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Market Analysis: Nov 29, 2002

posted on November 29, 2002


In a short trading week grain and oilseed markets finished the week mixed. Leading into Thanksgiving Day, Wheat prices gained 6 and ¾ cents. The December Corn futures contract closed down 7 cents, the March contract finished 3 and a half lower. January and March soybean contracts gained 5 and a half and 4 and ¾ cents. Cotton futures closed fractionally lower.

In livestock, fed cattle futures finished 82-cents higher. Feeder cattle gained $1.15. The lean hog contract closed a dollar-60 higher.

In the financials, COMEX gold finished nearly four dollars an ounce lower. The Euro lost 49 basis points against the dollar. And the CRB index finished the first three days of trading this week a full point higher at 231.25

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: Nov 29, 2002 WELCOME BACK, VIRGIL.

Robinson: THANK YOU, SID. HAPPY HOLIDAY.

Sprecher: WELL, THANK YOU. VIRGIL, WE HAVEN'T SPENT A WHOLE LOT OF TIME IN RECENT WEEKS ON THE BEEF SECTOR OF THE COMMODITY MARKETS, AND NOW MIGHT BE A VERY GOOD TIME TO TAKE THAT UP BECAUSE IT'S A VERY HOT MARKET.

Robinson: IT'S BEEN A VERY STRONG MARKET, SID, SINCE THE LAST TIME YOU AND I VISITED. LIVE CATTLE PRICES HAVE IMPROVED $6 TO $7. HAVING SAID THAT, THE BASIS, AS WE ALLUDED TO A MONTH AGO, HAS NARROWED, SID, FROM ABOUT $7 OR $8 INTO $2. LIVE CATTLE THIS WEEK TRADED 73 TO 73.50. BEEF AT $1.15. I THINK A COUPLE OF THINGS ARE WORTH NOTING HERE. IN THE THE MOST RECENT COLD STORAGE REPORT, BEEF STOCK -- BEEF STOCKS, SID, WERE PEGGED AT ABOUT 525 MILLION POUNDS, WHICH IS ABOUT A 35-PERCENT INCREASE YEAR OVER YEAR. SO THERE'S A LOT OF BEEF IN STORAGE THAT YET HAS TO BE MARKETED. IT'S TRUE FED SCHEDULES HAVE DECLINED, WEIGHTS HAVE DECLINED, AND THOSE ARE VERY POSITIVE FACTORS. AND AS A FUNCTION OF THE AFOREMENTIONED, FUTURES HAVE SHOT TO HIGHS NOT SEEN FOR MANY, MANY MONTHS.

Sprecher: SO THESE ARE TRULY FUTURES PRICES. I MEAN THEY'RE ANTICIPATING A SHORTFALL IN THE COMING MONTHS.

Robinson: THE MARKET IS ANTICIPATING SOME UPPER $70 LIVE CATTLE PRICES, SID. AND I THINK IT'S IMPORTANT FOR OUR VIEWERS TO KEEP IN MIND THAT WHILE TRUE, BEEF SUPPLIES ARE GOING TO BE SMALLER IN 2003 THAN THEY WERE IN 2002, WE'RE BEING OFFERED PRICES NOT SEEN FOR QUITE SOME TIME. AND THERE ARE COMPETITIVE PRODUCTS AS WELL THAT WILL ENTER THE PIPE AND VIE FOR THAT CONSUMERS DOLLAR OVER THE COURSE OF THE NEXT SEVERAL MONTHS. SO HAVING SAID THAT, AGAIN I'LL REGIONALLY MAKE AN ILLUSTRATION HERE, SID: SOUTHERN MINNESOTA, STATE OF IOWA, THE OPPORTUNITY RIGHT NOW USING FEBRUARY, APRIL, AND JUNE LIVE CATTLE FUTURES AND ASSUMING AN EXPECTED BASIS IN EACH OF THOSE DELIVERABLE PERIODS WOULD GIVE THE PRODUCER AN OPPORTUNITY TO LOCK IN ANYWHERE FROM $76 TO $78 FOR HIS LIVE PRODUCT IN THE FIRST AND SECOND QUARTERS OF THE YEAR. I THINK THOSE ARE ATTRACTIVE HEDGES, SID, AND I WOULD NOT HESITATE TO TAKE PART IN AT LEAST A PORTION OF THOSE.

Sprecher: WELL, THERE ARE TWO QUESTIONS HERE: ONE IS HOW LONG CAN THIS GOOD MARKET LAST AND, TWO, HOW HIGH CAN IT GO?

Robinson: WELL, BOTH VERY DIFFICULT QUESTIONS TO ANSWER. I GUESS I WOULD BE SURPRISED TO ANSWER YOUR SECOND QUESTION, SID, IF WE WOULD SPEND ANY APPRECIABLE TIME ABOVE $80. NOW, I SAY THAT CHEEK AND TONGUE BECAUSE CLEARLY ANYTHING OVER THE COURSE OF A 12-MONTH PERIOD CAN HAPPEN. BUT THERE'S PLENTY OF MEAT, AS MENTIONED, IN STORAGE AS WE VISIT TONIGHT. AND WHILE BOTH CATTLE AND HOG NUMBERS ARE PROJECTED TO BE LOWER IN THE YEAR OF 2003, PLEASE REMEMBER THAT THE SWINE HERD CAN REGENERATE IN A HURRY AND POULTRY PRODUCTION CONTINUES ON A PACE OF ABOUT 2- TO 3-PERCENT INCREASE PER YEAR. SO I DON'T THINK THERE WILL BE ANY WANT FOR EDIBLE PROTEINS IN THE IMMEDIATE FUTURE, INCLUDING THE FIRST PART OF 2003.

Sprecher: SO THERE ARE SOME LIMITATIONS ON HOW HIGH THIS MARKET CAN GO AND HOW LONG IT CAN STAY THERE.

Robinson: I WOULD AGREE.

Sprecher: EXTRAPOLATING THIS OUT INTO THE OTHER SECTORS, WHAT DOES THIS MEAN FOR THE OTHER MAJOR RED MEAT -- THEY PREFER TO CALL THEM THE OTHER WHITE MEAT, BUT THE PORK SECTOR?

Robinson: THERE TOO I SAW, BEFORE I CAME TO VISIT THIS AFTERNOON, THE MONTHLY HOG AND PIG CROP RECORD, SID. THERE'S SOME GOOD NEWS THERE, SOME POSITIVE NEWS. PIG CROP DOWN 2 PERCENT IN OCTOBER 2002 VERSUS LAST YEAR. U.S. SOWS AND GILTS INVENTORYWISE DOWN 2 PERCENT VERSUS THE PREVIOUS YEAR. THOSE SOWS AND GILTS BRED THE MONTH OF OCTOBER DOWN A PERCENT. SO THOSE ARE ALL SUPPORTIVE FACTORS AND, OF COURSE, I THINK UNDERPIN THOSE DEFERRED LEAN-HOG FUTURES CONTRACTS. BUT AGAIN, HAVING SAID THAT, TONIGHT'S LIVE MARKET IS ANYWHERE FROM $28 TO $29. LEAN-HOG FUTURES CONVERTED TO PER HUNDREDWEIGHT AND ASSUMING, AGAIN REGIONALLY, SOUTHERN MINNESOTA AND IOWA FOR PURPOSE OF ILLUSTRATION, THE EXPECTED BASIS AS CALCULATED BY IOWA STATE, WE CAN, IN FACT, LOCK IN ANYWHERE FROM $35 TO NEAR $40 IN EACH OF THE FIRST AND SECOND QUARTER USING LEAN FUTURES AS OUR HEDGING VEHICLE, SID. I WOULD SUGGEST AND RECOMMEND TO OUR PRODUCERS THAT THAT CERTAINLY IS, IN MY OPINION, A PLACE TO BEGIN A HEDGING PROGRAM, AND I WOULD DO SO AT CURRENT VALUES.

Sprecher: THAT MAY BE A GOOD PRICE TO START HEDGING, BUT IS THAT GOING TO ENCOURAGE MORE PRODUCTION?

Robinson: WELL, STRONGER PRICES MAY IN THE FUTURE, BUT AT PRESENT, SID, AS MENTIONED, WE'RE NOT SEEING ANY INCREASE IN THE BREEDING HERD. IF ANYTHING, IT'S CONTINUING TO DECLINE. AND I'M SURE THAT'S WHAT'S DRIVEN, ALONG WITH WITH I THINK SOME SPECULATIVE ENTHUSIASM, DRIVEN LEAN-HOG FUTURES AS WELL AS LIVE CATTLE FUTURES TO THE LEVELS THAT WE HAVE TODAY.

Sprecher: TO TAKE ADVANTAGE OF THE SPECULATOR.

Robinson: THAT WOULD BE MY OPINION, SID. I THINK THESE ARE PRICES AND THESE ARE OPPORTUNITIES THAT WE NEED TAKE ADVANTAGE OF.

Sprecher: RIGHT NOW TURNING TO THE OILSEED AND THE GRAIN SECTOR, THE PART WHICH LITERALLY FEEDS THE MEAT SECTOR, THOSE PRICES HAVE BEEN RISING. IT'S BEEN A FAIRLY GOOD YEAR COMPARED TO MORE RECENT YEARS. YET, IN RECENT MONTHS, IT'S BECOME APPARENT THAT AN AWFUL LOT OF THE MARKET IS NOW COLORED BY WHAT OCCURS SOUTH OF THE EQUATOR. AND ALL EYES ARE ON BRAZIL, EVEN AS PRICES FOR OILSEED IN THIS COUNTRY REMAIN FAIRLY ROBUST.

Robinson: THE PROSPECTS DOWN THERE, SID, AS WE UNDERSTAND THEM TODAY, THE LIKELIHOOD OF RECORD SOYBEAN PRODUCTION IN BRAZIL, ARGENTINA, PARAGUAY, AND URUGUAY IS CURRENTLY PROJECTED. SO WE KNOW THAT AT SOME POINT IN 2003, MOST LIKELY BEGINNING IN MARCH OR THEREABOUTS, THERE WILL BE A MAJOR INJECTION OF NEW SUPPLY. NOW, IN THE INTERIM WE'RE DISCOVERING THAT -- WE'RE FINDING THAT BEAN USAGE REMAINS VERY ROBUST. EXPORTS OUT OF THE UNITED STATES ARE RUNNING AT A PACE ONLY A FRACTION OR TWO BELOW LAST YEAR'S RECORD PACE, SID, AND SHOW NO SIGNS OF ABATING. CHINA CONTINUES TO BE VERY ACTIVE IN THE MARKET, AS WELL AS OTHER CONSUMERS. SO I THINK THE PROSPECT OVER THE NEAR FUTURE OF OUR JANUARY FUTURES CONTRACT -- I'LL USE THAT SPECIFICALLY -- TRADING 2 OR ABOVE $6 IS VERY STRONG, SID. AND I THINK THAT IS LIKELY TO OCCUR BETWEEN NOW AND THE EXPIRATION OF THE JANUARY 2003 FUTURES CONTRACT.

Sprecher: HOW MUCH FURTHER OUT WOULD YOU TRY TO HOLD ON TO THIS CROP, THE EXISTING CROP, THIS YEAR'S CROP?

Robinson: AGAIN, I'VE USED THIS STRATEGY MANY TIMES BEFORE, BUT CERTAINLY THE PREMIUM OF A PUT OPTION, I THINK, GIVEN AS MENTIONED, THE OPPORTUNITY OF SEEING OUR LEAD FUTURES CONTRACT IN CHICAGO PRESS TOWARDS OR AT $6, I'D EMPLOY THOSE PUT OPTIONS AND CREATE PRICE FLOORS AND THEN SEE WHAT IN FACT DEVELOPS WITH THE CROP DOWN SOUTH, HOW LARGE IT IS, AND THEN THE DEMAND ELEMENT. DO WE CONTINUE TO CONSUME YEAR OVER YEAR MORE SOYBEANS AND OILSEEDS THAN WE PRODUCE? THAT AGAIN IS THE PROJECTION AS WE VISIT THIS AFTERNOON.

Sprecher: SO BY AND LARGE, IT LOOKS PRETTY GOOD FOR THE AMERICAN PRODUCER HOLDING A 2002 CROP, BUT THEY PROBABLY DON'T WANT TO BE HANGING ONTO THAT CROP WHEN FOLKS WAKE UP AND DISCOVER IN MARCH AND APRIL THAT THERE'S A VERY GOOD CROP IN SOUTH AMERICA.

Robinson: WELL, IF THEY CHOOSE TO DO SO, SID, AGAIN, I WOULD EMPLOY SOME TYPE OF SIMPLE STRATEGY TO THE EXTENT OF BUYING AN OPTION AND CREATING A PRICE FLOOR. I UNDERSTAND THEIR ARGUMENT ABOUT BEING OPTIMISTIC PRICEWISE AND THE PROSPECTS OF WHAT COULD BE SIGNIFICANTLY HIGHER PRICES, SHOULD THERE BE A PRODUCTION SHORTFALL DOWN SOUTH. DON'T NEGLECT THE OPPORTUNITY THE MARKET HAS PROVIDED US. USE SOME TYPE OF DEFENSIVE MECHANISM TO GUARD AND HEDGE AGAINST WHAT COULD BE LOWER PRICES SIX OR SEVEN MONTHS FROM TONIGHT.

Sprecher: ALL RIGHT. WE'VE GOT ABOUT A MINUTE LEFT. LOOKING AT THE GRAIN SECTOR -- OR RATHER THE CORN SECTOR, THIS MARKET SEEMS TO BE DISSIPATING FAIRLY QUICKLY NOW. SO WHAT SHOULD PRODUCERS BE DOING WITH THIS YEAR'S CROP AND LOOKING AN EYE TOWARD NEXT YEAR?

Robinson: SID, I THINK THE CASH MARKETS REMAIN PRETTY SOLIDLY UNDERPINNED BY DOMESTIC DEMAND. ETHANOL PRODUCTION LAST MONTH WAS THE LARGEST EVER, AND THERE ARE MORE PLANTS COMING ONSTREAM AS WE VISIT. SO I THINK THAT PLUS THE FRUTOSE SYRUP DEMAND WILL REMAIN VERY STRONG THE BALANCE OF THIS YEAR. I THINK CASH IS FAIRLY PRICED AS WE VISIT TONIGHT IN AND AROUND THIS $2.30 TO $2.40 AREA. I THINK WE MAY SUSTAIN THAT FOR SEVERAL MORE WEEKS, PERHAPS EVEN MONTHS, UNTIL WE GET A BETTER READ ON THIS SPRING'S ACREAGE AND THE CROP PROSPECTS THAT DEVELOP FROM THAT. HAVING SAID THAT, 2003 DECEMBER CORN FUTURES AT 240 OR LOWER ARE NOT, IN MY OPINION, AN ATTRACTIVE HEDGING OPPORTUNITY.

Sprecher: WELL, THANK YOU, VIRGIL. THAT WRAPS UP THIS EDITION OF "MARKET TO MARKET." IF YOU'D LIKE TO HEAR ADDITIONAL ANALYSIS VIRGIL, BE SURE TO DIAL UP THE "MARKET PLUS" PAGE ON OUR "MARKET TO MARKET" WEBSITE. UNTIL NEXT WEEK, I'M SID SPRECHER FOR MARK PEARSON. HAVE A GOOD WEEK.

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