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Market Analysis: Mar 25, 2005

posted on March 25, 2005


The bulls are heading for the sidelines as the laws of supply and demand retake control of the grain pits. For the week, nearby wheat futures lost 18 cents. May corn futures retreated by more than nine cents.

As mentioned, the soybean market continues to slide despite solid Chinese demand and Brazilian weather worries. For the week, May beans dropped more than 20 cents. The nearby meal contract lost $3.70 a ton.

The cotton market bounced back a tad, and for the week the May contract gained 65 cents.

In livestock, the markets were unfazed by neutral cold storage and inventory reports. For the week, the April cattle contract gained 95 cents. Nearby feeders edged up by 73 cents. And the April lean hog contract lost a dime.

In the financials, Comex gold fell nearly $15 an ounce. The Euro plunged 383 basis points against the dollar. And the CRB Index retreated almost 10 points to close at 306.75.

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

Market Analysis: Mar 25, 2005

Pearson: Virgil, what about this soybean market? Now, we've seen an interesting occurrence here where the market went wildly higher, very speculative, all the funds went long, now a big sell off here. Are we just going to kind of hang in this territory for a while? Or are we headed much lower?

Robinson: Well, you mentioned to begin the show a couple of reports coming, Mark, stocks in all positions as well as planting intentions and both those are capable of driving near term price direction, Mark, so we'll kind of wait and see and maybe touch on that here briefly. You mentioned futures down pretty hard on the week and soybeans about 20 cents. However, cash did not follow that, Mark. Cash levels actually were down less than that indicating the basis firm. So, a short term point here I think is worth making, basis firmed late in the week suggesting the pipe is in need of supply. I can tell you, Mark, the aggregate of total open interest in the soybean futures contract has declined significantly. And I think that is more a result of speculative long liquidation than it is heavy producer farmers selling and subsequent commercial short hedging. The point I'm trying to make I think the market is positioned for a near-term recovery. I'm going to try and give you some objectives short-term wise, Mark. I think July bean futures are positioned to recover back towards $6.50 at which point I believe I would establish a hedge to arrive or a short hedge with the idea that as we get into planting season the basis traditionally will firm and narrow because producers are preoccupied with planting. So, I think that is one way to manage remaining old crop soybeans, Mark, is to take advantage of this near-term situation. New crop I think can recover back towards $6.25. I am reluctant to finalize price there for reasons that are obvious. Don't know for sure what kind of acreage will be sewn this spring. Will we have a rust issue to deal with of significance? Will we have aphids to deal with or a combination of the two. So, I am reluctant to finalize price with new crop. I am more inclined to put together some type of minimum price strategy and as we visit tonight that $6.20 in and around 49 cents and I know that is a big, big premium, Mark, but please keep in mind in February new crop futures from low to high traveled over a dollar a bushel and thus far in March about 70%, 70 cents. So, I like the idea of minimum price there.

Pearson: Alright, and you're not afraid maybe to start taking a look at that. Like you say a lot of excitement could occur this summer.

Robinson: Yeah, Mark, to be honest with you I made my first new crop sale at $5.77 and a second at $6.25 so I began well in advance of this. I'm addressing an audience assuming they've done to this point nothing.

Pearson: Alright, and of course $5.75 still looks awfully good compared to where we were last fall. So, not a bad place to start if you're going to start. Virgil, let's talk about the corn market, it's also softened up this week.

Robinson: Corn, I think, the underpinnings and the fundamentals are different, Mark, and I fear the stocks in all positions report is going to indicate second quarter feed disappearance less than we are currently anticipating or forecasting which would imply now through half of the year that the USDA may be obligated to increase, excuse me, decrease feed disappearance. We know to this point in time export sales and inspections have lagged the pace needed to attain USDA targets. Mark, there is plenty of corn domestically and globally. Having said that I do, however, believe we are in position as are beans for a near-term recovery. I think May corn futures can recover back towards about $2.17, July in the vicinity of $2.27 at which point, Mark, again I would make either a short hedge or a hedge to arrive with the idea that basis will firm during planting season then attach my basis. New crop, reluctant to make a finalized -- or finalize a price there. I'm more inclined to look at that $2.40 put as the December futures contract recovers and approaches $2.40. I think that would be the way to manage new crop sales at this point in the calendar.

Pearson: Alright, so again during that planting season historically that basis will firm up for us and normally...

Robinson: Normally it does, Mark, normally it does firm.

Pearson: Alright, we'll see if the seasonals are true to form this year. Let's talk about the wheat market. Now, we're getting pretty good reports about the status of this winter wheat crop, seems to be pretty good. There seems to be plenty of wheat worldwide, Virgil. We had a nice rally in wheat and now we're stumbling and we seem to be dropping lower.

Robinson: This year's wheat crop is projected at 624 million metric tons record large, Mark. There does not appear to be any shortage of wheat on the globe. As you mentioned, northern hemisphere wheat prospects appear encouraging at this point. There are some concerns with respect to spring hard wheat weather wise which is always the case. But I think, as you mentioned, there is plenty of supply. Having said that I think Chicago July futures, Mark, near $3.50 warrant a sale, a cash sale. Kansas City July around $3.55 and Minneapolis July around $3.70.

Pearson: Okay, so that gives us some sales targets.

Robinson: Those are objectives as we visit tonight.

Pearson: And again, we still have some weather between now and the harvest. So, perhaps some opportunities to get that. The cotton market actually had a little bit of a bounce this week and as we look at what is going on in cotton there is concern that we might see cotton acreage increase but this market has been pretty firm.

Robinson: The pull down in price did its economic function, Mark. It attracted business and export sales have been pretty doggone brisk and strong to this point in time. However, it's very difficult to remain oblivious to the supply situation. U.S. stocks are projected to double year over year, global stocks increase about 33% or at least ending stocks, Mark. Supply I don't think at present is an issue. Having said that I think July cotton futures, Mark, around that fifty-five and a half to fifty-six cent area. There again I like to apply either a short hedge or a hedge to arrive with the idea basis will firm here through the planting season and in new crop futures I think we can trade the 58 or higher where I would either make a sale if the basis is appropriate, perhaps a hedge to arrive or for those who are reluctant to finalize price this early in the season a minimum price contract by buying a put seems appropriate as well, Mark.

Pearson: Virgil, let's go over to livestock. Fed cattle market has been decent. There still is this hangover with what is going on with Canada and of course Japan and BSE and so forth. Just looking at the numbers, Virgil, what is your take on what is ahead for fed cattle?

Robinson: Mark, I looked at the cold storage report. I thought the numbers there were bullish, a nice draw down month over month in beef inventories, a nice draw down year over year despite the fact that retail prices are high. I'm of the school that the U.S. economy as well as several others will continue to improve and support higher valued commodities including beef. I think the market is positioned, Mark, the futures market first, the live cattle futures market from June on forward all at a discount to prevailing cash and the cash index, I'm of the opinion they are undervalued. And as a result I'm not interested in making any kind of a hedge here. I think June cattle will recover to a minimum of 87.5 to 88 dollars at which point I might be inclined to put together some type of price floor. I think the deferreds will also follow and increase in value. Cash wise, Mark, I'm in the school of thinking we can sustain the first half, the balance of this calendar year, a live market in the upper 80's approaching 90 from the middle of the calendar to the end of the calendar, the mid 80's with fourth quarter somewhere in the mid perhaps low 80's, Mark. So, I'm not interested right now in establishing any short hedges in the live cattle futures market.

Pearson: Talk to these cow/calf guys for a minute Virgil, what do you see for them?

Robinson: Last time we spoke, Mark, we talked about creating a floor around a hundred dollars and I think either the April or the May feeder cattle futures contract is in position to trade back to 110 or higher. I think the trend of that market remains up.

Pearson: Alright, real quick, hogs, Virgil. I mean, we keep hearing that there is some expansion going on out there.

Robinson: Well, and the quarterly hog report indicated that, Mark. Total herd at 101, upper end of the pre-report estimates. It kept for market at 100, kept for breeding at 101 I believe. So, I'm concerned about the heavier weight breakdown. That concerns me combined with the fact that pork inventories in this last cold storage report, Mark, grew month over month, grew year over year. I don't think there is any shortage of pork at present. The best hedging opportunity for the April and June hog futures contract I think is past us. June futures is 78 dollars representing, in my opinion, a hedge, the equivalent of 50 plus. I'd take advantage of that. The July contract 76 to 77, I'd short hedge my production there as well.

Pearson: Virgil Robinson, as usual some great ideas for us. Thanks so much. And that will wrap up this edition of Market to Market. But if you'd like more information from Virgil 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 be sure to join us again next week when we'll continue our look at efforts by the Navajo nation to preserve both cultural and agricultural practices. Until then, thanks for watching. I'm Mark Pearson, have a great week.


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