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Market Analysis: Dec 09, 2005

posted on December 9, 2005


The numbers provided no big shock to the grain markets, which continue to see corn basis levels strengthen. For the week, nearby wheat futures fell more than a dime. December corn was unchanged.

All eyes in the soybean pits are on South America and the wide range of speculation on crop size down there. For the week, January beans gained six cents. The December meal contract advanced by $7.80 a ton.

Cotton prices halted their slide after nearly two months, but the March futures contract gained only 11 cents.

In livestock, the December live cattle contract was off by $1.10. Nearby feeders fell $2.90. And the December lean hog contract dropped a quarter.

In the financials, the gold bugs are on the loose and pushed Comex prices up by $23.70 an ounce. Nearby crude oil prices were up fractionally at seven cents a barrel. The Euro climbed 95 basis points against the dollar. And the bullish sentiment about commodities drove the CRB Index higher by nine-and-a-half points to a near-record 331.25.

Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. Welcome back.

Market Analysis: Dec 09, 2005 Roach: Thank you very much, Mark.

Pearson: Well, let's talk a little bit about what's going on. I want to talk first about wheat because I know you've had a sell signal on wheat for some time; the wheat market you were focusing primarily on, Kansas City and Minneapolis. And, of course, the Chicago market has been a little bit softer here this week. Soft red, hard red spring wheat, there has been a lot of interest in the last 30 days in what's been going on in the wheat pits.

Roach: The wheat market staged a rally that peaked here in the middle part of the week led by Kansas City wheat followed by Minneapolis and the Chicago wheat was dragging way behind. We have a tight supply/demand situation on high quality hard wheat. We also have a weather issue going on down in the Western states where it's dry and the crop has deteriorated in some areas. The condition rating continues to decline each week. The demand from Iraq has been very strong in that Kansas City market. But we didn't get any business and then finally, well, we did get some business announced, but then we didn't get any shipments, and finally now we started to see some shipments, some freight bookings take place this week. So, that is really what stimulated the market higher. The market had slid on commodity fund-type selling. Those commodity funds came back into the market as buyers in Kansas City. There is a process here that is going to occur every delivery month where funds roll from the nearby December delivery, this case, out to March. And so we'll see commodity funds liquidating as you approach the first notice day, which would be the first of December, last business day of November, actually, rolling out of their positions, taking off their long positions and then replacing those long positions in a more distant month.

Roach: That process is what shook the wheat out of bed this last go around. We think that the wheat market is back on relatively firm footing. Our sell signals earlier lasted for quite a long period of time so we think we'll have some more sell signals on wheat, although the market this week came up and gave us that peak to be making sales on.

Pearson: Alright, so at this stage of the game producers out there holding product, you'd recommend taking a look at taking advantage of these prices?

Roach: On strength, take advantage and make some sales, exactly.

Pearson: Let's talk about what is happening in the corn market and, of course, the futures; if you're just looking at the futures market you really don't see the excitement that has been in the corn market, which has been on the cash side of this market.

Roach: The cash market has gained quite nicely since harvest was completed and we started getting everything put away and farmers have been very reluctant to sell. Demand on corn, we saw the new supply/demand reports out today, that showed the export numbers smaller than what the government had forecast last month. That was widely expected by people. The market actually came up and closed higher this week following this report that was construed as being a negative report. So, all the bad news about slow exports, about a big crop, all seems to have been dialed into the price structure. The low we made earlier this week was followed by a higher close. That is a key reversal in the corn market for this week. That's a very solid bottom kind of formation. So, we would think that the corn market can rally up, but once we rally up a little ways you run right into the buzzsaw of farmers who have inventory available to sell. And there is expected to be a lot of inventory that wants to be sold after we get into the new tax year after January 1st. So, the corn market is going to be stuck within somewhat of a trading range, we think. But the interesting thing about the corn market that our viewers may not understand is that the world supplies are not all that burdensome on corn.

Roach: The U.S. supply is certainly burdensome but the world needs to have a big crop raised in the northern hemisphere this upcoming year. And the market, I believe, as we move into the spring of the year, will reflect that and we'll see some higher prices in the spring. So, if a person is needing to sell some corn to cover cash flow needs or for tax purposes or whatever, then I think it makes sense on strong basis to make sales. I would come back and reown that inventory with some options out into the summer because I think we'll have a better market in the spring than what we have there right now.

Pearson: John, you touched upon several things about good corn demand. Ethanol is a big part of that; a lot of producers out there are seeing demand for that. We're still looking at almost, what, 2.5 billion bushels carryout this year? When you take that into effect and the question viewers have asked me is, should they be looking at starting to sell some 2006 corn?

Roach: You know, the interesting thing when prices get cheap everybody looks out forward and says, 'Well, I think I maybe ought to be looking to sell something.' It's a lot better to make sales when prices are strong and typically you do not have the strong prices in December, particularly after a big harvest. Your normal period for strong prices comes in the March, April, May and June timeframe when we get worried about the growing crop in the field, lack of rain, too much rain, whatever happens to be the worry. We put weather premium in. When we do, December corn, I think will be at a higher price level. So, I'd be very patient on making any new crop corn sales at this time.

Pearson: Let's talk about soybeans; again, a big number in terms of carryout in the USDA supply and demand report today. There has been a little concern about exports to China and the whole H5N1 virus issue over there. What is your take on making soybean sales?

Roach: Well, the market is right now in the period of its tightest supply. The South American crop is virtually exhausted although they had, we think, a bigger crop last year than what was estimated. They exported more than we thought they would have available for export. But they are nearly exhausted. The U.S. farmers are unwilling to make sales at today's price levels. When the price comes up they're willing to make sales, but not when it is cheap. So, I think that this period of tight supply between now and the first of the year should give us an opportunity to sell signal on soybeans, back up toward the peaks that we've seen or maybe a little better than the peaks that we've already seen since harvest. Not a big market, just a little better market than we have today. And I would, at that point, get quite a bit of the inventory of soybeans moved.

Roach: I'm very much worried that holding soybeans into the spring of the year will not work and the reason I say that is because, first we have a big crop in this country that we're still going to have in the spring of the year. And secondly, we're going to have an even larger crop coming out of South America at that time. Their acreage is really not going up the way it had been historically. But when their yields come back their crop estimate is big. They'll raise more beans in South American than we do in North America, so the big harvest pressure comes in our spring, which is traditionally a good price time. So, I'm very much worried about old crop soybeans. I'd like to get sales made on strength. I'm also worried about new crop, '06 soybeans. I'd like to get some sales made there, as well, on strength with an understanding that the competition is going to be fierce if the crop continues to develop at a normal fashion in South America.

Pearson: Let's talk quickly about the cotton market, John, which has been under so much pressure now for two months. China is such a big player in this one. We've seen prices recover just eleven cents, I think, on the basis to March contract this week, first weekly upswing we've had in 60 days. What is your take on cotton? Be patient there too?

Roach: Well, the market has slid clear down into this 52-cent area, a little below that, and it's struggling. But it started from 59 cents and so it's hard to make sales at these kind of price levels. We did get a negative report on the cotton market today in the supply/demand report. The production was increased. We're looking at just under 24 million bales. That is the biggest ever. But by the same token, the exports are also forecast to be the largest ever. I think we can have a better market in cotton. I don't think we're going to have a lot better market, but a little better. When you can't go down on bad news and that is really something across all these agricultural markets, all the grains at least, we've had bad news and the market didn't go down. The market actually stabilized and in the case of soybeans and corn, actually recovered some. So, I think these markets are ready to move a little bit.

Roach: Part of it will come from the indexes. The number of people that are investing in commodity indexes, that is the reason the CRB Index gained so much is because new money is flowing into that investment vehicle, the likes of which we've never seen before. The estimate that was recently published was $70 billion are following these commodity markets, these index funds. It is the hottest thing selling right now on Wall Street. People who are very conservative think it makes sense to have five, seven to 10 percent of your portfolio in a commodity index type of a fund. So, I think that that will buoy our grain markets more than what people normally would expect with these supply/demand numbers.

Pearson: Alright, let's talk about the livestock market, fed cattle market. It's been very strong. Of course, you've got to make decent fed cattle prices when you're paying this much for calves. What is your take on live cattle? Should we start locking in some of these gains?

Roach: I think you need to keep yourself protected. I think you need some insurance, some put options underneath all the cattle out there. I'm very much worried that we're just now getting into this winter heating season, people are just now getting their first bills. It was a long, warm fall. There was quite a period of time when people neither got an air conditioning bill or a heating bill and now they're getting heating bills and they are 30-40 percent more than they were a year ago. I'm worried what that is going to do to the demand side of the cattle business. So, my hope is that we hear an announcement soon that we're going to be able to do business with Japan again. I hope it'll give us a little bubble in the market and on that bubble I'd be a hedger rather than an insurer. I'd be willing to go ahead and sell cattle on out forward.

Pearson: Alright, let's talk quickly about the hog business, John, which again has been a beneficiary of what we talked about earlier when it comes to trade and that has been increased exports and decent hog prices and not really much expansion.

Roach: No, there really hasn't been much expansion. But the numbers that I'm seeing would have me believe that the expansion is actually occurring now. The hog market is struggling up here at these higher price levels of $68 on the February hogs; it's a tough area. I think we're going to have difficulty moving forward. Although the market was stronger this week and the live market, packer margins worsened, the pork market was cheaper, the dress pork was cheaper. So, the margins are not there for the packer, so I'm concerned in the hog business, as well. Take advantage of these higher prices to be locking in some sales.

Pearson: Excellent, great insights as usual. Thank you so much, John. That will wrap up this edition of Market to Market. But if you'd like more information from John on just where these markets may be headed, be sure and 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 examine whether the Hong Kong trade summit was a success and what the outcome means for U.S. agriculture. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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