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Market Analysis: Nov 04, 2005

posted on November 4, 2005

The crop estimates did little to support grain prices and have refocused attention on taking the LDP. For the week, nearby wheat futures lost more than six cents. The December corn contract fell one-and-a-half cents.

Soybean futures prices moved solidly higher even as basis values continue to improve. For the week, November beans gained more than 15 cents. The December meal contract jumped $7.40 a ton.

Cotton prices remain under pressure as the big harvest progresses. The December futures contract was down another $1.08.

In livestock, the December live cattle contract was up 17 cents. Nearby feeders gained 72 cents. And the December lean hog contract advanced by $1.32.

In the financials, Comex gold plunged $18.50 an ounce. Nearby crude oil prices declined 64 cents a barrel. The Euro fell 251 basis points against the dollar. And the CRB Index lost nearly 10 points to close at 322-even.

Here now to lend us their insight on these and other market trends are two of our regular market analysts, Erin Golly and Darin Newsom. Welcome back.

Market Analysis: Nov 04, 2005

Golly: Thank you.

Newsom: Thank you.

Pearson: Alright, let's get right after these grain markets. Let's talk first about the wheat market Darin and what you're seeing in there. You're a Kansas boy and I know you follow this wheat market very close. And we've had some good opportunities to make some sales on the hard red winter wheat and also, of course, the Chicago contract which is a soft red which has been going pretty much south here for the last month.

Newsom: Right, we've seen some pretty good strength in these markets. Now, a lot of this had been built on, oddly enough, in both the Kansas City and Minneapolis markets on non-commercial activity and it's kind of hard to imagine why would they be so interested in these markets when we're really not in any tight world supply and demand situation. They had just become a popular buy and so we saw some extraordinarily large, net long futures positions in these two exchanges. Now, this did work to push the prices higher during its seasonal time of rally, the planting season when we normally get a rally. So, we did have some opportunities here over the last few weeks to get some sales on and looking out into next year's crop also being able to start getting some of that locked down as well because what we're heading into now is more of a down turn, kind of a sideways to down pattern and the seasonal tendencies of all three exchanges so we could start to look at some of these markets that don't look quite as good, you know, another month down the road as we have here over the last few weeks. Soft red winter market really has had no friends, neither the commercial or non-commercial side and the only gains that we've seen have come from spill over buying from the other markets.

Pearson: And as you look at the cash wheat market it has held in fairly good too.

Newsom: It really has because we continue to see pretty decent exports. The hard red winter market we've had some nice basis levels, we've started to weaken them a little bit here over the last couple of weeks but overall they've held fairly well as commercial traders remain interested. We've seen some good export numbers here the last couple of weeks. So, if we can keep this going, the cash grain and the cash wheat market should stay, could stay firm.

Pearson: Alright, let's talk a little about what's going on with the corn market where basis has been the story there. The corn market sub two dollars, of course, has a lot of people concerned. But this cash market and these big LDP's particularly in the Western Corn Belt, what is your take on that?

Newsom: You know, it's interesting, you see the LDP's going out into the mid 40's and the upper 40's and some may have gotten up almost as high as 50 cents in some areas. It's very attractive to be taking the LDP's and if you look at the longer term situation in corn we could very well be near the lows, you know, the market, the corn futures, Dec. corn futures should find some pretty good support around $1.95, possibly again down against $1.91 longer term. So, if basis can continue to improve as we've seen over the last couple of weeks where we've put three to five, six cents on it that could pretty much offset anything we might lose on the future side. So, therefore, you know, these LDP's do look attractive and if we can start to turn these markets around, you know, it's got plenty of time to start working higher.

Pearson: Big issue is if you have a place to store it.

Newsom: Huge issue right now, I've been hearing a lot of reports of more grain on the ground than anyone's ever seen, big piles, lots of production everywhere. And I think that leads us into the, you know, the expectations for this coming report. The idea is that we're going to see about an 11 billion bushel crop. It's going to take something extraordinary now to really put much of a shock into the market. So, as far as the USDA report really coming out and pushing us much lower I just don't see it happening at this point.

Pearson: Alright, let's talk about the soybean market where there has been some excitement. Looking at what has been happening on futures we've been seeing really just, I guess we'd call it almost a post-harvest rally.

Newsom: We have and it fits right in with its seasonal, you know, towards the end of September, early October we start to build a little strength in this market. It starts off in the basis and we have seen some substantial gains in the national average basis markets. And at that point then the futures start building it as well. Now, towards the end of October we did see some non-commercial selling. They had been holding some net long futures, they decided to square those up, take it down to a neutral position to finish the month. As soon as we turned the calendar page they were back in buying here earlier this week. So, we were actually, even though the markets closed lower on Friday overall for the week the market looked fairly well as far as being able to turn itself around.

Pearson: Alright, so what is your strategy for selling beans?

Newsom: Right now if you've got beans you need to have them hedged out in the January contract and if you do have them hedged out there the volatility of the market has been so low that options bought back against it, call options bought back against those hedges should be looking pretty good at this point. Hold onto those hedges, let the basis continue to appreciate. The market tends to trade sideways to a little higher into mid-February but the basis also stays neutral to strengthening in that time frame as well. So, better markets could be on the way.

Pearson: We just touched on it in our last feature but South American crop is going to start to play a role here pretty soon. Now, what is your outlook for what is going on down there?

Newsom: Very interesting situation down there because we really don't know. The last couple of years from the early estimates to the final production numbers Brazil alone has dropped twelve to fifteen percent. You know, early on this year we were looking at 60, 61 million metric tons out of Brazil. That has already dropped, you know, USDA has it pegged at 60 but you hear some reports coming out of South America itself, you're talking more in the 51, 52 million metric tons. So, there is a wide range. Planted acreage remains a question. Input costs are big, they may not go in with as much fertilizer and so on. And the weather has not been conducive. You know, some parts of northern Brazil remain dry even though they have had some rains and the rains have moved onto the south where, you know, they've had plenty of rains but planting should be able to about finish up. So, it's going to turn very interesting. South America will take the lead here before too very long and all eyes will turn that way.

Pearson: Alright, let's talk about the cotton market which, of course, has been an interesting market to watch. We're seeing it back hop just a little bit here the last three weeks or so. But cotton prices above fifty dollars. I mean, should we be making sales?

Newsom: I would assume so, you know, it's a little disappointing in here right now because we saw the December contract go up and test the 57 mark and it wasn't able to hold. It slipped right back down into its sideways pattern closing today below $51.70 does not bode too well. It looks like it could start to drag back to 47, around the 47 area right now. What we're looking at non-commercial traders remain short, commercial traders aren't too bullish this market either yet pretty good carries in the market. So, you know, if you can still get some sales on above 50, if you catch a bounce up into 52, 53 probably not a bad idea to pull the trigger.

Pearson: Alright, let's go talk about livestock now. And Erin Golly, kind of some good news as far as the fed cattle market is concerned with that Japanese team that came to the U.S. and gave an endorsement to hopefully re-open trade. That is ten percent of our beef market or has been. What can you tell these fed cattle producers out here watching the show tonight about the outlook for this fed cattle market?

Golly: Well, Mark, I've been bullish of the cattle market for quite some time now and will continue to be so. There is just nothing better than having a bull in the cattle pit and that bull is the funds right now, along with myself. But I do think that prices are going to rally and stay around the $90 area and rally into the mid-90's in early December as retailers wrap up their holiday purchases. Packers should begin to stockpile some product in getting ready for the export market to Japan. But I don't think there was enough yearlings placed market through the first quarter of 2005. So, the big thing to watch is the cattle producers can stay current with their marketings which I do think is going to be a little bit of a struggle. Cheap corn and high prices usually generates heavyweight cattle. The best solution I can see is if futures, we could trade a new version to the futures market which is cash trading better than the futures board.

Pearson: And, who knows, I mean we could see that happening before the end of the year. Strategy wise what would you be doing? Hedge wise what do you think?

Golly: I'm a little bit concerned that we could see some really good demand coming out of next year. We've got various things going on. The Avian Flu, we've got Foot and Mouth Disease in Brazil so I dont want to jump in front of this market. I would actually rather purchase put options to protect profitability in the cattle.

Pearson: Alright, good point. What about feeder cattle market which has been phenomenal? I mean, it's been clover days for the cow/calf producer and we were seeing that on the board also in the cash markets. What are you telling those cow/calf people who are going to winter all these cows and hopefully have a big calf crop next year?

Golly: Well, there is actually a really interesting scenario coming around in the feeder cattle market. Midwest producers that raise both grain and livestock basically have only become grain farmers over the last few years because they weren't ready and they weren't willing to pay for high price feeder cattle. Now, with this year's high corn production and large supplies they are starting to look at repurchasing feeder cattle again at these high prices. With the large corn supplies they'd rather feed the corn through those feeder cattle and not let it sit on the ground and deteriorate. So, I think the feeder cattle market continues to look good with very good demand.

Pearson: Alright, so some good news in the cow/calf world. Let's talk hogs. The hog market has been interesting fall and you can see from the chart that we've had a nice bounce here the last couple of weeks and we had really kind of a nice uptrend right after Labor Day which is contra-seasonal. I mean, it's not typically what we'd see in the hog market. You were talking about maybe seeing some expansion coming in this year. What is your take now in the hog market?

Golly: Well, we've had hog weights come down a little bit this past week in spite of cheap corn prices which leads me to believe that producers are becoming a little bit more current with the aggressive slaughter that we've seen. I think packers are going to continue to be aggressive but weekly slaughters are going to continue to run at two million plus head until about mid-April of 2006. But in the spring and summer of 2005 the were just outstanding. But we're starting to see some problems with the summer breeding numbers due to the high heat that we saw throughout the Midwest. But in the demand side I think we're going to continue to see support from the bird flu epidemic around the world. U.S. pork is considered a safe meat right now and I think we're going to continue to gain support from that. But I do feel very good about the hog market but it's important that producers look at purchasing put options underneath of it because we do have large supplies forecasted in front of us with cheap feeds and the demand is unknown right now.

Pearson: Alright, well some great points as usual. Erin, we appreciate it. Darin, 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 learn how first responders prepare for rural emergencies. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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