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Market Analysis: Oct 28, 2005

posted on October 28, 2005


Big crops and sluggish export sales are weighing heavy on the grain market. For the week, nearby wheat futures lost more than 12 cents. The December corn contract fell more than four cents.

Soybean prices remain volatile, although long-term trends seem positive. For the week, November beans slumped more than seven cents. The December meal contract dropped 60 cents a ton.

Cotton prices continued their two-week slide, with the December futures contract falling $1.97.

In livestock, the October live cattle contract was up 43 cents. Nearby feeders gained 93 cents. And the December lean hog contract advanced by 18 cents.

In the financials, Comex gold improved $7.80 an ounce. Nearby crude oil prices climbed 59 cents a barrel. The Euro gained 120 basis points against the dollar. And the CRB Index lost a half-point from last week to close at 331.50.

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

Market Analysis: Oct 28, 2005 Robinson: Thank you, Mark, always a pleasure.

Pearson: Well, the pleasure is ours. Let's talk about this wheat market, Virg. And I know you've been tracking it about as close as anybody. We've (seen) that big rally in Minneapolis and Kansas City but the Chicago market really hasn't done much.

Robinson: You have three subclasses you just mentioned there, Mark, and two of those three -- hard red winter, hard red spring -- are in relatively tight demand domestically. Soft red, however, in contrast to that, plenty of that supply. So, we've got two markets behaving relatively well, one that is not. I'm going to speak a moment about the futures contracts representative of each. I think Minneapolis and Kansas City December wheat, Mark, on a recovery back towards $3.85. I'd use that as my trigger point to sell both hard red winter and hard red spring. Soft red winter is decidedly more bearish because of the supply scenario. Assuming no one has sold anything to this point in our conversation, any little bump next week in the December futures contract, I think there is likely to be one back above $3.20. I'd use that, Mark, and I'd sell wheat based on that futures contract as my barometer and trigger. If you want to re-purchase with some type of call option or a vertical call spread, certainly that is appropriate given the fact that we have quite a length of time here regarding world production, and world production is slated to decline year over year, about 13 percent.

Pearson: Alright, so maybe some better times ahead there on the soft red front. Let's talk about the corn market, Virgil. And, of course, the big story in the corn market has not been so much futures, they're going sub-$2, certainly got everybody talking. But this cash market, 49-cent LDPs across Iowa on Friday, this is one of the big ones in terms of the cash spread, really, of all-time. What is ahead for the corn market? What do you see on these cash markets?

Robinson: Well, I think I've watched the show in the past several weeks and the idea of capturing LDP and selling carry has been discussed numerous times. Web sites everywhere are covering that subject matter, Mark. So, I want to address tonight just for a moment the futures market because again it appears to me that futures are yet positioned to move lower. Next week, at least in the work that I keep, the timing work that I keep, it is a very important and pivotal week. I think we'll fall into basis the lead contract, the $1.91 to $1.95 area, Mark, early in the week. If we would happen to do so and then close a week from tonight back above the $1.98, $1.99 area, we could then begin to talk about some type of bottom in futures. Until that time, the trend is clearly down, new contract lows across the board this week and new contract low closes. It's difficult to be very bullish as you've categorized in your lead-in; big crop likely to grow larger and relatively sluggish export demand. Those two factors have the market on the defensive.

Pearson: You'd agree with taking the LDP as big as you can get it, of course. And then if you can find a place to store corn -- if you can't find a place to store corn, Virg, what are your options?

Robinson: Mark, you haven't many options available. I mean, you can go to the ground if you're willing to assume the risks associated with that for any length of time. And I think quite frankly many producers will do precisely that. I think there is about 25 percent of the corn harvest yet remaining. The states that are in critical storage capacity crunches, South Dakota, Minnesota and Nebraska, Iowa, Indiana, Ohio, Mark the basis, the spot basis in all of those states has dropped to areas or levels that I have not seen in my career. They are going to recover and started this week. So, be cognizant of those, Mark, because the basis may recover in some areas more quickly than futures do. And the basis recovers 20, 25 cents, you've captured your LDP; that's probably a pretty good opportunity to sell to cash regardless of the flat price of futures.

Pearson: And not a bad price for your corn, all things considered.

Robinson: Well, when you've considered direct payment, counter-cyclical payment, no, it's probably a pretty attractive price on those bushels.

Pearson: Alright, let's talk about the soybean market. Of course, soybeans, as we mentioned earlier, a little bit different scenario worldwide. I mean, there could still be some life to this bean market. I mean, there has been, you know, a penny or two, maybe a nickel on the soybean LDP. Soybeans have held in there pretty good, a little bit of a back step this week. But the harvest seems to be close to being wrapped up.

Robinson: Yeah, the harvest is virtually over, Mark, and the basis this week has responded. In numerous geographies that basis has improved sharply; in some areas upwards of 20 cents. What does that imply? What does that tell you when the basis firms that abruptly? There is obviously demand for that product. Processing margins are strong. We've had a couple of fairly good weeks of export ... or export inspections. Mark, they could improve beyond what we've seen, provided transportation permits that. And I think that will eventually happen. We need yet to hear from the Europeans. The Chinese have bought beans but likely (are) to buy more. You mentioned the economics in Brazil. The rust issue, will they be able to combat it with less money in their pockets? These are all issues that I can't answer. I don't know. They have to unfold over time.

Robinson: But I can tell you this, futures, Mark, have behaved quite well as they've dropped to and been in that $5.55 to $5.65 area. Provided that support area doesn't give way there is reason to believe that we're in the process of putting bottoms in the futures market. A weekly close below $5.55, however, spells trouble and tells us we're headed towards $5.00 in futures. So, those are my parameters and my warning signals.

Pearson: Alright, let's talk quickly about the cotton market. Again, a sharp sell-off again this week.

Robinson: Yeah, Mark, cotton fundamentals, both U.S. and global, indicate adequate supplies. We've spent a long period of time in this $45 to $60 area and tonight we sit around 52 or 53 cents. As the markets come down the last two weeks, the basis has firmed. I'm inclined to sell the cash via call or via vertical call spread and await developments down the road, Mark. I think the idea of $60 cotton or higher with the supply situation does not seem likely as we visit tonight.

Pearson: Alright, let's move over to livestock. Fed cattle market, we try to keep that cash cattle market around $90 and some places hold, some places it isn't. Futures are under that. What is your take, Virgil, as we go forward in this fed cattle trade?

Robinson: Can I address futures for a minute?

Pearson: Absolutely.

Robinson: I think the futures, Mark, is going to push higher. I think December futures are positioned to push back above contract highs at which point, Mark, you might entertain the idea of some type of put strategy, create some type of a floor although we're rapidly approaching the month of December. The February contract I would, in fact, employ a put strategy, a price floor strategy as the February futures contract pushes back to or above $96. That is my target tonight.

Pearson: Alright, let's talk about the calf market; feeder cattle market has also been phenomenally strong. And we don't see that changing. And this cheap corn, Virgil, in tight supplies, when is it going to slow down?

Robinson: Mark, you know, as we end the month Monday, feeder cattle futures concern me. There is reason, and I think an awfully good argument, that feeder cattle futures, and if they are representative of the underlying cash and I believe they are, there is an argument that market has topped. I'm inclined to suggest tonight, and I made this same suggestion $10 ago when feeders were $10 cheaper, I'm inclined to protect inventories with some type of put strategy, Mark, or some combination of puts to ward off what I think could be the high in that market. I think there is an awfully good argument there.

Pearson: Alright, let's talk about the hog market, which has enjoyed really a pretty decent fall all things considered. We don't seem to be seeing the expansion. We had a little bit in the USDA report, kills are staying relatively flat. What is ahead now for hogs?

Robinson: Well, the kills have been large the last few weeks, Mark. I saw it tonight before I came, 2.1 million plus. Yeah, it's likely going to sustain that kind of a kill at least through November, which is not uncommon but rather seasonal. I think we can sustain a cash market in this upper 30s, low 40s the balance of this year. So, when you take a look at the December hog futures contract, lean hog futures contract, Mark, it doesn't offer much of a hedge. I think February hog futures will recover because I'm bullish on pork bellies, as well as the live trade and move back towards $68, at which point, Mark, I would instill a hedging strategy for first quarter live hogs as I think cash will be somewhere around $45.

Pearson: Outstanding, some great insights as usual. Virgil, we appreciate it. That will wrap up this edition of Market to Market. But be sure to join us again next week when we'll learn how a group of Midwest soybean farmers retains ownership of the crop from the field to the marketplace. Until then, thanks for watching, I'm Mark Pearson, have a great week.


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