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Market Analysis: Apr 08, 2005

posted on April 8, 2005

The large carryout for both corn and wheat did nothing to support the sliding grain markets. For the week, nearby wheat futures lost more than 12 cents. May corn dropped by almost nine cents.

After testing contract lows, soybean prices rallied at midweek, before falling sharply on Friday. For the week, May beans lost two cents. But the nearby meal contract gained $1.70 a ton.

The cotton market edged a little higher again this week, with the May contract gaining 41 cents.

In livestock, the April cattle contract fell $1.45. Nearby feeders lost 68 cents. And the April lean hog contract dropped by $1.93

In the financials, Comex gold gained $1.00 an ounce. The Euro advanced 21 basis points against the dollar. And the CRB Index fell nearly seven points to close at 304.32.

Here now to lend us his insight on these and other market trends is our senior market analyst, John Roach. Welcome back.

Market Analysis: Apr 08, 2005 Roach: Thanks, Mark.

Pearson: Alright, let's talk about what everybody is talking about and that is the soybean market again. And more numbers out, USDA numbers, trying to get a clearer picture of what is happening worldwide. We had the numbers out of Brazil, again, showing the crop shrinking from some pretty high estimates early on and now shrinking, like we said, almost on a weekly basis. U.S. crop is yet to be planted for the most part, there is a lot of concern about what is ahead for soybean prices, Asian Soybean Rust, there are a lot of issues out there. What is a producer to do in terms of getting this crop marketed?

Roach: Well, we've seen the soybean market come down quite a bit from the peak prices that were around three weeks ago or so. The lower close today after the government report signals really that we know most of the fundamentals for today and those fundamentals are not really positive. We have a large carryover, it's the largest in I think nine years forecast for this fall, that is after the cut today. The Southern Hemisphere's crop is smaller than was expected earlier but it's still larger than last year's crop because of a very good crop in Argentina and some of the other countries. So, in the final analysis there are plenty of beans to go around for this upcoming year. But we have to raise a good crop in this country and that is going to be the real focus from here on forward is what kind of crop can we raise in this country. How many acres are we going to actually plant? Some of the people are a little worried that because the planting conditions are so good right now that we may get more corn acres planted than was earlier thought and cut the bean acres back a bit and we certainly have that unknown of the Asian Rust. The market is going to have to deal with this acreage and deal with this rust over time but that is not something we're going to focus on too much in the next couple, three weeks. In the next couple, three weeks we're going to have a Brazilian harvest that continues. Between now and the end of the month they'll harvest somewhere between 30 and 40% of their total soybean crop. So, what they do with those inventories, with those bushels will have a big impact. The trade really is in kind of a middle of the road spot. There are still reasons to be bullish if we have anything go wrong with our crop but there is plenty to go around if we don't. So, we're going to just kind of trade and buy time here for a little bit would be my thought. We are, however, down against an important support area. If we break the market very much further this early part of next week we could well have another round of technically based selling. We're forming a head and shoulders on the chart and we don't have to break very far before we confirm that pattern which would cause another breakdown here in the price level. So, I think we're really at kind of a crossroads right here and we have to wait for the next news to come out and meanwhile we have to see what it is the technical boys want to do with the chart picture.

Pearson: Okay, so at this stage of the game a producer you'd pretty much sit on your hands right now?

Roach: I'd sit on my hands right now. The presumption that I'm making is that everybody made some sales on that stronger market, that they were not led astray and kept from making sales. And hopefully everybody is in a pretty good position so that we go through this planting period and wait and see what actually happens. One thing that does bother me about the marketplace and we normally don't talk much about the energies but crude oil closed today at the lowest close in 30 days. And we're hearing all kinds of publicity on the TV and so forth about the high prices of gas and on and on and on. But in reality the market has already peaked in crude and with this close down where we are we may be ready to unwind that energy market a little bit and that has been the engine that caused the whole CRB index to go up and if we start to unwind that we may be -- if you remember the old expression that all boats go up in a rising tide. Well, all boats go down on a declining tide and if we start to see this energy market come apart all the markets we're dealing with here will come under some pressure because of it.

Pearson: Okay, and then scare off some of that fund money that we've been seeing rolling into the agrocommodities that were spilling out really from oil futures, some of those places?

Roach: That's exactly right, we saw a lot of money come in and support our market and push prices up to price levels that were no longer able to maintain and sometimes that hot money which looks so good can feel awfully bad if it decides to leave the game.

Pearson: Alright, now speaking of games, the corn market also benefited a little bit by what was going on. Again, they were looking at cheap corn and cheap beans. Real quick, John, this corn market there is not a lot in the way of fundamentals there.

Roach: The corn market has a situation of big inventories still left in the bin this fall before we put the new crop in, increased acreage and now we have an excellent planting season to get this new crop started in. We already have planters running, we're probably going to look at plantings on Monday's report from the government at the fastest pace maybe ever. If the weather holds the way the forecast is we could certainly see that again for the next two, three weeks and if we get the crop planted and we get moisture on top of it the genetics are such that they go a long ways without being too worried. However, that being said, everybody knows the bad news in corn. We must raise a very big crop this year for the demand for next year so weather is going to be critical, we're a little bit dry, that can start to play. I'm not interested in making any sales here. I think the market has already been pretty well bled out and I think we'll have some opportunities at some better price levels. Surely there will be something that comes along that makes us nervous and I may be talking completely differently in a week depending on what is happening here with the CRB index and with the oil markets.

Pearson: Which, again, is another one for us to watch. Let's talk a little bit about the wheat market. Again, a fundamental situation where lowest wheat plantings, lowest planting acreage in years this last year and yet plenty of wheat worldwide.

Roach: The world production numbers out today were the record production level in the United States we saw the ending stocks decreased a little bit because of increased feed usage. But the new crop that is coming on, again, we see the numbers out or the crop condition reports on Monday we expect to see some of the best crops for this time of year and that we've ever seen. So, when you have these kinds of good growing conditions along with adequate supplies in the bin and a lot of competition in the world. The wheat market is probably the one that has got the worst outlook at the moment because we have the crop further along in its development and bearing down, quite frankly on this whole price structure.

Pearson: Right, now talk about cotton. We had the story about textiles to China. China has been a big cotton, U.S. cotton buyer. Of course, we've also had the situation with Asian soybean rust down in the South where we saw some shifting of acres. What is your take on cotton up around this 50 dollar level has been pretty attractive hasn't it?

Roach: Well, the cotton we saw in last week's report that the intentions are to plant an extra million acres of cotton actually and this week we saw the Chinese announce that they may cut their production acreage by as much as ten percent. So, the cotton situation actually looks kind of positive at the moment. We saw the market look at today's supply/demand report close a dollar a pound higher so the marketplace feels buoyant but as we move this market up in here we'd be willing to make some sales on out forward because we think that this springtime rally may well give way to some lower prices over time.

Pearson: Let's talk about livestock, John. The futures were lower on cattle and hogs this week. Again, still some question marks about what is going to happen with Canada but the cattle market has held in there really pretty darn good despite all the other issues that are out there. Can we keep this market where it is?

Roach: Cattle market was, of course, very strong last week. This week weakened a bit, the dress beef trade just really struggled, difficulty moving the product at higher numbers so we're really right on that delicate balancing spot of what can we get the buyer to pay. We think that the cattle market is going to struggle here in a little bit. We need good positive economic news, we're not getting that. Energy prices at the pump are stealing away the consumer's money so we're really struggling here a little bit but we're coming in, of course, to the best time of the year. We think that on strength you need to be a hedger of cattle and seek some protection. We're not overly bearish but we think that we're having difficulty moving this market any higher.

Pearson: This calf market has been unbelievable. I think your heart has to go out to a cattle feeder right now.

Roach: Well, you know, the replacement animals are tough to buy and tough to make work and you have to be very careful as you are replacing feeders in the lot.

Pearson: Let's talk about the hog market. We had the ruling from Canada about the Canadian pork which has been coming in. There is also, of course, pretty good argument I guess for pork to expand and we're starting to see that a little bit. What is your take on this hog market as they go forward the next three to six months?

Roach: Well, we're a little worried actually, a little worried that we're going to see some increase. We're starting to get this kind of the preliminary indication and some of the guilt numbers, slaughter numbers that maybe we're seeing a little bit of a holding and maybe a little bit of an expansion going on. The profitability has certainly been very, very good. There has certainly been all the stimulation and there has been some opportunity to get some of the paperwork through in order to do some expansion. There has been some time with profitability. We think, again, that on strength here that you need to be protecting the hogs as you look out forward and anticipating that as we move through the rest of '05 that we start to see some lower price levels. We would also hope, of course, that we can open up the export channel into Japan and that we may well lose some of the pork demand as some of that demand gets replaced by beef.

Pearson: Okay, so the pork miracle last year which was pork going into Japan is probably a little bit of a fade if Japan opens up to beef?

Roach: Well, you can bet that the beef production, beef producer will try very hard to get that market share back.

Pearson: Well put, John Roach, thank you so much. That will wrap up this edition of Market to Market. But if youd like more information from John on just where these markets are headed then be sure to check out the streaming audio at the Market Plus page on our Market to Market Website. And, of course, be sure to join us again next week when we'll check on the progress of spring planting in the grain belt. Until then, thanks for watching. I'm Mark Pearson, have a great week.

Tags: agriculture commodity prices corn markets news wheat