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Market Analysis: Mar 18, 2005

posted on March 18, 2005

Drought worries in the Northwest slowed a slide in wheat prices, though the fundamentals in the grain pits still look bearish. For the week, nearby wheat futures lost 1 1/2 cents. May corn futures retreated by a nickel.

Strong Chinese demand and further cuts in the estimate of Brazil's harvest failed to support soybean prices. For the week, May beans dropped more than 13 cents. The nearby meal contract lost $6.00 a ton.

The cotton market finally cooled off, and for the week the May contract declined $2.71.

In livestock, the April live cattle contract lost $1.70. Nearby feeders edged up by 72 cents. But the April lean hog contract lost another $1.97.

In the financials, Comex gold fell $7.10 an ounce. The Euro dropped 102 basis points against the dollar. And the CRB Index climbed another point to close at 316.50.

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

Market Analysis: Mar 18, 2005 Pearson: Here with his insight on these and other market trends one of our regular market analysts, Doug Hjort. Doug, welcome back.

Hjort: Thank you, Mark.

Pearson: Well, let's go right to the soybean market since there was so much volatility there this week. And some people are trying to think that looks like trees growing in the sky in this soybean market despite the fact they are cutting Brazilian harvest. You know, it's still going to be larger than last year's harvest. There seem to be plenty of beans out there. Is this just a lot of new money chasing the bean market, Doug?

Hjort: Well, I think it is. I'm not connected to that money but that is what they tell me. And it's got to be because the fundamentals are really quite negative. Just on some numbers take the Brazilian or total South American crop, some estimates now are down 10 million tons from the previous, the earlier estimates. But that still would be ten million ton more or less more than last year. It would also increase world soybean stocks by about 10 million ton all in round numbers and that is above the previous record, 10 million above the previous record. So, the fundamentals are still very negative. U.S. ending stocks over 400 million bushel, that is not bullish at all. So, the money driven market here really had an impact this week, I think, and a very negative one. Now, we talk about reversals and hooks and so on and so forth on the charts. Some of that is beyond me but it's pretty clear that you see the action this week. A spike high on Wednesday, a lower close. That is the reversal. The next day we gapped lower and closed lower, very volatile trade and Friday closed sharply lower again taking out, closing below one of the support levels underneath the market. Now all of this is way up here at the top, you know, almost seven dollars on some of the futures contracts on the high and then dropping down below $6.50. So, a lot is there but this is a definite signal, a sell signal. I think on any old crop stuff you should be looking at making sales there if you've got some left. Sure, these funds could grab a hold of this thing and run it right back and put in new highs. But the action this week on the charts and the technicals both look pretty ominous.

Pearson: That's right and they can go to the short side too.

Hjort: Right.

Pearson: What is your strategy right now? The corn market doesn't have really as attractive fundamentals as the beans do. Corn really hasn't been doing a whole lot. We've certainly seen a move up. I mean, are we looking at sales levels there too?

Hjort: Well, I think the rallies that we had, yes, were sales levels for old crop, maybe a little bit on the new but I'm not quite so interested in the new yet. And the reason is that we're already starting to hear of some weather concerns. Southeast Asia, parts of Europe on the dry side, our Pacific Northwest very dry and Montana, most of Montana very dry and so on. Now, that is not enough to start pulling those estimated yields down and so on for world grains. But remember last year the grain yields were record high worldwide. Hardly, or mostly everybody had a beautiful crop last year. That is not going to happen two years in a row or very unlikely to happen. So, you don't have to cut demand, or supply down very far. This demand is strong enough so that we can wind up pulling stocks down as low as we had them two years ago. That was record low relationships there. So, the new crop corn, unless everything is just about perfect, even assuming a two million acre increase in corn plantings and so on we could wind up with some pretty interesting markets come mid to late summer and on into next fall on the corn. So, new crop sales I don't think are quite as important. Yeah, on rallies from here on the corn you need to work on getting the old crop cleaned up but not the new.

Pearson: Let's talk about the wheat market. Again, if you were just trading the fundamentals you'd have to look at what has happened in the last two weeks on wheat and say this has got to be a sales target.

Hjort: Oh absolutely, absolutely. The market ran up mirroring what happened in the soybean market and putting in reversals there on weekly charts and daily charts this week. So, the market on the charts looks negative, the fundamentals are. But there again when you're looking at new crop there is already a little concern about wheat production next year. The USDA attaché and Argentina says the estimate is down three percent on acreage in Argentina. That is one of our competitors. Europe, as I mentioned earlier, having a little bit of weather, dry weather concerns. You know, who knows how that is going to play out. Summertime, spring and summer weather will determine that but it's enough to be just a little concerned about production next year and that could support new crop prices quite well.

Pearson: As we go forward and we look at what is happening with the wheat and the corn, the cattle markets, the cotton market hasn't been immune either, big run up there and a softening big time this week on the cotton market.

Hjort: I don't follow the cotton market nearly as much as the grains but as I look at acreages for next year I'd be a little concerned and maybe use some pricing opportunities here for new crop cotton because cotton is the first alternate crop for soybeans down South and there are some estimates now that are talking about a pretty sizable increase in cotton acreage here in the United States. It might be something to think about as you look ahead to that new crop.

Pearson: Asian Soybean Rust has also been a factor in both the cotton market and the bean market this week because it's an unknown.

Hjort: Yeah, that is right, absolutely and it probably will stay an unknown until we start hearing those reports, yes it's in Missouri, yes it's in Illinois, yes it's in Iowa and so on. And I'm sure we'll find that. Now, we have control measures to control it with spray but it's very costly. So, the identification of that rust as I understand it is difficult in the first place. You have to be out there very frequent in your fields and so on.

Pearson: It's going to keep people on their toes for sure this year including the Board of Trade. So, it's going to be an interesting growing season. Let's talk about livestock which has been interesting now for the last 18, 24 months, this fed cattle market, the small cow herd situation with Japan, the situation with Canada we talked about earlier in the show, still nothing has been resolved really on either front. Doug, if you're a cattleman right now, if you're a feeder and you're looking at buying some expensive replacements based on this cattle on feed report that has slowed down quite a bit this last month.

Hjort: Yeah, it really has and the price outlook for the fat cattle looks a little better as a result of that report. However, you can't hardly buy feeder cattle right now and make them work on the board when they come back as fats. It's really a difficult thing. There may be some ways to feed, maybe a different type of animal that you're feeding and so on but you need to watch quality, of course, very closely as well. It's going to be a difficult year for feeding cattle, very difficult. When you look at, if you have the opportunity -- several of my clients background calves and so on and then maybe feed them out. I don't think that is the thing to do this year. Sell the feeders this spring, get them marketed on these high prices and take advantage of that.

Pearson: This feeder market, of course, depending on what happens with Canada and no one seems to know but now there seems to be this easing of this concern of this big mounting wall of beef coming across from Canada.

Hjort: Well, that's right and it had to be disposed of some way and has been as we go along. Last week, of course, in our fat cattle market, fat cattle prices jumped dramatically. Well, they came back down somewhat here, actually in the last two weeks they jumped up, but down a little bit for this week, a pretty sluggish market here. However, looking at the fat cattle futures you see that consistent decline as you go on out there. That is building in the opening of that border, it's just a question of when it will happen.

Pearson: Let's talk about the hog market, which has been a beneficiary of what has happened with the stopping of beef imports by Japan of U.S. beef and, of course, they did not stop pork exports. The pork market was phenomenal in 2004. It's held in there fairly well so far, Doug, in 2005 and you were relatively friendly to this hog market. Have we started expansion? Are we going to see this hog market now under some pressure?

Hjort: I think we will but, you know, we're not going to go through the cycles of expansion that we did before just because of the control of the corporate body here on the hog production end of it. It's going to be leveling off more. Yeah, we'll probably see some influx but not that much. Yeah, the Canadian border issue is really alive in the hog market as well because you're looking at very strong demand. The last two weeks it's been interesting -- two weeks ago butcher prices came down along with pork product prices. This past week pork product prices continued to erode but the cash price started to stabilize and then move up just a little bit. So, I think as we look ahead in the next year, next week, week after and so on we could probably see a little bit firming in that cash hog market. But those prices are pretty darn good right here. So, my recommendation is keep selling those butchers just as soon as they reach market weight especially on markets like this.

Pearson: Absolutely, Doug, just a few seconds left. We didn't talk about covering feed needs. I mean, the fundamentals have been such that it didn't look like you'd want to do that, you'd want to go hand them out. Do you start covering some feed needs if we see a serious break here?

Hjort: A serious break but in soybean meal, for example, that is probably going to have to be at least 20 dollars a ton and that is a big break. Corn prices, probably 20 cents down before I'd be covering very much.

Pearson: Excellent, Doug Hjort, thank you so much, we appreciate your insights. That will wrap up this edition of Market to Market.

But before we go, we'd like to remind you that many public television stations across the country are seeking your investment in quality television programming. If you value the information you receive each week on programs like Market To Market, then please help with your generous support. We thank you for it.

Until next time, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news wheat