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Market Analysis: Dec 16, 2005

posted on December 16, 2005

The cash corn market moved high enough this week to encourage some farmer selling, while Chicago wheat futures spent time testing support levels. For the week, nearby wheat futures were up more than 12 cents. March corn gained nearly four cents.

Tight stocks are supporting soybean prices as South America has sold off its inventory and U.S. farmers hold tight. For the week, January beans gained more than 23 cents. The March meal contract advanced by $10.50 per ton.

Cotton prices continued to rebound after a two-month slide, with the March futures contract up another 67 cents.

In livestock, the December live cattle contract jumped $3.60. Nearby feeders gained 55 cents. But the February lean hog contract dropped $1.58.

In the financials, Comex gold plunged $23.60 an ounce. Nearby crude oil prices were down $1.33 a barrel. The Euro gained 178 basis points against the dollar. And the CRB Index fell three points to close at 329-even.

Here now to lend us her insight on these and other trends is one of our senior market analysts, Sue Martin. Welcome back.

Market Analysis: Dec 16, 2005 Martin: Thank you, Mark.

Pearson: Well, let's talk first about what is going on in the wheat market. It's been interesting. It's been an interesting late fall between the Kansas City hard red market, the spring market up in Minneapolis and Chicago red. It looks like Chicago wheat prices now are starting to come up a little bit.

Martin: Well, they are and it's partly because of the fact that it's been very dry in that area and it's also thought that they're going to start to become a little more competitive. I think that when I look at, excuse me, I think that when you look at the wheat prices they have been demoralized to some degree and cyclically or on a technical basis wheat is about to enter into a time period where it should start to take some leadership. As you go onto spreads though traders do continue to sort of like or favor the KC wheat versus the Chicago. But there is talk that they're going to get some snow cover in the plains and that might help out to protect the wheat versus when they start to get those bitterly cold temperatures over the course of the next week or so. And so as dry as they are because subsoil is very low in a lot of areas in this country, in fact, I'd say probably 80% of this country is very, extremely dry and so it's a concern because with dry soils and then you get bitterly cold temperatures if you don't have a snow cover to protect it's going to do some damage to that crop.

Pearson: You mentioned subsoil moisture is an issue certainly in wheat and indeed all the crops, we had a drought last year but in key parts of the Corn Belt there was plenty of subsoil moisture. At this stage of the game we haven't replenished that. For a wheat grower then are you getting much for a hurry to make sales or do you think maybe the moisture concerns could hang with us for a while? Martin: I think the moisture concerns are going to hold with us. And as we go towards spring and you come out of dormancy it is going to be extremely important. You know, it's been a couple of years or so since we've had any frost scares in the spring. So, I think this is one year we're going to have to watch because we are so dry. and if we come out of dormancy and you get snapped with some cold temperatures it's going to do damage. And so I think that the wheat market along with I think we're going to start to pick up some demand I think the wheat market or the wheat producer should hold off making sales. I think there is something better coming down the road.

Pearson: Alright, some good news hopefully for wheat producers on that point. Let's talk about the corn market, Sue. and that has, of course, been interesting as well. It's been interesting technically and we talked about this on last week's show just briefly. But it was a key reversal that occurred in the nearby corn contract and it had traders a buzz all week. We saw corn prices rise some this week. You're a technician, what does all this mean and what does this pretend to a producer out there who maybe has a couple of bins full of corn or is maybe paying for some commercial storage?

Martin: Well, I think a producer that has corn that he's holding, of course, there is al to of company there but I think they ought to just hang onto the corn here for a little bit. Now, I will say this, the expectation is that corn is going to start to move after the first of the year and all that as you go towards tax season and farm payments and all that. That is a traditional. But I think the farmer is going to hang onto corn pretty aggressive. He's taking and living off of his LDP's right now but the corn market when it did its key reversal it was an important one. We'd gotten down to a trend line of support that has helped Dec. corn, every contract of Dec. corn all the way back to 1969. So, it was a very important area of support and the market reacted to it. But what else is said is that the traders, when you got the bearish news out of this government report it felt like being into that price level that the advantage of being short wasn't there. And many times when you take prices, especially on beans, but corn as well when you move your prices higher into the summer and then you decline every month in through November with lower lows December has a tendency to see a rally. And I think that when you've got natural gas prices as high as they are, metals as high as they are the tendency is to be a little nervous to be too short going into a turn of the year with a lot of positions and leveling on some of these positions. And I think that is another thing that is helping the market move up. Also, you've got ethanol plants. We have 94 I think it is, or 92 ethanol plants in the United States and you've got 24 more coming on line here in the next year. And I think that the USDA in their last report underestimated the industrial usage by 100 million bushels. And we had thought they'd show that, you know, yes we thought they'd lower the exports but we also thought that they would increase the industrial usage, we also thought that they'd increase the feed usage because this next year in the first quarter cattle supplies are supposed to increase by 5.5%, the second quarter by 8%, you know, you're going to have pork production up maybe by 3% and poultry up nicely as well. We think that they are underestimating the feed usage and then, of course, with all this cold weather that we've been getting in the month of December here I think they've just flat have surprised us with not paying attention. But that will come later and we'll get that somewhere along the line. We think they are underestimating ethanol demand or usage for corn by, well, we think the USDA is around 1.5, we think it's more around 1.8 to 1.7.

Pearson: So, with those factors alone, you mentioned increased industrial use of corn, also the fact that we're going to look at higher expenses next year to raise a corn crop. And we're a ways away from those decisions being made but it's not like we have a Brazil and Argentina standing there with a huge corn crop that they're going to produce this year. So, as we look at this corn picture what is your strategy going to be? Certainly, as you mentioned earlier, subsoil moisture is an issue for corn.

Martin: It's a big issue, Mark.

Pearson: We made it through the drought in Central Illinois and Eastern Iowa and Northern Indiana this year because we had plenty of subsoil moisture.

Martin: Exactly, and that is just the key. I've heard many people make the comment well, you know, it appears like the crop has been, the corn crop has been bred up, that it can withstand drought. Well, to some degree yes, that is true. But, you know, pollination is 90% of your crop and if you don't have that subsoil moisture to get started and you get into pollination and it's hot, you know, I'm afraid that they're going to be surprised, we're still going to see a crop that goes backwards this year and big droughts move east to west and I think that we're looking at a year that we're very vulnerable. But even more than that when we look at the rest of the world and assume what the world produces, they never produce enough to meet their needs. But when you look at foreign production deficits this year, as opposed to the year of '04-'05, we had retractment or, in other words, the needs by the foreign buyer were not as great as they were in '03-'04 and those needs are growing again in '05-'06. So, as we go into '06 that means yes we're coming in with big supplies but on course grains, on corn, on wheat and on soybeans the foreign production deficit is growing to almost the level, record level it was in '02 and also the record level for soybeans in '03-'04. And then on top of it the stocks usage ratio is extremely tight for rice. So, your major food groups in the world are extremely in need. That says you get one little catalyst going, the U.S. accounts for 63% of the world's demand in corn. You get one little catalyst going and we're accounting for 63% of that market share and by 2014 we'll probably be 74-78%. I want to tell you, you have a drought this year and that corn market is going to rally nicely.

Pearson: Alright, so you're not in a huge hurry to make old crop sales?

Martin: No, in fact Mark, I know we need to move onto other markets but in corn in years when you have all of those foreign production deficits in those same commodities at the same time which is not a common thing the July contract of corn, the lowest price high that you ever had after the first of January in the new marketing year or in the new year was $2.47. The next one was $2.48.5 and then there was a $2.58 one and then the other three or four years were over $3.00. So, I'm telling everybody don't sell yet. It's too early.

Pearson: Alright, let's talk about soybeans and the soybean market, of course, everybody has turned south now, everyone is looking down at South America to see what is happening in Brazil and Argentina. The market is almost starting to trade that way already.

Martin: Well, they are and it's because of the fact that we're looking at less acres in Brazil, of course, or less hectares they would say and we know that. But in the meantime Argentina picked up those hectares. And so when you've got Argentina picking up the slack for Brazil and looking at production that the USDA is at 40.5 million metric tons for Argentina and Brazil at 50, I think it is 58.5. You know, there is some talk in that if Argentina had good weather they could come off with a 42 million metric ton crop. But the problem is they are dry. 70% of their beans are planted and they are very dry. And if that continues and see last year we started that drought moved south and southern Brazil became dry and Argentina started to be dry. Well, this year it is progressing more and it's unusual to see all of Argentina and Brazil together be dry. So, I think it's going to favor the south this year. And I think that we have to keep a close eye on it because the market I think will watch that very closely with all these foreign production deficits, I go back to that, and also the fact that the economy this next year around the world especially for developing countries is going to drop off a little bit but still hold pretty good and China is going to remain around, well they'll drop from 9.2 to 8% growth. So, there is need out there and the market knows it has to have what Argentina can provide.

Pearson: Soybean sales, make any?

Martin: No. I believe that beans are going to go higher this next year and be a surprise to us. Now, there is two methods that we could take here into the spring. One is prices go down to April. If they do don't get panicky, that market will explode into July. But I think you're going to put a low in by the end of January and I think prices will rally into July.

Pearson: Alright, let's talk quickly, cotton market which has been rather dismal. A little bit of a bounce here lately.

Martin: Well, I like cotton and I think cotton has got merit. Exports are good on cotton and I think demand will stay fairly good and I think that the July cotton contract should be up around 55 to 56, maybe 57 cents.

Pearson: Alright, let's talk about the fed cattle market. Again, it's been popping. The boards have been popping. Cash markets have been strong. What is ahead for cattle?

Martin: Well, I think cattle are going to still try to rally but it was interesting today, Mark, I went back and I looked at February contract of cattle to see how many times you peak in the month of December. Well, it was very interesting because there are times you have peaked in December. In fact, fed cattle peaked in December in '03 and I think the date was around the 3rd of December or something like that. But what was real interesting in 1975 the December month of 1975 the February contract peaked in the first few days of December. In 1985, peaked in the first few days of December. And in 1995 the '96 Feb. contract peaked I think it was by the 5th of December. So, it's interesting that for some reason Decembers have been peaking in the years of ending in 5. Now, the market always throws you a curve when you get used to something and I think that we had a little weakness in the early part of December and that might have been why. But I think what is going to happen is, is that because we're looking at increased numbers coming down the road and I think another thing that has been helping the market hold is if you look at imports of beef and veal our imports for the month of October declined by 5% from September and 35% from June where a year ago we only declined from June into October 13% but we gained I think 10% from September to October so there was like a reversal there. But in the meantime, we're going to see some cattle prices, I think, that still edge higher. I look for February cattle to try the $99 area, the highest price you've ever had for a cattle contract in the month of December for any contract of cattle is $99.92 and I think Feb. cattle are going to go try that.

Pearson: Let's talk about the hog market and what you see happening over there. A little bit of pressure there on the board this week.

Martin: Well, I think the hog market is kind of taking, feeling like they are the lost child or something like that because of the fact that now that the exports are opening up to Japan they are worried they're going to lose some of that. And I think the Feb. contract was trying to align with the expiration of the Dec. and so I kind of think that the April contract of hogs will still gain a little bit on those Feb. hogs but I think the summer month on rallies if we can get it up around 65, 66 cents I think you sell from summer month hogs.

Pearson: Sue Martin, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Sue on just where these markets may be headed be sure to visit the Market Plus page at our Market to Market Web site. And also be sure to join us again next week when we'll learn how an Illinois farmer is working to solve waste problems for rural communities as well as local hog farms. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news wheat