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Market Analysis: Jun 03, 2005

posted on June 3, 2005

Rainfall and warming temperatures in the Heartland caused the rally in grain prices to stall. For the week, nearby wheat futures fell by nearly 12 cents. The July corn contract lost three cents.

Soybean prices continue to ride high, thanks to factors like fund buying. For the week, July beans gained more than seven cents. The nearby meal contract jumped another $6.50 per ton.

Chinese consumption failed to support cotton prices on the nearby futures contract, which declined $2.09 from a week ago.

In livestock, the June cattle contract was down a dime. Nearby feeders gained 25 cents. But the June lean hog contract plunged $4.05.

In the financials, Comex gold gained $3.90 an ounce. The Euro fell 343 basis points against the dollar. And the CRB Index advanced nearly six points to close at 306.50.

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: Jun 03, 2005 Martin: Thank you, Mark.

Pearson: Well, let's talk a little bit about what is going on. We talked about the funds in that report just a moment ago. And, of course, they are a factor but the market is watching the weather closely. Soybeans are a good example. And there is some concern about dry weather in northern Indiana and many parts of central and eastern Illinois.

Martin: Well, that is true. In fact, for the state of Illinois March, April and May they only had about less than 50% of normal rainfall or moisture so they are very, very dry. We're coming into June and the long-term outlook looks like at least the first half of June may not be a whole lot different and then plus you've got warmer temps in the forecast in the next seven to ten day forecast. So, temperatures that maybe should be five to seven degrees above normal. You put that heat in there and that is going to get them thinking even more that we could start to stress the crop. Now, in some areas of Illinois the crop doesn't look bad. In other areas it does. In some fields, you know, from the road maybe the stand looks good, you get in and it's not but then there are other fields that have germinated just fine. This does not seem to me that it's a year like last year. Things went very easy last year and everything was ideal. You know, you had cool weather, we had a cool summer but we also had some moisture along with it and the crop was never stressed. So, the cool temps meant a lot last year and this year we're off to a cool start but now we're also with the dryness. Last year you had moisture, this year you didn't. So, I think that yes, the rain does make it important, especially when it's in the backyard of the Chicago Board of Trade, you know, those traders get out on the weekends, drive the countryside, take a look, see lawns that maybe start to turn brown, aren't being mowed, haven't been mowed for two weeks or something like that. And I hear around Kankakee it's one of the areas that maybe doesn't look so good in Illinois. So, yes it is an important thing but it's not the sole thing. The value of the dollar -- I think it's very interesting you have 70% of the beans sold in South America. Well, 70% of what? You know, we don't see truck lines and you don't see ships waiting to load and in the meantime our export sales are still running well over what the USDA has us targeted for each week to meet the estimates. So, I think that in the supply/demand report this next week we'll probably see a drop of 15 to 20 million bushels again because the exports will be increased once more and that just all says we're tightening our supply a little bit and with all the uncertainty, the fear of Asian rust, maybe some dry weather the bean market could -- I believe it's the leader this year anyway so it means that this market could still take out the March highs.

Pearson: Okay, so if we go back to those March highs or take them out would you start selling some new crop? And what about old crop? Should we start cleaning that up right now?

Martin: Well, I think I would start to make some sales. If we get up through these March highs which is $6.96 our first major count on a wave count is $7.33. There is a lot of resistance around $7.09 to $7.12 so certainly we should put a seven in front of beans but you get up there. The other thing that would go along with that thought that you should start to maybe make some sales especially on old crop and maybe even on some new is the fact that when you take beans, adjust it in world values of dollar, beans are up against a 200 month moving average on that data. And so that too will give us a little bit of static here. And so it's no surprise that beans are hesitating against the $6.91 1/2 high that you had basis the May contract for a lead month but $6.96 is the July-March high as well. So, those are the areas I think come out. Now, do they come out right away? If they don't then we're going to hesitate into the week of June 11 and then I think around the 14th, 15th you find your low and you come screaming out of there and then you rally all the way into late July. I think we're going to maybe move up and take out the highs, hesitate and fall back, scare everyone and think the tops are done only to see the market come back one more time in the last half of July to the first week of August.

Pearson: Okay, of course, we've got a lot of the growing season between now and then...

Martin: Exactly...

Pearson: Yeah, that is your critical time. You mentioned Kankakee over towards Lafayette, Indiana. I visited my old friend Dr. Mike at the University and he said corn was rolling over there. The corn market could be stressed some too by this dry weather if it continues.

Martin: It very much is and I think that is helping it but because of the fact that you have such big projected carry outs that is kind of still stalling us when we get up around that $2.40, basis these corn $2.45 to $2.50 area and $2.50 beans so psychological it is stalling us. But the beans will pull the corn in the near term. Once you get into July or the latter part of June if it remains dry and you've got the bean market rolling then we have to start saying whoops, you know, let's take another look. I'm going to flip back on beans for a second because beans are leading corn. But there is a trend line just over the top of this bean market that comes in at $7.12 which coincidentally is also a spike high from last year on the weekly charts for a lead month. But that trend line goes all the way back into October of 2003. And so before it was supporting lows, now it's a little bit of resistance but you get through that $7.12 area and of course, $7.33 is another target I have but you get through $7.12 and hold it nicely that sets the door open, we're headed for $8.00.

Pearson: If that happens, that $7.12 area and the fact that you're right, beans would be the leader, could it pull corn up past $2.30 basis this December?

Martin: Absolutely, I think so. You know, there is very few years, if you back the last 32, 33 years it's been very rare that you did not get a chance from April 1st to September 30th for $2.50 to $2.60 on the corn, on the new crop corn. I think we're going to get that chance. There is just too many uncertainties. But, again, without a severe weather problem in corn I think we're limited as to how high corn can go. So, maybe $2.52, $2.62 and then again around $2.70, $2.72 would be those areas. Can we make $3.00? I think you have to have a severe weather issue going on.

Pearson: Old crop corn?

Martin: Well, old crop corn, as you cross over $2.50 and you start to get up into that $2.55 area, $2.58, something like that yeah, go ahead and get some sales going because there is a lot of corn in farmer's hands.

Pearson: Alright, let's talk about the wheat market. We talked about some of the weather challenges that the wheat market has had and of course harvest being interrupted with the rainfall. A little bit of a softening again over the last couple of weeks. What is ahead for wheat? And what would you recommend a producer do?

Martin: Well, I think what has happened is, you know, when you got this rally up towards $3.40, especially on the hard red winter wheat farmers did make some sales in that March rally. So, there probably won't be aggressive sellers now in through harvest. They know that is usually some of your worst prices. They'll just stand back and wait until we get past harvest. In the meantime, if the bean market -- I go back to beans -- if they start to come out of here and lead then it's going to drag wheat with and you may have your harvest lows in early because we did get down just to $3.04, $3.02, $3.06 something like that and there is counts down to $2.92. So, do we get under $3.00? I don't think so. With everything else that is going on I guess I don't think so. The soft red wheat, the crop is maybe going to be better in the U.S. than what we've got. The hard red wheat, of course, very much a better crop than what the USDA is estimating, I think. So, in the meantime yet we don't have the demand that keeps taking and pulling us. The _____ next year is going to look at less acres and maybe even the soft red wheat will have a little tighter supply on the carryout. But what happens, well you've got Australia with problems, they'll probably drop in production. But then you've got India that might turn off to a good start.

Pearson: Alright, I think last time you were here we talked about the Baltic states and those other regions that are huge wheat producers.

Martin: Exactly, and they're going to compete with us very much.

Pearson: We have plenty of it. Let's talk about the cotton market which probably we have plenty cotton based on what we did this week, off two dollars. We've kind of depended on China to get this thing going and they don't show up, our price suffers.

Martin: Well, exactly and cotton is down back towards some low levels again. But it seems to me that every time cotton gets under this fifty cent mark or under forty-nine I think it's got some value. So, I don't know as if I'd be too negative on cotton right now. Maybe what is hurting us a little bit is that there have been some rains here recently in the delta and over the past couple of weeks and maybe that is kind of what has hurt the price a little bit there. But I think I'd have more hope down the road for cotton.

Pearson: Alright, what is your hope down the road for fed cattle? It's been an unbelievable couple of year ride here in this fed cattle market. What is your take now? We talked on our show earlier about high retail beef prices and certainly we've seen some stronger fed cattle prices than what we see right now. What is ahead?

Martin: Well, first off, you're right the beef prices are high. I think this week we ended up around $3.92 or something like that so very second highest. And in the meantime we moved about, on the average this past week for a holiday week we moved about 559 loads on a daily average. That is a record, that is a historical record. I think that that says the pipelines were pretty empty and going into the holiday with the bearish attitude packers were kind of -- and retailers as well -- were just going hand to mouth. But this next week I wonder if we won't see a little bit of improvement in the cash market. So, for the next week or so I think we'll see some improvement in the cash market, we'll probably take June cattle back over the highs that we had before the holiday, the Thursday before the holiday and then -- we've already done that once -- but I think we'll do that again. The June cattle will probably gain on the August in the near term but overall I'm not friendly cattle prices. You've got hog prices that have fell through the floor, you had a thirty dollar drop in the past two weeks in bellies. The pork seems like it has stabilized out but I think we're going to see the cattle market still head south overall through the summer. I see more negativism towards the Dec. and Feb. contracts of next year. That is where I really get real bearish on those. And, you know, we've got cattle prices out there thirty dollars plus over the hog prices for those months. I see hog prices not dropping ten dollars as easily as the cattle could drop ten to twenty dollars and to narrow that spread in they could even come to even money. So, I'm telling hog producers, hedge your meat in the cattle market.

Pearson: Okay, some good strategy there. Certainly the action this week was extremely negative for the pork.

Martin: Oh, it was, it just fell through the floor but today it sounds like hams we're starting to base out and bottom. It also sounds like we might have hit the bottom on bellies and cash bellies. So, this next week we'll probably see a cash belly market that comes back up five to ten dollars. That would be about a 33% retracement back of what it did here in the past two weeks, pretty volatile. If it gets much higher than that they'll just go back to the freezer with them.

Pearson: Alright, real quick Sue, would you be hedging some hogs for summer?

Martin: If you can get a bounce here maybe a couple dollar bounce I would say go ahead and do some August.

Pearson: Okay, Sue Martin, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Sue on where these markets are headed then be sure to check out the steaming 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 a software sales guru has made the marketing of beef his next big venture. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news