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Market Analysis: Oct 11, 2002

posted on October 11, 2002


Markets were feeling the pressure of harvests. Wheat gave up ten cents from last week's close. Corn and soybeans also lost ten to 11 cents on the week. October meal lost three dollars 90 on the week. Cotton futures closed 71 cents higher.

In livestock, fed cattle futures gained a dollar – 65. Feeders finished 60 cents higher. October hogs closed more than 2 dollars higher.

In the financials, COMEX gold lost $5.80 per ounce. The EURO climbed 59 basis points against the dollar. The CRB index gained a point and a half to close at 226.10.

Here now to lend us their insight on these and other market trends are two of our regular market analysts, Doug Jackson, and Virgil Robinson. Welcome back.

Market Analysis: Oct 11, 2002 Pearson: LET'S START WITH YOU, DOUG, AND TALK ABOUT THIS GRAIN MARKET. FIRST OF ALL, USDA CROP REPORT, WHAT'S YOUR TAKE ON IT? LET'S START FIRST WITH THE WHEAT.

Jackson: OKAY, MARK, THE GOVERNMENT INCORPORATED, OF COURSE, THE SMALLER WHEAT PRODUCTION NUMBER THAT WE ALREADY HAD AND REALLY WORKED IT THROUGH THE TABLE. THERE WERE REALLY NO SURPRISES, PER SE, BECAUSE WE ALREADY KNEW THE LOWER PRODUCTION NUMBER. OF COURSE, WE HAVE ANOTHER YEAR OF DECLINING WHEAT STOCKS IN THE UNITED STATES. THIS HAS BEEN SEVERAL YEARS IN A ROW. WE HAVE DECLINING WORLD WHEAT STOCKS. WE HAVE AN EXTREME SUBCLASS SHORTAGE PROBLEM. U.S. SPRING WHEAT IS THE TIGHTEST IT'S EVER BEEN. THE HARD RED WINTER WHEAT IS ONE OF THE TIGHTEST SITUATIONS WE'VE EVER HAD. THERE'S SOME DEBATE ABOUT SOFT RED WHEAT AND JUST HOW TIGHT IT'S GOING TO BE. AND SO WE HAVE A SITUATION WHERE THE WORLD IS TRYING TO DECIDE HOW TO RATION ONE OF THE TIGHTEST, HARD AND MILLING WHEAT SUPPLY SITUATIONS WE'VE EVER HAD. WE HAVE VERY TIGHT SUPPLIES IN MAJOR EXPORTER HANDS, BUT THE WILD CARD IS HOW MUCH DO NON-CONVENTIONAL EXPORTERS HAVE: HOW MUCH CAN EASTERN EUROPE SELL; HOW MUCH CAN RUSSIA LOAD AND SELL; WHAT'S THEIR LOADING CAPACITY IN THE BLACK SEA AND THE BALTIC; HOW MUCH CAN INDIA EXPORT; AND HOW DO THESE PEOPLE HELP US GET BY WITH VERY TIGHT SUPPLIES THIS YEAR? IT'S AN IMPONDERABLE, MARK. PEOPLE CAN DRAW PARALLELS TO THE 1996 SITUATION WHEN WHEAT FUTURES TRADED AT 720 AND HIGHER. ON THE OTHER HAND, OF COURSE, THESE LARGER SUPPLIES AROUND THE WORLD MAY TEMPER ALL OF THAT. AND REALLY, WE'RE JUST GOING TO BE IN, I THINK, A VERY VOLATILE, NERVOUS MARKET. THE FUNDS ARE A LITTLE OVERLOADED IN CHICAGO WHEAT. WE MAY SEE LIQUIDATION THERE. OBVIOUSLY, WE'RE NOT RUNNING OUT TODAY BUT WE COULD RUN OUT OR GET VERY TIGHT LATER IN THE YEAR. A LOT OF PEOPLE SEE MAYBE 10 OR 20 CENTS DOWNSIDE HERE IN THE NEXT FEW MONTHS, WITH THE POTENTIAL, OF COURSE, TO TRADE MUCH HIGHER LATER ON. THE MARKET THINKS MORE WHEAT ACRES YEAR. WE'VE HAD SOME GOOD MOISTURE TO HELP GET THE CROP OFF TO A GOOD START. BUT, AGAIN, MAYBE A MODERATE DOWNSIDE, LOTS OF POSSIBILITY TYPE OF A SITUATION LONGER TERM. AND OF COURSE, CRITICALLY WE MUST HAVE AN OUTSTANDING CROP NEXT YEAR OR THIS THING JUST EXPLODES INTO A MUCH TIGHTER SITUATION A YEAR FROM NOW. A VERY DELICATE SITUATION FOR A LONG TIME TO COME.

Pearson: ALL RIGHT. STRATEGY WISE, THEN, YOU WANT TO MAINTAIN CONTROL?

Jackson: WE DON'T REALLY WANT TO SELL WHEAT TOO BAD, MARK, AT THE POSSIBILITY OF SOMETHING LONGER TERM DEVELOPING. BUT THE KEY WORD THERE MAY BE SOME PATIENCE HERE. THIS THING MAY NOT DO ANYTHING FOR A WHILE.

Pearson: ALL RIGHT. WHAT ABOUT ON THE CORN?

Jackson: WELL, THE CORN CROP HAS INCREASED AGAIN ABOUT 120 MILLION BUSHELS. THE MARKET HAD ANTICIPATED THAT. BUT THIS YEAR NOW WHAT WE HAVE IS A SITUATION WHERE AT ONE TIME WE FEARED THAT THE CROP COULD BE SO SMALL THAT WE'D HAVE TO RATION DEMAND TO HAVE ANYTHING LEFT OVER. NOW THE CROP SEEMS TO BE LARGE ENOUGH WHERE WE'RE NOT GOING TO NECESSARILY NEED TO RATION, BUT THIS WILL BE THE YEAR THAT GOES DOWN IN HISTORY WHERE OUR BUFFER INVENTORY DISAPPEARED. WE'RE GOING TO WIPE OUT A BILLION BUSHELS OF CARRYOUT AND GO FROM ABOUT 1.6 BILLION TO MAYBE 600- OR 700 MILLION. THAT SETS THE STAGE FOR US TO NEED MORE ACRES AND PERFECT GROWING CONDITIONS A YEAR FROM NOW, OR THE CORN MARKET WILL EXPLODE A YEAR FROM NOW. BUT THE CROP IS LARGE ENOUGH THIS YEAR NOW, MARK, THAT, AGAIN, THERE'S A BIG DIFFERENCE BETWEEN RATIONING AND JUST LOW SUPPLIES. IT LOOKS LIKE THIS IS GOING TO BE A LOW SUPPLY YEAR. PRICES HAVE ALREADY GONE LOWER THAN WE THOUGHT THEY WOULD, MARK. THE FUNDS HAVE REMAINED LONG ALL THE WAY DOWN. THEY'RE STILL LONG FRIDAY NIGHT, ABOUT 50,000 CONTRACTS. WE MAY BE NOW FRUSTRATED ENOUGH WITH A MEDIOCRE SUPPLY/DEMAND SITUATION AND A CROP THAT GOT A LITTLE LARGER THAT WE MAY STILL SEE THE FUNDS LIQUIDATE ANOTHER 20,000 OR 30,000 CONTRACTS, AND THAT MAY BREAK US MORE YET INTO HARVEST. BUT LONGER TERM, AGAIN, IT'S A SITUATION WHERE WE NEED MORE ACRES AND PERFECT WEATHER NEXT YEAR, AND THAT LONG-TERM POTENTIAL OF AN EXPLOSION IN THIS SITUATION STILL IS THERE. MAYBE 10 OR 15 CENTS DOWN ON CORN. I DON'T REALLY WANT TO SELL CORN VERY BADLY. JUST HOLD ON AND WAIT FOR THE LONGER TERM SITUATION. BUT AGAIN, WE'RE NOT RUNNING OUT OF HARVEST. THERE'S 1.6 BILLION MORE CORN TODAY THAN IN '95. THIS ISN'T 1995. BUT THE LONG TERM IS POSITIVE.

Pearson: ALL RIGHT. IS IT POSITIVE FOR SOYBEANS?

Jackson: THE BEAN SITUATION, AGAIN, THE CROP DIDN'T CHANGE HARDLY AT ALL. WE STILL HAVE A BARE MINIMUM CARRYOUT PROJECTED. THE WHOLE REASON THAT BEANS HAVEN'T EXPLODED TO HIGHER LEVELS, OF COURSE, IS THAT WE HAVE LARGER CROPS IN SOUTH AMERICA. AND AS WE'VE GONE THROUGH THE LAST FEW WEEKS, ACREAGE AND PRODUCTION ESTIMATES IN SOUTH AMERICA HAVE GOTTEN LARGER AND LARGER AND LARGER. WHAT WE NEED TO DO LONGER TERM IS TAKE BEAN ACRES INTO CORN AND WHEAT IN THE UNITED STATES AND SHIFT THE WORLD SOYBEAN SITUATION TO SOUTH AMERICA. WE'RE IN THAT PROCESS. WILL WE DO IT IN AN ORDERLY FASHION WHERE ACREAGE EXPLODES AND PRODUCTION CONTINUES TO EXPLODE IN SOUTH AMERICA OR NOT IS YET TO BE SEEN. THIS TOO WILL BE A VERY DELICATE SITUATION WHERE ANY PROBLEMS WITH THE WEATHER IN SOUTH AMERICA COULD BE EXPLOSIVE ON BEANS. PRODUCER SELLING IS VERY LIGHT. LDP'S ARE NEAR ZERO HERE. PRICES ARE NEAR LOAN AS WE GO HOME OVER THE WEEKEND. BUT A VERY DIFFICULT SITUATION. IF WE DON'T HAVE PROBLEMS IN SOUTH AMERICA, MARK, BELIEVE IT OR NOT, WE COULD ACTUALLY HAVE MORE BEANS IN THE WESTERN HEMISPHERE NEXT SPRING THAN WE DID THIS PAST YEAR WHEN PRICES WERE AT 450. IT ALL DEPENDS ON SOUTH AMERICA. SO WHAT DO YOU DO IN BEANS? THE POTENTIAL HERE IS TO TRADE HIGHER LONGER TERM IF WE HAVE ANY WEATHER PROBLEM AT ALL. HOW WE SOLVE NEXT YEAR'S SITUATION IN THE U.S. WITH LESS ACRES IS EVEN MORE DIFFICULT. BUT IT MAY TAKE THE CATALYST OF HAVING A WEATHER PROBLEM IN SOUTH AMERICA TO GET THIS THING GOING. IN THE MEANTIME, MAYBE WE SEE SOME FUND LIQUIDATION INTO HARVEST BUT NOT A LOT OF DOWNSIDE.

Pearson: OKAY. LET'S TALK LIVESTOCK. WHAT A WEEK WE'VE HAD THERE. A MUCH MORE POSITIVE WEEK AS FAR AS PRICE ACTION IS CONCERNED FOR CATTLE AND HOGS AT LEAST ON THE BOARD. VIRGIL, LET'S TALK ABOUT THIS CATTLE MARKET. THERE'S A CONCERN ABOUT BIG CATTLE STILL BEING OUT THERE.

Robinson: THEY'RE THERE, MARK. WEIGHTS REMAIN HISTORICALLY HIGH AND CERTAINLY HIGHER THAN A YEAR AGO AT THIS TIME. A PRETTY GOOD SIZED SLAUGHTER THIS WEEK, MARK, 700,000 PLUS. SO CLEARLY NO SHORTAGE OF FRESH PRODUCT, NO SHORTAGE OF FROZEN PRODUCT. THE GOOD NEWS I THINK IS THAT YEAR OVER YEAR WE'RE FORECASTING A DECREASE IN BEEF PRODUCTION AND ENDING STOCKS, AND I THINK THAT CERTAINLY IS SUPPORTING SOME OF THE DEFERRED CATTLE FUTURES CONTRACTS, MARK. OF CONCERN TO ME, AND PERHAPS AN OPPORTUNITY HERE IN THE SHORT TERM, I THINK HOG SLAUGHTER NEEDS TO PICK THE PACE UP HERE A LITTLE BIT IF THIS RECENT HOG AND PIG CROP REPORT IS ACCURATE, MARK. AND I ANTICIPATE, AS WE WIND THROUGH THE HARVEST, SOME ADDITIONAL RECEIPTS SHOWING UP. TOTAL AVAILABLE MEAT IS ADEQUATE. HAVING SAID THAT, I THINK THERE ARE SOME NEAR-TERM HEDGING OPPORTUNITIES IN BOTH CATTLE AND HOGS. AS YOU MENTIONED FUTURES THIS WEEK, A COUPLE OF DOLLARS HIGHER IN CATTLE, CASH WAS ACTUALLY BASICALLY STEADY. I'M OF THE OPINION DECEMBER CATTLE FUTURES AT THIS PRICE OR A DOLLAR HIGHER WOULD REPRESENT A PRETTY GOOD SHORT-TERM HEDGING OPPORTUNITY. I THINK FEBRUARY CATTLE FUTURES NEAR $73, THE SAME. THAT WOULD LOCK IN, FOR AT LEAST CORN BELT FEEDERS, ABOUT $70 OR $71. AND I THINK THAT'S AN ATTRACTIVE HEDGE FOR THESE CATTLE FOLKS.

Pearson: IT HAS BEEN A LITTLE BIT MORE ENCOURAGING THAN WHAT WE HAVE SEEN. YOU MENTIONED HOG SLAUGHTER. WE NEED TO PICK UP THE PROCESSING LEVEL. WHAT'S YOUR TAKE THERE?

Robinson: WELL, IF THE LAST HOG CROP REPORT IS ACCURATE, MARK, WE SHOULD BE SLAUGHTERING ABOUT 3 PERCENT MORE HOGS THAN A YEAR AGO AT THIS TIME. AT LEAST THROUGH THE FIRST TWO WEEKS OF OCTOBER, WE'RE ONLY SLAUGHTERING AT A PACE ABOUT 1 PERCENT LARGER, WHICH WOULD SUGGEST, THEN, WE NEED TO PICK THAT PACE UP. HAVING SAID THAT -- AND I DO THINK THAT WILL DEVELOP AS WE WIND THROUGH OCTOBER INTO NOVEMBER -- HERE AGAIN I THINK THERE ARE SOME SHORT-TERM OPPORTUNITIES FOR PRODUCERS, NOT PERHAPS AS ATTRACTIVE AS THEY'D LIKE. BUT NONETHELESS, DECEMBER HOG FUTURES, LEAN HOG FUTURES, AROUND $45, CONVERT THAT TO PER HUNDREDWEIGHT, LESS THE BASIS IN SOUTHERN MINNESOTA AND IOWA OF A COUPLE OF DOLLARS, AND YOU CAN, IN FACT, LOCK IN ABOUT $31, MARK. AND I THINK THAT'S MAYBE AS GOOD AS WE'RE GOING TO DO THE BALANCE OF THIS QUARTER. THE FEBRUARY CONTRACT AROUND 51.5 CENTS. GO THROUGH THE SAME CALCULATION, ASSUMING ABOUT THE SAME BASIS, LOCKING IN A CASH PRICE OF ABOUT $35, I THINK IS ALSO AN ATTRACTIVE HEDGE, GIVEN THE NUMBERS AND THE SUPPLY THAT WE SEE HEADED TOWARDS THIS MARKET THE BALANCE OF THIS QUARTER INTO THE FIRST OF 2003.

Pearson: VERY GOOD. THANKS, VIRGIL. THANKS, DOUG. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." IF YOU'D LIKE TO HEAR ADDITIONAL COMMENTARY FROM THESE GUYS, SIMPLY CLICK ON THE "MARKET PLUS" SEGMENT ON OUR WEB PAGE. UNTIL NEXT WEEK, THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK. CAPTIONS BY: MIDWEST CAPTIONING DES MOINES, IOWA

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