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Market Analysis: Dec 05, 2003

posted on December 5, 2003


The grain markets flirted with new highs this week as private forecasters were lowering world corn production estimates.

For the week, nearby wheat futures prices gained 4½ cents. December corn was up by four cents.

Soybean rust in Brazil has the market thinking about smaller South American numbers. For the week, the nearby bean contract was up nearly 15 cents. But soybean meal lost $3.00 a ton.

December cotton dropped another 26 cents.

In livestock, live cattle futures were off $1.90. January feeders lost 42 cents. And the lean hog contract was up 60 cents.

In financials, Comex gold gained $9.60 an ounce. The Euro extended its record gains and, for the week, advanced 226 basis points against the dollar. And the CRB Index surged seven points to close the week at 256-even.

Here now to lend us his insight on these and the week's other market trends is our senior market analyst, John Roach. Welcome back.

Market Analysis: Dec 05, 2003

Roach: THANKS, MARK.

Pearson: WELL, LET'S TALK ABOUT THE WEEK THAT WAS. LET'S TALK FIRST ABOUT WHEAT. A LOT OF ACTIVITY THERE. WE'RE BOOMING BACK TO THE UPSIDE. WHAT'S AHEAD FOR WHEAT MARKET?

Roach: WELL, THE WHEAT MARKET HAS HAD SEVERAL THINGS WORKING IN ITS FAVOR. IN THIS COUNTRY, WE'RE WORRIED ABOUT DRY CONDITIONS DOWN IN THE HARD RED WINTER WHEAT BELT AREA. AND IF YOU RECALL, OF COURSE, LAST SUMMER WE HAD A RECORD DROUGHT IN EUROPE, AND THAT EXTENDED THROUGH A WIDE AREA, AND RECORD TEMPERATURES AS WELL, A WIDE AREA OF EUROPE. SO WE'VE SEEN QUITE A BIT OF BUSINESS COME AT US FROM THAT SECTOR. THAT BUSINESS WAS REALLY SLOW IN COMING. WE ALL ANTICIPATED IT ACTUALLY SOME WEEKS AND MONTHS AGO, BUT IT REALLY STARTED TO COME ON-STREAM HERE REALLY OVER JUST THE LAST MONTH IS WHEN WE'VE REALLY SEEN THE STRENGTH. THE MARKET MOVED UP UNTIL WE HAD A REVERSAL KIND OF A TRADE YESTERDAY, WHICH I THINK IS A BIT OMINOUS. I THINK IT'S THE ENTRY INTO THE MARKETPLACE OF THE SOUTHERN HEMISPHERE PRODUCERS. SO I THINK THE WHEAT MARKET MAY WELL HAVE PUT IN A TOP HERE WITH THE PERFORMANCE WE HAD OF THE HIGHS SEEN ON THURSDAY.

Pearson: SO IF YOU HAVE NEAR-TERM SALES NEEDS, YOU SHOULD BE MAKING THEM.

Roach: I THINK YOU NEED TO MAKE THEM. AND AT THE SAME TIME YOU NEED TO LOOK OUT FORWARD AT NEW CROP AND UNDERSTAND THAT WE'RE UP HERE ON A COMBINATION OF OUR WEATHER CONCERNS AND THE WEATHER PROBLEMS FROM LAST YEAR IN EUROPE AND, PLUS, SOME POSSIBLE OPTIMISM COMING OUT OF CHINA. SO I THINK IT'S A GOOD TIME TO BE SELLING INTO THE MARKET, AND WE MAY HAVE OTHER OPPORTUNITIES THAT WILL COME ALONG, PARTICULARLY IF CHINA ACTUALLY DOES SOME WHEAT BUSINESS. BUT IF WE FAIL TO GET ANY WHEAT BUSINESS OUT OF CHINA, WE MAY WELL HAVE JUST SEEN THE HIGHS.

Pearson: ALL RIGHT. LET'S TALK ABOUT THE CORN MARKET. HAVE WE SEEN THE HIGHS THERE?

Roach: I DON'T THINK WE'VE SEEN THE SEASON'S HIGHS, BUT I THINK WE'VE SEEN THE POST-HARVEST RALLY HIGH, IF YOU WILL. THE MARKET MOVED UP. THE TECHNICAL INDICATORS BECAME OVERBOUGHT. BASIS LEVELS WERE VERY STRONG WHILE PRODUCER SELLING REALLY STEPPED UP, AND THAT'S REALLY WHAT STOPPED THE MARKET, PRODUCER SELLING OF INVENTORY. THE UNITED STATES CORN CROP IS A RECORD CROP THIS YEAR. STILL A LOT OF IT IN FARMERS' HANDS, AND WE GOT BACK UP CLOSE TO THE HIGHS SEEN IN NOVEMBER. FARMERS ARE WILLING TO MAKE SALES.

Pearson: WE'VE GOT A LITTLE BIT OF REASON. WE'VE GOT A LITTLE BIT OF A CARRY IN THAT CORN MARKET.

Roach: WELL, THE WORLD SITUATION IS EXTREMELY TIGHT, AND WE'RE GOING TO CONTINUE TO REVISIT THAT WORLD TIGHT SITUATION. BUT THE NUMBER ONE SUPERMARKET IN THE WORLD, THE UNITED STATES, HAS PLENTY OF CORN TO SELL. SO WHEN THE MARKET COMES UP TO THE HIGHER PRICE LEVELS, YOU'RE GOING TO BUY CORN FROM PRODUCERS, THE MARKET WILL BUY CORN FROM PRODUCERS. THAT WILL CYCLE THE MARKET BACK DOWN, BUT WHEN THE MARKET CYCLES DOWN, PRODUCER SELLING JUST DRIES UP. AND I BELIEVE WE'LL CONTINUE TO DO THESE RATCHETING BACK AND FORTH CYCLES UNTIL WE COME CLEAR OUT INTO THE SPRING OF THE YEAR. AND THAT'S WHEN WE'RE LIKELY TO SET THE HIGHS FOR THE YEAR IS WHEN WE WORRY ABOUT OUR PLANTING SITUATION NEXT YEAR.

Pearson: YOU ALWAYS TALK ABOUT THE SPRING BEING THE BEST MONTHS TO MAKE SALES.

Roach: MARCH, APRIL, MAY, AND JUNE, THE BEST MONTHS TO MAKE SALES IN CORN. I THINK IT WILL BE AGAIN THIS YEAR.

Pearson: AND WHAT ARE YOUR TARGETS, JOHN? WHAT ARE YOU TELLING PEOPLE?

Roach: I THINK WE CAN SEE MAY CORN REACH THE 270 LEVEL OR CLOSE TO THE 270 LEVEL. NOW, I'M ASSUMING SOME THINGS HERE WHEN I'M SAYING THAT. THE FIRST THING I'M ASSUMING IS THAT THE CHINESE DON'T EXPORT MORE THAN THE USDA CURRENTLY HAS FORECAST. THAT ALLOWS THEM STILL TO DO MORE EXPORTING. THAT'S NOT AS OPTIMISTIC A STAND TO SOME PEOPLE, BUT I THINK WE CAN -- IF THE CHINESE ONLY EXPORT WHAT THEY'RE CURRENTLY BEING ESTIMATED AT, I THINK WE'LL BE OKAY. THE ARGENTINE CROP IS SMALL. THEY DID NOT GET THE CROP PLANTED IN PRIME CORN PRODUCING AREAS. AND LIKELY WE'LL GO ON TO SOYBEANS, AND WHAT CROP THAT'S BEEN PLANTED IS OFF TO A POOR START. WE STILL HAVE QUITE A BIT OF DEMAND COMING AT US OUT OF EUROPE, SO I THINK WE HAVE THOSE THINGS IN THE WORLD TO BUOY US UP. ON THE OTHER SIDE OF THE COIN, WE'RE GOING TO HAVE TO DEAL WITH THIS U.S. INVENTORY AND MOVE IT THROUGH THE SYSTEM.

Pearson: WE'VE BEEN TALKING ABOUT THIS WEAKNESS IN THE DOLLAR. THAT'S SURELY HELPING US ON THE EXPORT FRONT.

Roach: WELL, JUST THIS WEEK THE EURO MOVED 200 BASIS POINTS. THAT'S 2 PERCENT. SO IF YOU TAKE THAT 2-PERCENT CALCULATION ON $2 CORN, THAT'S 4 CENTS A BUSHEL RIGHT THERE THAT AN OVERSEAS BUYER IN EUROPE -- PRICE GOT CHEAPER. THE PRICE WE'RE SELLING DROPPED BY 4 CENTS A BUSHEL JUST DUE TO CURRENCY EXCHANGE. THAT'S JUST THE LATEST MOVE. THE CURRENCY HAS MOVED A LONG DISTANCE OVER QUITE A PERIOD OF TIME. BUT I DO THINK PEOPLE NEED TO BE CAUTIOUS HERE. PEOPLE ARE ACTING LIKE THE DOLLAR IS GOING TO SINK FOREVER. BUT IN THE EARLIER PART OF THE SHOW, WE SAW SEVERAL GOOD REPORTS THIS WEEK ABOUT HOW THE U.S. ECONOMY IS STARTING TO COME BACK ALIVE, AND SO WE WANT TO BE CAREFUL. IF WE SEE THAT DOLLAR TURN AND BECOME STRONG, IT'S GOING TO HURT OUR DEMAND.

Pearson: CHINA IS SUCH A BIG FACTOR IN THESE MARKETS. WE TALKED EARLIER ABOUT THE STEEL TARIFF, THE ISSUE THAT IS TRYING TO AVOID TRADE PROBLEMS WITH CHINA, KEEPING THIS DEMAND PARTICULARLY FOR SOYBEANS. AGAIN, A BIG UP WEEK THIS WEEK ON SOYBEANS. SOME CONCERN ABOUT THE RUST SITUATION IN SOUTH AMERICA. STILL PRETTY EARLY TO OUTGUESS THIS SOUTH AMERICAN CROP. JOHN, WHAT ARE YOU TELLING SOYBEAN PRODUCERS? THERE IS NO CARRY IN THAT MARKET.

Roach: THERE'S CERTAINLY NO CARRY IN THE MARKET, BUT THERE'S ALSO NO SURPLUS INVENTORY. THE UNITED STATES IS TIGHT. FARMERS HAVE SOLD A SUBSTANTIAL PERCENTAGE OF THEIR INVENTORY. THEY REALLY DON'T HAVE THAT MUCH MORE TO SELL. THE SOUTH AMERICAN CROP ABSOLUTELY HAS TO BE A BIG CROP. AND THE SOYBEAN RUST PROBLEM IS NOT A SMALL ISSUE. IT'S A BIG ISSUE. IT'S SHOWING UP MUCH EARLIER IN THE SEASON. NORMALLY IT'S A LATE-SEASON KIND OF THING. WELL, THIS YEAR IT'S SHOWING UP EARLIER IN THE SEASON. WE USED TO WORRY ABOUT RAISING THE U.S. CROP, AND WE USED TO HAVE VERY STRONG PRICES IN THE SPRING OF THE YEAR ON SOYBEANS. WELL, THE BIG CROP NOW IS NOT IN THIS COUNTRY; IT'S IN SOUTH AMERICA. SO THE TRADE IS GOING TO WORRY ABOUT THAT CROP UNTIL IT'S ALMOST READY TO BE IN THE BIN. MEANWHILE THE BIG BUYER IN THE WORLD, CHINA, IT'S THE FIFTH LARGEST ECONOMY IN THE WORLD. THEY'RE GROWING AT A 9-PERCENT GDP RATE AND HAVE FOR SEVERAL YEARS. THAT'S A MONSTER ENGINE OVER THERE. WE'VE ALL KNOWN FOR A LONG TIME THAT IF CHINA EVER BECAME A WORLD CONSUMER, REALLY HIT THE WORLD WITH THEIR POSSIBILITY, THEIR POTENTIAL, THAT IT WOULD CHANGE THE WAY WE LOOKED AT MARKETS. AND WE'RE SEEING EXACTLY THAT THIS YEAR. WE'RE SEEING IT NOT ONLY IN THE SOYBEAN MARKET BUT ALSO IN THE COTTON MARKET.

Pearson: LET'S TALK -- BEFORE WE GET TO COTTON, TALK A LITTLE BIT ABOUT STRATEGY. WHAT ARE YOU TELLING PRODUCERS ON BEANS?

Roach: WELL, I THINK THAT PRODUCERS ARE PROBABLY DOWN TO THE SMALLER END OF THE BEANS, AND MY SUGGESTION IS BE PATIENT. LET'S SEE WHAT THE WEATHER CONDITIONS ARE LIKE IN SOUTH AMERICA AND WHAT THE RUST DOES. I THINK THE BEAN MARKET WILL HAVE ANOTHER RUN BACK TOWARD ITS HIGHS BEFORE ITS FINISHED.

Pearson: EIGHT BUCKS OR BETTER?

Roach: WELL, I WOULD THINK THAT WE HAVE TO CONTINUE TO WATCH THE TECHNICAL SIDE. AND WE'RE ON SOME SUPPORT LEVELS HERE, BUT AS LONG AS WE CONTINUE TO MAINTAIN MOVING AVERAGES, 50-DAY MOVING AVERAGES, AS LONG AS WE CONTINUE TO SUPPORT ABOVE THAT, WE'RE DOING JUST FINE AND I THINK WE CAN TRADE IN EXCESS OF $8.

Pearson: YOU MENTIONED COTTON IN CHINA A MOMENT AGO. THE COTTON MARKET SOFTENED UP A LITTLE BIT, BUT WE'VE HAD SOME FAIRLY LOFTY LEVELS IN COTTON. SHOULD WE BE MAKING SALES?

Roach: WELL, CERTAINLY AT THESE KIND OF PRICE LEVELS, YOU PRESUMABLY HAVE BEEN MAKING SALES AND SO YOU'RE DOWN TO THE SMALLER END OF THE INVENTORY. AND IF THAT'S THE CASE, THEN I'D HAVE A LITTLE BIT OF PATIENCE. I THINK THE SELL-OFF HAS MAYBE RUN ITS COURSE. I THINK WE CAN HAVE A SURGE BACK THE OTHER WAY. PART OF WHAT'S HAPPENED HERE IS WE GOT THE FEELING IN THE MARKET BUSINESS THAT WE WERE KICKING OUR BEST BUYER IN THE SHINS HERE A LITTLE BIT, AND MAYBE WE'VE GOTTEN PAST THAT A LITTLE BIT WITH THE STEEL TARIFF BEING PULLED AWAY AND SEEING THE CHINESE DELEGATION COMING TO THIS COUNTRY LATER THIS MONTH, BUT PERHAPS WE CAN SEE MORE POSITIVE NEWS ON THAT SECTOR.

Pearson: ANOTHER EXPLOSIVE MARKET HAS BEEN THIS CATTLE MARKET, VERY SURPRISING, SURPRISING STRENGTH AND DURABILITY. WE'RE SEEING A SOFTENING ON THE BOARD RIGHT NOW. IS THIS A PORTENDING OF THINGS TO COME?

Roach: IT CERTAINLY IS. THE CATTLE MARKET, IF YOU LOOK AT THE ENTIRE YEAR, THE BEEF SUPPLIES ARE DOWN 2 PERCENT COMPARED TO THEIR PRIOR YEAR. BUT IF YOU LOOK AT THE PAST FEW WEEKS GOING BACK TO THE FIRST WEEK OR SO OF OCTOBER, WE'VE BEEN DOWN SOMETHING LIKE 13 PERCENT. SO OUR SUPPLIES HAVE BEEN VERY TIGHT IN A TIME WHEN OUR ECONOMY IS BECOMING MUCH MORE ROBUST. SO THE TWO ISSUES OF TIGHTENED SUPPLY AND INCREASED DEMAND HIT THE INTERSECTION AT THE SAME TIME, AND PRODUCERS SAW BIG PROFITS COMING. THEY SOLD CATTLE QUICKLY. THEY DIDN'T PUT EXTRA WEIGHT ON, BUT NOW THAT'S STARTING TO CHANGE. WE'RE NOT KILLING QUITE ENOUGH CATTLE EACH WEEK HERE TO REMAIN CURRENT. THE 610- TO 620,000-HEAD-PER-WEEK SLAUGHTER IS NOT QUITE ENOUGH, AND THE PACKER IS NOT MAKING MONEY. THE PACKER IS TRYING HIS DARNEDEST TO BE ABLE TO BACK DOWN THE SLAUGHTER HERE A LITTLE BIT TO GET SOME NUMBERS AND GET SOME TONNAGE UP. PLACEMENTS WERE SUBSTANTIALLY INCREASED ON THIS LAST REPORT, SO THE CATTLE NUMBERS ARE COMING. AND SO WE WANT TO REMEMBER THAT WHEN THESE MARKETS TURN AND GO DOWN, THEY USUALLY GO DOWN FASTER THAN THEY EVER GO UP.

Pearson: WHAT'S YOUR STRATEGY ON CATTLE?

Roach: WELL, I THINK YOU WORK BASED ON THE PROFIT AND LOSS OF YOUR BUSINESS. TAKE A LOOK AT THE CATTLE THAT YOU HAVE ON FEED AND TAKE A LOOK AT WHERE THE BREAK-EVENS ARE AND LOOK FOR A HEDGING OPPORTUNITY TO BOLD IN SOME OF THOSE PROFITS LEVELS.

Pearson: LET'S TALK ABOUT THE HOG BUSINESS, WHICH HAS BEEN DEPRESSING AT BEST. WE THOUGHT WE WERE GETTING SMALLER NUMBERS. THE NUMBERS HAVE STAYED PRETTY LARGE. PORK CONTINUES TO BE UNDER PRESSURE. WE REALLY HAVEN'T SEEN MUCH OF A CONSUMER SWITCH OVER TO PORK EITHER DESPITE HIGH RETAIL BEEF. WHAT'S AHEAD FOR HOGS?

Roach: WELL, THE HOG BUSINESS IS HARD TO LOOK AT RIGHT AT THE MOMENT WITH REALLY AN OBJECTIVE KIND OF A MIND BECAUSE YOU'RE RIGHT AT THE PIT OF THE YEAR. THIS IS PROBABLY THE LOW WEEK OF THE YEAR, GIVE OR TAKE A LITTLE BIT, THE HIGHEST SLAUGHTER LEVEL THAT WE'RE GOING TO HAVE ALL YEAR LONG. SO WE'RE AT THE WORST. THE MARKET HAD A PRETTY GOOD RUN UP AND THEN FELL. AND OF COURSE, ONCE YOU STARTED GOING DOWNHILL, THEN IT MAKES IT EVEN LOOK WORSE THAN THAT. SO WE'RE AT THE WORST. THE NUMBERS ARE NOT GOING TO EXPAND MUCH THIS UPCOMING YEAR. I THINK THE HOG MARKET IS AT A BOTTOM. I THINK WE WILL STRENGTHEN AS WE MOVE ON INTO THE NEW YEAR AND BEYOND. AND SO FROM A PRODUCER'S STANDPOINT, SUCK IT UP, IT WILL GET BETTER.

Pearson: AND FEED PRICES, DO YOU HAVE ANY CONCERNS ABOUT FEED PRICES? YOU MENTIONED CORN POTENTIALLY HAS SOME UPSIDE. DO YOU WANT TO LOCK IN ANY FEED NEEDS?

Roach: FEED IS NOT GOING TO GET CHEAP THIS YEAR. FEED IS GOING TO GET HIGHER AS TIME GOES ALONG. NOW, IF THE -- SO I THINK PRODUCERS NEED TO BE LOCKING IN FEED.

Pearson: EXCELLENT. THANK YOU, JOHN, SO MUCH. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET," BUT IF YOU'D LIKE ADDITIONAL INFORMATION FROM JOHN ON THESE VERY ACTIVE MARKETS, BE SURE TO VISIT THE "MARKET PLUS" PAGE ON OUR "MARKET TO MARKET" WEB SITE. AND BE SURE TO JOIN US AGAIN NEXT WEEK WHEN WE'LL EXAMINE ONE SET OF SURVIVAL STRATEGIES FOR THE NATION'S DAIRY PRODUCERS. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK.

CAPTIONS BY: MIDWEST CAPTIONING DES MOINES, IOWA

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