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Market Analysis: Jun 17, 2005

posted on June 17, 2005

Grain and oilseed prices rallied this week as the markets trade on weather with increasing volatility.

For the week, nearby wheat futures gained 14 cents. The July corn contract was up 19 cents.

The largest rallies though were in the soybean pits. For the week, July beans gained a whopping 58 cents per bushel. The nearby meal contract was up by 17.60 per ton.

The cotton market trended higher and for the week the July futures contract gained 42 cents.

In livestock, fundamentals appeared to influence the markets more than the scepter of mad cow disease. The June cattle contract continued its decline losing $2.60, while nearby feeders gained $3.68. And the July lean hog contract fell $2.37.

In the financials, Comex gold gained $10.90 an ounce. The Euro gained 156 basis points against the dollar. And the CRB Index rallied more 11.00 to close at 313.50.

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

Market Analysis: Jun 17, 2005

Pfitzenmaier: Thanks, Mark.

Pearson: Wild week in the soybean market. This continued drought particularly around the Chicago area seems to have really caught the trade's attention, specifically Tomm the funds' attention.

Pfitzenmaier: Yeah, and I don't know that it's necessarily a drought, it's the prospects of a drought that I think has a more -- I think if you talk around that most people would say currently their crops are fairly good and the crop conditions reports reflected that. Expectations are that that crop condition rating is going to increase again next week. But there is a lot of forecasts out in that week to two week time period showing temperatures heating up, lack of rainfall in an area that was marginal. So, I think that is -- we're trading the futures market and that is what they're putting into the market. And to your second point there certainly is a lot of fund money in there, very willing to buy it, the seller is scared to sell it, they're standing back which makes it easier for it to go higher and one thing leads to another and next thing you know you're up fifty-eight cents on the week.

Pearson: Yeah, and we're at some pretty substantial numbers, old crop and new crop when you look at soybeans. Historically these have been good places to sell crops.

Pfitzenmaier: That is true but historically also if you look at when beans go to seven dollars fairly quickly if you can get them to close above seven you can fairly rapidly get them to go to eight dollars. If you look at the long-term charts there is not a lot of time spent between seven and eight. And I think a lot of people are looking at that and the way the market has acted this week that is probably not going to be a big surprise if we do shoot up to eight. So, I guess if I was a producer or somebody watching the market and having an interest in the market I'd be a little cautious about selling it too until you've got at least in the upper $7.70 to $8.00 area and then I think you probably need to start looking at some sort of a put strategy.

Pearson: So far we have not had the threat of the Asian rust up in the serious part of the soybean belt and the dry weather, like you say, this seems a little premature to see this kind of a rally. Well, see, you've got Asian rust potential, you've got aphid potential, you've got, we had a little preliminary number on acreage came out Friday. Their prediction was down a million acres on soybeans so everybody is really focusing on that acreage number at the end of the month. So, if any of these things crop up with the reduced acreage and you do have crop problems all of a sudden that 255 million carry out sneaks down to 155 or 110 and all of a sudden you're back to nine or ten dollar beans. So, I mean, we are kind of on a thin line there and you can see why everybody is so sensitive to that potential weather problem. You're not in a big hurry to sell soybeans right now?

Pfitzenmaier: No, you get up towards eight dollars and I would be but I'm not in a big toot right now, no.

Pearson: Alright, well let's talk about the corn market also up this week, not quite as dramatic as the soybean market but corn has a different set of fundamentals.

Pfitzenmaier: Yeah, it doesn't have the Asian rust or the potential for reduced carry out or aphids. The carry out there is fairly substantial. That report out this week showed an increase, a potential increase of 1.3 million acres so opposite really you've got crop condition rating that was only two or three percent behind the record crop we had last year, bigger acreage, you had the sensitivity that soybeans have and just naturally kind of a me too psychology I guess of beans go up people are going to go over and buy wheat and corn both. But the fundamentals there are certainly not as strong. I think that is a market where, you know, with the old crop being as burdensome as it is if you get rallies from here on up you need to, at the bare minimum start buying yourself some $2.50 puts for around twenty cents or so.

Pearson: Are we seeing the cash market pick up?

Pfitzenmaier: No, well it's being drug along. I mean, every few cents you go up in the futures you gain a fraction of that in the cash market. They're very reluctant to bid up simply because we know we have that big cash supply sitting around, we know that it's going to have to move between now and harvest if we have a good crop and why pay up to buy it if you don't have to.

Pearson: Alright, so as we look at this corn market you might be in more of a mood to get some corn sold right now. What particular prices, Tomm, would you look at?

Pfitzenmaier: Well, like I said, on new crop December I think you start with $2.50 puts at around twenty cents and then scale up from there. We're banging up against that $2.50 level on the December as we went home Friday night and I think that is going to, we'll have to see Monday whether that continues to hold. There is probably a good chance we're going to break through that. If we do $2.54 is one area a lot of people are looking at. You break up through that and then there's not a lot between there and $2.70.

Pearson: Alright, the wheat market was also up a little bit and that is also kind of a weather situation domestically.

Pfitzenmaier: Yeah, it is kind of. I mean, we're into harvest, harvest is going well by all reports. Again, it's a me too market, it's following along. Exports aren't anything to get too excited about. You know, all these markets are also being effected just a little bit by some weather problems in China and I think all three of the markets are kind of keeping that in the back of their mind and watching that as a potential beneficial market factor anyway.

Pearson: We're going in towards harvest, do you want to make any wheat sales?

Pfitzenmaier: Well yeah, I mean, you've got old crop up toward $3.40, it's been very tough resistance. New crop up around $3.60 has been very, very difficult resistance so I think you would naturally want to sell up against those resistance levels.

Pearson: Alright, let's talk about the cotton market which has also been interesting. Of course, also China is a big factor on that one too.

Pfitzenmaier: Well true, China and the EU have been kind of doing battle here and that is kind of what suppressed the market over the last three to four weeks anyway. That is kind of starting to get straightened out and as a result you see the cotton market stabilize. I think right around 45 cents is probably the bottom end of that trading range, 48 to 49 is probably the top end. The crop appears to be okay, not great, not bad, doing okay. Demand is doing fairly well but still I think we're going to struggle to meet the USDA's projections for exports on cotton. So, you know, the cotton is kind of just stuck in the trading range, you get to the upper end of it you sell it and you get the bottom end don't get too excited.

Pearson: Alright, let's move over to livestock, Tomm. Fed cattle market there is some concern out there in what is happening as far as fed cattle prices, what that could mean for the rest of the complex, that BSE situation last Friday didn't help anything out. We're talking about fundamentals being the bigger factor here.

Pfitzenmaier: Well, as your report eluded to we've had all this big testing program set up and everybody has sort of come to rely on that. If that gets overwritten by this test in London that is obviously going to shake the Japanese confidence and they didn't have a lot to begin with, we were just starting to get that back. And so it is going to shake things up a little. I don't know that it's going to be a great big deal but it's another factor that is going to be a problem in the cattle market. You've got competitive meats that are a problem both the pork and the chicken and that is going to continue to hurt demand, crude oil made new highs so you're probably going to have an increase in gasoline, again, that is going to be competing with the beef industry. So, there are some fundamental problems here on the beef side and I think any rallies there need to be sold also.

Pearson: Alright, feeder cattle market, impact there?

Pfitzenmaier: That market I think is going to continue to be strong, you know, there is some holding back of heifers and I think that is going to continue to make those feeders pretty valuable. They're going to have setbacks, I think setbacks probably need to be bought there. That market I expect to stay strong. I don't know that the profitability on buying feeders up there is going to be that great but the demand continues to be very strong. I guess the one thing that could hurt on that is if you do see corn and meal prices continue to work higher that is going to make it a little tougher for the feeder market too.

Pearson: Let's talk about the hog market. Last time you were on you were saying there isn't talk about expansion, there is expansion. Starting to see some of that now and hogs have been under some real pressure.

Pfitzenmaier: Yeah, and weights have been up a little bit and any time you start to have a down market you start to see some resistance to selling and that doesn't, that brings tonnage up and that doesn't help any either. And you've got all the coolers are full of beef, or pork, excuse me. That is not helpful either. Exports have really been carrying that market and continue to but the domestic side of the pork side has really been struggling here the last several months. And you start, you have to wonder a little bit about exports too when you've got the dollar have turned around and continues to work off a little bit this week but the trend appears to be firmer for the dollar with all the problems that are going on in the EU trying to get their constitution straightened out or confirmed which is doesn't look like it's going to happen. That is going to create more unrest and I think it's going to be dollar supportive and going to be a little hurtful to U.S. pork exports.

Pearson: I hope people took your advice the last time you were on and made some sales. At this stage of the game what would you do?

Pfitzenmaier: I think it continues to be a sell to rallies kind of market. Now, maybe you can get three, the things is very over sold, three or four dollar rallies are probably going to be coming along here soon and I think you have to use them to make sales.

Pearson: Alright, some good points as usual, Tomm Pfitzenmaier. Thanks so much for joining us. That will wrap up this edition of Market to Market. But if you'd like more information from Tomm 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 learn how efforts to bring more workers to the fields is creating a buzz in the bee business. Until then, thanks for watching. I'm Mark Pearson, have a great week.

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