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Market Analysis: Jan 07, 2005

posted on January 7, 2005

The crop estimates along with a positive supply-demand outlook lent support to grain prices this week. For the week, nearby wheat futures gained more than two cents. March corn improved by two cents.

Soybean prices rallied this week as U.S. inventories decline ahead of the South American glut. For the week, January beans climbed four cents, but the March contract lost five. The nearby meal contract was up by just 30 cents a ton.

The cotton market enjoyed another small upgrade and for the week gained $1.79.

In livestock, the February live cattle contract gained $1.10. Nearby feeders advanced $2.00. But the February lean hog contract dropped $1.45.

In the financials, Comex gold retreated almost $19 an ounce. The Euro plunged against the dollar, and for the week lost a whopping 608 basis points. And the CRB Index sank more than five points to close at 279.25.

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

Market Analysis: Jan 07, 2005 Pearson: Wow, what a week. You look at these indexes, things really pretty wild. Pretty wild in soy beans, pretty wild in the accompanying bean products, as well. But let's talk about soy beans and what you see ahead, as far as the soybean market is concerned. Going into 2005, lot of variables out there, Asian soybean rust, overseas demand, of course what could happen in south America in terms of their crop.

Robinson: Mark, before we forget, you mentioned earlier, it's next Wednesday the USDA will freshen supply and demand projections. So there are always the possibility of surprises. And in soy beans, perhaps the USDA will reduce overall production based upon the lengthy and delayed harvest in parts of the southern southeastern United States, as well as the far northern plains. That is certainly possible. To an extent it remains to be seen. Mark, it's kind of interesting that the prospects in the southern hemisphere remain at least as best I can report tonight, online for trend line yields. Perhaps better than that, in select parts of central northern Brazil. There are weather issues in southern Brazil. It's been dry. There is a forecast this weekend of scattered showers, so we'll see if they in fact do materialize. The week was interesting, first week of the year. There's a lot of conversation about various commodity index funds, reallocating positions, and buying additional grain, futures, contracts, to accommodate that reallocation, including soybeans. That I think combined with the weather and the fact that China continues to be a fairly aggressive buyer of beans, kept and underpinned the market pretty solidly. Oil and meal exports remained pretty encouraging, Mark. As you mentioned a few moments ago, we have the onslaught of that harvest in the southern hemisphere staring us in the face, February, march and April of 2005. I think there is going to be a pricing opportunity between now and the availability of that February-march grain out of the southern hemisphere. I'm aiming now, old crop beans measured by the March futures, mark, I think will take another swing at that 560 area, at which point I made no sale, I would certainly make one at that point.

Pearson: Good target to look for. Look at the corn market. First the futures, Virgil, as you can see from our chart, corn came up a little bit this week, as far as the board is concerned. Longer term, what are you seeing? What a pre-- what should a producer be doing?

Robinson: For short-term observation, early in the week we established contract lows, came off those and closed the week higher. What's known as kind of a reversal week to a technician, one who pays attention only to the price formations on weekly charts. That is an encouraging sign and would suggest there is additional short covering ahead of us. I wouldn't argue that. I think there is another weather front bearing down on the middle part of the country next week, middle-late part of next week, which is likely, if it materializes, to impede the grain flow, disrupt the pipe. I think there's another -- a little additional bounce in corn here, in the near future. March futures I think had the ability to trade towards 215, perhaps something fractionally above that. At which point, mark, I would evaluate my local basis. If it's average or above average, I've made my election, previously, I'd sell some cash corn. If I hadn't, again, I would evaluate my basis if it's average or above average. I think a sale is appropriate if you want to repurchase corn, traditionally, some time during the month of February, futures normally are at or near whatever the low proves to be, in the previous month. So that is somewhere around the $2 mark. Repurchase would be appropriate under those circumstances.

Pearson: A good thought there. Let's talk about wheat futures first. What you see now as we head down the road, as far as the wheat market is concerned. Again, a little bit stronger prices this week.

Pearson: You mentioned and went through a little scenario. Wheat seedings. Most private analysts are of the opinion that winter wheat seedings, year over year are going to be lower anywhere from 100,000, upward of a million acres. That has underpinned the market. Quality is an issue. And we happen to possess, I think relatively high-quality wheat. And for select importers, that is in demand, kept the market firmly underpinned. Near-term targets, Chicago March futures, 315 to 20, sell them, or use them to make cash sales. Kansas City, march futures, above 352, I sympathy a good and likely target. Minneapolis, march futures at 355 to 60 area. I think is an appropriate area, to make a cash sale based upon that kind of a futures level.

Pearson: All right. Our national wheat index, from D.T.N., which underpins just what you're saying, that we should be close to an opportunity here. Let's talk about cotton market. Cotton showing strength this week, as well. Again, are we just kind of beginning of the year bounce going on here? Look at the cotton, despite the demand outlook is not that bright. Is there a lesson there for us?

Robinson: We've talked supply in cotton for week after week after week. World stocks project 46.5 million b bails. Expected to grow year over year. We beat the supply issue, I think to death. Demand has improved, mark. China, again, you know, a common buyer of a lot of things, has been active in the market, as have others. I think that the spot futures contract, in New York, the March futures contract's position here, to make a swing at 48.5 to $49 marks. It has been discussed, several weeks ago, we used that price area to make a sale and repurchase with something, whether it was an option strategy or futures contract. I'm going to stick in that camp. I like that prospect. A lot of weather can develop between now and the availability of new crop. If you are of the opinion, and I happen to be, that global G.D.P. is likely to grow here in 2005, anywhere from 4% to 5%, and with that, and to accompany that additional demand for various agricultural commodities, I think a lot of our commodity markets will, underpinned to some extent by that type of development. I like the prospects of world growth here over the course of the next couple of years.

Pearson: All right. Let's talk about livestock, speaking of growth. We are going to need to grow demand for beef if Canada opens up for us, first woog week of March or so. Hopefully we get Japan open, hopefully this will all work out. But there is concern down the road about where this cattle market may be headed.

Pearson: I'm concerned, too. A difficult market to handicap with the variables you just mentioned, prior to the ban, Canadian beef imports accounted for, I believe, for as much as maybe 7% or 8% of U.S. beef production, which is pretty significant number. The issue there, around the new discovery, I think there's going to be a lot of debate here in the next couple of weeks. I'm not sure that March date or time frame will in fact become a reality. So with that in mind, mark, I think again, I'm going to stay with the projection we made here, a few weeks ago. I think cash cattle, the first half of 2005, live cattle prices, I would try and defend the 85 to $86 mark, be it a forward cash contract or some type of hedge. I think that's a fairly attractive price here.

Pearson: A good point. Let's talk about the hog market, which was the glamour of livestock crop of 2004. And usda. It was pretty friendly. Are you buying into that report, or do you think we have expansion going on?

Robinson: Historically when you have two or three consecutive profitable quarters, that normally nurtures expansion in the industry. This year it did not for whatever reasons. Mark, I'm going to take it at face value, and given those numbers, I think we can sustain and support a $50 to $54 live market for an extended period of time. Given the opportunity, futures less a basis, depending on geography, I'm going to defend that $50, $54 area from now through July of 2005.

Pearson: Excellent. Thank you so much. Want to wrap up this edition of "Market to Market."- But if you'd like more information on where these markets are head, advice the the streaming audio on the market plus page at our "market to market" website. Of course be sure to join us again next week when we'll learn how a California man instills rural values in urban youth. Until then, thanks for watching.

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