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Market Analysis: Dec 02, 2005

posted on December 2, 2005

Basis continues to strengthen in corn as the trade waits for commodity fund bulls to migrate to the grain pits in Chicago. For the week, nearby wheat futures gained more than six cents. The December corn contract fell a penny.

The funds now have built a healthy short position in soybeans, with bird flu and South America remaining key fundamental factors. For the week, January beans gained less than a penny. But the December meal contract advanced by $3.10 a ton.

Cotton prices continue to slide for a seventh straight week, with the December futures down another 65 cents.

In livestock, the December live cattle contract was up by $1.07. Nearby feeders gained $2.27. And the December lean hog contract climbed 95 cents.

In the financials, Comex gold jumped $10.30 an ounce, and closed at its highest level in 22 years. Nearby crude oil prices were up 61 cents a barrel. The Euro fell 73 basis points against the dollar. And the CRB Index advanced five-and-a-half points to close at 321.75.

Here now to lend us his insight on these and other trends is one of our senior market analysts, Tomm Pfitzenmaier. Welcome back.

Market Analysis: Dec 02, 2005 Pfitzenmaier: Thanks, Mark.

Pearson: Let's talk about the wheat market and what has been going on there. When we watch Chicago wheat on the show, that is what we track, and Chicago wheat has been a continual spiral down until the last week or so. This is one of those interesting trade phenomenons, wasn't it?

Pfitzenmaier: Well, the market got a little bit oversold. All the indicators had sort of bottomed out and turned and all of a sudden you get a little uplift in the wheat market. You know, they tried to blame it a little bit on the crop condition ratings that came out on Monday night. You know, maybe that was the catalyst that turned it. I don't know that crop condition ratings in wheat at this time of the year mean all that, all that much. I mean, you look at the crop condition ratings on corn and beans this summer and they were just terrible; horrified how terrible they were all summer, and look at how the crop turned out. So, I don't know that you want to put a whole lot into that. I think its a market that got oversold, needs to correct, probably has another 10, 12 cents left up in it and then it's going to start to struggle again.

Pearson: Alright, Kansas City and Minneapolis wheat contracts, they had a big run and soft wheat in Chicago was pretty soft.

Pfitzenmaier: Yeah, and it's probably going to stay that way. I mean, most of the action is going to be in those other two markets rather than Chicago and it's going to be a follower and I guess that is probably going to continue.

Pearson: Alright, so at this stage of the game would you make some sales?

Pfitzenmaier: Ten to 15 cents up I would. Don't let the market get 10 or 15 cents up and then get all excited that you're going to get another 30 out of it because I don't think that's going to happen.

Pearson: Alright, let's talk about the corn market and what has been happening there. Obviously, big crop has been put away, this cash market has been coming back pretty nice.

Pfitzenmaier: Well yeah, we have a lack of farmers selling, farmers taking a lot of income this year, big LDPs and nobody wants a whole lot more income this year and are going to wait until after the first of the year. Plus, everybody is mad because the price is so cheap and they don't want to sell it yet. But the rally to 70 percent or 70 percent plus of that corn in the country has been LDP'd, meaning that potentially a big chunk of that hasn't been sold and so there is no price protection under that corn. So, if you've got a firm basis here with an opportunity to sell corn on a firm basis I think you need to take advantage of it because the upside potential here on corn is pretty limited with that much corn sitting out there. In the last couple of years the farmers had the loan rate and done other things to generate cash flow. Well, this year almost, like I said, 70 percent have taken the LDP, which is good. It was a good thing to do but it doesn't generate cash flow for those, you know, winter bills that need to be paid and the only way you can generate cash flow now is to make corn sales. So, you know, this basis is nice but don't expect it to hang around and continue to firm a whole lot more, I don't think.

Pearson: OK, so even though they just put that crop, boy you're saying let's not maybe hang onto it for forever; let's maybe put wheels on it and get it out.

Pfitzenmaier: And part of the way this basis is improved is by the futures continuing to creep lower. It's not necessarily that the cash has gotten all that much better. It's just that the futures kept creeping down and the cash has kind of stayed steady and all of a sudden you go, 'Wow, the basis is better.' Well, so what? If you're short futures you still made pretty decent money while that basis was firming up.

Pearson: I was out in Wichita, Kansas, I was out in Elwood, Nebraska, Springfield, Illinois, everywhere I go people are saying, 'You know we've got a two billion bushel carryout this year in corn, a little over that, and we've produced a tremendous crop with a huge drought in the key part of the Corn Belt; central/northern Illinois, eastern Iowa, northern Indiana. That scares me. Should I look at pricing some 2006 corn?'

Pfitzenmaier: Well, I suppose if they don't want to sell the 2005 I don't know why anybody would be selling the 2006. But I think you have to, you know, you have to remember that we went into last year and grew a crop and a great deal of that happened because of the big, great subsoil, full subsoil. And we don't have that yet. I mean, we may in the Spring; two or three good rains can fill that back up again. So, I think until that happens you're going to maintain some premium into that, in that corn market. There is a perception that there is going to be a little shifting of acreage from corn to beans; probably not a lot, 2 to 4 percent maybe, and that is going to shore that December of '06 corn up. So, I think, yeah, if you get back up in that $2.50 range, maybe $2.60, then I think you have to aggressively sell corn. I don't know that I want to sell too much down at $2.38.

Pearson: OK, let's talk about soybeans and what has been going on with the soybean market. It seems like the market has turned its attention to South America. I mean, that is the big driver of this bean market any more. And it is pretty confusing Tomm, until the end of the day, exactly what is going on in South America.

Pfitzenmaier: Yeah, I think you just kind of -- again, we watched Illinois corn grow all summer and hadn't a clue what was going on over there with beans. So, how do you know what's going on in Brazil? I mean, you just kind of have to take an overall look at it and hope you're kind of right. The bean market, I think, is suffering from that as well, as you reported earlier. The dollar continues to, is on the verge of breaking out actually even on the top side and that is not making our products any better. You've got this bird flu concern. There is a lot of problems with the bean market right now. Maybe if something does develop in South America that gets everybody excited it'll give us a little pop up. It's not uncommon to have a weather concern during a growing season. But, again, I think everything else being equal, 10 to 15-cent rally on soybeans probably needs to be sold.

Pearson: Same question, do you start thinking about selling 2006 beans? At what point would you do that?

Pfitzenmaier: Oh, I think if you can get '06 beans up back in that $6.10 to $6.25 area, which is, you know, a fairly good rally from where we're at right now, I think you have to start, at the very minimum, start putting some puts on and getting a minimum floor established for yourself.

Pearson: OK, so maybe pick that up a little bit or as we hit those levels because, again, the same applies if we have the same size Brazilian soybean crop that we do with the U.S. carryout that we have. We have burdensome supplies of soybeans going into 2006.

Pfitzenmaier: Yeah, and it's not $6 beans, it's $5 to $4.50-type bean prices. I mean, there is substantial downside potential here in beans, I think, as much as 50, 60 cents without a whole lot of difficulty.

Pearson: You mentioned what I call the energy wave, which is the fact that it's much less expensive to put a bean crop in, much less energy intensive than it is to put a corn crop in. And we could see another, like you said, maybe 2 to 4 percent that might switch over to soybeans. That could be significant by the end of the day.

Pfitzenmaier: Yeah, and I think energy is important. I think people aren't as freaked out this year as they were last year about the rust and, you know, the effect that is going to have on them and a lot of people they just kind of like having a rotation. It works a little better, it spreads your work out in the fall a little better, you aren't harvesting until way into Thanksgiving to get everything put in. I think there is a lot of different reasons that you're going to see some shift -- a lot of people went ahead and sprayed the fungicides and got some yield benefit to that in spite of the rust being around. So, I guess I won't be too surprised to see, like you say, 2 to 4 percent shifting.

Pearson: Alright, so as we look ahead for what is going on in the world of the soybean, it is checkered but really most of the factors that are out there could be increased production, demand relatively flat as we go forward?

Pfitzenmaier: Well, it's worse than flat. Exports to date in beans are down about 22 percent from a year ago. I mean, we're not selling very many beans and that is definitely a problem.

Pearson: Cotton market has been down, we just mentioned it, seven straight weeks in a row. Obviously, China is a big player in that front.

Pfitzenmaier: Fifty percent of our exports go to China. You know, up until October exports were really bad because you had a lot of trade negotiations and trade disruptions with China and since that has kind of gotten straightened out since the first of October, you've seen fairly good exports there. But, like you say, 50 percent of our exports go to them, they're big every week and everybody else is down a little bit. So, unless some of the other buyers come in and start shoring that up a little bit, cotton is going to be under pressure. Right now we're in a trading range from 53.5 to 51.5 roughly. I'd guess we're going to break down and test the $50 area before too long here.

Pearson: Let's talk about the fed cattle market, Tomm; futures this week, very interesting. I mean, had a strong week, week over week, but Friday that is some pretty negative action in fed cattle.

Pfitzenmaier: Well, you know, mid-week when we had that snowstorm go through, a lot of people thought, 'Well, there were trades reported in Nebraska in isolated areas of $94 versus the $91 that traded a week ago,' and everybody got all excited that, 'Holy Smokes, you might have $94 cattle.' Well, as it turned out that was just kind of isolated. The trade, the vast majority of the trade ended up at $92 by the time the week was ended and Wednesday and Thursday we got all excited about this high trade. Then when it comes actually in at $92 there is some disappointment; you had a lot of people that had been long all week long, made good money, took profits and you saw a pretty good sell-off on Friday. I dont know that that means a lot but it left kind of a bad taste in everybody's mouth by the end of the week, you're right.

Pearson: Overall, cattlemen that I've talked to in the past couple of weeks (are) pretty optimistic going forward next year and still not a lot of expansion; dry areas in the West are precluding that. You've got Corn Belt cow/calf people are about the only ones that are in a position to expand.

Pfitzenmaier: Well, there is a lot of optimism but I'll tell you, $96 to $97 cattle is a high price for cattle and if you aren't putting puts under the market, I think you're making a financial mistake personally. I mean, those are good prices that need to be locked in here. Now, you can walk by $96, $97 and say, 'Well, they're going to a dollar or a dollar five,' or wherever you think they're going but these are good prices for cattle.

Pearson: Absolutely. And we look at what's going on with this feeder cattle market. That has been so incredibly strong really for three years in a row. And, of course, we've had that nice bump up here in the last 30-45 days. People are working to find cattle.

Pfitzenmaier: Well, historically when you look at markets when they are screaming, yelling, hollering to buy a product, you're pretty close to the high and if that isn't what is going on in the feeder market I don't know what else you'd call it. And like I said, maybe it's going to go for a while, maybe it is going to go all winter, but we're in the process of putting in a cycle high on cattle.

Pearson: Alright, what about over on hogs? A lot of people have been anticipating lower markets on hogs. It really hasn't happened.

Pfitzenmaier: Now there is a market that did reverse this week. We went up, you know, that 68, 68.10; everybody has been watching it and watching it. We've bumped it two or three times. We went up, took it out today and then ended up going down the limit before. Now it didn't close down there, it closed down $1.70 or so but extremely poor closes after going up and making new highs. People are going to be a little nervous about that market after Friday's action.

Pearson: OK, what would you tell a pork producer tonight?

Pfitzenmaier: Same thing with a pork producer. I think you go in, you buy puts, get yourself shored up and there is upside potential. Pork is the healthy meat, it is a substitute for bird flu, the whole bit.

Pearson: OK, keep that in mind producers. Take advantages of good prices when they're there. Thanks Tomm. That will wrap up this edition of Market to Market. But if you'd like more information from Tomm on just where these markets may be headed be sure to visit the Market Plus page at our Market to Market Web site. And be sure to join us again next week when we'll delve deeper into the obstacles facing negotiators in the world trade talks in Hong Kong. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news