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Market Analysis: Jan 28, 2005

posted on January 28, 2005


Prices moved in a narrow range in the grain pits this week as limited farmer selling quickly satisfied buyer needs. For the week, nearby wheat futures lost nearly six cents. March corn was down more than a penny.

Widespread rains eased drought fears in South America this week and helped stymie any price rallies. For the week, March beans lost nearly three cents. The nearby meal contract declined $1.70 a ton.

The cotton market flew into reverse and for the week dropped $3.62.

In livestock, the February live cattle contract gained 50 cents. Nearby feeders lost $1.03. And the February lean hog contract fell by $1.75.

In the financials, Comex gold gained $2.90 an ounce. The Euro declined just six basis points against the dollar. And the CRB Index gained less than a point to close at 282.50.

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: Jan 28, 2005 Brugler: Good to be here.

Pearson: Let's talk about the soybean market. News out of South America. It's interesting, I hear when they get rain in South America that's bad because they get too much rain. So when it's dry it's actually good. Then we hear they're waiting for rain in South America. So they got rain and now the markets are under pressure in Chicago. Sort this out for me. I'm confused.

Brugler: I tend to say you can get any weather forecast you want to pay for.

Pearson: Yep.

Brugler: And it's growing season so we're getting stories to both sides. The data that I've seen shows there's no problems with moisture in the growing areas. Some of the areas away from the main soybean areas along the coast in the northern part of Brazil, for example are showing dryness but not in the major production areas. There are a few areas in southern Brazil and Argentina that really do need a drink. The forecasts were saying we get that rain this weekend. Obviously if we missed that this weekend and come in on Monday morning and those areas are still dry, we could get a little bit of a pop here. It's interesting now because we follow the Brazilian crop, with the U.S. crop it's even more important with size and production this year, but a lot of that crop is unpriced. Are we going to look at pressure down the road? We've got a situation in both corns and beans. Carriers in many cases aren't hedged on the futures or in the options on those commodities. And I think the corn market has a tendency to want to use the stick first to try and convince the producer who is unprotected to sell that commodity, particularly if he's got storage costs running.

Pearson: So what would you tell a producer out there at this stage of the game?

Brugler: Basically we're maintaining our hedges. We're looking for a strong basis. We're seeing some strong basis push because the crushers aren't able to buy enough beans at this price level. Any further weakness in the board will probably mean additional basis improvement. We're trying to maintain some kind of a price floor with put options or short futures then reward the market when the basis does improve.

Pearson: What kind of price floor are you trying to protect?

Brugler:Basically, $5.20, $5.10 and $5.20. $5.40 in the November contract.

Pearson: Let's talk about that. Let's move over to corn, too the corn market as we look ahead, look at the December contract. And you're hearing some tales of maybe increased corn acres this year because of concerns about soybean rust that's a $64,000 question. I've surveyed several seed dealers. They're not seeing any tremendous shift over to corn on corn. In fact, it's almost the same as last year. Practically with everyone we've talked to. What's your take on the market? Some of the new crop corn in the summer?

Brugler: I'm not a big fan of doing forward contracts at this price level. Most years we trade corn sometimes between January and July and we haven't done that this year. We did have an opportunity last summer to do that, but typically there's at least one shot at pricing new crop at a better price than what we're looking at right now. I think the problem in the short run is, as you mentioned, those bushels, the acres to drive those bushels is are assumed to come into the market without having to bid them up. My data suggests we might have a 1.5 million acre switch from soybeans to corn. Much of that will be in the south. It will be up and down the Mississippi river. Much smaller switches in intentions, I think, in the Midwest. Over 8 billion bushels, obviously, we've used 3 billion plus of the crop already. But we are vulnerable, again to that carrot and stick situation. And with the Chinese being more active in the export market, I think there's some danger that we have to take the prices down to be competitive or risk losing some of that export market and end up with more carryout next summer. We really want to clean things up, get stuff moved so we have a lever to rally the market if we come up with weather problems next summer.

Pearson:A dime, 15 cents?

Brugler: 20 cents for sure, 10 cents I would have to look at the short action and what the funds are doing. If we start to get them to bail out of these large net positions, I think that would be an encouraging sign. A little cash movement would help trigger that. I joke with producers, get their neighbors to sell so we can get the rally started.

Pearson: Sometimes you have to do that. Let's look at the wheat market. If you look at the worldwide supply situation, in wheat market, we've been continuously under pressure.

Brugler: Yeah. The situation is very similar to what we've seen at this point in the year in other years. and that is, we've got a comfortable supply in stocks, somewhere over 500 million bushels. It's not burdensome compares to the 900 million we had a couple of years ago, but the market starts to worry about getting those last few hundred million, either in exports or you'll hear stories about how you have to drop prices. The world production is up tremendously. 621 million tons is one of the most recent estimates. Just a huge increase from a year ago. The U.S. is really in pretty good shape stock wise but we've got to move the inventory. And just a good crop last year in wheat. Not a huge crop. I think the wheat producers in particular should be cautious about selling new crop because of the big drop in acreage. All the ice and snow that we've got in some areas in winter wheat country, it could be a pretty small crop.

Pearson:Let's talk about the cotton market. Big selloff this week.

Brugler:Big selloff. The market bought a tremendous amount of cash cotton over the two previous weeks. We've got some situation where is the price was above the loan rate, net redemption price, equities values were up. Merchants bought a lot of cotton. Now we're coming within a few weeks of the deliveries against March futures. And I think the speculator funds who had actually gone from net short to net long are getting a little nervous about what might happen to them at delivery with the merchants controlling that much cash cotton.

Pearson: The fed cattle market, as you look at what's going on there, the cattle inventory Friday afternoon. What is your take on that? I thought the report was about as advertised. It shows some expansion, some retention efforts, some growth in the calf herd. The cow crop was really as expected. It really doesn't vary that much year for year. A couple of the numbers were a little on the high side of trade estimates. I suppose if there is a reaction, there's probably a slight drift down. But the big story in cattle is still the wholesale market. The box beef prices ran into a brick wall about 10 days ago. We've been coming back ever since. If, I would anticipate that move would probably stop within the next week.

Pearson: And, of course, that wholesale market, that tends to translate right back to the feeder. And there's a little concern out there right now?

Brugler:Exactly. There's nervousness that the packers aren't coming to the feeders' defense. He's got fairly high costs because of what he paid for feeder cattle. He needs a break even that he's not currently seeing. But at the same time, the longterm chart in cattle is up. Support technically at $82. There's really not that big of a supply as long as we keep the Canadians out, whether there's politically feasible or not.

Pearson: That's right. And we'll see what's going to happen on that front, and also the situation with Japan and the rest of Asia. By and large, you're fairly positive. You look at these input costs, as cheap as they've become, this cattle on feed thing should work.

Brugler:What we've been encouraging people to do is look at cattle crush spreads. $135, even $130 you make money. We've got some opportunities out in September and October placement where is the crush has been trading $140. So that's a good profitable price that you can walk in with the crush spread and kind of ride out whatever goes on with the border and with Japan.

Pearson:Let's talk about the hog business. Great year in 2004, great export demand, good product demand. And these hogs have held in there pretty good, we don't see that expansion really.

Brugler: Producers in the U.S. have had great discipline. They're still recovering from the losses we had in 1998, 1999. We had now a whole year where we basically made some money in hogs. I think we're starting to see little hints of new buildings going up or plans for new buildings. The consumers helped us out. The consumer demand, per capita demand has actually shifted slightly to the right. And the export market has been great all year. As long as we can keep exports going. That happens on the margin. Those tons that go out tend to have a nice impact on the price.

Pearson: As you go forward in 2005 what's your outlook?

Brugler: We saw weakness in the capital demand in December. Technically, it's very overbought, but at the same time, we have a good cash index.

Pearson: An optimistic note, we're going to wrap up this edition of "Market to Market" as well. But, if you'd like more information from Alan on just where these markets may be headed, be sure to check out the streaming audio of the "Market Plus" page on our "Market to Market" web site.

And of course, be sure to check in next week when we learn how American farmers are benefiting from the research of a combine expert from down under. Until then, thanks for watching. I'm Mark Pearson, have a great week.

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