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Market Analysis: Jul 01, 2005

posted on July 1, 2005

Weather already is the dominant theme in the grain markets, as the corn crop enters the critical pollination period. For the week, nearby wheat futures fell by more than 15 cents. The July corn contract lost more than 16 cents.

Soybean prices tumbled sharply this week as traders dismissed earlier worries about weather and soy rust. For the week, July beans lost 71 cents. The nearby meal contract dropped by $21.70 per ton.

Chinese demand helped prop up cotton prices thus week, with the July futures contract gaining $2.02.

In livestock, the August cattle contract was down 5 cents. Nearby feeders advanced $1.85. And the July lean hog contract gained 65 cents.

In the financials, Comex gold dropped $11.70 an ounce. The Euro fell 31 basis points against the dollar. And the CRB Index retreated by two points to close at 310.25.

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: Jul 01, 2005 Pearson: In now to lend us his insight on these and other market trends one of our senior market analysts, Virgil Robinson. Virgil, welcome back.

Robinson: Thank you, Mark and happy holiday.

Pearson: Happy holiday to you. Boy, what a week it was. If you were holding soybeans waiting for the top to come in it was pretty ugly on Monday, Virgil.

Robinson: It was, Mark. Again, you alluded to the weather and that clearly is something difficult to handicap. But I think there are several other factors that we can discuss tonight. The stocks report of last week I think is first and foremost, a lot of old crop beans yet on and off farms to a lesser extent that will most likely need to move to market before the availability of whatever new crop we grow, Mark. So, that brings to our attention those of us or those who are still holding old crop beans are probably thinking pretty seriously here within the next few weeks about marketing those. I'll give them what I think is a target tonight. Basis the August futures contract I think it will recover back towards $6.90, Mark, at which point I would think very, very seriously about parting ways with those old crop soybeans. And I'm fully cognoscente of the weather concerns.

Pearson: So, you'd be making some sales at that point?

Robinson: Mark, I've sold all of my old beans long ago. I'm not in the market but there are still 700 million bushel of old crop beans tributary to the market. So, for those who own them I would bring to their attention that is a target that I think is attainable and I would seriously consider making a sale of some kind, even if it's a minimum price sale as the August futures contract pushes back towards that seven dollar mark.

Pearson: Alright, Virgil, is the soy rust premium pretty much out of this market now? It seems to be contained in the southeast. We haven't seen really much in the way of expanding in counties in the southeast.

Robinson: Mark, new case of rust discovered in Alabama late this week and of course that springs to mind the prospect of it migrating farther north. Certainly that could happen. The agronomists that I have the opportunity to visit with at least in the middle part of the country are not terribly concerned about that problem at present. However, I can tell you in the same context that there has been an increase in aphid discoveries, Minnesota, parts of South Dakota and parts of Iowa. So, that pathogen problem may yet rear its ugly head. So, again, we have weather, we have the rust issue, we have the aphid issue still lurking, Mark, and certainly potential market factors here.

Pearson: Alright, Virgil, I have to ask you about what is happening over in many parts of the eastern Corn Belt with the dry weather and the drought conditions which triggered, to some extent, this rally that we've had. And from viewers over there and farmers over there and relatives of mine who were saying it is extremely dry in areas around Peoria to Champaign over to Lafayette, Indiana.

Robinson: Mark, I think it is primarily of concern near term wise to their corn crop. As you mentioned earlier we are heading now into pollination and clearly that is an area of the Corn Belt of concern. I can only tell you this, Mark. Market behavior maybe is as good or bad as the next forecast and I did happen to see a couple, three before coming to the studio. And for the period tonight through July 6th there is rain in the forecast in the eastern Corn Belt. So, should that materialize, you know, an inch or more of rain through much of Illinois would, I think, change the mindset of the market pretty significantly. But we could theoretically, Mark, speaking about corn trim production fairly significantly in the state of Illinois and assume that other eastern states, the likes of Indiana and Ohio, for example, and the western Corn Belt produce that trend line or something even better and we would still have an adequate supply of corn to take care of domestic demand and I think export demand as well, Mark. So, I wouldn't plug that factor into my marketing decisions and have it be the sole factor.

Pearson: Absolutely, a lot of things are going to effect this corn market as we go ahead. Where are your sales targets on corn?

Robinson: Mark, I started, you know, several weeks ago and the first was at $2.42 and the second was at $2.47 and I missed my third, Mark, at $2.57. I'd like to step that up now and move towards 50% or greater given the opportunity in December corn, again, back at that $2.40 mark and I think that is attainable, Mark, within the next 30 days.

Pearson: We kind of slipped into corn, I had one more soybean question I did want to follow up on. And that is this cash market, I mean, can we be looking potentially at a situation like we did last year where we did have those spot shortages of soybeans for processors in different parts of the Corn Belt?

Robinson: Well, I think certainly in those areas that are most concerned about their crop prospect it could happen, Mark. As we visit tonight processing margins as I calculate them are profitable which means processor demand remains strong. We're still exporting beans, clearly not at the same pace as we did several weeks ago, but for this time of year very impressively. So, bean demand remains strong and I'd like to reiterate that, Mark. There is no question it is strong. But, again, if our stocks report is accurate there is 700 million bushel or thereabouts of old crop beans to satisfy the balance of this crop year's demand. And, again, we have the prospect, I think at least as of tonight, the probability of a trend line soybean yield given the number of acres that the USDA estimated last week. We still have the prospect here of producing a 2.9 billion bushel soybean crop. And if that is, in fact, true bean supplies will be adequate.

Pearson: Okay, so these market both in corn and soybeans you want to take advantage of them, up around $6.90 I think you made the comment, seven dollars has always been a spot for us.

Robinson: And that was the old crop contract, Mark. New crop soybeans I think they are very firmly underpinned, at least for the next few weeks at or near $6.50 and I think, again, there will be opportunities in that November futures contract back towards or even fractionally above seven dollars where at a minimum, and I'm big on minimum price contracts this time of year, I'd employ that strategy for sure.

Pearson: Let's talk about the wheat market where again U.S. production has been rolling along, the harvest is well under way and it has moved along relatively smoothly. But globally there is plenty of wheat out there.

Robinson: Yeah, Mark, I think that is true and it's likely the spring crop could be much better than what is currently forecast which brings to mind the next USDA and world ag supply and demand estimates will be out July 12th and I think there will be some significant changes there. But to answer your question, yes, I think U.S. supplies are adequate. I would use the September Chicago and the September Kansas City futures contracts. Should they again trade at or very near the $3.50 mark to at a minimum create some type of minimum price contract, Mark. $3.50 is my target in both of those futures contracts.

Pearson: Alright, let's talk about the cotton market. Interesting week there in the face of the big declines elsewhere we saw the cotton market strengthen a little bit. Again, the Chinese are actively making purchases and we saw that come through this week. What is ahead now for cotton?

Robinson: Well, I can only tell you, Mark, that U.S. cotton inventories are projected to grow a little year over year, ending stocks somewhere around six million bales and a U.S. stocks to use ratio of about 30%. If that, in fact, is accurate, Mark, that doesn't spell particularly well for cotton prices. Global world cotton ending stocks are projected to be about 44 or 45 million bales which is large, historically, Mark. So, October cotton futures $58 I think is a hedging opportunity, December cotton futures in the $57 area. I would create minimum price contracts.

Pearson: Alright, let's talk livestock, Virgil. It was a rough week last week in the cattle market with this additional BSE case, domestic case. So, we actually didn't really get hit that much as far as the futures following that but the cash market has had some problems.

Robinson: Yeah, you know, futures remain actually discounted at the cash index, Mark. And I think domestic beef demand remains strong. The recent cold storage report I think underscored that with a month over month and year over year decline in total beef inventories. Much of the behavior in the market is perhaps psychological. That being said I think that the market over the course of the next six months, Mark, I think the third quarter of this year we can sustain here in the United States a live market in and around that $83 to $85 mark. And I think the fourth quarter much the same even though beef production is forecast to grow modestly. So, that would suggest, Mark, those October and December cattle futures, when they recover back into the $86.5 to $87 area I think they represent a good hedging opportunity for the balance of this calendar year.

Pearson: How do you make these feeder cattle work, Virgil?

Robinson: That is a good question, Mark, that's a very good question. I don't think in many instances you can but I don't sense, at least in the futures market, any area where the market or any signals that the market has topped, Mark. I think the August or the nearby August and Sep. futures contracts will again trade back into that $112 to $115 area.

Pearson: Wow, some opportunities for these cow/calf people. Let's talk about the hog market which you expressed some concern some time ago about expansion and we saw that in the USDA report. We have a little bit of recovery in this hog market here in the last week. But as you go forward what is your take on the hog market, hog prices?

Robinson: Well, Mark, the third and fourth quarter of this year pork production is forecast to grow year over year and certainly that would imply that pork supplies as well as red meat and poultry meat in general will be ample to supply projected demand. The futures market I think is in a short-covering mode, probably the catalyst being the BSE issue with the assumption that perhaps pork would assume a bigger role in exports. Hedging opportunities October lean hog futures 61 to 62, I'd use that as my hedging mark. December futures in that 58 to 59 cent area, I would also use those for hedging purposes, Mark.

Pearson: As usual some excellent insight. Thanks so much, Virgil. And that will wrap up this edition of Market to Market. But if you'd like more information from Virgil on where these markets are headed then be sure to check out the streaming audio at the Market Plus page on our Market to Market Web site. And be sure to join us again next week when we'll see how specialized training is improving emergency procedures for rural first responders. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news