's maybe time to take some action if you're a wheat producer. And we track Chicago wheat on the show and have for years, soft red variant and a lot of times the leads are really coming from the higher proteins in Kansas and Minneapolis.

Robinson: And that has been the case I think this year, Mark, which has been well addressed by the likes of Doug and Alan and others on the show prior to tonight.

Pearson: Let's talk about, Virgil, this corn market as we go into 2006. We've got a decent sized carry out, a couple billion bushels left over as we go into 2006. The corn market has had a pretty decent rally and the cash markets have certainly looked stronger. And obviously for those in the Corn Belt that took a 45 cent LDP and may be making some cash sales right now that looks pretty dog gone good for 2005. What is ahead for 2006? Should producers be taking advantage of this strength?

Robinson: I think they should, Mark. On the 12th of January the USDA will give us final crop production from last fall as well as stocks, a fresh stocks report, Mark. And that is anxiously awaited to give us a better indication of feed disappearance in the last quarter. Again, animal consuming units have been on the rise. Beef cattle, swine to some extent and certainly poultry and consumption has been brisk. Hog weights as we visit about consuming units, Mark, are at historically high levels in southern Minnesota and Iowa which would suggest we've been pouring a lot of grain and protein through those animals. So, feed disappearance is likely, feed and residual, that number, that line entry is likely to grow a little bit larger in this Jan. 12 report. Now, to off set that to some extent, production probably will grow a little bit as well. We're still talking about 2.4 billion or thereabouts in terms of a carry out in September of 2006. January traditionally a month where a lot of grain hits the pipe. I think this year will be no exception. So, the combination of improved basis which you've eluded to and now a futures rally in my opinion is an opportunity for those who are in need of making sales to do so at the turn of the calendar.

Pearson: Real quick, Virgil, what is your feeling -- we talked about this on the show through the years -- but you look out at December of '06 corn, look out at '07 corn, it looks pretty attractive in '07 around $2.60. Do you want to make any of those sales?

Robinson: The argument here I think, Mark, is one there is concern about soil conditions in a significant area of the primary corn growing region as well as the southern plains. And unlike a year ago at this time soil profiles are basically or pretty much depleted in those areas. Last year pretty good subsoil moisture base, Mark. So, that combined with the variable cost factor here of selling a corn crop this spring is, I think, beginning to switch and beginning to move some acres into soybeans. That being stated we've yet the entire season ahead of us. That $2.50, Mark, in December corn futures is always kind of a bench mark and this year no exception. But personally, Mark, I'm not willing to make a final sale or finalize a sale at $2.50. I think the market has the capability of trading beyond that this year and likely to do so in the early spring of 2006. My target tonight, Mark, is above $2.60 at which point I'd begin at the very least some type of minimum price program.

Pearson: Alright, let's talk about soybeans, Virgil. Obviously eyes have turned now to the southern hemisphere, what is happening in Brazil and Argentina. There seems to be this underlying inflation to all commodities which kind of has people on edge. There is the spector of the index funds and the managed commodity accounts entering in the market. Any typically soybeans are so volatile so add all that together and yet you look at what the soybean market -- cash beans and you kind of think should we be making sales now. What is your take?

Robinson: You know, cash beans are about 80 cents above where they were a year ago at this time, Mark, and as you just mentioned there is the prospect of a big crop of beans in the southern hemisphere combined with what is a very ample supply here in the U.S. Come March or April of 2006 conceivably we could have anywhere from ten to fifteen million metric tons more beans at that point than in the previous year and prices about a dollar a bushel higher. I think, again, January, normally a big movement of cash into the pipe. I don't expect this year to be any exception to that, Mark. I think folks should be thinking very seriously about moving and pricing some old crop soybeans if they've done nothing to this point in time and at the very least be defensive at this point in the calendar. Put together some type of floor, some type of minimum price and take advantage of this opportunity.

Pearson: Real quick, Virgil, the cotton market, again, it staged an up turn finally after a long swing down. What is ahead for the cotton market? Do you want to price anything here? Do you want to see this market maybe strengthen?

Robinson: Supplies, Mark, are a daunting force here. U.S. ending stocks are projected to grow to 6.9 million bales, up a million and a half from the previous year and world stocks, ending stocks around 51 million bales. That does not suggest any shortage of that product. Chinese demand as they have become more affluent has grown and that I think has fueled and underpinned the market. To answer your question based on the lead futures contract in New York, 57.5 to 58 cents I'm a seller.

Pearson: Alrighty, let's move over to livestock. Fed cattle market a little soft at the end of the year. Going forward we have heard about, you know, herd expansion perhaps. U.S. economy is critical. We've gotten some good news on the export front with Japan now and Hong Kong. What is your take for fed cattle as we go into 2006 Virgil?

Robinson: The cattle and feed report was concerning to, Mark, the placement number suggesting that there is likely to be a pretty good increase in marketings headed our way come spring, early summer of 2006. Given that potential supply increase, Mark, I think the April and June live cattle futures contracts, April 97 to 98 dollars I believe is an awfully good hedge and anything at or above 90 cents in that June futures contract I think also represents a good hedge. The idea of us assuming full market share, again, with Japan in the immediate future is not likely to happen, Mark. Domestic demand remains strong although in each of the last couple of months the data I watch and keep is beginning to show a little weakening of that demand, Mark. So, I think it's time to be defensive there as well, particularly as mentioned that late spring, early summertime window.

Pearson: Alright, producers hopefully take note. Let's talk about the hog market. We had a USDA hogs and pigs report and again, not a huge expansion underway, Virgil. Looks like more of a tweaking of hog expansion.

Robinson: Mark, I read that the University of Missouri's overview of that report, one thing sticks in my mind, they are of the opinion that the breeding herd number is perhaps underestimated and they documented by their data tracking sow and guilt slaughter the last few weeks. If in fact their data is correct here again it's likely there will be a bigger slaughter in 2006 than in 2005. Cash prices, Mark, are projected to be in the mid-40 level from this point in the calendar through mid 2006. April hog futures $70, June hog futures $72. I want to hedge them at those prices.

Pearson: Excellent, Virgil Robinson, thank you so much. That will wrap up this edition of Market to Market. But be sure to join us again next week when we'll take a look at what 2006 holds in store for rural America. Until then, thanks for watching, I'm Mark Pearson, have a happy new year.


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