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Market Analysis: Nov 18, 2005

posted on November 18, 2005

Corn export sales hit a marketing year high last week, fueling some bullish sentiment in the grain pits. For the week, nearby wheat futures lost nearly eight cents. The December corn contract fell more than two cents.

In the soybean pits, the trade is watching for signs of increased demand even as weekly export sales rise. For the week, January beans lost nearly 18 cents. The December meal contract declined by $3.30 a ton.

Cotton prices continue to slide for a fifth straight week, with the December futures contract down another 89 cents.

In livestock, the December live cattle contract was down 95 cents. Nearby feeders dropped 15 cents. The December lean hog contract fell by 50 cents.

In the financials, Comex gold jumped $19.00 an ounce. Nearby crude oil prices declined $1.66 a barrel. The Euro gained 29 basis points against the dollar. And the CRB Index lost two-and-a-half points to close at 314-even.

Here now to lend us their insight on these and other market trends are two of our senior market analysts, Walt Hackney and Doug Jackson. Welcome back.

Market Analysis: Nov 18, 2005 Pearson Well, Doug, let's talk about the grain markets and the wheat market in particular, which the higher protein wheats, the hard red market and the spring market have had a pretty decent rally for the last couple of weeks; starting to cool off now?

Jackson: Mark, to be long Kansas City or secondarily Minneapolis, again, short Chicago has been one of the few interesting trades to the fund crowd for many weeks if not months, while they have an abnormally small position, if any position at all in corn, meal and beans, they flock to the Kansas City/Chicago spread and are long or had been long nearly 40,000 contracts at Kansas City, and as we go into the weekend are short a record amount, nearly 50,000 contracts in Chicago. Open interest is at record levels. The index funds have been attracted into wheat, a commodity oftentimes not traded by the larger funds. So, this is really an interesting situation.

Jackson: But as we approach December 1 deliveries, all these people that are long Kansas City have had second thoughts. We're not sure that basis values are high enough to support commercial interest in the December and we've been getting liquidation. Now, this whole thing has been going on within the context of a generally adequately supplied world situation and a generally bearish market. So, the funds are long in Kansas City but short Chicago as a hedge against it. We have a tight situation in the hard red led by Iraqi business, political considerations, other economic considerations (are) driving that business to the U.S. But in the larger picture, Mark, while the hard red and Minneapolis is going to be tight, relatively it is still really a bear market. We may see the funds ebb and flow here on inner market spreads but the bottom line is we're probably going to work lower, longer term, very slowly. We have dry weather in the U.S. Plains; it looks like a dry winter. People will be watching that but yields are still a function of spring weather, not winter. And with adequate supplies in the world, plenty of Black Sea wheat at deep discounts to U.S. values, I think we're going to see values work slowly sideways to lower as we may see in all these grains, Mark.

Pearson: Alright, it makes sense to be a seller of wheat now Doug?

Jackson: We've seen heavy farmer selling already, Mark. A lot of people are sold out. The next thing that is going to be a factor to the upside is going to be weather problems and we're going to have to be patient and wait for that until next spring. If you don't have that kind of patience, then we probably don't see much upside here in the intermediate run.

Pearson: Alright, let's talk about the corn market. Cash market has been recovering, which has been good to see. But the board has been under some pressure.

Jackson: Well, Mark, we've seen producers, you know, take LDP payments on nearly five billion bushels, compared to about three billion a year ago. LDP payments got out towards 50 cents at one time, so you can imagine with this huge liquification of the corn crop, if you will, financial liquification through a 50-cent LDP, nearly a third of the value of the entire crop, the producers have no reason to make additional sales; they have no consideration for tax purposes to make any sales now whatsoever; they've got plenty of cash. So, basis is recovering. But futures continue to drift low and, Mark, after our drought scare and certainly our reality of a drought in selective locations last year, the truth is that yields were still way above anybody's expectations; supplies are actually going to be bigger this coming year than a year ago. We're estimating carryout at 2.3 billion today. Remember, we didn't have a 2 billion carryout estimate last year until February. Futures are nearly identical to where they were a year ago with a more bearish situation today than a year ago.

Jackson: Futures drifted lower by 10 or 15 cents from where we are today into spring last year. We have no reason to think we're not going to see something similar this year. Interestingly, the funds have not wanted to get short. They have resisted the temptation throughout the entire fall; only now are they getting a little bit short. They may go ahead and get a little bit shorter but the fundamentals are going to allow this corn market to drift again sideways to lower and not much is going to change that situation; feeding, ethanol exports, it's all really irrelevant at this point even though we have a record demand level; a record crop is going to mean lower prices into summer until we have a weather threat. If we get a big acreage switch, which is questionable here, or a summer drought, obviously things can change. But not much is going to change until we can get to that point.

Jackson: So, if you're holding corn you're going to have to have that long-term patience simply to wait until next summer to see if things change fundamentally. Of course, if we don't have a major drought, we can have a situation similar to this again in '06-'07 even with ethanol usage expanding such as it is.

Pearson: OK, so even with these increased industrial uses we're still outpacing in terms of production?

Jackson: We've seen incredible productivity, Mark, and people are so impressed with that demonstrated productivity with the new technology, the new genetics, that people have lost a lot of enthusiasm; they realize now that to have a major yield decline, it's going to take what appears to be a nationwide drought now.

Pearson: Alright, let's talk about the soybean market. Again, we're seeing basis improvement there on beans. We've got a roof over the bean crop now. So, you're right, just going to take something to pull it back out. What about the fundamentals on the bean side? Everyone is talking about the H5N1, the situation in China, what that could mean for soybean and soybean meal exports. What is happening in Chicago right now? They sold the beans off this week but obviously Brazil is going to be a factor. We have a weather market to contend with there.

Jackson: Well, you're right, the bird flu thing is going to be a constant backdrop to this thing; that is slowing down Chinese demand to some degree but we're also seeing South American offerings continuing undercutting U.S. offers by as much as 20 cents a bushel even during this key period when we should be the dominant seller during our harvest period. So, exports are down 23 percent for the first two months of the (marketing) year. A lot of privates are cutting their export demand to where U.S. stocks will build well above 400 million and this could almost be a reverse of last year where we started off with big carryout ideas and then the Chinese demand left us with much smaller stocks than we thought early. This year we may start off with modest stock expectations and with constantly realized poor demand stocks may balloon later in the year.

Jackson: You have private analysts out there talking about $5 futures, Mark. That may be extreme; funds are long oil right now but they are liquidating that. The bottom line is that to do anything to the upside in this bean market we are going to need a weather problem, an abnormal weather problem for the third year in a row; the third year of drought back to back in South America, which is unprecedented. If we have climate changes that result in that, so be it. But at the moment demand is poor, stocks are large, we're projecting a record crop in South America. So, values are going to drift lower. The only problem is that South American economics have deteriorated; soy rust cost, fertilizer, transportation, they're losing money now. Long-term we need to expand acres of soy in the Western hemisphere but we can trade below the cost of production in Brazil in the short-term, which means lower prices for the foreseeable future.

Pearson: Alright, well, we'll see what happens with the weather map. Let's talk to Walt Hackney about this livestock business. And Walter, all eyes have been on this cattle business for a while. We've seen this market post-Labor Day. Last time you were on you thought we were a little cheap post-Labor Day market. We've jumped up. What is ahead now for fed cattle? Cattle on feed report came out Friday afternoon. Any surprises to that?

Hackney: I think the placement figure might have been a little bit over what some of us thought it should have been. A lot of us thought 101, somewhere in there. It came into 103. The marketing was no surprise at 97. The on-feed at 100-101 percent, that was pretty well in line. But the traders, as we get into this coming week, will determine that as a bearish report. The question is how much of the bearishness was built into this report this week prior to it actually coming out. Cash market is a direct result probably of anticipating lower beef and lower cash next week on fat cattle. We seem to lose anywhere from one to three bucks a hundred this week compared to a week ago on cash cattle; Texas sell cattle at 90 compared to 92; Kansas sell at 90 compared to 92.5; Nebraska sell cattle at $1.43 compared to $1.45 dressed. And there may have been that kind of pressure in the market to cause the cattle feeders to do that. They needed to sell cattle. Our inventory is not as current as we should like it to be and some of us have been projecting that the inventory is fairly current. But in actuality it is not and anything that restricts the trade as we speak is only going to come back to haunt us with cheap rations and heavier cattle.

Hackney: So, the consequence of all of that probably means we've topped this cash market at the 92, 93 dollar level. We probably have topped that thing for a while, Mark.

Pearson: Alright, Walter, what about Japan? I mean, they're talking again about hopefully getting that re-opened. We've seen some positive signs, we've heard a lot of that situation with the Canadian beef coming down. What is our whole picture out there beef supply-wise?

Hackney: Probably neutral. Canadian beef coming down you might say, 'So what's new.' We've been bringing in the Canadian beef in the boxes for two years. And as far as the Japanese issue, we're probably not going to see much evidence of that assisting us actually for a year, maybe two. It'll take three or four years to get back to the level we were at when they put the ban on us. However, the Japanese people actually are so leery of American beef due to the media and the notoriety that it had received, that I question personally the ability to recoup that market. It may not recoup.

Hackney: I don't know that that is a problem. We've gotten along very well without exporting that beef to Japan. We've done miraculously here in the United States. We've got a problem with the Canadian cows, the problem being the federal government, the U.S. government is insisting that we open that border to all aged ... cows; that is going to create a problem bigger than any dairy buyout or anything else within the United States in an effort to salvage some packing houses that were specifically dedicated to killing cows that have gone out of business or are going out.

Pearson: Real quick, Walter, this hog market, what is your take on hog prices? Again, it's just been a long, sustained profitable run for hogs.

Hackney: It is and it will probably continue well into the first half of 2006. It is probably topping as we speak in that if you're talking 45-cent hogs or something within that range, we may be looking at 41 and 42 dollar hogs.

Pearson: Alright, so keep that in mind, maybe protect some profits out there if you can. As usual, Walter, appreciate your comments; Doug, 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 continue to look at the increasing role of female farm operators. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news