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Market Analysis: Nov 25, 2005

posted on November 25, 2005

Heavy fund selling and doubts about demand forecasts have done nothing to support grain prices. For the holiday-shortened week, nearby wheat futures lost a nickel. The December corn contract fell less than a penny.

Soybean prices have been pressured by bird flu concerns in Asia and the accelerated pace of planting in South America. At Wednesday's close, January beans lost nearly eight cents. The December meal contract declined by $1.50 a ton.

Cotton prices continue to slide for a sixth straight week, with the December futures contract down another 36 cents.

In livestock, the December live cattle contract was up by 93 cents. Nearby feeders gained 83 cents. The December lean hog contract fell 77 cents.

In the financials, Comex gold jumped $7.00 an ounce. Nearby crude oil prices climbed $1.31 a barrel. The Euro gained 38 basis points against the dollar. And the CRB Index advanced more than two points to close at 316.25.

Here now to lend us his insight on these and other trends is one of our regular market analysts, Alan Brugler. Welcome back.

Market Analysis: Nov 25, 2005

Brugler: Always good to be here, Mark.

Pearson: Well, the pleasure is ours. Let's talk about this wheat market to start things out. And the spring wheat and the hard red wheats had quite a rally going this fall. And Chicago seemed to be under pressure and there was a trading strategy, I guess, to do just that that's been in place. What is happening now? We saw the Chicago back off a little bit this week. What about the other stronger proteins?

Brugler: Well, the hard wheats actually fell a lot harder this week, pardon the expression, but we had a number of fund traders and speculator types that were in the December contract. Those contract go into deliveries the first of December, actually first notice day will be the 30th of November. And that is a situation they don't want to be in. As a speculator they don't want to have a certificate saying they own 5000 bushels of physical grain. So, we've seen fairly heavy liquidation selling in those contracts, the longs were concentrated in that Kansas City and Minneapolis market. As you mentioned earlier, the shorts, the sellers were mostly in the Chicago. So, we're seeing a little extra pressure in KC and Minneapolis this week.

Pearson: Okay, so we were recommending, most of our analysts were recommending making some sales, hopefully people took advantage of that before the sell out.

Brugler: Yeah, I think a lot of selling was done two to three weeks ago when prices were higher. And now we're kind of waiting for that first notice day to get past us and look and see if we can't get some kind of a winter recovery rally going.

Pearson: Alright, cash prices on wheat, are they hanging in there?

Brugler: We've seen a little backing off in the basis both with the PNW in the Gulf, the export market slowed down somewhat with the stronger dollar over the last month or so and various other issues, the southern hemisphere harvest has begun and those are causing some problems. So, basis has improved but we're still a little weaker than we were.

Pearson: It looks like plenty of wheat was leftover from last year worldwide.

Brugler: We've got a fair amount of wheat, we had a huge crop last year worldwide as you mentioned. The U.S. ending stocks aren't projected to be that large, 530 million bushels, but that is still 150-200 million more than we think is a pipeline requirement. So, the market has got some work to do to get rid of it.

Pearson: Alright, let's talk about the corn market. And, of course, we're in a very holiday shortened week this week so you can't really look from a day to day look and see what has actually happened in the market to really determine a lot of trends. But as we look at where the corn market has been and what we've seen here lately aren't we due for some kind of a post-harvest rally in here Alan?

Brugler: Well, you'd think so but the problem is that we've got it chewed through these piles that we created at harvest with the second largest crop ever following the largest crop ever a year ago. We've basically got 2.3 billion bushels that nobody is expecting to use any time in the next twelve months and we've got a 12 billion bushel pile to chew through at the moment. So, the post-harvest rally has been delayed. We have seem a rally in the cash grain. The cash corn prices are up six or seven cents from where they were at the fall lows. But the board continues to grind lower until we find that we've got export business and enough domestic business to find a home for all that grain.

Pearson: Alright, I've talked to a lot of producers particularly in the Midwest over in Nebraska and elsewhere, they found a home for this corn. They're not going to be in too big of a hurry to take it back out.

Brugler: No, most of the guys have got 35-50 cents of LDP in their pocket as the earlier piece referred to. We've got over half the crop LDP'd now so the guys have got cash flow to hold them into the first of the year or even into February and March and they are waiting for that basis to continue to improve. Most of our clients have got short futures positions or they've hedged the grain to ensure that they earn carry or storage returns and they're just kind of waiting for a higher price to convince them that they should quit storing.

Pearson: Again, that is the only way that strategy works is you have to go out there and sell that futures contract.

Brugler: Yeah, you have to sell the futures or buy a put or do something, in some fashion you have to put a price floor under the market because there is no guarantee that cash will come up to where those deferred contracts are trading. Sometimes it is the other way around.

Pearson: Absolutely. So, at this stage of the game that is still the best strategy.

Brugler: Still the best strategy, it's a little dangerous adding to short positions here just because, as you mentioned, we've been going down for an extended period of time and there is a potential for a bounce here. But more likely to be after the first of December is the way we see it.

Pearson: Alright, let's talk about soybeans. Again, there has been some pressure there. As we look at what is happening with the soybean market, we're not up to January is our spot month. I keep hearing about South America, I keep hearing about planting activity down there. What is your take on what is happening down there?

Brugler: Well, basically planting is moving along fairly quickly, I believe it's 65% done in Brazil right now. The biggest problem we're running into is they've still got old crop to sell, either old beans or products. And the world market for those exports is a little shaky right now because of the Avian Flu problem in China and to a lesser degree in Europe. So, we're kind of in a situation where the U.S. has got too much product. We saw that with the census crush report on Wednesday morning. We had larger than expected stocks of soybean oil and of soybean meal and the market basically is trying to find a home for that in the export market competing with the South American supplies. Weather down there is pretty good, we've got a few dry pockets, particularly in the northeastern part of the country and a little bit down in Paramount, but it's not a major concern at this point.

Pearson: Alright, as we look at the numbers for soybeans and the carry out we have for soybeans, again, well over pipeline needs what could drive the soybean market higher? You mentioned Avian Flu on the downside. At this stage of the game what could drive this -- what is the hope, I guess, for holding onto soybeans?

Brugler: To get beans to go up you're basically betting on a problem in South America. It is the middle of the growing season, this is when we find problems. The last two years we've found problems down there, they've had drought in various areas of the main producing area down there. So, that is what you're really betting on or a quick resolution to the Avian Flu problem, you know, the Chinese get all their birds vaccinated and there is no more outbreaks and now they can start buying beans again. They are buying beans, they're just not buying the same quantity that we had projected that they would buy. So, I think that is what you're looking for is an end to the current problems. It's possible that we could get a little competition for acreage next spring and we'll start to anticipate that after the first of the year, corn versus soybeans versus some other crop.

Pearson: But now really it's a South American weather market from this point on?

Brugler: Yeah, it's weather and it's exports. It's what do we do with our crop? And what is coming on behind our crop from South America?

Pearson: Strategy wise what have you been doing with soybeans?

Brugler: Basically several weeks ago we bought six dollar March puts and we sold some $6.80 calls and some down side puts to pay for them. Basically that gave us forty cents of down side protection. We've used about thirty of it since then. So, we're not expecting a whole lot more pressure here but I think you just have to take that kind of a price floor approach and then wait for the basis to improve and get your cash bid up.

Pearson: Another market that has been sagging has been cotton, futures we just talked about it, six weeks in a row we've been under pressure in this cotton market. Plenty of cotton out there. What is ahead for a cotton producer? And what should they be doing?

Brugler: Well, again, cotton has the Chinese as their main target. USDA is projecting record cotton exports this year. We're actually well ahead of last year on shipments and on sales commitments. But the pace of sales over the last three or four weeks has slowed. There has been concern that maybe the Chinese aren't going to take as much as we've got them dialed in for. And, of course, we have a crop that is over 23 million bales. So, the market, the bull needs to be fed daily is what they say and he's been starving over the last few weeks. We did get a little bit of a bounce there on Tuesday, a nice little short covering rally but we couldn't hold it on Wednesday. So, I think you've got LDP protection, you maybe throw a few more shorts inside of that on the hedge side and you're good.

Pearson: Alright, let's talk livestock, fed cattle market which has I think just been absolutely amazing and continues to amaze. We're talking into the 90's for fed cattle. It just looks to me like if you look over the last several months or really the last three years in this cattle market we'd see some kind of a correction happen, this market start to slide, the optimism is there, feeder cattle are off the charts. What is ahead for the beef business Alan?

Brugler: Well, I think beef can hold up a little longer here. We've got a dominant 45 week cycle in cattle that is not really due to top out yet. We've got fairly tight numbers, they are larger than a year ago but fairly tight numbers into the first quarter of 2006. And there is quite a bit of optimism about improving the export picture to South Korea or to Japan. The beef business tends to be a business where most of the pricing is set on the margin, that last one percent of production determines a lot of the price. So, if some of that export business develops or we get more Avian Flu concerns that eat into poultry demand and shift some demand to pork and beef I think cattle could still go just a little bit higher.

Pearson: Opening in Japan I know would help a lot too. This calf market, this is still a relatively small cow herd isn't it?

Brugler: Yeah, the cow herd is expanding and I think you'll see a fairly large expansion in the January 1 inventory numbers. We held back about four percent of the, four percent more beef heifers this year, we've cut the cow slaughter so we're definitely starting to rebuild that engine and get more calves in a pipeline. But it takes over a year to get a yearling, so to speak, and we don't have them yet. So, what we're seeing is a fairly tight supply of animals to go into the feedlots and with excellent prices for the cattle coming out of the feedlots the owners are willing to pay up for the calves and the yearlings. So, I think that is, again, it's part of the cattle cycle and we're going to see a pattern of lower highs and lower lows but it really hasn't started yet.

Pearson: Let's talk about the hog market and, of course, pork again very strong prices for a couple years in a row. We're just not seeing much in the way of expansion there either.

Brugler: Yeah, the hog guys are still kind of smarting from 1998 and they've been very cautious about expanding. We are seeing a little bit of expansion, growth in breeding herd numbers. But it's been very slow and controlled and that has been to their advantage. It has helped our producers keep the supply matched up with the demand and we're seeing an unusually long period of profitability.

Pearson: Real quick, strategy, would you do anything right now if you were a pork producer?

Brugler: I think you have to have a little bit of hedge protection or long puts because of the price level.

Pearson: Very good, thank you Alan. That will wrap up this edition of Market to Market. But if you'd like more insight from Alan 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 why one rural school finds it necessary to teach the town kids about farming. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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