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Market Analysis: Sep 17, 2004

posted on September 17, 2004


General agreement in the grain pits that the corn crop is even larger than last week's USDA estimate did little to depress prices. For the week, nearby wheat futures lost a fraction. December corn fell seven cents.

Harvest-time pressure on soybean prices was mollified somewhat by good export sales. For the week, November beans lost 21 cents. The nearby meal contract dropped $2.90 per ton.

The cotton market was quiet in the wake of Hurricane Ivan, and for the week was down $1.04.

In livestock, the October live cattle contract gained 43 cents. Nearby feeders gained $2.35. And the October lean hog contract jumped $5.95.

In the financials, Comex gold gained $3.80 an ounce. The Euro dropped 88 basis points against the dollar. And the CRB Index advanced more than three points to close at 275.75.

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

Market Analysis: Sep 17, 2004

Robinson: THANK YOU MARK. NICE TO BE WITH YOU.

Pearson: WELL, GOOD TO HAVE YOU. LET'S TALK ABOUT THIS WHEAT MARKET FIRST. WE'RE THROUGH HARVEST. WE'RE LOOKING AT WHAT'S AHEAD PRICE-WISE AND WHAT'S GOING TO DRIVE WHEAT PRICES. OF COURSE, THEY'RE LOOKING AT THIS CORN CROP AND ALL THOSE OTHER FACTORS OUT THERE. WHAT'S AHEAD IN WHEAT NOW, VIRG?

Robinson: SOME HARVEST DELAYS, MARK, IN PARTS OF THE NORTHERN PART OF THE UNITED STATES, AS WELL AS THE CANADIAN PRAIRIES. AND THAT'S OF CONCERN, MARK, TO THE EXTENT THAT QUALITY AND PRODUCTION IS AT JEOPARDY BECAUSE OF DELAYS. AND I SEE BEFORE LEAVING MY OFFICE TO HEAD OVER HERE THIS AFTERNOON, SOME ADDITIONAL RAIN AND RELATIVELY POOR WEATHER IN MUCH OF THE WESTERN PART OF CANADA AGAIN FORECAST NEXT WEEK. SO A BRIEF REVIEW HERE MIGHT BE APPROPRIATE, MARK. AT PRESENT USDA IS PROJECTING THAT WORLD WHEAT PRODUCTION WILL BE ABOUT 611 MILLION METRIC TONS, UP FROM LAST YEAR'S 550 OR AN INCREASE OF ABOUT 10 PERCENT. AND ENDING STOCKS YEAR OVER YEAR, MARK, ARE PROJECTED TO GROW FROM LAST YEAR'S 132 TO THIS YEAR'S 142, OR UP ABOUT 7 PERCENT. SO THE IDEA IS, OF COURSE, THERE'S PLENTY OF SUPPLY. THE POINT OF ORIGIN, OF COURSE, IS AN ISSUE. BUT AT PRESENT, MARK, I THINK CHICAGO WHEAT FUTURES PIERCED 340 THIS WEEK AND THEN QUICKLY PULLED BACK. I THINK THERE WILL BE ANOTHER RUN TO THAT LEVEL OR SOMETHING ABOVE IT. FOR PRODUCERS WHO HAVE WHEAT TO SELL AND HAVE DONE NOTHING, BASED ON CHICAGO FUTURES, I THINK THAT 345 TO 355 SOUNDS A GOOD PLACE TO MAKE A SALE, MARK. AND I WOULDN'T HESITATE TO MAKE A SALE THERE.

Pearson: THEY ROUNDED THE CORN CROP UP IN THE LAST USDA REPORT TO BASICALLY 11 BILLION BUSHELS, VIRGIL. AND WE HAVE HAD REPORTS, SOME OF THE PRIVATE ANALYSTS ARE SAYING, MAYBE WITHOUT ANY FROST WORRIES, WE COULD BE ELEVEN BILLION PLUS. TALK ABOUT THIS CORN MARKET. TALK TO THOSE PRODUCERS OUT THERE WHO MAYBE HAVEN'T DONE ANYTHING YET IN TERMS OF MAKING SALES.

Robinson: WELL, WE'RE AT A POINT NOW, MARK, WHERE IN MANY INSTANCES WE'RE TALKING ABOUT LDP, SO WE'RE BACK INTO THAT TYPE OF PRICING OPPORTUNITY OR PRICING WINDOW. MARK, YOU KNOW, THERE WILL BE PEOPLE THAT TAKE EXCEPTION WITH THE IDEA OF AN 11-BILLION-BUSHEL CROP, PARTICULARLY IN PARTS OF THE NORTHERN CORN BELT. AND IT REMAINS TO BE SEEN HOW THEY RECOVER FROM LAST WEEK'S WEATHER EVENT. AND BY THAT I MEAN THE TORRENTIAL RAINS IN SEVERAL AREAS. SO WE'LL GAUGE AND SEE HOW THAT PROGRESSES IN THE OCTOBER REPORT. BUT YOU ARE CORRECT. I MEAN IN TERMS OF SUPPLY, WORLD COARSE GRAIN SUPPLY IS PROJECTED AT 959 MILLION METRIC TONS IN THIS SEASON, THE '04-'05 SEASON. THAT'S UP FROM THE PREVIOUS YEAR'S 900, OR AN INCREASE OF ABOUT 6 PERCENT. BUT HAVING SAID THAT, MARK, ENDING STOCKS ARE PROJECTED AT 130 MILLION METRIC TONS, FRACTIONALLY HIGHER THAN THE PREVIOUS YEAR. SO THAT DOCUMENTS, I THINK, AND UNDERSCORES THE FACT THAT THE DEMAND BASE WE HAVE BUILT FOR COARSE GRAINS IS QUITE LARGE AND GROWING. THAT TO ME WILL KEEP THE VALUE OF 2005 FUTURES SOMEWHERE IN THIS 240 TO 260 RANGE FOR THE FORESEEABLE FUTURE. OLD CROP CORN, MARK, I THINK WE'RE AT A POINT NOW WHERE CARRYING CHARGES HAVE WIDENED. I'D BE INCLINED, IF YOU ARE STORING GRAIN, TO PAY ATTENTION TO THOSE CARRYING CHARGES. WE'RE AT ABOUT 65 PERCENT OF FULL CARRY, AS I CALCULATE IT. ANOTHER COUPLE OF CENTS IN THOSE SPREADS, AND I'M REFERRING SPECIFICALLY TO THE DEC.-MARCH, DEC.-MAY. I'D TAKE ADVANTAGE OF THAT FULL CARRY. I'D SHORT HEDGE THOSE DEFERRED FUTURES CONTRACTS, WAIT FOR THE BASIS TO APPRECIATE, AND PICK UP THAT ADDITIONAL 15 OR 20 CENTS. SO I THINK THERE ARE SOME HEDGING OPPORTUNITIES FOR THOSE WHO POSSESS ON-FARM STORAGE. FLAT PRICE-WISE, MARK, I THINK WE'RE DESTINED HERE FOR A RUN BELOW $2 AT WHICH POINT, IF I'M AN ETHANOL MANAGER AND PROCURING SUPPLY FOR ETHANOL -- AN ETHANOL PLANT, FOR EXAMPLE, I'D CERTAINLY HAVE A BOOK OF GRAIN, WHETHER IT'S FUTURES AND/OR CASH. AND IN SELECT AREAS, I THINK THE CROP WILL BE LARGE ENOUGH IN COMBINATION WITH THE BILLION-BUSHEL CARRYOVER FROM LAST YEAR THAT WE'LL SEE SOME AWFULLY WIDE BASIS VALUES, MARK. AND I WOULD BE INCLINED TO PROCURE THE CASH UNDER THOSE CIRCUMSTANCES AND NOT THE FUTURES.

Pearson: ALL RIGHT. SOME EXCELLENT STRATEGIC POINTS. WHAT ABOUT ON THE SOYBEANS, VIRGIL? WE'VE BEEN WATCHING THAT ONE CLOSELY, AND WE'RE JUST -- WE CONTINUE TO SEE THE MARKET CRUMBLE. SO WHAT'S AHEAD, VIRG? ARE WE GOING TO BOTTOM A LITTLE EARLY MAYBE?

Robinson: WELL, MARK, I THINK A LITTLE PREMATURE TO TALK ABOUT A BOTTOM. BUT HERE AGAIN, YOU KNOW, I THINK WE NEED TO ALERT OUR LISTENERS TO THIS SUPPLY SCENARIO. AND THAT IS AT PRESENT, YOU KNOW, PROJECTING 381 MILLION METRIC TONS OF OILSEEDS IN THIS CROP YEAR, UP 12 PERCENT FROM LAST YEAR. ENDING STOCKS GLOBALLY ARE PROJECTED TO GROW BY 26 PERCENT YEAR OVER YEAR. SO CLEARLY, THAT IS THE PREMISE BY WHICH THE MARKET HAS BEEN GOING THROUGH ITS PRICE DISCOVERY PROCESS, MARK. I THINK THERE'S THE CHANCE IN THE NEXT TWO OR THREE WEEKS, GIVEN SOME WEATHER CONCERNS -- AND AGAIN, YOU MENTIONED THE HURRICANE -- THE NEWLY FORMING HURRICANE: WILL IT COME; WILL IT MAKE LANDFALL; WILL IT NOT? I'M NOT SURE. THERE'S SOME COLD WEATHER AND SOME POOR WEATHER PROJECTED IN THE WESTERN PART OF CANADA. IT MAY DROP INTO THE NORTHERN TIERS OF THE UNITED STATES. SHOULD THAT OCCUR, NOVEMBER SOYBEAN FUTURES COULD BOUNCE BACK TO $6 VERY QUICKLY, MARK, BECAUSE THE SPECULATIVE COMMUNITY IS SHORT, AND SHORT IN RECORD PROPORTION. I WOULD USE THAT OPPORTUNITY, MARK, AND FOR THOSE WHO ARE OF THE OPINION -- AND I HEARD THE OPINION LAST WEEK VOICED HERE, BASED ON SOME CYCLICAL STUDIES, THAT FUTURES COULD AGAIN TRADE BACK TOWARDS $8 AT SOME POINT IN THIS CROP CYCLE. I'M NOT HERE TO ARGUE THAT. IT CERTAINLY COULD HAPPEN. I WOULD BE INCLINED, HOWEVER, TO USE SOME TYPE OF MINIMUM PRICE DEVICE, SHOULD FUTURES RECOVER BACK TOWARDS $6, MARK, IN THE NEXT TWO TO THREE WEEKS. AND AS WE VISIT TONIGHT, I THINK WE'RE ALIGNED FOR SOME TYPE OF RECOVERY BACK TOWARDS THAT NUMBER.

Pearson: ALL RIGHT. AND THE WEATHER FACTORS REMAIN, AS YOU SAY.

Robinson: RIGHT.

Pearson: ONE OF THOSE THAT'S ALSO IMPACTED, OF COURSE, IS COTTON. WE DON'T REALLY KNOW WHAT THE IMPACT HAS BEEN FROM HURRICANE IVAN ON THE SOUTH, BUT THERE CERTAINLY IS SOME EXPOSURE AND CERTAINLY POTENTIAL FOR DAMAGE, PARTICULARLY IN ALABAMA. WHAT'S YOUR TAKE ON THIS COTTON MARKET? NOT A LOT OF MOVEMENT THIS WEEK? SOFTER, IN FACT.

Robinson: I AGREE, MARK. HARD TO QUANTIFY THE DAMAGE THAT HAS BEEN INFLICTED DOWN THERE. BUT I CAN TELL YOU, THROUGH THE COURSE OF THE LAST FEW DAYS, A COUPLE OF CASH OBSERVATIONS. ONE, THE BASIS AS MEASURED BY VALUE IN MEMPHIS HAS TIGHTENED OR NARROWED SHARPLY, AND I SUSPECT THAT'S FAILURE TO PROCURE SUPPLY AND FROM PRODUCER, AND SO ON, AND CONCERN ABOUT THE CROP SIZE. AND I DID NOTICE THE FUTURES MARKETS, THE SPREADS IN THE NEW YORK FUTURES CONTRACTS ALSO NARROWED, MARK, WHICH IS INDICATIVE OF DEMAND. NOW, I KNOW THE PRICE ISN'T PARTICULARLY ATTRACTIVE. BUT IF I'M A PRODUCER WITH COTTON IN HAND, BE IT OLD OR NEW, I THINK I'M INCLINED HERE TO KIND OF LEVERAGE MY MONEY BY SELLING COTTON INTO THIS STRONG BASIS AND REPURCHASING THAT INVENTORY, MARK, WITH EITHER A FUTURES CONTRACT OR SOME TYPE OF OPTION STRATEGY. AND AGAIN, I'M NOT MAKING A STATEMENT HERE ABOUT PRICE, BECAUSE PRICE AS MEASURED BY HISTORICAL VALUE ISN'T PARTICULARLY ATTRACTIVE. BUT THE DEMAND, WHEN MEASURED BY THE BASIS WHICH, IN MY OPINION, IS THE BEST LOCAL BAROMETER OF DEMAND THERE IS, IS VERY STRONG. I'D REWARD IT AND THEN I'D REPURCHASE WITH SOME TYPE OF FUTURES CONTRACT OR OPTION POSITION TO MAINTAIN THAT INVENTORY OVER THE COURSE OF THE NEXT SEVERAL MONTHS.

Pearson: ALL RIGHT, SO SOME OPPORTUNITIES OUT THERE. LET'S TALK ABOUT LIVESTOCK. FED CATTLE, WHICH HAS BEEN PHENOMENAL REALLY ALL YEAR, CONSIDERING THE BSE, CONSIDERING ALL THE THINGS WE'VE RUN UP AGAINST IN THE BEEF BUSINESS. AND THEN TO BE ABLE TO HOLD ONTO THESE PRICES. AND WE'VE TAKEN A HIT ON FED CATTLE. A LITTLE BIT OF RECOVERY ON FUTURES THIS WEEK. THE CASH MARKET IS STILL SOFT AND STILL THE CONCERN, BASED ON THIS CATTLE-ON-FEED REPORT, THAT WE'RE HOLDING THESE CATTLE TOO LONG. THIS IS NOT UNCOMMON FOR POST-LABOR DAY BEEF MARKET AT ALL, IS IT, VIRGIL?

Robinson: NO, I DON'T THINK SO. IT'S KIND OF A SEASONAL EVENT, ACTUALLY, MARK. BUT YOU DID BRING TO THE ATTENTION HERE OF OUR LISTENERS SOME POINTS THAT NEED TO BE, I THINK, REITERATED. AND THAT IS CATTLE HAVE GROWN LARGER AND CONSISTENTLY LARGER IN THE LAST SEVERAL WEEKS, MARK. AND I NOTED THAT AGAIN TONIGHT ON THE WEEKLY ESTIMATED LIVESTOCK PRODUCTION NUMBERS. SECONDLY, THE CATTLE-ON-FEED REPORT, WHILE THE MARKETING NUMBER WAS BETTER THAN PER REPORT ESTIMATES, IT DOES SUGGEST TO ME THAT WE STILL HAVE, PERHAPS, AN ISSUE HERE WITH SOME BIGGER CATTLE THAT NEED TO BE MARKETED AND MOVED TO MARKET. NOW, THE MARKET IMPROVED LIVE-WISE TWO OR THREE BUCKS HERE LATE THIS WEEK, MARK, AND I THINK THERE WAS A MOVEMENT TO REWARD THAT. AND I WOULD CONTINUE TO MAINTAIN AND STAY CURRENT. I THINK FOURTH-QUARTER LIVE VALUES -- AND THIS, MARK, IS NO SCIENCE, BUT I THINK WE'RE DESTINED FOR SOMETHING IN THIS MID 80, PERHAPS SOMETHING NEAR $88 TO $89. AND I WOULD TRY AND PROTECT THAT PRICE RANGE THROUGH THE BALANCE OF THIS CALENDAR YEAR.

Pearson: ALL RIGHT. AND OF COURSE, THIS CALF MARKET HAS BEEN STRONG. FEEDER MARKET HAS BEEN UGLY. BUT I WANT TO FOCUS INSTEAD ON WHAT'S GOING ON WITH THE HOG MARKET. A BIG WEEK ON THE FUTURES ON HOGS. WE'RE KILLING A RECORD NUMBER OF HOGS, VIRGIL ROBINSON! IN '98 WE DID THIS AND WE HAD 9-CENT HOGS, AND THIS YEAR WE'RE DOING IT REALLY WITH MANY STRENGTH.

Robinson: MARK, I THINK YOU'VE DESCRIBED WHAT IS KNOWN AS A DEMAND-DRIVEN MARKET. AND DEMAND-DRIVEN MARKETS ARE VERY DIFFICULT TO HANDICAP BECAUSE OF THE ELASTICITY INVOLVED AND THE ABILITY TO SUBSTITUTE. BUT THE AVERAGE PRICE OF PORK LAST MONTH, $2.89, A RECORD HIGH. NO SIGNS OF IT ABATING. I THINK, HOWEVER, I WOULD PROTECT, MARK, FOURTH-QUARTER VALUES $45 OR HIGHER. I THINK THAT REPRESENTS A PRETTY GOOD HEDGE FOR THE BALANCE OF 2004. AND FUTURES ARE AT THAT POINT AS WE VISIT TONIGHT.

Pearson: EXCELLENT POINTS AS USUAL, VIRGIL ROBINSON. THANK YOU SO MUCH. THAT'S GOING TO WRAP UP THIS EDITION OF "MARKET TO MARKET." BUT IF YOU'D LIKE MORE INFORMATION FROM VIRGIL ON JUST WHERE THESE MARKETS MIGHT BE HEADED, THEN BE SURE TO CHECK THE STREAMING AUDIO ON THE MARKET PLUS PAGE AT OUR "MARKET TO MARKET" WEB SITE. AND BE SURE TO JOIN US AGAIN NEXT WEEK, WHEN WE WILL LEARN HOW WESTERN RANCHERS ARE CUTTING CATTLE RUSTLERS OFF AT THE PASS. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK.

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