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Market Analysis: May 21, 2004

posted on May 21, 2004


The grain markets have entered a narrow late spring trading range, limited on the downside by substantial fund ownership and on the upside by the prospect of a large 2004 crop. For the week, nearby wheat futures dropped more than nine cents ... and the July corn contract fell by nearly three cents.

As mentioned earlier, a massive selloff by the funds sent soybean prices tumbling, despite improved export sales. For the week, nearby beans plunged 60 cents. July meal was off by $16.80 per ton.

July cotton continues to trade in a narrow ranged, losing $1.97 over last week's close.

In livestock, the nearby live cattle contract gained $1.38. May feeders advanced by $1.70. But the lean hog contract fell by 27 cents.

In the financials, Comex gold gained $7.80 an ounce. The Euro jumped 134 basis points against the dollar. And the CRB Index gained nearly two points to close at 268.75.

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: May 21, 2004

Robinson: HI, MARK. THANK YOU. IT'S NICE TO BE HERE.

Pearson: ANOTHER ROLLER COASTER IN THE SOYBEAN MARKET, VIRGIL. BOY, THIS WEEK WE WERE PUSHING LOWER. LAST WEEK WAS UP AND DOWN. VOLATILITY CONTINUES ON THE OLD CROP. I DON'T HEAR OF A LOT OF SOYBEANS STILL BEING AVAILABLE OUT THERE IN THE COUNTRY.

Robinson: WELL, I THINK SUPPLIES ARE PRETTY LIMITED, MARK, AND THAT'S DOCUMENTED BY THE FACT THAT IN THE WESTERN PART OF THE CORN BELT THIS WEEK, I NOTED BASIS PREMIUMS ANYWHERE FROM 35 CENTS TO AS MUCH AS 50 CENTS OVER JULY FUTURES WHICH, IN MY THIRTY-YEAR CAREER, MARK, I'VE NOT EVER SEEN. SO YOU'VE PAINTED, I THINK, THE CORRECT SCENARIO FOR BEANS AT PRESENT, AND THAT IS A TIGHT U.S. SITUATION SUPPLY-WISE, BUT A SLOWING WORLD DEMAND PICTURE, I THINK ACCENTUATED BY THE FACT THAT CHINA HAS RECENTLY MANEUVERED, NOT ONLY IN OUR MARKET BUT ALSO GLOBAL MARKETS TO EITHER DEFER IMPORTS AND DELIVERIES OR TO THE EXTENT OF EVEN CANCELING THEM, MARK. SO I THINK THE MARKET IS TORN BY THOSE TWO FACTORS, CORRALLED BY THOSE TWO, AND NOT LIKELY TO CHANGE, AT LEAST IN MY OPINION, FOR THE FORESEEABLE FUTURE. HOW MUCH OF WHAT'S DEVELOPING IN CHINA IS JOB OWNING AND HOW MUCH OF IT IS FACT, MARK, REMAINS TO BE SEEN. THERE'S STILL AN ENORMOUS SWINE POPULATION, A GROWING POULTRY POPULATION THAT NEEDS TO BE FED SIGNIFICANT QUANTITIES OF PROTEIN. AND THAT'S, IN MY OPINION, NOT CHANGED IN THE LAST THREE WEEKS.

Pearson: LET'S TALK NEW CROP -- NEW CROP SOYBEANS. BOY, WHO KNOWS WHAT MOTHER NATURE IS GOING TO THROW AT US SO FAR THIS YEAR; BUT WITH THAT TIGHT SITUATION GOING FORWARD, IS THE MARKET GOING TO STAY NERVOUS?

Robinson: MARK, I THINK CLEARLY AS WE GET INTO A MORE WEATHER DOMINATED MARKET, THERE WILL BE PERIODS WHERE IF WE HAVE AN EXTENDED DRY PERIOD, THE MARKET WILL REACT AND MOVE HIGHER AND DO SO VERY QUICKLY. BUT AT LEAST AS WE VISIT TONIGHT, THE SCENARIO IN THE SOYBEAN MARKET IS ONE WHERE SUPPLIES ARE TIGHT AS WE VISIT TONIGHT, WITH THE PROJECTED ACREAGE AND, AT LEAST AT THIS POINT, THE ASSUMPTION OF A TRENDLINE YIELD HERE IN THE UNITED STATES AND THEN ATTACH SOME TYPE OF DISAPPEARANCE FACTORS. IT'S LIKELY THAT U.S. INVENTORIES WILL GROW YEAR OVER YEAR. TO WHAT EXTENT REMAINS TO BE SEEN. BUT AT THIS POINT I THINK THAT'S THE SCENARIO THAT TRADERS BELIEVE IS ACCURATE. AND AS A RESULT, RALLIES AT THIS POINT IN TIME IN THE NEW CROP SOYBEAN FUTURES CONTRACT ABOVE $7, IN MY OPINION, WILL ATTRACT A FAIR AMOUNT OF PRODUCER SHORT HEDGING HEDGE TO ARRIVES OR FORWARD CASH CONTRACTS.

Pearson: AND STRATEGY-WISE, IS THAT THE KIND OF SCENARIO YOU'RE TALKING TO PRODUCERS ABOUT?

Robinson: MARK, I THINK WITH ALL DUE RESPECT TO THEIR BOTTOM LINES, AT $7 PLUS, MOST OF OUR PRODUCERS CAN IN FACT, WITH NORMAL YIELDS, PROJECT A PROFIT. AND GIVEN THAT SCENARIO AND THAT MOTIVE, YES, I AM TALKING IN THOSE TERMS. COULD THEY GO HIGHER THAN $7? WELL, OF COURSE THEY COULD. SO IF MINIMUM PRICE IS MORE APPEALING TO THOSE WHO ARE CONCERNED ABOUT WEATHER, FINE, I THINK IT'S A PLACE TO BEGIN, PARTICULARLY IF TO THIS POINT YOU'VE DONE NOTHING.

Pearson: LET'S TALK CORN, AGAIN OLD CROP AND NEW CROP SCENARIO. OLD CROP HAS BEEN UNDER A LITTLE PRESSURE HERE THIS WEEK, BUT THERE STILL SEEMS TO BE SOME TENSION ABOUT NEW CROP AND NEW CROP PRODUCTION. WE HAVE A COUPLE MILLION MORE ACRES OF CORN. THAT'S DAMPENED THE ENTHUSIASM JUST A LITTLE BIT FOR AN EARLY BULL MARKET IN CORN. WHAT'S AHEAD FOR THE CORN MARKET? WHAT WOULD YOU TELL A CORN FARMER TODAY IF MAYBE HE HASN'T MADE ANY DECISION ABOUT THIS CURRENT CROP?

Robinson: MARK, YOU KNOW, I TRACK THE NATIONAL CASH INDEX, AND I SEND THAT PICTURE TO YOU WEEKLY. AND WE'VE BEEN IN A LONG-TERM, EXTENDED UPTREND UNTIL JUST RECENTLY. AND THAT INDEX, AT LEAST BASED ON MY WORK AND CALCULATIONS, HAS FALLEN THROUGH THAT TREND LINE, WHICH DOES IN FACT SUGGEST THE TREND OF CASH CORN HAS TURNED FROM UP TO DOWN. NOW, I FULLY UNDERSTAND THERE'S A LONG PERIOD OF TIME HERE BEFORE WE'RE TALKING ABOUT A 10.5-BILLION-BUSHEL NEW CROP. BUT GIVEN THE SITUATION AT HAND, AND THAT IS AN ADEQUATE SUPPLY OF OLD CORN WITH, AS YOU MENTIONED, AN INCREASE IN ACREAGE BEYOND USDA'S PLANTING INTENTIONS SUGGESTION, ATTACH A TREND LINE YIELD OR, PERHAPS EVEN WITH MONDAY NIGHT'S CROP CONDITION, THE FIRST THAT WE'LL SEE FROM THE USDA BEING VERY GOOD, MANY WILL ATTACH TREND LINE PLUS. SO THE IDEA HERE IS THERE'S LIKELY TO BE A YEAR-OVER-YEAR INCREASE IN U.S. STOCKS AGAIN. SO UNDER THAT SCENARIO, I THINK OLD CROP CORN ON A NATIONAL BASIS AS IT APPROACHES 280 OR HIGHER, I'D SELL IT. NEW CROP CORN, MARK, AGAIN, THE IDEA OF MAKING YOUR FIRST SALE -- AND OF COURSE, I'VE MADE SALES PRIOR TO THIS PRICE LEVEL. I THINK, AGAIN, THE 280 TO 290 AREA, IF YOU'VE DONE NOTHING TO THIS POINT, MINIMUM PRICE AT THE VERY LEAST. A FORWARD CONTRACT IF THE BASIS IS ACCEPTABLE, IN MY OPINION, IS THE APPROPRIATE PLACE TO BEGIN.

Pearson: LET'S TALK ABOUT THE WHEAT MARKET, AND WE'RE MOVING CLOSER TO HARVEST THERE DAILY. WHAT'S YOUR TAKE ON WHAT'S AHEAD NOW FOR WHEAT?

Robinson: MARK, WHEAT -- HARD RED WINTER PRICES ARE AS STRONG AS THEY'VE BEEN AT HARVEST SINCE '97, AND THAT'S ATTRACTING A FAIR AMOUNT OF MOVEMENT. I'VE NOTED SOME CASH SALES BEING MADE THAT WILL COME RIGHT OFF THE COMBINE. I THINK THEY'RE SUFFICIENT ENOUGH TO KEEP THE PIPELINE RELATIVELY WELL SUPPLIED. SO AT LEAST AS WE VISIT TONIGHT, I THINK THE PROSPECT OF SIGNIFICANT PRICE IMPROVEMENT IN THE NEAR TERM ISN'T VERY BRIGHT. I WOULD BE INCLINED TO BELIEVE JULY CHICAGO FUTURES, JULY KANSAS CITY FUTURES, THE 380 TO 385 AREA RESPECTIVELY, I'D MAKE SOME OLD CROP SALES OR SOME CROP SALES -- SOME NEW CROP SALES, MARK, BASED ON THOSE KIND OF FUTURES PRICES. WORLD INVENTORIES ARE PROJECTED TO GROW YEAR OVER YEAR ABOUT 40 MILLION METRIC TONS, AT LEAST BASED ON USDA DATA, AND MOST OF THAT GROWTH WITHIN THE CONFINES OF MAJOR EXPORTING COUNTRIES. SO THE FEAR IS, OF COURSE, COMPETITION WILL ACCELERATE AMONGST THOSE EXPORTING COUNTRIES AS THE YEAR PROGRESSES.

Pearson: LET'S TALK ABOUT COTTON. A SOFTER WEEK IN COTTON THIS WEEK. AGAIN, ANOTHER YO-YO CROP. AND CHINA IS AGAIN A PLAYER THERE.

Robinson: YEAH, I A BIG PLAYER. NUMBERS ARE NOT PARTICULARLY ENCOURAGING, MARK. EVEN THOUGH U.S. COTTON PRODUCTION IS PROJECTED AT I THINK 17.9 MILLION BALES, WHICH IS ACTUALLY DOWN ABOUT 4 PERCENT VERSUS LAST YEAR. DOMESTIC CONSUMPTION AND EXPORTS ARE ALSO PROJECTED TO DECLINE YEAR OVER YEAR, AND ENDING STOCKS ACTUALLY GROW A LITTLE BIT HERE IN THE U.S. WORLD COTTON PRODUCTION PEGGED AT 103 MILLION BALES. WHILE CONSUMPTION WILL BE UP, STOCKS ARE PROJECTED TO GROW ABOUT 10 PERCENT TO ABOUT 36.5 MILLION BALES. UNDER THAT SCENARIO, SIGNIFICANT PRICE IMPROVEMENT FROM PREVAILING LEVELS IS NOT LIKELY.

Pearson: TAKE ADVANTAGE OF WHAT'S OUT THERE?

Robinson: MARK, AT A MINIMUM, I WOULD CREATE SOME TYPE OF MINIMUM PRICE HERE. PRICES ARE ON THEIR LOWS, NOT VERY ATTRACTIVE. YOU KNOW, THE TIME TO HAVE DONE THINGS, MINIMUM PRICE OR OTHERWISE, WAS WEEKS AGO.

Pearson: ABSOLUTELY. LET'S TALK LIVESTOCK. FED-CATTLE MARKET, A LOT OF STRENGTH OUT THERE. THE FEEDER CATTLE MARKET LOOKS GOOD. FED-CATTLE MARKET HAS BEEN DECENT. WHAT'S AHEAD FOR THE LATE SPRING AND SUMMER. THIS AFTERNOON'S CATTLE-ON-FEED REPORT, AT LEAST IN MY OPINION, IS A BULLISH REPORT, MARK. AGAIN, PLACEMENTS, THIS IS THE FOURTH CONSECUTIVE MONTH WHERE PLACEMENTS HAVE DECLINED VERSUS THE PREVIOUS YEAR. I THINK MAY WILL TRACK IN THE SAME DIRECTION, SO CLEARLY THAT'S UNDERPINNING THOSE DEFERRED CATTLE FUTURES CONTRACTS AND PUSHED THEM THIS WEEK TO CONTRACT HIGHS. I THINK THERE'S SOME ADDITIONAL GAIN YET TO BE SEEN THERE. FROM AUGUST THROUGH FEBRUARY OF 2005, I THINK FUTURES ARE GOING TO TRADE TO $90, PERHAPS ABOVE, AT WHICH POINT, MARK, GIVEN YOUR INPUTS AND YOUR PRODUCTION COSTS, A MINIMUM PRICE CONTRACT, IN MY OPINION, IS AT LEAST NECESSARY.

Pearson: ALL RIGHT. LET'S TALK ABOUT HOGS. A LITTLE SOFTER ON THE BOARD THIS WEEK BUT, AGAIN, WE'VE HAD A NICE UP MOVE IN HOGS.

Robinson: WE REALLY HAVE, MARK. I REMEMBER OUR LAST CONVERSATION. I WAS OF THE OPINION THAT HEDGING JUNE/JULY/AUGUST HOG FUTURES AT THAT POINT AND LOCKING IN SOMETHING IN THE VICINITY OF $46 TO $50 WAS APPROPRIATE. TONIGHT AS WE VISIT, CASH HOGS ARE $55. SO IF I THOUGHT HEDGES WERE GOOD BACK THEN, CLEARLY I THINK THEY'RE GOOD TODAY. AND I THINK THAT'S THE CASE. THIS IS A DEMAND-DRIVEN MARKET. PORK PRODUCTION IS 3 PERCENT ABOVE LAST YEAR, AND PRICES, AS MEASURED BY LEAN-HOG FUTURES, ARE $30 HIGHER, MARK. DEMAND IS HIGHLY ELASTIC, CAN CHANGE VERY ABRUPTLY. I SENSE THERE WILL BE SOME CHANGES BETWEEN NOW AND THE END OF THE YEAR, DRIVEN BY SUPPLY AND, I THINK, PERHAPS A LITTLE WEAKER DEMAND STRUCTURE AT SOME POINT THIS YEAR. SO I LIKE THE IDEA OF CREATING SOME TYPE OF PROTECTIVE HEDGE AT LEAST THROUGH THAT OCTOBER FUTURES CONTRACT AT PREVAILING LEVELS. FROM OCTOBER THROUGH THE BALANCE OF THE YEAR, MARK, THE HEDGING OPPORTUNITIES ARE NOT AS ATTRACTIVE. I THINK THERE WILL BE SOME ADJUSTMENT IN THOSE DEFERRED CONTRACTS, AND I THINK THEY'LL GAIN ON THE NEARBYS BETWEEN NOW AND THE END OF THE YEAR. SO I'LL DEFER ANY HEDGING SUGGESTIONS UNTIL A LATER DATE THERE.

Pearson: WE'VE ONLY GOT ABOUT FIFTEEN SECONDS, VIRGIL, BUT I JUST HAVE TO ASK YOU: WITH THE POTENTIAL VOLATILITY IN THE WEATHER MARKETS AND THE TIGHTNESS WE'VE HAD, WOULD YOU BE LOCKING IN ANY FEED NEEDS NOW?

Robinson: MARK, IF SOYBEAN MEAL, YOU KNOW, BASIS VALUES IN MEAL ARE SURGING AS CRUSHING CAPACITIES DECLINE HERE IN THE U.S. IF JULY SOYBEAN MEAL FUTURES TRADE BELOW $270, I'D USE THAT AS MY CASH TRIGGER AND I WOULD BUY MEAL THROUGH THE BALANCE OF THIS QUARTER AND THE NEXT.

Pearson: VIRGIL, THANK YOU SO MUCH. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET," BUT IF YOU'D LIKE MORE DETAIL FROM VIRGIL ON WHERE THESE ACTIVE MARKETS MAY BE HEADED, BE SURE TO CHECK OUT 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'LL EXAMINE GLOBAL EFFORTS TO TRANSFORM THE GREEN REVOLUTION INTO THE GENE REVOLUTION. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK.

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