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Market Analysis: Apr 12, 2002

posted on April 12, 2002


The grain market continued their slide this week, as the trade remains concerned about another big crop in 2002. For the week, wheat prices were down more than four cents. Corn futures prices were down more than two cents. Soybean futures were down four to five cents. Soybean meal finished forty cents lower per ton. Cotton futures were 68-cents lower.

In livestock, fed cattle futures dropped nearly three dollars. Feeder cattle were down more than three dollars. The lean hog contract finished four dollars lower.

In the financials, COMEX gold gained two dollars per ounce. The Euro was basically unchanged against the dollar. And, the CRB index finished the week nearly six points lower to close at 195.40.

Here now to lend us their insight are a couple of our regular market analysts, Walt Hackney and Doug Jackson. Welcome back.

Market Analysis: Apr 12, 2002

HELLO, MARK.

Pearson: WE'LL GET TO THIS LOWER CATTLE MARKET AND HOG MARKET IN JUST A MOMENT. DOUG, LET'S START WITH YOU. THIS GRAIN MARKET: LAST TIME YOU WERE ON, YOU WERE TALKING ABOUT THE EXPANSION IN BRAZIL AND ELSEWHERE AROUND THE WORLD, AN INCREASED COMPETITION. WE ARE NOT FINDING A WHOLE LOT OF BRIGHT SPOTS AS FAR AS THE GRAIN TRADE IS CONCERNED AT THIS POINT YET.

Jackson: NO, MARK. WE CONTINUE TO HAVE A MULTITUDE OF PROBLEMS. AND EVERYTHING, WHETHER IT'S CURRENCY RELATED OR OTHER ASPECTS, YOU KNOW, WE CONTINUE TO CONSTANTLY BE REMINDED OF WHAT MAY BE THE MARGINALIZATION OF U.S. AGRICULTURE. WE HAVE CHEAPER SOURCES OF PRODUCTION AROUND THE WORLD IN ANY NUMBER OF PLACES NOW. BUYERS ARE LEARNING WHERE THOSE SUPPLIES ARE. THEY REALIZE THEY CAN ORIGINATE THAT. WE HAVE A MUCH MORE DIVERSIFIED PRODUCTION BASE AROUND THE WORLD THAT'S LESS SUSCEPTIBLE TO WEATHER PROBLEMS. AND YOU KNOW, THIS IS REALLY CREEPING INTO THE WHOLE PSYCHE OF AGRICULTURE. SPECIFICALLY, MARK, THE CORN MARKET THIS WEEK SAW A LARGE COMMERCIAL HEAVY SELLER LATE IN THE WEEK. THIS MAY HAVE FUND RELATED, BUT WE SUSPECT IT MIGHT BE MORE CHINESE HEDGING. THE FEED GRAIN WHOLE COMPLEX IS UNDERGOING THE CONTINUED INFLUENCE OF THE RECOGNITION THAT THERE'S MILLIONS OF TONS OF FEED WHEAT AROUND THE WORLD COMPETITIVELY PRICED TO UNDERCUT CORN DEMAND. AND WE'VE GONE THROUGH ONE OF THE MOST DRAMATIC DOWNWARD REVISIONS OF EXPORT ANTICIPATION AND TOTAL DEMAND ANTICIPATION THAT WE'VE SEEN IN YEARS IN THIS CORN MARKET, PRIMARILY, BUT NOT SOLELY, BECAUSE OF THE RECOGNITION NOW THAT CHINA WILL PROBABLY CONTINUE TO EXPORT CORN WELL INTO THE FUTURE WITH LARGE INTERNAL STOCKS REGARDLESS OF WTO. AND OF COURSE, AT ONE TIME WE THOUGHT THEY'D DROP OUT OF THE EXPORT MARKET COMPLETELY. SO THAT'S TAKEN US TONIGHT WITHIN 10 OR 15 CENTS OF THE LOWS THAT WE MADE LAST YEAR IN THE MIDDLE OF JUNE, WHEN DEC. CORN GOT DOWN TO 204. SO WE DON'T HAVE A LOT OF DOWNSIDE POTENTIAL WITH THESE PRICES. ARGUABLY WE DON'T HAVE MUCH UPSIDE. THE FUNDS ARE SHORTER TODAY AT ABOUT 45,000 CONTRACTS OF FUTURES THAN THEY WERE AT THE LOWS LAST JUNE AT 35,000 CONTRACTS SHORT, SO THEY'RE ALREADY LOADED UP. THE DOWNSIDE IS LIMITED HERE. WHAT WE NEED TO GET TO, THOUGH, IS A WEATHER PROBLEM, A PRODUCTION THREAT, EITHER AN ACREAGE REDUCTION OR A YIELD REDUCTION, TO REALLY TURN THE MARKET PSYCHOLOGY AROUND. LAST YEAR THAT HAPPENED FROM THE MIDDLE OF JUNE TO THE MIDDLE OF JULY. FUNDS BOUGHT NEARLY 80,000 CONTRACTS OF FUTURES. WE RALLIED FROM 204 TO 245, AND THAT CAN HAPPEN AGAIN OR EVEN MORE. BUT RIGHT NOW THE MARKET IS HAVING DIFFICULTY SEEING NEXT YEAR'S CORN SITUATION MUCH DIFFERENT THAN THIS PAST YEAR.

Pearson: AT THIS STAGE OF THE GAME, WHAT ARE YOU TELLING PRODUCERS TO DO? SIT TIGHT?

Jackson: DO NOTHING HERE. WE HAVE A BASIS RISK PROBLEM LATER IN THE SEASON. IF WE HAVE A GOOD CROP, OF COURSE, WE COULD STILL GO DOWN THAT 10 OR 15 CENTS. BUT REALLY IN THE LARGER PICTURE, IT'S STILL WORTH WAITING NOW AND EVALUATING THE WEATHER SITUATION DOWN THE ROAD. THE BEAN MARKET, OF COURSE, MAYBE REALLY HAS PUT LOWS IN DESPITE THE DOWNWARD DIP THAT WE SAW THIS WEEK. THE REDUCTION IN ACREAGE IN THE UNITED STATES MAKES IT IMPORTANT OR IMPERATIVE NOW THAT WE HAVE BACK-TO-BACK CROPS -- BIG CROPS IN SOUTH AMERICA. AND REMEMBER THAT EVEN THOUGH WE'VE HAD THIS HUGE EXPANSION FOR A NUMBER OF YEARS IN SOUTH AMERICA, WE HAVE NOT BUILT STOCKS IN THE U.S. AT ALL. CARRYOUT IS THE SAME THIS YEAR AS IT WAS A YEAR AGO. IN OTHER WORDS, WE NEED TO BE HITTING ON ALL CYLINDERS WITH EXPANSION IN BOTH NORTH AMERICA AND SOUTH AMERICA TO TAKE CARE OF THE DEMAND BASE THAT CONTINUES TO EXPLODE. NOW THAT WE KNOW U.S. ACREAGE IS STABLE, IT PUTS THE MONKEY ON THE BACK OF SOUTH AMERICA TO HAVE BIGGER AND BIGGER CROPS. WE REALLY NEED TO TAKE BEAN PRICES TO A LEVEL THAT WILL ACTUALLY STIMULATE GREATER EXPANSION IN SOUTH AMERICA, OR THE SITUATION GETS TIGHTER IN THE U.S. NOW, WHAT PRICE ARE BEANS REALLY WORTH AT ANY LEVEL OF SUPPLY/DEMAND? WE DON'T KNOW THAT, MARK, IN THIS MARKETING LOAN ENVIRONMENT. BUT I'D ARGUE THAT'S THERE'S NOT MUCH DOWNSIDE IN THE BEAN MARKET EITHER. AND OVER TIME IT MIGHT HAVE SOME SIGNIFICANT UPSIDE POTENTIAL IF WE HAD THE LEAST WEATHER PROBLEM. REALLY WITH THE LOWER ACREAGE NOW IN BEANS AND THE BIGGER ACREAGE IN CORN, THE BEANS HAVE THE BEST FUNDAMENTAL STORY LONGER TERM, REGARDLESS OF THE SOUTH AMERICAN SUPPLIES THAT ARE STILL HANGING OVER THE MARKET.

Pearson: SPEAKING OF HANGING OVER THE MARKET, THIS LIVESTOCK MARKET, WALTER, HAS -- THIS IS PROBABLY ONE OF THE WORST WEEKS, I THINK AT LEAST ON THE BOARD, THAT WE'VE SEEN IN YEARS. GIVE US AN UPDATE ON THIS FED-CATTLE SITUATION. YOU WERE NEGATIVE THE LAST TIME YOU WERE ON ABOUT THIS MARKET. WE ACTUALLY HELD IN THERE PRETTY WELL, AND THEN IT HIT.

Hackney: WELL, THAT'S EXACTLY THE POINT, MARK. WE, IN FACT, HAD CREATED OR DEVELOPED A BULL TREND IN THE CASH MARKET AND IN THE DOMESTIC USAGE. THE PRODUCT WAS GOING UP PHENOMENALLY PRIOR TO MARCH 12. MARCH 12 WE GOT THE HOOF-AND-MOUTH SCARE THAT PSYCHOLOGICALLY TRIGGERED A LIMIT-DOWN POSITION ON THE MERCANTILE. IMMEDIATELY THE RETAILER SAW A POTENTIAL OF A BUST IN THE BEEF TRADE, AND THEY TOOK BEEF DOWN. AND SINCE THEN, WE'VE LOST ABOUT $12 A HUNDREDWEIGHT IN THE VALUE OF THESE CATTLE ON A DRESSED-WEIGHT BASIS. THERE'S NO SHORTAGE NECESSARILY OF CATTLE IN THE FEEDLOT, BUT WE HAVE NOT GOT ANY KIND OF AN OVERFED OR AN OVERPOPULATED POSITION. WHAT IT AMOUNTS TO IS A HUNDRED PERCENT PSYCHOLOGY. THE PACKER IS IN AN ENVIABLE POSITION TO OWN THESE CATTLE SORT OF HIS WAY. HE'S GOT A BIG PERCENTAGE. AROUND 50, 60 PERCENT OF THE CATTLE BEING KILLED IN THE SOUTHWEST ARE FORMULA CATTLE. HE CAN TAKE A LEISURELY LOOK AT BUYING CASH CATTLE. THERE'S PLENTY OF CASH CATTLE. AND AS A RESULT, WE SOLD CATTLE THIS WEEK AT $1.07 TO $1.09, KEEPING IN MIND THAT THREE SHORT WEEKS AGO WE WERE SELLING THOSE SAME CATTLE AT $1.22.

Pearson: WALTER, THIS -- WHAT'S THE TURNAROUND? WHAT'S IT GOING TO TAKE HERE TO SEE THESE PRICES GO THE OPPOSITE WAY?

Hackney: WE'RE NOT GOING TO CREATE A DOMESTIC ISSUE TO CAUSE A BULL TREND. THAT ISN'T GOING TO HAPPEN TO THE BEEF TRADE. WHAT WILL HELP SUBSTANTIALLY IS IF WE COULD INCREASE EXPORTS. EXPORTS HAS BEEN A REAL DRAG ON PORK AND BEEF FOR QUITE SOMETIME NOW. BUT PARTICULARLY IN BEEF AND ON THE ASIAN FRONT, WE'RE HAVING A TREMENDOUSLY HARD TIME GETTING THIS BEEF TO EXPORT, TO THE POINT WHERE SOME ANALYSTS ARE SUGGESTING THAT THE JAPANESE CONSUMER, THAT DIET THERE, MAY NOT BE QUITE SO BEEF DRIVEN AND RED MEAT DRIVEN AS IT WAS PRIOR TO THE HOOF-AND-MOUTH AND THE MAD COW SCARE.

Pearson: ALL RIGHT. SO SOME DEMAND CONCERNS ON THE BEEF SIDE. BUT ON THE PORK SIDE, AGAIN JUST LITERALLY FELL OUT OF BED.

Hackney: THE PORK IS OVERPOPULATED. WE'RE WELL INTO EXTRAORDINARY HEAVY HOGS OF AVERAGE MARKET WEIGHT. WE'RE ABLE TO KILL 1.85 MILLION TO 1.9 MILLION A WEEK. AND WE HAVEN'T ANYWHERE TO GO WITH IT. WE CANNOT GO TO JAPAN WITH THE EXPORTS. THAT'S SHUT DOWN. THE POULTRY ISSUE THAT YOU BROUGHT UP EARLIER, MARK, IS A TERRIBLE BURDEN ON THE PORK BUSINESS. AND IF RUSSIA DOESN'T LIFT THAT BAN AND WE HAVE TO ABSORB THAT PRODUCT DOMESTICALLY HERE ON TOP OF THE PORK, THEN THE THREE-MEAT PRODUCT -- THAT WOULD BE BEEF, PORK, AND POULTRY -- AS WE GET TO JUNE OF THIS YEAR, COULD BE A REAL DISASTROUS MARKET COMPARED TO WHAT WE HAVE RIGHT NOW.

Pearson: ALL RIGHT, WALTER. FOR THE PORK PRODUCER, QUICKLY, WHAT OPTIONS DOES HE HAVE AT THIS STAGE OF THE GAME?

Hackney: HE HASN'T ANY EXCEPT TO MARKET THE HOGS. THERE'S NO HEDGE AVAILABLE. THERE'S TOO MUCH DISPARITY FROM CASH TO CONTRACT. BEEF, IT'S EXACTLY THE SAME SITUATION. WE JUST HAVE TO KILL AND EAT OUR WAY OUT OF THIS BURDEN.

Pearson: ALL RIGHTY. WALTER, DOUG, THANK YOU SO MUCH. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." BE SURE TO JOIN US AGAIN NEXT WEEK WHEN WE EXAMINE AN EFFORT TO BRING SOCIAL CONSCIOUSNESS INTO THE MARKETPLACE. UNTIL THEN, I'M MARK PEARSON. THANKS FOR WATCHING. HAVE A GREAT WEEK.

Tags: agriculture commodity prices Mad Cow markets news