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Market Analysis: Sep 02, 2005

posted on September 2, 2005

Despite the abundance of bearish news, grain prices in the trading pits remained fairly stable this week. For the week, nearby wheat futures dropped more than seven cents. But the September corn contract fell less than a penny.

China was busy buying soybeans this week, which helped offset private forecasts for a bigger soybean crop. For the week, the September contract lost 2 1/2 cents. But the nearby meal contract was up 40 cents per ton.

Cotton prices moved higher as the market tried to assess crop losses across the South. For the week, the October futures contract gained $1.57.

In livestock, the October cattle contract was down 90 cents. Nearby feeders lost 65 cents. And the October lean hog contract slipped 57 cents.

In the financials, Comex gold jumped $8.00 an ounce. Nearby crude oil prices climbed $1.72 a barrel over last week. The Euro gained 257 basis points against the dollar. And the CRB Index soared to near-record highs before falling back on Friday to close at 331.25, up more than 12 points for the week.

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: Sep 02, 2005 Pearson: Here now to lend us his insight on these and other trends is one of our senior market analysts, Virgil Robinson. Virgil, welcome back.

Robinson: Thank you, Mark. Happy Holiday.

Pearson: Absolutely, a three day weekend coming up but a lot of producers a little pensive, especially if they have old crop corn stored in the Western Corn Belt with the situation with Katrina and the Gulf Coast being closed down. We saw the impact, we showed the graphic earlier of the slide in cash prices. Futures were relatively stable, the cash market definitely was not.

Robinson: Mark, the situation boils down to storage and transportation here for at least the immediate future. And as you mentioned in select geographies we have a collision here of old crop grain with the onslaught of new quickly at hand. I don't sense that there is going to be any short-term basis relief in those geographies. Producers may have a tendency to let the crop stand a little longer in the field for dry down purposes as well as trying to accommodate storage and space. There is a risk, of course, an inherent risk involved there. Mark, it would be difficult for me in good faith to suggest to someone in these geographies that we have defined here with unusually wide basis levels, eighty cents, for example, below the July 2006 futures contract to finalize a price under those circumstances. I've seen circumstances similar to this in my 30 some years in the business and I don't think we should underestimate the creativity of our producers. They'll find a way to isolate that grain from the market for at least a period of time.

And as the basis suggests they'll have opportunities, Mark, to capture LDP's, perhaps sell that deferred carry or that carry and capture basis improvement in that regard. Should one decide to do that or have the facilities to do that they might want to entertain the idea that some point during the harvest buying a call option to protect their up side over the course of the next several weeks because I think there will be appreciation in both the basis and in the futures market at some point late in this harvest or post the 2005 harvest.

Pearson: Alright, so our opportunities are pretty much on the cash side, not so much on futures.

Robinson: Futures are likely to be contained in a trading range, Mark, for the next several weeks somewhere in the vicinity of two dollars on the low side of this range and somewhere in the vicinity of $2.60 on the high side which brings to mind that 2006 futures contract, Mark, which currently hangs right around $2.60. It's probably worthy of our time to remain pretty darn vigilant of that contract and should because of concerns about acreage next year because of high fuel and high input costs. Should that contract push its way back above $2.75 and I think there is an awfully good chance that could happen before the end of this calendar year one should consider or one might consider the idea of creating some type of defensive strategy whether it is a minimum price or perhaps even forward contracting with proper insurance to buttress that idea. But don't lose sight of that 2006 futures contract.

Pearson: Let's talk about soybeans, Virgil. Again, not quite the dramatic cash movement there. Not quite as many soybeans out there in the countryside. But a relatively flat week in the face of these problems.

Robinson: Yeah, interesting, Mark, through the course of the week processing margins, at least as I calculate them, improved. Prior to the Katrina situation, as you mentioned on the show earlier, China had made an entry into the market and bought several cargos. The first that they had bought this year but perhaps the start of many more to follow. And I think that is the case. The size of the crop remains an unknown, Mark, on the 12th of Sep. the USDA will make another guess in terms of U.S. and world production. Through the month of August in many, many geographies well below average precipitation. So, is Informa, is FC Stone's recent private forecast of a little larger crop on track? Both have had their moments where they have been very accurate, both have been inaccurate over the course of the last five years. Personally I think the crop is maybe a little bit larger than what the USDA projected in August. But to suggest it is significantly larger I think that would be misleading.

Pearson: Let's talk about the wheat market, Virgil, where again there was a little bit of pressure this week but wheat worldwide we had so much of it in 2004 now we've drawn down supplies a little bit so there may be some activity there.

Robinson: You know, all wheat in the U.S., Mark, stocks are projected to grow modestly year over year. However, that is not the case at present globally. As a matter of fact the global, the world stocks to use ratio, which I like to use to represent supply, is forecast at about nineteen or nineteen and a half percent which is the second smallest in the last 30 years. To suggest there is a glut of wheat globally I think is also misleading. Two wild cards, I think, here in this next report on Sep. 12 the Australian crop perhaps is a little larger than last month's forecast, the Russian crops is perhaps a little larger, Mark, than the last forecast. But as I sense things tonight if I were to try and range futures prices as barometers of cash prices I think Chicago futures, $2.95 to $3.60, I can envision that range containing wheat futures prices for several months ahead here, Mark. Kansas City the $3.10 to $3.70 area. Minneapolis $3.20 to $3.80. So, if those are accurate, I hope they are tonight, Mark, I'd clearly avoid making sales below those levels and if I were a buyer of wheat I would procure supply or create price ceilings based on those levels. And if were a producer I would use the upper end of those ranges to make cash sales or to protect cash inventories.

Pearson: We talked about the damage of Katrina, of course, it's in the South and that is where the cotton comes from. No real word on just what the impact is going to be and has been on the cotton market and the market didn't seem to be relatively too concerned about it either. What is your take now on cotton, Virgil?

Robinson: Well, what we do think we know right now, Mark, is a little increase in U.S. ending inventories, maybe a half a million bales year over year, a million bale increase in world ending stocks. There is no shortage of cotton as we perceived the market today. Mark, I took a look at price parameters given that kind of a supply structure and I don't think we're going to spend any time below 46 cents in cotton futures but I do think we'll attract some sales and some commercial sales activity as we approach the fifty-three to fifty-four cent area.

Pearson: Okay, let's talk about livestock, Virgil. We are going into the Labor Day weekend holiday and it's a big grilling season historically, a lot of people are concerned about what this high gas price is doing to beef demand and that is going to be a tough one to sort out and will be for a while. What is your take now on this fed cattle market? Are we getting current again?

Robinson: Well, weights have not increased over the course of the last couple of weeks and I saw again tonight they were about unchanged week over week modestly higher than a year ago. Beef production is about six-tenths of one percent below year over year levels. Cash wise, Mark, again I think the cash market can sustain a price level the balance of this calendar year in the low 80's. Now, I also believe as we visit tonight that the October and December futures contracts are vulnerable here to some additional weakness, probably a test of something near 80 or below. I do think there will be a recovery in cattle futures over the course of the next two to three months and if October futures move back into that 85 cent area I'd use that as a hedging level, Mark, in the December cattle futures 86.5 to 87 cents I'd use that as my hedging level as well. That should equate to about 83 and about 85 dollars live respectively.

Pearson: Okay, a good strategy. About a minute to go, Virgil. The hog market which has done relatively well, it's held up fairly well, we've had this expansion that now has been verified by the USDA. What is ahead now? Take us through this fall for hog prices.

Robinson: Demand is strong for pork, Mark. I don't think we're building inventories. I think we're moving it through the pipe relatively well. However, I do think, and I saw it tonight, weekly slaughter exceeded a couple a million head and is likely to continue in that direction here the balance of this calendar year. So, if that is correct lean hog futures, the October contract, 65 cents I'd use that as my hedge, Mark, and that should equate in the southern Minnesota, Iowa market to about a 48 dollar live price. I'd take that, Mark, and I'd capture that. The December futures contract I think is in position to recover towards 63.50. I'd use that as my hedging, Mark. That equates to about a 44 dollar live value.

Pearson: Pretty good values especially when you look at what these input costs, corn and soybeans are doing. Virgil Robinson, thank you so much. As usual, appreciate your insight. That wraps up this edition of Market to Market but be sure to join us again next week when we'll examine how on the brink of harvest grain shippers and handlers are dealing with the repercussion of Hurricane Katrina. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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