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Market Analysis: Sep 23, 2005

posted on September 23, 2005

Strong export sales boosted grain prices this week, especially for hard red wheat varieties. Corn remains in a narrow trading range. For the week, nearby wheat futures gained more than nine cents. The December corn contract fell a penny.

Export sales also were bullish for soybeans, and the commodity funds went on a buying spree for soy oil. For the week, the November contract gained more than two cents. But the nearby meal contract was down $2.20 per ton.

Cotton prices rebounded after an off week, with the October futures contract advancing $1.16.

The September cattle on feed report released after markets closed Friday was seen as neutral. For the week, the October cattle contract was up 70 cents. Nearby feeders gained 93 cents. And the lean hog contract jumped by $1.85.

In the financials, Comex gold climbed $3.60 an ounce. Nearby crude oil prices gained $1.19 a barrel. The Euro lost 131 basis points against the dollar. And the CRB Index soared nine points to close at 328.75.

Here now to lend us her insight on these and other market trends is one of our senior market analysts, Sue Martin. Welcome back.

Market Analysis: Sep 23, 2005 Martin: Thank you.

Pearson: Interesting week again in the grain markets. The corn harvest is zipping along through many parts of the Corn Belt, particularly the Western Corn Belt. Dry weather conditions, good harvest conditions and anecdotally we're hearing some pretty good yields. You can see just what the price of corn has done since about the end of July, really. We've been in a downward spiral, we're in the teeth of harvest. I've got to think it's a pretty negative near-term outlook.

Martin: Well, I think it is. First off, you know, we've started bringing in an awful lot of old crop corn into the elevators coming out from under loan and so that kind of put a black cloud over us because it hit right next to an early harvest. And then finding that the yields could be a little bit better and the USDA number of 10.68 billion bushel crop really set the tone for the market to set down. We've gotten Sep. corn off the board at $1.95, there is lots of support in the past two lows, major lows before this was around $1.94, $1.95 and of course our price projection for Dec. corn of this year is $1.93 1/2. Now, there is good support around this $2.05 area and so the market is trying to hold here. But I wonder if we don't have one more slip down.

Martin: But when we talk about a 10.6 crop everybody gets enamored with it, that is huge and yes it is by old standards but then we have to remember it's still down 1.2 million bushels from a year ago. And also that we do have demand that is probably going to be like a 10.7 so we have to have a big crop to take care of that demand otherwise our stocks to usage ratios are going to get extremely tight. And there is the potential next year that you could have a stock to usage ratio that drops down to as much as 15%. And if you go back to all the years in the last 30 some years, any time you have a stock to usage ratio of 15% or less you rallied corn $2.90 or higher.

Pearson: OK, so with that in mind, Sue, you're not going to get real negative just because we're in the heart of the harvest right now?

Martin: Well, I think the problem I have with corn is all of this old crop with the new crop together. But the LDPs are big and if the farmers can garner those LDPs and capture them, then they're going to use that money along with selling cash beans and then live off of that. And that will carry them quite a ways into next, into the first quarter of March or maybe even April/May. And, of course, we need to get into at least May because that is where I really start to see the industrial usage pick up greatly. We have a lot of ethanol plants that are coming online, everybody is banking on those ethanol plants. I see those ethanol plants as helping the basis but when you've got a lot of LDP corn coming along with underneath a bunch of old crop, the two crops together bother me a lot. That is the only bearish thing I really see because China is going to be a net importer of corn this next year, our industrial usage is increasing, domestic feed usage for cattle, hogs and poultry are all picking up and increasing. We're seeing expansion. So, those are good things but, you know, if we go another year out into 2007 we're going to need probably close to an 11 billion bushel crop to cover just the demand.

Pearson: So, strategy wise right now, take the LDP.

Martin: Well, take your LDP's, don't wait to get them bigger, just take the LDPs. You know, when cash corn is at an elevator around $1.34 to $1.40, $1.50 how do you tell someone to go sell it? You know, that is pretty tough. So, at this point hang onto it, take your LDPs and see if you can't garner a little bit out of your storage out of your basis and on an improved basis. The problem (in) taking the LDPs, what does that do? And every time they start to bid up for corn, all of a sudden you're going to see a lot of it come into the cash market and that keeps you stabilized. So, I look for a market that is going to be in a sideways range for some time and then as we get more into the second quarter I think then the market prices will start to lift unless we try to buy some acres and that could be your Dec. contract doing that.

Pearson: Alright, let's talk about soybeans. What is your outlook there? You talked about the fact take your LDP and sell cash beans so would you make that as a recommendation?

Martin: Well, the problem I have with selling cash beans is I'm not bearish beans long-term and that is the hard thing for me to tell people, to sell beans but yet beans are better this year than they were at this time last year and I don't think you're going to get an awful lot of an LDP on beans. So, I guess I would say if you need to sell something to generate cash, go ahead and sell some beans but retain ownership, come back under that board and retain ownership but move out into May or July of next year, bypass the March because everybody is going to be talking about we're going to increase bean acres and all this kind of stuff. I'm not sure we increased as many acres as not but we're going to certainly hear a lot of rhetoric about it come February into March, planting intentions. But I think we have the potential of a bean market that swings at eight dollars again this next year. If I don't get my way Mark, this next year I'm going to be there again for the year after that. I'm not going to give it up. There is too much growing demand, biodiesel is growing, Europe had a poor crop, China has to import more beans, their crop was OK but ... they never do produce enough. And then on top of it they're utilizing the stocks that they had right now on hand because they didn't get imports in as easily because of Hurricane Katrina and now if you have Hurricane Rita kind of infusing more water into that area and problems that it slows the exports down again. It just slows up the chain a little bit.

Martin: These world end-users are all short bought or hand to mouth I should say. And that makes me think there is good demand. South American farmers (were) very slow to getting their beans planted and they're going to cut back on inputs and they're not going to plant as many beans in Brazil, maybe more in Argentina but not as many in Brazil and that is the country you have to worry about.

Pearson: OK, so fairly friendly to soybeans longer term. Wheat market has been on a little bit of an upswing, particularly the hard varieties have been strong. We show the Chicago price here which also has been reflected with some stronger prices.

Martin: Well, it is and of course we've had some good news this week with Iraq wanting to buy wheat and that they might be back for a million metric tons more. That has helped the market to some degree. Exports have been good for the hard red winter wheat and so all of that is positive and even the talk of Hurricane Rita coming in possibly to Galveston or maybe even just glancing off the side of Galveston and disrupting exports out of that port, you know, where can they go to send exports elsewhere? You can't do it very easily out of New Orleans. So, that is a concern and yet the market didn't pay much heed to that. I think that we have some good demand under this market, prices are good on wheat and it might be that this market can push a little farther with them playing right around the 50-day moving average on the soft red wheat. But I think that I still have to, it has divorced itself, it's very seasonal but I wouldn't get myself too bulled up just yet on wheat.

Pearson: Alright, what about the cotton market?

Martin: Oh, cotton, I think longer term cotton has potential, again, in an export demand-led market and, you know, you've had some damage to cotton crops in the South and we may still have more once we see how this weekend goes. But I think that this 48-cent area on cotton is supportive, down to 46 if we can dig that deep, I don't know. I think cotton in the long term has a chance of going to 65 cents.

Pearson: Let's talk about livestock. You mentioned earlier that we're seeing increased feed grain demand, increased feed usage because we're seeing increases in cattle and hogs, poultry. This cattle market has been awfully good. We've had a nice run here for the last couple of weeks in fed cattle prices. What do you tell a cattleman right now?

Martin: Well, the one thing I've been telling cattlemen is, you know, I'm leaning, since we're in our third year of good prices and exceptionally high prices, things that we just haven't seen and, you know, when have cattle producers seen three years in a row of these kind of profits? I've been telling them lock in and so the market goes higher, sell more. You know, use this market as a hedging tool now from here on out through all of next year because I think that when this market turns it's going to be nasty. We fear the energy cost is going to kind of cramp the style of the homebuyer, of the consumer but we have until winter to worry about that. You know, unlike in the summertime you can open up the windows and try to catch a night breeze or something to cool the house down. In the wintertime you've got to have that heat. And so they aren't going to have any alternatives and so natural gas prices are up 70% from a year ago. Once we get into November/December that is going to start to weigh I think on beef prices.

Martin: In the meantime, demand for all meat seems to be really quite good. You know, there is one thing under this market that nobody really concentrates on or talks about and it's not only in the meats, it's in the grains, the cereals. If you look at what has happened through Mississippi, Alabama, Louisiana and now maybe Texas, there has been a lot of foodstuffs lost. Those are foodstuffs that have to be replaced, not to mention when these people dislocate to other areas, they have to be fed there too. It's a big draw on making more cereal, more bread, more meat to refill the fast food chain, there is a lot of it there.

Martin: Now, retailers have bought up in advance for their October -- I can't think of the word I want to say -- but they want to feature beef, that is the word I wanted to say. And so they have bought up ahead for that and so they're very slow to buy right now because they're very leery with this hurricane coming in here and they're very leery of the high prices of beef.

Pearson: 30 seconds or so Sue. You mentioned beef on the rise, pork we've seen is increasing. We certainly have seen facilities increase and large operators tweaking their operation and yet this hog market has done nothing but go up.

Martin: Well, it has and of course when you have high priced beef cattle prices it keeps that pork market strong too. But underneath all of that we're killing about a little over 2 million head a week and the packers are geared up for 2.1. And we're not quite getting enough hogs to fill that packer's need. And the demand has been good but lately here we've been noticing loins and butts slipping and so I think demand is softening to some degree and yet, you know, the belly market is just hotter than hot and that keeps the hog market going. I have a feeling when you look at the December hog market, Mark, that market could rally to 75 cents.

Pearson: Alright, on that note Sue Martin, we'll have to wrap up. And that will wrap up this edition of Market to Market. But be sure to join us again next week where we'll discover how some tobacco farmers are adjusting now that their government support program has gone up in smoke. Until then thanks for watching. I'm Mark Pearson. Have a great week.

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