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Market Analysis: Apr 22, 2005

posted on April 22, 2005


Money chases money, as they say, and the funds were back in the commodity pits this week as futures prices moved higher. For the week, nearby wheat futures improved by 4 cents. May corn gained 3 cents.

Weather concerns, strong exports, and the shrinking Brazilian harvest remain bullish factors in the soybean market. For the week, May beans gained more than 16 cents. The nearby meal contract improved by $8.70 per ton.

The cotton market's move upward continued this week, with the May contract gaining $2.94 from a week ago.

In livestock, Friday's cattle on feed report was seen as bullish; more on that in a moment. For the week, the April cattle contract was up by $2.57. Nearby feeders advanced 77 cents. But the May lean hog contract lost 63 cents.

In the financials, Comex gold gained $9.40 an ounce. The Euro advanced 147 basis points against the dollar. And the CRB Index rose more than 6 points to close at 307.29.

Here now to lend us his insight on these and other market trends is one of our regular market analysts, Alan Brugler. Welcome back.

Market Analysis: Apr 22, 2005 Brugler: Good to be here again, Mark.

Pearson: Alright, let's talk about what everybody is talking about still and that is the soybean market. It's like a broken record. We start with soybeans week after week on the show as the volatility in soybeans continues. This week volatility finishes up sixteen cents for the week but we had some weeks we were up 25 and then gave it all back. What is your take? Continued volatility in soybeans going to continue?

Brugler: I think the volatility is going to continue. There is a -- we've got a couple of fundamental factors that are going to be with us all summer. We've got the rust risk, we've got aphids, we've got drought pockets developing -- nothing major yet but the potential is there. So, I don't think the market wants to sell off and say okay, we've got a crop, we're done. And then, of course, we've got these commodity speculator funds coming in in a big way and soybeans because they are volatile are one of the more popular places to put that money. So, a lot of activity, we did some nice things technically this week, broke out above some overhead resistance lines. I think the market is still fairly _____.

Pearson: What are you telling producers right now trying to make decisions? And also I keep hearing about all the old crop that we still have in farmer hands.

Brugler: Well, we've got a fair amount of old crop just because we had a record crop last year. We had very active selling on the rally to $6.90 here in March but there is still a fair amount of old crop beans. The selling has dried up for both corn and beans and producers have gotten into the field. Basically we're holding onto the last batch of old crop thinking that there is one more swing at the highs here. And new crop we've basically put floors under the market through various selling techniques and trying to let it go a little higher before we lock those in.

Pearson: You talk about the fact that everyone seems to be anticipating a pretty volatile summer and you mentioned the reasons. Kind of give us some parameters. I mean, the rust situation is one that is a real wild card. You mentioned that there are some dry spots out there already. Give us some parameters, some highs and lows that you might anticipate.

Brugler: Well, I think you have to realize that we've got a leverage here. We've got a couple hundred million bushels of excess old crop both in the U.S. and in the world market. So, we don't have to go to nine dollars or anything like that. But I think the market is in a mindset of shoot first and ask questions later. If rust is found in Tennessee or Missouri or somewhere starting to get towards the Corn Belt I think the market is going to react very quickly to that even though, depending on who you talk to, we may be able to control whatever rust there is with the sprays. The market is going to assume that there is a problem and then work backwards.

Pearson: Let's talk about the corn market, not quite the volatility there. But, of course, you know there has been some spring rains and we always worry about getting this crop in. So, is this going to be our time in the sun for corn prices?

Brugler: Well, I think the corn market looks pretty good technically, we've held the lows, we've got some fund buying coming in, we've got the mechanism is there for rally which is that we need some farmers selling to provide the funds something to buy against. And we've certainly got a lot of corn that hasn't left farmer hands yet. The western Corn Belt is pretty wet right now, a lot of planters parked this week in South Dakota and Nebraska, Kansas. The eastern Corn Belt has made tremendous planting progress but that is where the dry pockets are. And we'll be very interested to see on Monday night what the planting progress looks like. I think it will actually be ahead of the five year average but again because of the delays in the West the market is going to be nervous.00:21:38:14 00:21:40:23

Pearson: Any selling ideas on corn?

Brugler: I've been basically taking the stance that we've put in a short-term trading cycle low. In corn normally a trading cycle swing is ten to twenty cents a bushel. So, we're looking for that ten to twenty cent move off of the lows before we make any more old crop sales.

Pearson: And let's talk about this wheat market. I was out in Nebraska last week and had people out there telling me the best winter wheat crop out there in Kansas that they've seen in a long time and yet things just don't seem to be happening in a big way for the wheat market. Just too much world supply?

Brugler: Big world supply, looks like it would be a little smaller this coming year but again a very good supply and very good crop condition ratings. We did see a drop in the ratings in the hard red winter wheat this past week and depending on how the cold temperatures go this weekend we could singe a few leaves here and there and maybe knock that condition rating down a little bit more. But in general the winter wheat looks pretty good. Export sales are holding up very well thanks to the weak dollar primarily. But we're not going to run out of wheat. We're not going to go to sub pipeline supplies so there is not a whole lot to work with other than the general buoyancy and commodity prices.

Pearson: Wheat strategies at this point?

Brugler: Our strategy is that there is a seasonal rally typically starts in late Feb. -- late April and goes into the May crop report and usually tied to some dip in crop ratings or some concerns about acreage or spring wheat planting. We want to take advantage of that rally. We're already fairly heavily sold from the previous rally for harvest delivery but a little clean up to do yet.

Pearson: Let's talk about cotton, another up week in cotton prices. And talk about a turnaround, that has been one that has surprised a lot of people and didn't have the blow off kind of formation that we had with soybeans but one that has just been working its way gradually higher.

Brugler: Cotton market has got a speculative element to it but it has also got some merchant activity behind it. And the big speculation is that there is a merchant who wants all of the cert. stocks. There is a huge buildup in cert. stocks which are the bales that are deliverable against the futures contract. The futures deliveries begin this week. The speculation is that that merchant wants to hold for delivery and they are forcing the short speculators out, that is driving the price up. Now, what we need to see yet is whether the deliveries actually take place and whether that merchant holds them. There is no real incentive to take delivery and then store it for July because the market is inverted right now. It's saying it wants the cotton in the near term.

Pearson: Okay, so with that thinking the cotton market is going to continue to be fairly exciting then until we get closure on those contracts?

Brugler: Yeah, we're kind of flat on the price structure over the last month and a half. It was up nice this week but if you look over the last month and a half it's more of a sideways to slightly higher pattern. Most of the activity has been in the front month, in May which has got these delivering issues. So, I'm not looking for a big bounce in the July right now but what we are looking for is those weeks where you get a three or four cent rally during the week so that we can still play the LDP market loan gain situation.

Pearson: Let's talk about the cattle market. Cattle on feed report pretty friendly, released Friday afternoon.

Brugler: Yeah, very current, 100% of last year's marketings I don't think anybody in the industry was really looking for that, certainly was above all the published guesses. Because of that the total numbers on feed were about 101% of a year ago. That is the bad news in a way in that there are one percent more cattle in the lots than there were a year ago and we're still running a little high on the weights overall. But the more current situation than what we probably though we were and we had fewer placements during last month. So, I think the market will treat this report positively on Monday. It will be, I'm thinking, fifty cents higher to start with, maybe a little firmer than that in the back months where we've got some discounts.

Pearson: Cattle feeder right now, looking at what these calf prices are doing. What is the recipe for these guys to make these feeders work? I know the cow/calf guy has been smiling until his teeth are falling out. What is ahead for the cattle feeder?

Brugler: The cattle feeder has got to control his costs. We've been big proponents of the cattle crush spread, looking for those situations where the feeder price and the fat price and the corn price all come together at a profitable level. We did quite a few of those using May feeders when the spread was around $145 a head. It's down to $115 now so we've made $30 a head. We're looking to do similar things with the fall contracts. We think that is a little cleaner than just trying to play buy the cattle and then hope the market rallies enough to make a profitable head.

Pearson: What do you tell these cow/calf people? This cow herd is small, Canada is still closed, is this going to keep that price strong?

Brugler: The price is going to be good for another year to eighteen months if we follow the normal cattle cycle. That is, again, assuming the border stays closed. I think you have to make hay while the sun shines, to use an old phrase, and make sure that you capture the prices that are currently available. And if there is something that develops on the court side that makes it look like additional supplies are going to be available you probably have to accelerate your sale process.

Pearson: Let's talk about the hog market, which certainly benefited last year with the problems we've had in the beef business with the embargo of our beef into Japan. What is ahead for this hog business? We're hearing about some expansion going on out there, we saw out in the hogs and pigs report to a certain extent. Also the Canadian trade situation now, maybe more Canadian pork certainly could be available to come down to the U.S. What is your take on pork prices going into the summer?

Brugler: Actually I think the pork prices are holding up pretty well. We're running around $70 on the lean index at the CME. The cutouts have been struggling a little bit, we're nowhere near the $84 numbers that we saw a couple of times last year. Yes, there is a little more Canadian supply available but I think the bigger issue from a hedging standpoint is that the June and July futures contracts already have a tremendous premium to the cash market. They are already trading the $76, $77, $78 range which makes it very difficult for them to rally. Our normal seasonal rally in hogs from say April to July is about ten dollars a hundred and the board has already discounted eight of that in the pricing structure. so, it's going to be very difficult to move those summer months up.

Pearson: Alright, Alan Brugler, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Alan on where these markets are headed then of course check on the streaming audio at the Market Plus page on our Market to Market Web site. And of course be sure to join us again next week when we'll examine how used farm machinery is bringing top dollar at auctions all across America. Until then thanks for watching, I'm Mark Pearson, have a great week.

Tags: agriculture commodity prices markets news