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Market Analysis: Dec 24, 2004

posted on December 24, 2004


The grain pits were in a holiday mood during a quiet, trade-shortened week. For the week, nearby wheat futures gained more than five cents. March corn advanced by more than two cents.

Brisk export business shored up the soybean market. For the week, January beans gained just under two cents. The nearby meal contract was up $2.60 a ton.

Swelling world inventories turned the cotton market sluggish. For the week March cotton lost $1.23.

In livestock, the December live cattle contract jumped $4.00. Nearby feeders improved $1.95. But the February lean hog contract lost a nickel.

In the financials, Comex gold gained 30 cents an ounce. The Euro after a short lull moved to a record high against the dollar, and for the week surged 215 basis points. And the CRB Index dropped nearly three points to close at 282.50.

Here now to lend us their insight on these and other market trends are two of our senior market analysts, Walt Hackney and Doug Jackson. Welcome back.

Market Analysis: Dec 24, 2004 Pearson: We just showed nice pictures of soybeans being harvested and we had a nice rally this week in the soybean market. Is this time to make sales? What's ahead for beans?

Jackson: Well, we had an interesting situation but we had a little bit of reprieve and rebound from the October lows. Primarily because of tight final holdings. South American producers have sold only a mere fraction that they normally have sold this time of year. U.S. farmers have also been reluctant sellers at prices of half of what they were a few months ago. And yet we had record demand exceeding the previous biggest quarter demand by about 1% this year. So we have been pulling on the pipeline to try to source those inventories. We had inversions in the futures, sky-high, record-high basis levels and that helps support these futures. Yet at the same time the weather is perfect in South America. The crop is 15% bigger than the U.S. crop this year and we had a record crop here. The biggest supplies in both absolute terms and relative to zphand that we have ever seen by the first of March. And a producer in both another and South America, as I just said is behind the curve in making sales.So all of these things look like they can push prices lower by spring or summer, particularly if U.S. weather is good. So there is -- we think there's substantial risk. But the down side, even though the markets have been bottoming since harvest, we want to be very careful here to not underestimate the potential to make new lows later in the spring and summer. Some of the good news, if you will, producers in the United States only redeemed about 1/3 of his inventory through the L.D.P. so there's protection and 1 2/3. But we are not optimistic about the price return, unless there's a sudden weather reversal in South America, which we don't at this point see.

Pearson: So serious pushes in spring and early summer?

Jackson: That's right. The strapping hold prices are moderately higher prices.

You have to be betting on a summer weather problem or an out-of-control Asian soy rust problem next summer and we are talking a month down the road for that.

Pearson: So at this stage of the game, producers of beans, tell them to hold or go ahead and sell?

Jackson: They can make sales the next several weeks. We are seeing good demand. This is the finale, final steps of the buying demand here before it switches to South America. We think farmers selling will pick up just as demand starts to dwindle. This will be a good opportunity to make cash sales with the market inverted. The market now.

Pearson: Let's talk about corn. As we look at the corn market and what it's done since harvest, it would appear as though, Doug, we have a corn market that's maybe bottomed, just kind of cruising along here in kind of trading range.

Jackson:That's right, Mark. The next thing on the agenda will be the January 12 stocks and final production report. This, of course, was the great surprise last year that started this on the bull market in the spring last year, when we had the biggest November to January production drop in history last year. But the market still doesn't expect anything significant this year. Of course, that's how we get surprised but it will take something dramatic in the January report to change the generally sideways, more than adequately supplied situation until summer. Next year, of course, more demand, 200 million bushels of increasing annual ethanol usage right now. An 11.2 demand base next year, record demand base. But, if we have normal weather, normal yields or better-than-normal weather, prices will move lower in the next year. Of course, any kind of repeat last year's incredible record yield, there could be substantial downside long-term into summer. And half the crop has no price protection whatsoever. Kind of a dangerous situation. Hold on to corn if you're betting on a summer weather market next year. But normal weather or better-than-normal weather, and we will move lower, perhaps decidedly lower, into the end of July, which many times are major lows if the crops develop there next summer.

Pearson: We hear about demand.We hear ethanol demand and, of course, China question, which is always out there. You don't think it will be enough if normal conditions persist to drive this market?

Jackson: It wasn't all good news but incredible market, Chinese corn exports in the first three months of the year are down 140 million bushels from what they exported a year ago. And yet United States shipments are no better than a year ago. So you can see how much other competition there is from other grains around the world, slow demand in Asia, bird flu problems, mad cow problems. Hot weather problems in the summer that have cut that Asian demand. So the demand is not going to be look for price recovery.

Pearson: Let's talk about retail. You mentioned plenty of wheat around. What's your take on wheat prices ?

Jackson: There's an interesting situation coming up in that all-important January 12 report, where we will get our first winter wheat acreage. We have a number of states from Ohio to Arkansas to Georgia that have all indicated a sharp drop in winter replanting due to wet weather. So we could have an acreage surprise in that report. Which would be a moderate surprise to the world market. But U.S. production is only 9% of world production and a moderate change in one of our sub classes will not turn the whole thing around but could be a surprise in that January report. One worth waiting for to make new sales. Otherwise, the world is still reacting to a record crop in eastern Europe, western Europe and around the world last year. Stocks have rebound in a situation much like corn, will really be just one of going sideways until they have a production problem, legitimate, significant production problem some place in the world. Right now U.S. winter wheat conditions were some of the best ever going into the warm season. It will take some unforeseen weather development not on the radar screens to do something to prices. Otherwise sideways in the spring.

Pearson: Let's switch gears and talk livestock. Walt Hackney, interesting week for cash cattle. Interesting developments on several fronts. First of all, the futures have reflected this as well, been quite a rally.

Hackney: Mark, excellent turnaround on what -- compared to what was expected in this beef trade. You know, 10 short market days ago, we were totally prepared for an 83% or less cattle market. Demand on beef was driving, prices were lower, packers were geared for a lower market. That reported the hand, I'm afraid, because as we got into this in the past, as you're aware, this market jumped $5 to $6 late. And we came from $1.43 just to $1.42. This next week they are anticipating $1.45 going into January, it looks like $1.42 to $1.45 will hold that cash market. Demand picked up to the extent that quite expectedly and the cattle industry as we approach the new year is almost 180-degree turn around in attitude towards the market itself. We are current in the lots. We came out heavy wheat posture, and all of our sudden our cattle are very, very well fed and very well accepted as far as the value and those appear that we will have an excellent demand on our beef trade going into the first part of the year.

Pearson: All right. Real quick, these feeders are still pretty pricey. People are stepping up.

Hackney: Again the report viewed a lot of optimism, too, buying feeder cattle. You have 10% fewer placements, for instance, in November, given the new herds and excellent chance to rally. Given the cattle feeder, much more optimism about buying. The feeders steer heifers so you have had a rally in the feeders and the price is high but it may be more than an acceptable price today than it was two, three weeks ago.

Pearson: Let's talk about the flip side. This cash hog buying is under pressure. We had such a good move really since June that it's been pretty upbeat. This week cash markets, where we had some, we saw prices soften up.

Hackney: It's been a mystery why the producer sector have had their cash physically erode to 43 or so, $45 cash level. It's possible those hogs are still at a break even or making just very little profit. The point being with these 2 million head a week kills, and even this week, 400,000 head a day in the holiday week, is nearly unheard of. It simply means the availability and mild inventory is still out there. Producers have done the right thing by continuing it market in this continually depreciating market. We go into the first of the year, we will still have a huge inventory of hogs out here to market. But there's been some indication that the weight itself is coming down indicative of a more current inventories as we get into January.

Pearson: So the live hog sale market, as Doug mentioned, these feed cows are not hurting anybody right now.

Hackney: They are not hurting anyone and will not hurt anyone, if Doug's analogy is correct.

Pearson: Thank you very much, Walt. Thanks, Doug. That will wrap up this edition of "Market to Market." If you would like more information from our experts on where the markets are headed, be sure to check out the streaming audio on the Market Plus page on our "Market to Market" website. And be sure to join us next week when we will look back at events that shaped 2004 and ahead to the issues that loom in 2005. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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