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Market Analysis: Dec 31, 2004

posted on December 31, 2004

It's been a quiet week in the grain pits between the holidays. For the week, nearby wheat futures lost two cents. March corn dropped more than two cents.

The soybean market continues to try to entice farmers into selling. For the week, January beans lost nearly three cents. But the nearby meal contract was up by $1.20 a ton.

The cotton market enjoyed a small upgrade and for the week gained $1.87.

In livestock, the December live cattle contract went off the board Thursday by closing $2.50 lower for the week. Nearby feeders fell $3.40. But the February lean hog contract jumped $2.60.

In the financials, Comex gold retreated $3.50 an ounce. The Euro continues to strengthen against the dollar, and for the week gained another 154 basis points. And the CRB Index climbed nearly two points to close at 284.40.

Here now to lend us their insight on these and other market trends are two of our newest market analysts, Erin Golly and Darin Newsom. Welcome back.

Market Analysis: Dec 31, 2004 Pearson: Good to have you with us. Let's talk about the grain market, Darin. Let's talk first about soybeans. They have been so exciting this year, a lot of ups and downs. Some great opportunities to sell early on, a lot of people missed those, we've been in the throws of harvest, they're still trying to get farmers to make some sales.

Newsom: The soybean market has been interesting. We've come 40, 50 cents off the market low. The cash market has done very well. If you look at the, further out, we're starting to build a little bit of carry in this market. Outside of the contract which went into delivery at the end of this week. What that says is there's not as big a push now they are cash soybeans that we've seen over the last three to four weeks, and the marketing opportunities now could be, if you've got them hedged, the opportunity to start rolling those hedges out might be there. We might be looking at a situation where you could role these things out to the May, to the July, toll July futures contract. You might be able to hold on to them for a little while longer.

Pearson: Producers out there in a position where they can either hold beans or maybe look at pricing beans ahead, they're talking about a big crop down in South America. A lot of people have been looking at that, looking at deferred contracts. Are there big sell opportunities?

Newsom: That's the downfall of trying to store and hold and wait for a better market. We're staring at the face of a huge crop. There's a lot of uncertainty with South America. If that is the case, it would not be bad to say OK. We've seen a 40 cent, 50 cent rally in this market, it normally rallies into spring. It's not necessarily a given this year. If they're a little bit squeamish about sitting and waiting, taking advantage of these better prices at the end of the year isn't all that bad.

Pearson: Let's talk about what's been happening in corn. A huge crop here in the U.S., we're looking at the typical fallout from that prices being under some pressure. What's ahead for corn? I keep hearing about demand out there. What's ahead for corn?

Newsom: The corn market is very similar. If we want to talk about a market that has just gone flat, futures have traded seven or eight cents trading since September, maybe a 10-cent range since September. There hasn't been much reason for it to do anything. It's found good support in the low $2, but can't quite get through $2.10. This has a large carry out to the July, September contract. If a producer already has this hedged, they do have the opportunity, they have had the opportunity to roll these hedges or protection out and wait for the market to come back to them. As of right now, market is still saying it doesn't want, it's got enough corn on hand to meet command. We get the feed numbers, we get these things. They've got enough corn in hand right now, so we've seen basis go flat, there's no rush to sell at this point.

Pearson: So you're not in hurry on marketing corn. Same thing is true on 2005, you wouldn't look at December contracts with any longing at this point?

Newsom: The magical number people talk about is $2.50, so if we can get the December corn into the $2.50, $2.55 range, because we're looking at 1.851.9 bushel carry out, there's going to keep a lid on that, barring any type of adverse weather next Spring.

Pearson: As producers are making plans, the other -- as producers are making plans, I wanted to talk about soybean, the fact we have Asian rust in the United States, how much can be attributed to that?

Newsom: I think the early part of it had a lot to do with it. But it didn't have as much as it might have appeared. What we've real Illinois got is the continued strong cash market. A lot of, I think a lot more strength in the futures came in the cash market, fed off processors. We have crush numbers come every month, continuing at higher than projected paces. We've got solid demand in the soybean market. They were looking for a 14% increase this year, only a 2 1/2% increase last year. We're going to be dealing with now over the next two or three months a much less expensive product than we were looking at this time last year. That could keep demand strong. The demand in the soybeans has been very solid. There's been a bit of a rally tied to rush, but it comes back to that.

Pearson: Talk about how many acres could be switched from beans to corn.

Newsom: I've heard 1.5 to two million acres. What a lot of folks are watching right now is the spread between the December corn contract and the November bean contract. Right now it's out around the 2.4-to-1 ratio. We watched that last year as well. This year, I think they'll take that into account, how watch can they net out along with how much is it going to cost to take care of any possible rust problems? I think they'll weigh all that in together.

Pearson: Not a big hurry to sell corn. What about the wheat market?

Newsom: The wheat market has not -- the wheat market has not looked really good. Orders from Pakistan were supposed to come in, they wound up buying Australian wheat. Egypt was in the market, we wound up with a third of their purchase. On the other hand, the futures have held together fairly well. We saw a bit of a rally. But overall, the wheat market doesn't look that good. We've got the winter week, we had the winter kill scare going on. The first time they're going to try to kill the wheat market for next year. The wheat looks in too good of a situation for the new crop a little too big supply on the old crop to build a lot of bullish enthusiasm into this market.

Pearson: So --

Newsom: I think I'd wait for the next scare to come along or the next big push. A very solid spring wheat basis. This has helped to support the market. I think I would hold off a little bit, ride the coat tails of the other grains. But I wouldn't wait for much. There's too much out there.

Pearson: Real quick, cotton market. Victim of some success.

Newsom: A huge, record supply. I think the March futures have taken other. They've got good solid support at 42 1/2. It has stabilized in here since Thanksgiving. So not in any hurry to do anything, but it may have been at least formed a base down here.

Pearson: Darin Newsom, thank you so much. All right, let's talk livestock. For the balance of the show. We've been watching this cattle market all year. Mad cow scare up in Canada opening up the Canadian cattle into the U.S. Erin Golly, what's your outlook for cattle?

Golly: We've seen a volatile market last week alone. The cattle market saw a rally the last two weeks. There was so much bullishness in the market already, and producers were continuing to feed their cattle heavier, not wanting to miss out on the rally that unfolded the year before. Since that time, we have seen that wash out, we've cleaned up heavy supplies and had a nice rally. I guess the most positive thing is that we're in the process of moving cash premium to the future. I think if we can continue that trend, cattle weights will stay manageable, I think that we'll probably trade right around in the upper 80's to lower 90's for a while. If we have weather problems, we could trade higher than that.

Pearson: But you feel we're pretty cleaned up.

Golly: I do think that.

Pearson: What about Canadian cattle in the U.S.?

Golly: It's pretty negative right now. There's a lot of factors to deal with that. As you said previously, we did have the announcement that March 7 we'd start accepting Canadian cattle under 30 months of age. Analysts said that would be about 2 million head of cattle. It's really throwing a flip into whether the boarder is going to open or not. It's up in the air. It is negative for the feeder cattle market.

Pearson: Demand has been strong. If you were feeding cattle, you're buying expensive calves, what would you be doing in terms of strategy?

Golly: Though we had that rally, we've seen strong, we'll continue to see cheap feed input along with a cash cattle market. I think we'll slide more in the cattle market just through this news.

Pearson: And prices have been so strong, it's time to wake up from the dream almost.

Golly: I feel bad that's the situation, but there are a couple of things that could happen. There's a possibility there. Congress, like you said earlier in the show, Congress has up to 60 days to veto the USDA proposal, but they don't think that's going to happen. They could put proposals up that we don't open the border. What they did earlier this year was successful. If they do that again, that could throw another loop in it.

Pearson: They've been very vocal.

Golly: Yes, they have.

Pearson: Let's talk about an early positive and it was confirmed this year, hogs and pigs report.

Golly: Very surprisingly bullish. Everyone was looking to see some expansion in the the breeding you were in -- estimates were around 101%, and they actually came out in 99%. In our current company which purchasing breeding animals, we saw what the report confirmed actually earlier in the year. In the late spring of 2004, producers were looking at high sow prices along with $3 or $4 corn. There was talk of large supplies into the fourth quarter and possibly test capacity into the fall. All through 2004, we didn't see expansion. What we did see is that sow producers and smaller operations weren't looking which at that time put me in an exit strategy.

Pearson: What's your take for prices on futures?

Golly: We think the cash could rally up.

Pearson: Some great insights. Thanks so much Erin and Darin. Some great ideas as we wrap up 2004. That wraps up this edition of "Market to Market." But if you'd like more information from our experts on where these markets are headed, then be sure to check out the streaming audio on the market plus page at our "Market to Market" website. And be sure to join us again next week when we'll learn how some Illinois pork producers removed the middle map by launching their own packing company. Until then, thanks for joining us and have a great week.

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