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Market Analysis: Mar 21, 2003

posted on March 21, 2003


The grain markets finished the week mostly on the down side. Wheat futures prices fell sharply, losing 25 cents on the week. Corn prices closed down a cent and a half to three and ¾. The new and old bean contracts gained a couple of cents, but meal lost more than 4 dollars a ton. December cotton futures closed a cent and a half lower.

In livestock, both fed cattle and feeder cattle futures recorded modest gains. The lean hog contract closed the week 37 cents lower.

In the financials, COMEX gold closed the week down by more than 10-dollars, nearly 25 dollars lower in the last two weeks. The euro finished 218-basis points lower against the dollar. And the CRB index finished the week more than nine points lower to close at 228.35. Here now to lend us his insight is one of our regular market analysts, Virgil Robinson. Welcome back.

Market Analysis: Mar 21, 2003

Robinson: THANKS, SID. HAPPY NATIONAL AG DAY.

Sprecher: WELL, PROBABLY THE BRIGHT SPOT ON NATIONAL AG DAY IS MAYBE THE BEEF SECTOR. THERE WAS NEWS OUT ON FRIDAY AFTERNOON THAT INDICATES THAT THERE MIGHT BE SOME UPSIDE FOR CATTLE PRODUCERS.

Robinson: MY READ ON THAT MARKET IS THAT I THINK THERE IS SOME BULLISH NEWS THAT WE CAN DISCUSS TONIGHT, ADDRESSING FIRST THE SUPPLY SIDE. CATTLE-ON-FEED REPORT THIS AFTERNOON INDICATED FEWER PLACEMENTS DURING THE MONTH OF FEB. THAN WAS PREREPORT GUESSED OR ESTIMATED. TOTAL NUMBER ON FEED AT 91 PERCENT OF A YEAR AGO FALLS BELOW THE LOWER END OF PREREPORT GUESSES. AND I THINK EQUALLY IMPORTANT, SID, IN THIS WEEK'S COLD STORAGE REPORT, PRETTY SIGNIFICANT DRAW DOWN IN FROZEN BEEF INVENTORIES MONTH OVER MONTH TO ABOUT EQUAL OF WHERE WE WERE A YEAR AGO. SO FROM A SUPPLY PERSPECTIVE, I DON'T THINK THERE'S AN ARGUMENT HERE THAT WE HAVE AN OVERABUNDANCE OF BEEF OR WE ARE FACED HERE IN THE NEAR FUTURE WITH SIGNIFICANTLY LARGER BEEF SUPPLIES. I THINK THE USDA IS ON TRACK HERE IN THEIR YEARLY FORECAST SUGGESTING BEEF PRODUCTION WILL BE DOWN ABOUT 5 PERCENT YEAR OVER YEAR. SO THAT'S PRETTY GOOD NEWS. DEMAND WISE I THINK THE FACT THAT CHOICE BEEF AVERAGE PRICE PER POUND FOR THE MONTH OF FEBRUARY 2003, SID, WAS $3.48, RECORD HIGH. IF THAT'S INDICATIVE OF DEMAND, AND CLEARLY IT MUST BE, THEN I DON'T SENSE THAT WE HAVE A PROBLEM WITH DEMAND EITHER. SO WE'VE GOT STRONG DEMAND. WE NOW HAVE DOCUMENTATION TO THE FACT THAT SUPPLIES ARE CLEARLY GOING TO BE SMALLER IN THE NEAR FUTURE OR AT LEAST THROUGH THE BALANCE OF 2003. AND TO COMPLETE THIS SCENARIO, LIVE CATTLE FUTURES TODAY, THE JUNE, THE AUGUST, THE OCT., THE DEC., ARE ABOUT THE SAME PRICE AS THEY WERE ONE YEAR AGO WHEN SUPPLIES WERE SIGNIFICANTLY LARGER. SO MY CONCLUSION IS CATTLE FUTURES, AS WE VISIT TONIGHT, SECOND-, THIRD-, AND FOURTH-QUARTER CATTLE FUTURES ARE UNDERVALUED. I'M NOT INTERESTED IN HEDGING ANY CATTLE BASED ON FUTURES VALUES TONIGHT. I THINK THEY'RE UNDERPRICED.

Sprecher: DO YOU SEE THEM RECOVERING SOME OF THE LOSSES THEY'VE HAD IN RECENT WEEKS? I MEAN IT WASN'T THAT LONG AGO WE HAD $80 CATTLE. NOW WE'RE PROBABLY $10 BELOW THAT.

Robinson: YEAH, WELL, THERE'S ALWAYS THIS BASIS FACTOR TOO, SID, THAT NEEDS TO BE CONSIDERED REGIONALLY. BUT TO ANSWER YOUR QUESTION "DO I THINK WE'RE UNDERVALUED BOTH CASH AND FUTURES," YES, I DO. I THINK OVER THE COURSE OF THE NEXT SEVERAL WEEKS, ONCE WE PERHAPS GET PAST THIS LARGER HOG SLAUGHTER -- AND I THINK THAT'S GOING TO HAPPEN SOMETIME MID TO LATE APRIL, PERHAPS FIRST PART OF MAY -- I THINK TOTAL RED MEAT INVENTORIES ARE GOING TO BEGIN TO DECLINE PRETTY APPRECIABLY AND PRETTY NOTICEABLY. AND AT THAT POINT, I THINK THAT'S THE BASIS AND THE CATALYST FOR PRICE IMPROVEMENT IN CATTLE AND, TO A LESSER DEGREE, HOGS AS WELL.

Sprecher: WHAT WOULD YOU SEE AS YOUR UPSIDE FOR PRICES ON BOTH FED CATTLE AND FEEDERS?

Robinson: I THINK, SID, THE UPPER 70S HERE LATE IN THE SECOND QUARTER, UPPER 70S, PERHAPS THE $80 MARK. AND I ALWAYS CRINGE WHEN I TALK ABOUT $80 BUT --

Sprecher: SOME PEOPLE THINK THAT'S A PROMISE, VIRGIL.

Robinson: I THINK THERE'S THE POTENTIAL OF THAT OVER THE COURSE OF THE NEXT SEVERAL MONTHS. MAYBE SOMETIME THIRD -- EARLY FOURTH -- EARLY PART OF THE FOURTH QUARTER. I THINK WE HAVE THE PROSPECTS HERE OF SOME $80 LIVE CATTLE MARKETS. WE'RE ONLY $2 OR $3 FROM THAT TONIGHT AS WE VISIT.

Sprecher: BUT ON THE OTHER HAND, YOU DID MENTION PORK. AND THERE'S PLENTY OF PORK OUT THERE, SO THERE IS NO REAL SHORTAGE OF RED MEAT.

Robinson: WE'LL HAVE A QUARTERLY HOG AND PIG REPORT NEXT FRIDAY NIGHT. AND FROM WHAT I'VE BEEN ABLE TO GATHER FROM FAIRLY RELIABLE SOURCES, MOST ARE IN CONSENSUS THAT THE BREEDING HERD WILL BE DOWN 3.5 TO 4 PERCENT YEAR OVER YEAR. KEPT FOR MARKETING DOWN 1 TO 2 PERCENT. IF THOSE NUMBERS ARE ACCURATE AND IT'S DOCUMENTED BY USDA DATA NEXT FRIDAY NIGHT, I THINK THEN WE'LL BEGIN TO SEE THIS F.I.S. BEGIN TO DECLINE SOMETIME APRIL/MAY, SID, AND FALL BELOW YEAR EARLIER LEVELS PRETTY CONSISTENTLY THROUGH THE BALANCE OF THE YEAR. HAVING SAID THAT -- AS YOU MENTIONED, COLD STORAGE INDICATES STILL HALF A BILLION POUNDS OF TOTAL FROZEN PORK THAT WE NEED TO DISPOSE OF. I THINK IT WILL PROVIDE AN OPPORTUNITY IN THAT WINDOW TO DO THAT. HEDGING OPPORTUNITIES, I THINK WE NEED TO DISCUSS THAT BRIEFLY. AUGUST HOG -- LEAN-HOG FUTURES AT $61. THE OCTOBER NEAR 54. THE DECEMBER AT 53 TO 54. I THINK OFFER RELATIVELY GOOD, ATTRACTIVE HEDGING OPPORTUNITIES, SID, RESPECTIVELY THAT WOULD PENCIL OUT TO A LIVE MARKET OF AROUND $42 TO -3, AROUND $40 TO $41, AND ABOUT $38 RESPECTIVELY IN THOSE TIME PERIODS.

Sprecher: SO THERE ARE SOME OPPORTUNITIES FOR FOLKS.

Robinson: I THINK THERE ARE.

Sprecher: TURNING TO THE GRAIN, THE RATIONS FOR -- IT WOULD SEEM THERE'S AMPLE SUPPLIES OF GRAIN, DESPITE THE DEMAND IN CERTAIN SECTORS. THE DEMAND FOR SOYBEANS REMAINS STRONG. THE DEMAND FOR CORN SEEMINGLY STRONG, ALTHOUGH IT'S ALMOST WEEK TO WEEK. SOME WEEKS ARE MUCH BETTER THAN OTHERS. WHEAT, SOMEWHAT FLAT DEMAND. CAN YOU GIVE US -- GOING INTO SPRING PLANTING AND, OF COURSE, JUNE HARVEST AND THE WINTER WHEAT CROP, WHAT SORTS OF PRICE PARAMETERS CAN YOU SEE?

Robinson: I'LL TRY AND ADDRESS FUTURES BECAUSE CASH IS SUCH A REGIONAL VEHICLE, SID. I THINK THE PRICE PROSPECTS IN CORN FUTURES ARE MEASURED. THERE'S AN ADEQUATE SUPPLY OF CORN. AND AS YOU AND I JUST DISCUSSED BRIEFLY, THE PROSPECTS OF FEWER ANIMAL CONSUMING UNITS HERE DOMESTICALLY I THINK IS VERY SOLID. CATTLE NUMBERS WILL BE DOWN. POULTRY NUMBERS WILL BE DOWN YEAR OVER YEAR, SID. AND THE PROSPECT OF FEWER HOGS AT A POINT IN 2003, EARLY 2004 IS ALSO, I THINK, STRONG. EXPORTS, WE'VE TALKED ABOUT IT NUMEROUS TIMES; IN EACH OF THE LAST FIVE USDA SUPPLY AND DEMANDS, THE USDA HAS BEEN OBLIGATED TO REDUCE YEARLY EXPORT PROJECTIONS. THERE'S STILL AN ARGUMENT THEY'RE TOO HIGH. WE'VE RUN INTO A VERY FORMIDABLE COMPETITOR IN CHINA, AS WELL AS OTHERS. I THINK THERE'S AN ADEQUATE SUPPLY OF CORN, SID, AND I THINK OUR PRICE PROSPECTS BETWEEN NOW AND THE AVAILABILITY OF WHATEVER WE PRODUCE THIS NEXT FALL, VERY, VERY MEASURED. I WOULD USE ANY KIND OF RALLY, AND IT MIGHT BE A RALLY BASED UPON SOME ADDITIONAL STRENGTH HERE IN SOYBEANS TO MOVE THROUGH OLD CROP INVENTORY. IF YOU'RE CONVINCED THAT WEATHER WILL BE POOR, GROWING CONDITIONS AND CROP CONDITIONS POOR, THINK ABOUT SOME TYPE OF PREPURCHASE THEN, IN AN OPTION STRATEGY, A BULL-CALL SPREAD. BULL-CALL SPREADS I THINK SPRING TO MIND BECAUSE THEY INFER MODERATE PRICE INCREASES, AND I THINK THAT'S WHAT WE'D HAVE TO TALK ABOUT IN CORN. MAY CORN FUTURES 235 TO -40 I THINK IS VERY, VERY STRONG RESISTANCE. IT'S GOING TO BE TOUGH TO GET THROUGH. NEW CROP CORN FUTURES 240 AND ABOVE, I FEEL THE SAME, SID. I THINK VERY FORMIDABLE RESISTANCE AT THOSE PRICE PARAMETERS.

Sprecher: ALL RIGHT. WE HAVE ABOUT A MINUTE LEFT. SOYBEANS ARE MORE COMPLEX. THERE'S MORE COMPETITION, ALTHOUGH THERE'S MORE DEMAND.

Robinson: AS YOU MENTIONED EARLIER, MEAL IS STRUGGLING. THERE'S PLENTY OF COMPETITION IN THE FORM OF CORN GLUTEN AND FEED DERIVATIVES FROM ETHANOL PRODUCTION. HAVING SAID THAT, MAY SOYBEAN FUTURES TONIGHT MADE THEIR BEST WEEKLY CLOSE SINCE THE INCEPTION OF THAT CONTRACT. THERE'S THE PRICE PROSPECTS HERE TECHNICALLY FOR SOME ADDITIONAL PRICE IMPROVEMENT. BUT AS WE THINK ABOUT THE ONSLAUGHT AND THE SOON TO DEVELOP COMPETITION OUT OF THE SOUTHERN HEMISPHERE, I'VE GOT TO BELIEVE PRICE IMPROVEMENT FROM THIS POINT FORWARD, GIVEN WHAT WE KNOW TONIGHT, WOULD BE MODERATE IN NATURE AGAIN. I WOULD SELL BEANS NEXT WEEK ON THE 5- TO 10-CENT RALLY, REPURCHASE WITH A VERTICAL CALL SPREAD. AND I'D DO THE AUGUST 560, 620, FOR A TOTAL DEBIT OF ABOUT 15 CENTS.

Sprecher: GOOD THOUGHTS. THANK YOU, VIRGIL. THAT WRAPS UP THIS EDITION OF "MARKET TO MARKET." YOU CAN HEAR MORE OF VIRGIL'S THOUGHTS BY CLICKING ONTO THE "MARKET TO MARKET" WEB SITE. UNTIL NEXT WEEK, FOR MARK PEARSON, THANKS FOR WATCHING. HAVE A GOOD WEEK. CAPTIONS BY: MIDWEST CAPTIONING DES MOINES, IOWA


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