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Market Analysis: Apr 15, 2005

posted on April 15, 2005

Despite the bearish news, the drop in grain prices has slowed and the markets have settled into a sideways trading range. For the week, nearby wheat futures lost nearly five cents. May corn gained more than two cents.

The news of Brazil's shrinking crop bolstered soybean prices, especially in light of continued strong demand. For the week, May beans gained more than four cents. The nearby meal contract improved by $1.90 a ton.

The cotton market's move upward stalled this week, with the May contract losing $1.15 from a week ago.

In livestock, the April cattle contract was up by $1.18. Nearby feeders advanced $1.22. But the May lean hog contract dropped by 37 cents.

In the financials, Comex gold dropped $2.00 an ounce. The Euro declined 15 basis points against the dollar. And the CRB Index fell more than three points to close at 301.25.

Here now to lend us their insight on these and other market trends are two of our senior market analysts, Walt Hackney and Doug Jackson. Welcome back.

Market Analysis: Apr 15, 2005 Hackney: Hi Mark.

Jackson: Hello.

Pearson: Walt, Doug. Doug, let's talk about what is going on with the soybean market. Again, another interesting week, problems down in Brazil, the market strengthening a little bit. What is ahead at this stage of the game? We're waiting for planters to roll in the big part of the soybean belt so of course there is a lot of questions still to be answered about the size of the U.S. crop.

Jackson: Well, Mark, here we are with corn and wheat prices back near their contract lows, the funds got long and the funds are liquidated out of their entire position and yet beans are about $1.00 a bushel, of course, above their lows. We lost over 400 million bushels worth of production in South America from what we thought at one time. This has turned out to be an incredible year, Mark, with two back to back droughts in southern Brazil, almost unprecedented, in fact, it is unprecedented. We saw late in the week as we saw earlier the average yield estimate in Rio Grande del Sol, the most southern state in Brazil's growing area, is estimated to be eight bushels an acre. We're actually seeing greater yield variability now in states in Brazil than we've ever seen in the United States, even in the 1983 or 1988 drought because those soils drain so quickly and they just can't prevail during a long drought. So, what we've done here is we've cut that crop sharply and yet the U.S. is still going to have about a 360 million carryout, one of the largest carryouts we've had in a number of years. So, we're not running out of beans there, we're not running out of beans here. We still have a situation where values could probably drift lower very slowly if we have a benign weather situation in the United States in the next few weeks. Certainly we've got a certain amount of risk premium factored into these November beans. But with the possibility of any kind of a normal summer, dry weather threat compounded by the unprecedented Asian soybean rust threat in the United States, Mark, the trade is still going to maintain a lot of risk premium. You know, right now we might think beans are down 25 but perhaps an explosive upside potential over time -- we're not really interested in making sales at these prices of either old crop or new crop. I want to see how this rust thing plays out later this summer. Temperatures are above normal, maybe we're set up for some kind of a dry weather threat too. The bean market has the most potential to be explosive of the three grains.

Pearson: Alright, let's talk about the corn market which, again, like you say the bullish fundamentals just aren't there. Is that right?

Jackson: That's right. Really as we look across the spectrum of usage on the corn we think ethanol is overestimated, we think exports are overestimated and feed use may still be overestimated. We could end up with a 2.3 billion carryout this year, one of the largest stocks we've had in years, more than double last year's stocks. In a situation very similar to 1999 or 2001 where we saw July futures in both years, fundamentally similar years, drift down to the $1.90 level by late June taking cash corn towards $1.50. Dec. corn will go to $2.00 if we have normal weather. It will go below $2.00 if we have better than normal weather. And, of course, if we have dry weather then we can change the picture. But without a major catastrophe on the weather the corn market doesn't have a lot of potential and yet, Mark, we know that in a large number of years when we had record yields we were followed by a drought. So, anything is still possible but it's going to take a significant drought threat to change the course to lower prices by summer.

Pearson: Alright, let's talk about the wheat market. Again, we're hearing stories that the U.S. wheat market looks awfully good, the winter wheat crop looks good. Worldwide tremendous supplies?

Jackson: We made almost three year lows in the Minneapolis contract late this week. We saw funds starting to initiate short positions in Chicago and Kansas City. Mark, the crop does look good here. We saw some private estimates that the world wheat crop which rebounded so sharply last year could duplicate that performance again this year, building stocks again in the world, building stocks significantly in major exporter hands and most significantly for U.S. futures building stocks in the United States. You have several people now projecting U.S. stocks at 700 million, the biggest carryout in several years. The last time we had a carryout like that, if we can achieve that, we'd have prices basically back to loan tight levels. Now, anything that still happens we need some rain in Oklahoma but right now the winter wheat crop looks generally good, spring wheat crop is going in under good shape. The Eastern and Western European crops look good. So, without a major and fairly quick weather reversal the past of least resistance we saw playing out late in the week is going to continue. We'll make new lows, funds will get short and we'll drift to seasonal harvest lows that some are projecting to be 20 or 30 cents down from here.

Pearson: Alright, let's go from the grain markets over to the livestock markets. Walt Hackney is with us. Walt, this cattle market, it seems like we've been talking about that Canadian border for a long time. We've talked about Japan for a long time. This beef cattle market keeps chugging right along. What is ahead now for fed cattle?

Hackney: Well, you have to look at the available supply of feedlot cattle. We're down on available feedlot cattle. Packers are only killing roughly 565,000 to 580,000 head a week. If they really wanted to cause us to get current, if they'd run that kill up to 600,000 head a week I wouldn't guess where our cash market might go due to availability of finished cattle. We're shipping into the market right now probably 15-20% of choice quality cattle that are short fed enough they are referred to as green cattle. But the fact is our grade percentage is down on choice but not due to quality but due to the short fed position of the cattle. That will give you an indication of what we have in front of us. Now, many analysts are in fact indicating that by June 1 we're going to be in a much more plentiful supply of feedlot cattle. Maybe so. Personally I don't subscribe to that but not being an authority on it and listening to the analysts I have to feel that we probably have an opportunity to see bigger cattle if not more cattle. And the reason being is what Doug is talking about, these corn values, a ration cost. They are cheap enough that the feedlots are maybe going to prolong some feeding in these cattle due to cheap rations. That is not too good an idea because usually it causes bigger cattle, fatter cattle, more tonnage. That might be the run of cattle that some of the analysts are anticipating.

Pearson: Alright, you mentioned it, calf market. Of course, that is part of what is driving this is turnaround paying $1.35, $1.40, $1.38 for these 600-650 pound calves. That has got to be pretty scary for some of your feedlot operators out there.

Hackney: As a cattleman I would think it would be very scary. To be bumping nearly 800 dollars a head for 650 pound feeding calf to come in barely weaned, double shot going into a feedlot somewhere, too fleshy to go to grass to give you a chance to cheapen him up any further but the price of rations are driving the feeder cattle market. Availability is going to be nearly what it was a year ago. But the fact is cheap rations are driving the price of these feeders. And you're right, Mark, it's a phenomenal market. We've got eight weight cattle bringing $1.13 to $1.14. We've got seven weight cattle bringing $1.20 to $1.22 and $1.23. We've got six weight cattle bringing $1.40. We've got fall contract calves being offered today at 600 pounds at $1.20 to $1.25 and some are selling that way, Mark. So, the anticipation going into next year, May and June, apparently is about as high as it has been on these immediate delivery cattle.

Pearson: Boy, well let's talk about another market, let's talk about hogs. And the hog market we're hearing whispering that there is expansion going on in this herd. And, of course, it's a little bit tougher world now with the vertical integration we've got in the hog business. But what is your take on pork?

Hackney: Well, I think the independent sector might not be quite as guilty of an expansions as are possibly some of the corporate units. The corporate units, Mark, if there is a hedge potential on those hogs through a contract program with a packer, you know, they can lock in three to four bucks a head net and in that case produce one to four million hogs per unit per year. That is a lot of net profit for that corporate. But the independent guy can't afford to only lock in four to six bucks a head. They really and truly need to have twenty to thirty bucks a head net on their hogs to pay them for their effort and their labor on a smaller operation. I don't think the expansion is on the independent sector for those reasons. On the same token, we're knocking two hundred -- or two million -- head of hogs a week. This week we're in, we're going to get very close to two million a head kill. That is unprecedented in April for this week. That will be a record if we hit two million this week. Going into next week it looks like we should see a similar kill. The availability of the hog is out there. The expansion may not have caused it as much as the consolidation of production through the corporate units.

Pearson: Alright, well it's going to be interesting. Doug, we've got about fifteen seconds. What would you say to a livestock producer about covering some feed needs?

Jackson: Frankly it's all down to the weather, anything is possible this summer but right now we just keep our powder dry and we have a tendency to sell off into late June.

Pearson: Good point, alright Doug, Walt, that will wrap up this edition of Market to Market. But if you'd like more information from our experts 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 examine how the uncertainty over price support programs for fluid milk impacts dairy production. Until then thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news