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Market Analysis: Nov 11, 2005

posted on November 11, 2005

The crop report was seen as mostly neutral to grains, although bullish export news aided wheat prices. At Thursday's close, nearby wheat futures lost one-and-a-half cents. The December corn contract fell nearly two cents.

Increased consumption and exports offset the higher production and carryout numbers in soybeans. At Thursday's close, November beans lost more than three cents. The December meal contract declined by just 70 cents a ton.

Cotton prices continue to slide for a fourth straight week, with the December futures contract down another $1.24.

In livestock, the December live cattle contract was up 50 cents. Nearby feeders dropped 87 cents. The December lean hog contract gained 85 cents.

In the financials, Comex gold jumped $10.30 an ounce. Nearby crude oil prices declined $2.78 a barrel. The Euro fell 120 basis points against the dollar. And the CRB Index lost more than five points to close at 316.50.

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

Market Analysis: Nov 11, 2005 Pearson: Here now to lend us his insight on these and other market trends one of our senior market analysts, Doug Hjort. Doug, welcome back.

Hjort: Thank you, Mark.

Pearson: Well, let's talk first about this wheat market. It has been exciting watching all this Iraq demand that has come through, 800,000 metric tons is a pretty big order. The Chicago wheat market has seen a little bit of a bump but not that much. Kansas City would be the primary beneficiary, correct?

Hjort: Yeah, that's right. It's hard wheat that Iraq bought. It's kind of an interesting thing because they talked about it for so long and that's the way it is with Iraq, you just don't get things done in a hurry. They'll tender and then it might be two, three or even four weeks before the deal is done. But it was done and now you're looking at the soft wheats, the Chicago wheat futures primarily down grubbing along the lows here trying to find some traction and the Kansas City and Minneapolis markets have hit a peak about a month ago and come back down a little bit. They are holding quite well and I think they can probably rally a little bit more.

But remember, this is the fall of the year and this is the time the wheat prices top out, have trouble then trying to regain any rallies going on until probably spring. Now, you're looking at the potential for these prices to come up a little bit. But, I'm really not too enthused about any major rallies on wheat. So, if you've got some wheat to be selling here I think I'd be looking at opportunities in the next month or so.

Pearson: Alright, let's talk about the corn market. USDA report over 11 billion bushels, not really much of a surprise to the trade. Ending stocks, of course, are the real factor worldwide and people were keeping a close eye on that. As you look at this corn market though right now, Doug, do you think we've bottomed out on the corn market for this post-harvest time period?

Hjort: I think we're in the process of doing that right now, put a new low in this week, again. The trading action, as we talked about last time I was on the show, is just about identical to what it was last year. Harvest is a couple of weeks ahead of last year's pace, however, so I would think that prices are bottoming out, will next week or the week after. Now, basis levels have been improving very nicely on corn and beans both. But on the corn market you're looking at a situation here to where that basis improvement is something that is going to continue, I think, and that is going to give us some marketing opportunities. Now, the supply of corn we have in the United States primarily is going to limit the rallies in the futures market and limit overall cash rallies as well.

I think the key here this fall and into the winter is being to recognize some relatively small rallies, maybe 20 cents, ten out of the basis, ten out of the futures, that might be a selling opportunity. Cashing LDP's of 40 to 50 cents was very nice but don't expect those prices to go back even to loan rate in a lot of the county levels on the corn, at least not in the foreseeable future. So, if you need to raise some cash look at rallies maybe from where we're at this week of 20, maybe 25 cents in the cash market and use that to start your marketing program in the cash.

Pearson: Doug, I was just up in South Dakota, a couple of ethanol plants going in up there, 91 ethanol plants at last count. A lot of farmers are saying, you know, when is this demand going to start to pull this price up?

Hjort: Well, it's there and it is, it's helping. One of the reasons prices are not lower perhaps right now. But even with that increased demand for ethanol we're still looking at a carry out projected a year from this fall at 2.3 billion bushel. All you need is a little over a billion to keep prices from going too much higher. So, we've got a billion bushel to play with here and yeah, ethanol demand will probably eat into that some more throughout the next twelve months but it's not going to eliminate that billion bushel of excess. So, it helps and it helps in local markets, probably more than anything else seeing that cash being used right there, you don't have to try to transport off to some export location.

Pearson: Absolutely true. What about on the soybeans, Doug? Crop report again over 3 billion bushel soybean crop. Amazing thing about the corn and soybeans I think is the fact that we have that tremendous drought over in northern and central Illinois and the eastern portions of Iowa and still produced over 3 billion bushels of soybeans.

Hjort: It really is amazing but what the geneticists have done with the plants and being able to withstand the drought period and wait for that rain and wait for that rain and wait for that rain the production levels, though, it's interesting yes we have plenty of corn and beans both in the world and here in the United States but you have to have production at very high levels every year just to stay ahead of this tremendous demand we have out there. You talk about the bird flu and the worries about that, well, it's one of those big unknowns, great big question mark out there as to whether it's really seriously going to impact corn feed use and protein needs and so on.

But assuming that it is not going to affect it any more than we've seen in the last couple of years we're looking at good, solid demand. I think that is going to take soybean prices up, not because we have a short supply situation because we don't and yet when you think about it, 310 million bushel carry out for soybeans at the end of the year is not a big surplus at all. 200 million is where you start to really get excited about is there going to be enough and so on? So, we've got 100 million bushel more than we really need but two factors will take prices up, the demand I spoke of and then the futures traders. Futures traders love the soybeans because they can get a hold of it, the funds can buy and they can push that market rather substantially. They can make some quick bucks there and they like to do that.

Pearson: It gives us some volatility. We've got this soybean crop looks like under roof. So, have we seen the bottom as far as the cash bean prices?

Hjort: I think we have, futures too. As a matter of fact, if you go back, we've been kind of trading in a long-term sideways pattern, about 50 cent range in futures. We're about in the mid-point of that range right now. Pennant formation is what some of the technicians say is forming. But I think cash selling pressures are pretty well gone right now. As you say, the corn or the beans is under cover and you're looking at the potential for this market to start its post-season rally. It may take another week or so to get that started but I think it will. Basis levels here too have been jumping dramatically and looking very, very strong.

Pearson: Doug, we've had our final USDA crop report, the crop in the U.S. is basically harvested. You just mentioned it probably has a roof over it. The attention is going to turn to South America. What is your take on what is going on in Brazil and Argentina?

Hjort: Well, they've had some weather concerns down there, a little too dry and quite a bit of Argentina, too dry in northern Brazil growing areas, too wet in the southern for a while although that has kind of dried out now. Just visiting this week with some weather people and they are just a little bit concerned about potential weather concerns, weather problems down there. It might have to do with some of the El Nino or La Nina, whatever is happening there. It's really not a big deal, not set yet, don't really know what is going to happen in that area as I understand it weather wise. But the trends that they see could be a little problematic for South American production.

Pearson: Alright, let's talk cotton real quick. Four straight weeks of kind of a downward spiral on this cotton market. Right around the $50 level, what is your advice for a cotton producer?

Hjort: Well, there is not much hope there, again. It's the same thing almost week after week. The crop report out on Thursday, it didn't really help the market at all either. It wasn't really terribly bearish but it just didn't provide much bullishness. This market just has to chop down here, find the bottom. I don't think we're quite there yet but very close.

Pearson: Let's talk livestock, this fed cattle market up in the 90's on the board, $1.40 corn, it's got to be awfully tempting to hold those steers back and those heifers.

Hjort: Yeah, it is and I think this week we locked in some $92 cash prices out there and maybe a little better than that. This beef market has been a big surprise to an awful lot of people including me, swallowed some hedges along the way. But this market is good shape I think. You get the talk about Japan maybe opening the border and one week that sounds like they're going to do something and then that is followed a couple of days later by ah no, maybe not until spring. So, that is kind of there in the background but it's really the strong beef demand that we have here in the United States that is keeping these prices up here, well bringing them back up to this level now. I don't see that changing here in the near term. I think fed cattle prices can be strong. I'm very nervous about it all. Futures wise we come up and keep bouncing up against these contract highs. This week we put a new contract high in, in the nearby contracts, backed off from it a little bit but I believe we closed at new highs of this move. Market looks very solid, I wouldn't be in any hurry to do any hedging right here. We need to see more topping action before I'd do that. On the cash market just keep selling them as they're finished.

Pearson: Absolutely. I want to talk real quick about this calf market which has also been unbelievably good, Doug. And frankly the expansion in that July report really didn't amount to much. Much change there?

Hjort: No, there isn't much change. We're seeing more cow liquidation, have over the last year and a half, in fact, and some of those beef cow replacement heifers going in to replace them. So, we're not seeing much of an increase in the cow herd at all.

Pearson: Alright, let's talk hogs. Again, we would expect expansion based on the profitability we've had in the hog cycle. It hasn't happened either to any great extent.

Hjort: No, it hasn't and I think the hog industry has come very close to the poultry industry right now as far as production, supply/demand balances being equated here to a large degree. I'm not sure that these hog prices, well here kind of like the cattle, the hog prices are very strong, we're at a period of time now seasonally to where we should have been seeing quite a reduction in cash prices. We didn't go nearly as deep as we thought we should have. The kill is well over 400,000 a day. I think this pork demand is very strong, cash puts or prices should remain strong as well.

Pearson: Alright, so we should see a good year in 2006, at least it would appear at that stage right now. Doug Hjort, thank you so much.

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