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Market Analysis: Feb 25, 2005

posted on February 25, 2005


Grain prices moved higher this week on strong export sales and the strength in soybeans. For the week, nearby wheat futures gained more than 27 cents. March corn was up more than 11 cents.

Soybean prices also pushed higher with stocks at processing plants hovering near 15-year lows. For the week, March beans jumped 45 cents. The nearby meal contract advanced $9.00 a ton.

The cotton market enjoyed another positive week, and gained $2.56.

In livestock, the February live cattle contract lost $1.13. Nearby feeders gained a dime. And the April lean hog contract moved up $1.28.

In the financials, Comex gold improved $9.00 an ounce. The Euro gained 178 basis points against the dollar. And the CRB Index jumped more than eight-and-a-half points to close at 298.30.

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: Feb 25, 2005

Brugler: Good to be back.

Pearson: What a week. Sharply higher prices especially in the soybeans.

Brugler: I think this started out as strictly a short covering rally. We had a bunch of short positions in the March contract. They realized they were not the delivery stocks or receipts to facilitate staying in that position into March 1. So, they had a rather aggressive buying program. They had to buy some May and July contracts to spread out some of the positions and that triggered some other technical buying. So, a lot of it is technical. The cover story if you will is dryness in southern Brazil and I think in the background there's a little bit of intent on the funds and some other players to get flat going that the U.S. growing season with the uncertainty about rust and other things coming forward.

Pearson: If you have old crop what is your advice?

Brugler: We are sitting on what we have left. We were fairly aggressive last summer. We like the chart action here today blew through more resistant areas. So I don't want to overstate the rally. Certainly we have had the minimum move that we see from seasonal lows. We have accomplished that. So, it probably time to warm up here with your trigger finger and speed dialer but again other than catch up sales we have not done much yet.

Pearson: So what would be your target then?

Brugler: My target for March was $5.95 which we got to this week. I think there's a limited chance we get to $6.20 if Brazil turns out dry over the weekend and the market wants to add fuel to the fire. I'm nervous, I admit that we are very overbought and it could be by the rumor on Monday.

Pearson: New crop. What is the strategy?

Brugler: Again we are getting a chance to make some sales that we should have made last spring. The prices are back at that level. The $6 barrier broke down on Friday. I think that you start to put floors in the market. Buy puts, put spreads perhaps as a way of establishing some control over the gains that we have had. I don't think you sell calls or futures yet because we don't have any solid top yet. But we are getting there. And I think that you have to reward the market with some cash sales once the basis starts to narrow up a little bit. The cash market has lagged well behind.

Pearson: Is the market buying soybean acres right now?

Brugler: Continuing to buy some whether it needs them or not. The world stocks are fairly large and the losses in Brazil are probably only on the order of five or six million tons because the amount of gross of the biggest states is 21% harvested but we are losing some production in the southern part of the country. We will have very adequate stocks and we have to think of that rally more in terms of risk management for the U.S. growing season and this mechanical issue of just covering short positions.

Pearson: Let's talk about the corn market, which also was stronger this week. And we see the market showed improvement the last couple of weeks. What is your take on corn? We have plenty of it if we look at what we have in terms of carryover from the 2004 crop with record yields. Is this another opportunity to make sales?

Brugler: I think it might be a little early on the corn to make sales. We have a good technical bottom. One of rules technicians use is if you tried to test the old low and can't get there that is positive. March futures could only get to 1.90. That is causing the funds to come out of their short positions in corn. They are still not done doing that in corn so there is potential buying there. If in fact that was the low for the year we would expect at least a 44 cent rally off the low and we have not seen all of that in the front month cash. I'm trying to be patient here. Again we made fairly substantial sales last spring for fall delivery but we are keeping our powder dry on the rest of it.

Pearson: So, in terms of new crop sales you're still waiting?

Brugler: We lifted the hedges that we had for the most part at the beginning of the week or even last week. We have got some short calls in the 260 range that kind of thing happening on to thinking the market won't get quite that high. But again not wanting to be very aggressive here until we see how it plays out.

Pearson: Let's talk about the wheat market, another dramatic week there. Wheat prices, the Chicago market especially showing real strength.

Brugler: Yes, it is difficult to, again, in both corn and wheat and beans for that matter to really justify the rally in terms of the world stock situation. The Europeans are subsidizing the wheat at eight euros per ton for export. That is a fairly substantial discount off the world prices. But again if you have made the decision the C.R.B. index is rising, gold is rising, crude is rising, grains are cheap you buy wheat because particularly in soft winter wheat we have a 40 year low in planted acreage so there is potential leverage if there are any weather problems.

Pearson: We are in a cycle where commodities seem to be taking a real lead. The crude oil market had another spike this week. We are seeing what is happening in the grains, precious metals. We see it in the C.R.B. index. It looks to be a potentially inflationary cycle.

Brugler: The commodities are acting inflationary. We have had a couple other swings like this in the last six months and they have not stayed very well. But there's definitely an aspect of money moving back and forth from the stock market to the commodities market. The asset managers are trying to find a place in commodities to pick up a 20% return to balance the slow growth in other assets.

Pearson: It has been interesting this week in cotton. A huge move.

Brugler: Again, there in New York it's easy for the money managers to find. But we have also got to pick up the Chinese demand. Chinese, interesting thing to me, Chinese retail textile consumption is up 19% in the last year which means some of the cotton we are sending there is not coming back to us, it is being consumed domestically and that is a huge market. The USDA raised their export estimates for them and I think we will get this big pile of cotton on top of what we have.

Pearson: We may be into it. Let's talk about livestock. The fed cattle market -- we are close to the March 7 deadline regarding opening our borders to the Canadian cattle. We have Canadian viewers I know that enjoy the program. As you look at this, what kind of impact, what will we see if we see the border open?

Brugler: I think initially the response will be fairly muted. I think there's a fear that you get three days national process and then all of a sudden there's a court action or something that freezes you up. You buy feeder cattle and they are stuck in the middle of South Dakota on a truck what do you do with them? So people will go slow. I would anticipate Canadian prices won't rise toward the U.S. level fairly quickly once the border is open. Once you know that you can get more for them. You don't have to have that discount. So, the bark may be worse than the bite here.

Pearson: If you are a cattleman right now what is your take? With this little bit of improvement on feeder prices?

Brugler: I think you have to look at your break even. Can you lock in a profit on the cattle? We have had pretty good opportunities for fall, September, October. May has been pretty good. I'm talking about looking at the feeder cost and what you can hedge the cattle for. So, you have got opportunities. I think you need to put some kind of floor under it so that if the Canadian cattle do flood the market you still have the returns that you were anticipating when you put the cattle on the lot.

Pearson: But be thinking defensively?

Brugler: Think defensively.

Pearson: What is your outlook for fed cattle prices?

Brugler: I don't see us much above the $90 range. If there's a halt in the board opening we are fairly tight on numbers right now. We have got some opportunities to see a little upward movement in cash. The biggest problem we are having right now is the box beef. That has been under pressure, packer offerings are typically at least as much as what the wholesale market is wanting to buy. That may change as we get in spring, closer to the grilling season.

Pearson: Let's talk about pork. Hogs had such a great year in 2004 a bit of a rally, now faded again.

Brugler: The hog market had a pretty nasty break there after the first of the year. The problem appears to be on the pork cutout side, the lean cutout have dropped tremendously. Sometimes in 2004 we were up to $84. We were in the mid 60'S this week briefly. Having said that, most of the hog guys I'm talking to are still making pretty good money with the prices quoted. The $75, $76, June futures are an excellent hedging opportunity. There no chart top there that we can point to but it is a very profitable left and I've been encouraging clients to start to lock that in.

Pearson: We have about five second. Are we expanding this right now?

Brugler: I think there is modest expansion here, more so in Canada.

Pearson: Thanks Alan. That wraps 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 soon will be 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 week then, thanks for watching. I'm Mark Pearson. Have a great week.

Narrator: Market is a production of Iowa Public Television which is solely responsible for its content. Major funding is provided by this and other public television stations. And by Pioneer Hi-Bred because sound information plus consistent yields can help farmers stay on track. The people who bring you Pioneer brand corn hybrids proudly support "Market to Market."

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