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Market Analysis: Oct 31, 2003

posted on October 31, 2003


Export sales and farmer selling characterized an active grain market this week, while soybeans saw contract highs at midweek before retreating.

For the week, the nearby wheat futures contract was virtually unchanged. December corn, though, gained more than 12 cents. March was up a similar amount.

As mentioned earlier, soybeans enjoyed another good week. The nearby contract jumped almost 32 cents, while January beans were up more than 30 cents. December meal gained $11.80 per ton.

December cotton lost $5.28.

In livestock, October live cattle enjoyed a gain of $2.60. November feeders advanced $5.55. And the lean hog contract was up by nearly a dollar.

In financials, Comex gold dropped $4.30 an ounce. The Euro lost 253 basis points against the dollar. And the CRB Index lost two-and-a-half points for the week and closed at 247-even.

Here now to lend us his insight on these and the week's other active trends is one of our regular market analysts, Alan Brugler. Welcome back.

Market Analysis: Oct 31, 2003

Brugler: GOOD TO BE HERE.

Pearson: WELL, LET'S TALK ABOUT THIS BEAN MARKET. THIS HAS BEEN WHERE EVERYONE HAS BEEN TALKING, AT LEAST IN THE CORN AND BEAN BELT, ABOUT WHAT'S BEEN GOING ON AND WHAT'S AHEAD. TOUCH-STATE BUCKS FELL BACK BELOW. WHAT'S YOUR OUTLOOK?

Brugler: BASICALLY, WE'VE GOT A LITTLE BIDDING WAR GOING BETWEEN THE CRUSHERS AND THE EXPORT MARKET FOR THOSE BEANS. SO FAR THERE'S NO EVIDENCE THAT EITHER SIDE IS GIVING UP. THE CRUSH REPORT THIS WEEK SHOWED 127-MILLION-BUSHEL CRUSH. THAT'S THE CENSUS CRUSH. THE EXPORTS ARE INCREDIBLY STRONG. WE'VE GOT A SITUATION WHERE 60 PERCENT OF THE PROJECTED EXPORTS FOR THE YEAR HAVE ALREADY BEEN BOOKED, AND IT'S ONLY THE END OF OCTOBER. SO WE COULD GO A LITTLE HIGHER YET, JUST BECAUSE WE'VE GOT TO HAVE SOMEBODY CRY UNCLE HERE AND GIVE UP. MY BETTING IS IT'S EVENTUALLY GOING TO BE THE CRUSHERS SCALING BACK THE OPERATION A LITTLE BIT. BUT SO FAR, WE DON'T HAVE THE EVIDENCE THAT THAT'S TAKING PLACE.

Pearson: WE KEEP HEARING ABOUT CHINA COMING INTO THIS MARKET AND NO-HOLDS-BARRED BUYING.

Brugler: CHINA HAS BEEN A BIG BUYER. YOU CAN HEAR VARIOUS STORIES AS TO WHY. BUT THEIR INTERNAL PRICES ARE HIGHER THAN THE U.S. PRICE, EVEN AFTER THROWING IN PRETTY EXPENSIVE OCEAN FREIGHT AND SHIPPING BEANS OVER THERE. SO THERE'S NO DIRECT INCENTIVE FOR THEM TO STOP BUYING FROM US. AND WE'VE GOT PRETTY GOOD CRUSH MARGINS OVER THERE BECAUSE THEIR DOMESTIC LIVESTOCK INDUSTRY HAS BEEN EXPANDING AND THEY'VE GOT GOOD MARKETS FOR THE MEAL.

Pearson: SO PRICE-WISE, WE WERE TALKING EARLIER -- ANALYSTS WERE TALKING ABOUT THIS NOVEMBER CROP REPORT AS BEING MAYBE A KEY TIME. WHAT'S YOUR TAKE? PRODUCERS OUT THERE WITH BEANS TO SELL, WHAT SHOULD THEY DO?

Brugler: I THINK YOU'VE GOT TO BE VERY CAREFUL AROUND THIS CROP REPORT BECAUSE WE ARE TECHNICALLY VERY OVERBOUGHT. THE MARKET HAS GOT EVERYBODY WANTING TO BE LONG, EVERYBODY IS TALKING LONG. AND THERE'S AN OLD ADAGE IN THE MARKET THAT SAYS THAT THE NEWS IS ALWAYS THE MOST BULLISH AT THE TOP. I THINK MOST PRODUCERS ARE LOOKING FOR A LITTLE BIT OF A CUT IN PRODUCTION IN THE NOVEMBER REPORT. THEY'RE EXPECTING USDA WILL PAIR BACK THE ESTIMATES FOR THE EASTERN CORN BELT AND MAYBE A COUPLE OTHER PLACES. I THINK THE DANGER IS IF USDA DOESN'T CUT THOSE YIELDS BACK, GIVEN HOW OVERBOUGHT THE MARKET IS, WE COULD HAVE A FAIRLY DRAMATIC BREAK.

Pearson: SO TAKE HEED IF YOU'RE PLANNING TO MAKE SOME SALES. ARE YOU A BELIEVER? SHOULD WE GO BACK AND OWN THE BOARD IF WE SOLD THE CASH?

Brugler: I THINK THE MOST CONSERVATIVE STRATEGY WOULD BE TO SELL THE CASH AND THEN JUST REPLACE IT WITH A CALL OPTION OR A CALL SPREAD OF SOME TYPE. THAT WAY YOU KNOW WHAT YOUR RISK IS TO THE DOWN SIDE. PERSONALLY, WE'VE STILL GOT A FAIR AMOUNT OF CASH BEANS AROUND, BUT WE'RE LOOKING PRETTY HARD AT REWARDING THE MARKET FOR THE RALLY.

Pearson: ALL RIGHT. LET'S TALK ABOUT THE CORN MARKET THIS WEEK, AGAIN UP SHARPLY. THE CORN HAS BEEN KIND OF A SLEEPER. THE LAST COUPLE OF WEEKS HAVE BEEN PRETTY DRAMATIC.

Brugler: YEAH, CORN DID A V-BOTTOM, A U-TURN, WHATEVER YOU WANT TO CALL IT. BASICALLY WE HAD THE FUNDS COMING IN WITH A VERY LARGE SHORT POSITION. THEY ADDED ABOUT 15,000 CONTRACTS RIGHT AHEAD OF THE FIRST BIG UP DAY IN CORN, AND THEN THEY IMMEDIATELY BAILED OUT. WELL, WHEN YOU BUY BACK THAT MANY CONTRACTS IN A HURRY, THE PRICE GOES UP FAIRLY SUBSTANTIALLY. FROM THE FUNDAMENTAL STANDPOINT, WE STARTED TO SEE SOME IMPROVEMENT IN EXPORT SALES. WE GOT PAST THE GUT SLAUGHT OF HARVEST THERE. THERE'S STILL SOME CORN TO COME OUT OF THE FIELD, OF COURSE, BUT WE'RE STARTING TO LOOK AHEAD TO THE DEMAND SIDE. AND COMMERCIALS WERE HAVING SOME TROUBLE BUYING CASH CORN FROM FARMERS, BECAUSE WE'VE GOT PLENTY OF STORAGE LEFT OVER FROM THE SMALLER CARRYOVER, ET CETERA. SO IT MADE SENSE TO HAVE THE RALLY. IT'S POSSIBLY A LITTLE TOO FAST TOO SOON, GIVEN THAT WE'RE STARING AT AN 11-BILLION-BUSHEL PILE OF CORN THAT WE'VE GOT TO DO SOMETHING WITH.

Pearson: AT THIS STAGE OF THE GAME, A PRODUCER WHO MAYBE HAS NOT MADE SALES YET, WHAT WOULD YOU RECOMMEND?

Brugler: I THINK IN CORN, YOU PRETTY MUCH HAVE TO SIT ON IT. WE'VE GOT -- FROM A TECHNICAL STANDPOINT, WE WENT DOWN TO THE FOUR-YEAR UP TRENDLINE ON THE MONTHLY CHART. WE TRIED TO GO BACK THERE HERE IN OCTOBER AND COULDN'T DO IT. THAT'S CALLED A SUCCESSFUL RETEST OF THE LOW. AND WE HAD PRETTY HIGH VOLUME RALLY AFTER THAT. SO I THINK WE HAVE TO ASSUME THAT THE LOW IS IN FOR THE YEAR. THE QUESTION IS HOW FAST THE RALLY GOES OR IF WE HAVE TO FALL BACK A LITTLE BIT AND PROCESS SOME OF THIS BIG PILE OF CORN AND GET IT INTO THE SYSTEM. BUT I THINK IN GENERAL, IT'S GOING TO PAY YOU TO STORE THE CORN TO TRY TO PICK UP SOME POST AUGUST BASIS GAIN AND MAYBE A LITTLE BIT ON THE PRICE TOO.

Pearson: CORN BASIS, HAS IT WEAKENED THAT MUCH OR STRETCHED OUT THAT MUCH WITH THIS RALLY?

Brugler: NOT REALLY THAT BAD. IT'S STILL BETTER THAN THE FIVE-YEAR AVERAGE. IT'S NOT QUITE AS ATTRACTIVE AS IT WAS A YEAR AGO IN MOST PLACES. BUT YOU'VE GOT NORMAL IMPROVEMENT BETWEEN HERE AND THE FIRST OF THE YEAR THAT YOU CAN PICK UP MOST YEARS. I DON'T SEE ANYTHING IN THE MARKET STRUCTURE THAT WOULD PROHIBIT YOU FROM GETTING THAT THIS YEAR.

Pearson: OKAY. SO SIT ON THE CORN. OKAY, WHAT ABOUT WHEAT? A FAIRLY FLAT WEEK FOR WHEAT THIS WEEK, BUT THERE'S BEEN A LOT OF DRAMA THERE TOO.

Brugler: YEAH. WHEAT HAD A PRETTY STOUT RALLY OVER THE PAST COUPLE WEEKS AND THEN KIND OF RAN INTO A BRICK WALL. THE NEGATIVE, OF COURSE, WAS THIS WEEK'S EXPORT SALES REPORT. USDA REPORT ONLY ABOUT 11,000 TONS NET SALES. WE HAD A CANCELLATION FROM EGYPT. WE HAD ANOTHER CANCELLATION FROM UNKNOWN DESTINATIONS. THAT MADE THE WEEKLY SALES TOTAL LOOK PRETTY SMALL AND GOT SOME OF THE TRADERS WONDERING IF MAYBE WE'D GOTTEN THE PRICE TOO HIGH TO MAKE THE BUSINESS GO THE WAY IT NEEDS TO. BUT WE STILL HAVE A PRETTY GOOD YEAR-OVER-YEAR TOTAL SALES IN WHEAT, SO I THINK WE HAVE TO GIVE THE MARKET A LITTLE MORE TIME.

Pearson: OKAY. MAYBE SOME STRENGTH STILL TO COME.

Brugler: POTENTIALLY. THE SEASONAL TENDENCY WOULD BE FOR THE HIGH OF THE YEAR TO BE BETWEEN NOVEMBER AND FEBRUARY.

Pearson: LET'S TALK COTTON. IT'S A LITTLE BIT SOFTER WEEK ON COTTON, BUT THAT'S ALSO -- TREES DON'T GROW IN THE SKY AND IT JUST KEPT GOING UP.

Brugler: YEAH, WE HAD TWO PHENOMENALLY BIG EXPORT SALES WEEKS, SO THIS WEEK WAS THE LARGEST SINGLE EXPORT SALES TOTAL EVER REPORTED IN COTTON. AND THE PROBLEM WAS THE MARKET HAD BEEN RUNNING UP THE PRICE FOR SEVERAL WEEKS BECAUSE IT ANTICIPATED THAT THOSE SALES WERE OUT THERE, THAT THE CHINESE HAD PURCHASED A LARGE QUANTITY OF COTTON. YOU SAW THE MEMPHIS MERCHANTS IN THERE FOR THE MOST PART BUYING CALLS AND CALL SPREADS AND DOING OTHER BULLISH SORTS OF STRATEGIES. SO IT WAS ANOTHER TRADE AXIOM: BUY THE RUMOR; SELL THE FACT. WHEN THE BIG NUMBER CAME OUT, EVERYBODY SAID, "WELL, GEE, WHAT CAN WE DO NEXT? HOW CAN WE TOP THIS?" AND WE SAW SOME FAIRLY SUBSTANTIAL MONTH-END LIQUIDATION.

Pearson: SHOULD WE BE REWARDING THE COTTON MARKET?

Brugler: I THINK YOU'VE GOT TO ASK YOURSELF IF YOU THOUGHT THERE WAS ANY CHANCE YOU WERE GOING TO BE SELLING 80-CENT FUTURES COTTON AND WHATEVER YOUR LOCAL EQUIVALENT IS AND EITHER SELL A LITTLE BIT OF CASH OR AT LEAST PUT SOME KIND OF A PRICE FLOOR UNDER IT, LIKE BUYING MARCH PUT OPTIONS, FOR EXAMPLE, OR PROBABLY IN SOME KIND OF COMBINATION SPREAD, BECAUSE THEY'RE FAIRLY EXPENSIVE.

Pearson: LET'S TALK ABOUT THE LIVESTOCK MARKET AGAIN. THIS CATTLE MARKET HAS BEEN PHENOMENAL. USDA ANNOUNCED FRIDAY AFTERNOON THAT THEY WERE TALKING ABOUT OPENING UP THE CANADIAN MARKET TO LIVE SALES AND FRESH BEEF STARTING IN JANUARY. DO YOU THINK WE'LL SEE MUCH OF AN IMPACT ON THAT?

Brugler: I THINK THIS IS ONE THAT'S WELL ANTICIPATED. WE'VE BEEN TALKING FOR SEVERAL MONTHS, BASICALLY SINCE THEY OPENED UP THE BORDER TO SOME LIMITED BEEF SALES BACK IN SEPTEMBER, THAT THEY WERE GOING TO BE ISSUING REGULATIONS ON LIVE CATTLE. MY SOURCES ARE TELLING ME THAT IT WILL GO INTO THE REGS FOR THE SIXTY DAYS, IN THE FEDERAL REGISTER, AND THEN THEY'LL START THE PERMITTING PROCESS AFTER THAT. AT THE PRESENT TIME IT SOUNDS LIKE IT'S PRIMARILY GOING TO BE FINISHED CATTLE THAT ARE HEADING STRAIGHT TO PACKERS. THERE MAY OR MAY NOT BE A PROVISION IN THERE FOR FEEDER CATTLE TO COME ACROSS. THERE'S SOME CONCERNS ABOUT KEEPING TRACK OF THEM.

Pearson: ALL RIGHT. FOR THE CATTLEMEN OUT THERE, NOT MUCH TO DO ON THE BOARD AT THIS STAGE OF THE GAME. THESE FEEDERS ARE HIGH.

Brugler: THE FEEDERS ARE HIGH. THERE'S A SYSTEMIC RISK HERE OF PAYING TOO MUCH FOR FEEDERS. IT HAPPENS JUST ABOUT EVERY MARKET CYCLE HIGH. YOU PAY UP FOR THE FEEDERS, REINVEST SOME OF THE PROFITS YOU HAD FROM THE LAST LOAD OF FATS THAT YOU SOLD, AND THEN YOU END UP HAVING NEGATIVE $100 CLOSEOUTS WHEN THEY'RE DONE. SO, YEAH, I THINK YOU'VE GOT TO -- IF YOU'RE BUYING FEEDERS AT THIS PRICE, YOU'VE GOT TO PUT SOME KIND OF PRICE PROTECTION ON THE FAT CATTLE OR THE LIVE CATTLE THAT YOU'RE GOING TO MARKET. YOU'VE GOT TO REALIZE THAT THOSE HEDGES, IF THEY'RE STRAIGHT FUTURES HEDGES, AREN'T GOING TO MAKE A LOT BECAUSE THE BOARD IS ALREADY DISCOUNTING A GOOD PORTION OF WHAT IT SEES COMING DOWN THE ROAD. BUT I THINK YOU STILL HAVE TO HAVE THAT HEDGE ON AND MAYBE YOU DO A LITTLE OPTIONS BIT LIKE SELLING CALL OPTIONS TO KIND OF AN ENHANCE THOSE RETURNS A LITTLE BIT.

Pearson: REAL QUICK, ALAN, AS YOU LOOK AT WHAT'S HAPPENED IN THIS HOG MARKET, WE HAD A NICE RALLY GOING. WE PULLED BACK SHARPLY. AND TYPICALLY, SEASONALLY I GUESS, WHAT'S AHEAD NOW FOR HOGS AT THE FINAL QUARTER OF THE YEAR.

Brugler: I THINK WHAT WE'VE GOT TO LOOK AT IN HOGS IS WE ARE FINALLY SEEING THE BEEF -- THE HIGHER BEEF PRICES FED INTO THE MARKET. WE ARE SEEING SEASONAL INCREASE IN DEMAND FOR HAMS, FOR THANKSGIVING AND CHRISTMAS. AND THE BIG THING WE'VE GOT TO GET OVER IS THAT 2.1-MILLION-HEAD-PER-WEEK KILL. IF WE CAN START TO GET PAST THE SEASONAL HUMP IN KILL, I THINK WE CAN SEE A LITTLE MORE FIRMNESS IN HOGS.

Pearson: EXCELLENT. ALAN, THANK YOU SO MUCH FOR YOUR COMMENTS. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." BUT IF YOU'D LIKE TO HEAR ADDITIONAL INFORMATION ON WHERE THESE VOLATILE MARKETS ARE HEADED, BE SURE TO VISIT THE "MARKET PLUS" PAGE ON OUR "MARKET TO MARKET" WEB SITE. WHEN YOU DO, YOU'LL GET FURTHER INSIGHT FROM THIS WEEK'S MARKET GUEST, ALAN BRUGLER. BE SURE TO JOIN US AGAIN NEXT WEEK, WHEN WE'LL REEXAMINE THE EFFORTS OF A COMPANY MAKING THE TRANSITION FROM THE FEED BUSINESS TO THE FOOD BUSINESS. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK.

CAPTIONS BY: MIDWEST CAPTIONING DES MOINES, IOWA

Tags: agriculture commodity prices markets news soybeans