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Market Analysis: Feb 25, 2000

posted on February 25, 2000


THE NATION'S ECONOMY SOARED FAR HIGHER THE LAST QUARTER OF 99 THAN MOST ECONOMISTS EXPECTED. EXPANDING AT A PACE OF 6.9 PERCENT IN THE FOURTH QUARTER, THE SURGE CAUGHT MANY IN THE FINANCIAL COMMUNITY BY SURPRISE. AND WHILE JANUARY ORDERS FOR BIG-TICKET ITEMS SLIPPED, THE FALL WAS LESS THAN ECONOMISTS EXPECTED. THE GENERAL CONSENSUS IN THE FINANCIAL COMMUNITY IS THE INFLATION-WARY FEDERAL RESERVE WILL CONTINUE TO RAISE INTEREST RATES TO BLEED OFF ANY INFLATION THAT MIGHT BE GENERATED BY A RUNAWAY ECONOMY.

THE GRAIN MARKETS FINISHED THE WEEK LOWER ON CONCERNS THAT MIDWEST RAINS HAVE INCREASED CHANCES FOR GOOD YIELDS IN THE CORNBELT. FOR THE WEEK, WHEAT PRICES WERE DOWN MORE THAN 16-CENTS, WHILE CORN PRICES WERE MORE THAN SEVEN CENTS LOWER. SOYBEAN FUTURES WERE ALSO PRESSURED, CLOSING MORE THAN 17-CENTS LOWER. SOYBEAN MEAL FINISHED $7.30 PER TON LOWER. COTTON FUTURES WERE DOWN 21-CENTS.

IN LIVESTOCK, FED CATTLE FUTURES GAINED 87-CENTS. FEEDER CATTLE FINISHED 17-CENTS HIGHER. THE LEAN HOG CONTRACT CLOSED 43-CENTS HIGHER.

IN THE FINANCIALS, COMEX GOLD FINISHED $12.20 LOWER PER OUNCE. THE EURO FINISHED MORE THAN A POINT LOWER AGAINST THE DOLLAR. AND, THE CRB INDEX FINISHED THE WEEK MORE THAN FIVE POINTS LOWER TO FINISH AT 207.

Market Analysis: Feb 25, 2000

HERE NOW TO LEND US HIS INSIGHT IS ONE OF OUR REGULAR MARKET TO MARKET ANALYSTS, JOHN ROACH. WELCOME BACK.

JOHN, WELCOME BACK.

Roach: THANKS, MARK.

Pearson: WELL, WHAT DO YOU MAKE OF THIS SELLOFF IN THE GRAINS THIS WEEK. LET'S TALK ABOUT WHEAT FIRST, OFF 16 CENTS.

Roach: THE FIRST RAINS THAT WE'VE HAD FOR THE SEASON, AND THEN SUDDENLY IT LOOKS LIKE, WELL, MAYBE WE DON'T HAVE SUCH A BAD DROUGHT, AND THE MARKET REACTED TO IT. I THINK IT REALLY JUST SUGGESTED THAT A LOT OF THE EXCITEMENT IN THE MARKET HERE RECENTLY HAS BEEN BROUGHT OUT BY PEOPLE WHO THOUGHT "WHAT IF IT DOESN'T RAIN, WE COULD HAVE A REAL DROUGHT." AND NOW THAT WE'VE SEEN SOME RAIN, WE'VE TAKEN SOME OF THAT WEATHER PREMIUM OUT OF THE MARKET. AS WE GO HOME ON FRIDAY, WE'RE LOOKING FOR RAINS TO COME OVER THE WEEKEND, FIRST PART OF THE WEEK, AND WE'LL START OUT THIS NEXT WEEK JUDGING WHETHER THAT RAIN WAS MORE SUBSTANTIAL THAN PEOPLE EXPECTED OR LESS SUBSTANTIAL.

Pearson: IT SEEMS A LITTLE EARLY TO BE TRADING RAIN IN THE MIDWEST.

Roach: WELL, IF YOU REMEMBER LAST YEAR, WE TRADED RAIN AS WELL AND -- OR LACK OF RAIN. WE TRADED DRY WEATHER CONCERNS. AS WE CAME INTO THE VERY EARLY PART OF MARCH, WE STARTED RECEIVING RAIN AND THE MARKET STARTED TO SLIP OFF. THOSE RAINS CONTINUED ALL THE WAY OUT THROUGH MAY/JUNE, AND THE MARKET JUST CONTINUED TO SLIDE. SO WE'RE TRADING WEATHER NOT ONLY IN THIS COUNTRY -- WE STARTED TRADING WEATHER IN SOUTH AMERICA, OF COURSE, BACK AROUND THE FIRST OF THE YEAR. SO WEATHER IS IMPORTANT TO THE MARKET AND WILL CONTINUE TO BE IMPORTANT.

Pearson: ALL RIGHT, WHAT'S YOUR OUTLOOK RIGHT NOW ON CORN, JOHN? WOULD YOU HOLD OFF ON MAKING SALES?

Roach: WELL, IT'S THE WRONG TIME OF YEAR TO MAKE SALES. I REALLY DON'T LIKE SELLING CORN IN FEBRUARY, AND I REALLY PREFER MAKING SALES OUT IN APRIL, MAY, AND JUNE. BUT THE BASIS HAS NARROWED IN SOME AREAS TO WHERE THE OPPORTUNITY FOR FURTHER BASIS IMPROVEMENT -- WE MAY NOT HAVE MUCH OPPORTUNITY FOR FURTHER BASIS IMPROVEMENT. SO I THINK THE REAL QUESTION HERE IS WHAT HAPPENED AS FAR AS YOUR LOCAL BASIS IS CONCERNED. IF THE BASIS HAS NARROWED, IT MAKES PRETTY GOOD SENSE TO GO AHEAD AND SELL THE CORN AND COME BACK AND BUY SOME CALL OPTIONS. WE LIKE THE LOOKS OF JULY 230 CORN CALLS AND THEN WE'RE WILLING TO SELL DECEMBER $3 CALLS TO HELP PAY FOR THOSE CALLS THAT WE'RE PURCHASING.

Pearson: OKAY, SO SETTING UP A STRATEGY THAT WAY. WHAT ABOUT OVER ON THE SOYBEANS?

Roach: THE SOYBEANS ARE SIMILAR. ACTUALLY THE BASIS LEVELS ON SOYBEANS ARE VERY ATTRACTIVE. IN TALKING WITH SOME COMMERCIAL INTERESTS TODAY, THAT'S EXACTLY WHAT THEIR SUGGESTION IS, IS THAT THESE BASIS LEVELS ON BEANS ARE GOING TO BE DIFFICULT TO GET MUCH BETTER, MAYBE EVEN MORE SO THAN CORN. SO THE SAME ISSUES THERE. MOVE THE GRAIN; COME BACK AND OWN THE PAPER. REMEMBER, AS LONG AS YOU'RE HOLDING ON TO THAT GRAIN, YOU CAN STILL TAKE FURTHER LOSSES. THAT MARKET CAN GO DOWN EVEN FURTHER; WHEREAS, IF YOU GO TO AN OPTION STRATEGY, YOU CAN LIMIT THE AMOUNT OF EXPOSURE YOU HAVE AND STILL HAVE OPPORTUNITY FOR SOME PRICE IMPROVEMENT, AND YOUR COST OF STORAGE AND INTEREST ARE ELIMINATED.

Pearson: ABSOLUTELY. LET'S TAKE A LOOK AT WHAT'S HAPPENING THIS WEEK IN LIVESTOCK. YOU'VE BEEN A BIG FAN OF THE CATTLE MARKET FOR SOME TIME NOW. AND CERTAINLY THIS WEEK WAS A GREAT WEEK AS FAR AS FUTURES WERE CONCERNED. THE CATTLE MARKET HELD RIGHT IN THERE. WHAT'S YOUR OUTLOOK THE NEXT THREE MONTHS?

Roach: I THINK WE HAVE A CHOPPY MARKET FOR THE NEXT THREE MONTHS. IF YOU LOOK AT THE FUTURES, THERE'S A DOWNWARD BIAS TO THE MARKET, BUT IT'S BASICALLY BEEN BACK AND FORTH AND BACK AND FORTH. I THINK AS WE MOVE ON INTO THE NORMAL SEASONALLY STRONG DEMAND PERIOD OF THE YEAR, I THINK WE'LL FIND DEMAND IS PHENOMENAL. I THINK THAT ONE OF THE THINGS THAT'S KEEPING THE MARKET IN CONTROL RIGHT NOW IS THIS EXCELLENT WEATHER WE'VE HAD. THE CATTLE ARE FINISHING MUCH QUICKER THAN NORMAL. THE WEIGHT IS GOING ON MUCH FASTER. AND WE'VE GOT A LOT OF CATTLE OUT THERE, BUT WE'RE MOVING THROUGH THE CATTLE NUMBERS. WE MAYBE BACKED UP A LITTLE BIT HERE, BUT BY AND LARGE, PEOPLE ARE NERVOUS ENOUGH THAT THEY'RE MOVING CATTLE. I THINK WE'RE GOING TO CONTINUE TO HAVE STRENGTHENING AS WE MOVE THROUGH THE YEAR AND A VERY STRONG FOURTH QUARTER. BUT I DO THINK THAT THE MARKET WILL HAVE PRICE IMPROVEMENT AS WE GO INTO THE LATE SPRING WHEN THAT DEMAND TENDS TO PICK UP.

Pearson: ALL RIGHT, FROM A HEDGING STANDPOINT, JOHN, WHAT ARE YOU THINKING?

Roach: WELL, I THINK THAT YOU HAVE TO BE CAUTIOUS ABOUT SELLING BAD NEWS IN THE CATTLE MARKET. IF YOU'RE UP TOWARD THE STOP SIDE OF TRADING RANGES HERE AND YOU WANT TO MAKE SALES, IT MAKES SENSE TO ME. I'D RATHER BUY THE PUTS RATHER THAN THE STEPPING INTO THE FUTURES MARKET BECAUSE I THINK THAT, AGAIN, THE DEMAND SIDE OF THIS MARKET IS GOING TO HOLD US TOGETHER. SO DO IT ON STRENGTH; DON'T DO IT ON WEAKNESS.

Pearson: ALL RIGHT. LET'S TALK ABOUT THE HOGS FOR A MINUTE. THERE'S BEEN A NICE RECOVERY IN THE HOG MARKET. WHAT'S YOUR THINKING, JOHN, AS WE MOVE FORWARD HERE AS FAR AS THE MARKET IS CONCERNED FOR FINISHED HOGS?

Roach: I THINK THE HOG MARKET IS JUST GOING TO GET BETTER AND BETTER UNTIL WE GET INTO THE JUNE/JULY TIME FRAME. THAT'S WHEN WE'LL HAVE THE SMALLEST SLAUGHTER FOR THE YEAR, AND I THINK THAT THE PRICES WILL BE VERY STRONG, AGAIN ON VERY STRONG DEMAND. BUT IN ADDITION WE HAVE SOME REAL DISEASE PROBLEMS OUT THERE. WE'VE HEARD FROM SOME PEOPLE WHO ARE VERY KNOWLEDGEABLE WHO THINK THAT THE PORK PRODUCTION FROM THIS YEAR COULD BE DOWN 1 TO 2 PERCENT MORE JUST BECAUSE OF DISEASE ISSUES. DISEASE... GREATER QUANTITY THAN WE'VE SEEN BEFORE. SO WE THINK THAT THE HOG MARKET IS ON VERY SOLID FOOTING.

Pearson: WHAT'S YOUR OUTLOOK COME SUMMER? ARE THERE SOME HEDGING OPPORTUNITIES THAT PEOPLE SHOULD BE LOOKING AT?

Roach: I THINK ONCE WE GET INTO THE SUMMER MONTHS, YES. I THINK THAT AS YOU LOOK AT THE SLAUGHTER NUMBERS, THEY WILL INCREASE QUITE A LITTLE BIT FROM SUMMER LOW LEVELS TO THE FOURTH QUARTER. SO I THINK THAT IN THE MONTH OF MAY YOU SHOULD TAKE A REAL SERIOUS LOOK AT YOUR PRICING OPPORTUNITIES ALL THE WAY OUT THROUGH THE REST OF THE YEAR, BUT BETWEEN NOW AND MAY, YOU JUST HAVE TO WAIT BECAUSE PRICES ARE GOING TO GET BETTER, IN MY OPINION.

Pearson: ALL RIGHT. SO THE LIVESTOCK SECTOR LOOKS PRETTY DECENT. CONCERN ABOUT THE WEATHER? SHOULD WE BE CONCERNED ABOUT LOCKING IN SOME FEED NEEDS? YOU'RE TALKING ABOUT HIGHER BASIS RIGHT NOW.

Roach: I THINK IF YOU'RE IN THE LIVESTOCK BUSINESS AND YOU'RE LOOKING AT OPPORTUNITIES TO BUY CORN AT $2 A BUSHEL OR MAYBE EVEN A LITTLE LESS THAN $2 A BUSHEL, IF YOU DON'T BUY THAT CORN, YOU'RE GAMBLING THAT THE MARKET MIGHT GO DOWN ANOTHER 10 OR 15 CENTS, BUT IT COULD REALLY HURT YOU IF WE DON'T HAVE GOOD WEATHER. SO YOU'VE GOT TO GET THE CORN BOUGHT, AND I'D JUST AS SOON BUY CASH... NOT PAPER, JUST GET THE CORN BOUGHT. THESE ARE REASONABLY -- THESE ARE VERY REASONABLE PRICES ON BOTH CORN AND ON PROTEIN -- ON SOYBEAN MEAL, AND I'D JUST GET IT BOUGHT.

Pearson: ALL RIGHT. I CUT YOU OFF EARLIER WHEN WE WERE TALKING ABOUT SOYBEANS. WE TALKED ABOUT WHAT WAS AHEAD FOR THE SOYBEAN MARKET, AND YOU WERE TALKING ABOUT UTILIZING SOME OPTION STRATEGIES AND SO FORTH. THE SOUTH AMERICAN CROP, THERE HAVE BEEN SOME ESTIMATES THAT HAVE BEEN COMING OUT, JOHN. I MEANT TO ASK YOU ABOUT THAT. WHAT'S YOUR FEELING ON THE SOUTH AMERICAN CROP?

Roach: WELL, THEY'RE GETTING TOO MUCH RAIN NOW. THEIR HARVEST IS ACTUALLY BEING DELAYED BECAUSE OF TOO MUCH RAIN, AND THEY'RE HAVING SOME DETERIORATION BECAUSE OF THAT. WE'RE GETTING SOME EXPORT BUSINESS BECAUSE THEY'RE NOT ABLE TO SHIP QUITE AS QUICKLY AS THEY NORMALLY WOULD. I THINK THE BEANS ARE VERY LOW PRICED IN THE SCHEME OF THINGS. THE DEMAND IS VERY STRONG ON SOYBEANS AND I THINK WILL STRENGTHEN. SO I'M OPTIMISTIC THAT WE'LL HAVE HIGHER PRICES. I'M NOT AS OPTIMISTIC AS SOME ANALYSTS WHO TALK ABOUT VERY HIGH PRICES, BUT I THINK WE HAVE TO THINK IN TERMS OF PRICES SHOULD MOVE UP INTO THE APRIL/MAY/JUNE TIME FRAME. THAT'S NORMAL. AND IN A YEAR OF VERY STRONG DEMAND, WE SHOULD SEE THAT OCCUR. SO AGAIN, ALTHOUGH I'M WILLING TO SELL BEANS, I DON'T WANT TO LOSE CONTROL OF OWNERSHIP. I THINK THE MARKET HAS MORE STRENGTH AHEAD, AND THAT'S UNDER JUST RELATIVELY NORMAL GROWING CONDITIONS. IF WE HAVE ANY WEATHER PROBLEMS THIS YEAR WITH THESE LEVELS OF DEMAND, WE COULD HAVE VERY STRONG PRICES.

Pearson: ANY CONCERN ABOUT PRICING NEW CROP?

Roach: YES, I THINK THAT YOU HAVE TO BE CONCERNED ABOUT PRICING NEW-CROP CORN. WE BOUGHT A LOT OF 250 DECEMBER CORN PUTS BECAUSE WE THINK THAT PROVIDES A GOOD BEGINNING LEVEL, WILL ROLL THOSE PUTS DOWN IF THE MARKET STARTS TO BREAK. BUT BEANS, I WOULDN'T PRICE ANY NEW-CROP BEANS BECAUSE YOU'RE NOT HARDLY GETTING ANYTHING OVER WHAT THE GOVERNMENT LOAN GUARANTEE IS, SO I WOULD BE VERY PATIENT ON NEW-CROP BEANS.

Pearson: REAL QUICK, JOHN, OVER ON THE COTTON.

Roach: STRONGER MARKETS AHEAD, AS I SEE IT, MARK. I THINK THAT AS YOU SAW THIS WEEK, IT WAS THE MARKET THAT LOST THE LEAST IN THIS WHOLE ROUND OF AGRICULTURAL SELLOFF WE SAW THIS WEEK, SO I BELIEVE THAT THE COTTON MARKET HAS SOME STRONGER TERRITORY TO SEE AHEAD.

Pearson: PRETTY MUCH BASED ON WHAT'S HAPPENING WORLDWIDE?

Roach: WE'VE GOT STRONG WORLDWIDE DEMAND. AS WE LOOK AT WORLD ECONOMIES STRENGTHENING, WE'RE SEEING CONSUMPTION INCREASING. I ALSO THINK THAT WE'VE GOT SOME WEATHER WORRIES OUT FORWARD. SOME OF THE COTTON AREAS ARE SOME OF THE DRIER AREAS.

Pearson: SO WITH THAT COTTON SITUATION THE WAY IT IS, YOU MAY NOT BE IN A BIG HURRY TO MAKE SALES AT THIS STAGE?

Roach: NO, I'M VERY PATIENT ON SALES OF ANY AG COMMODITIES IN HERE, UNLESS I'M WILLING TO COME BACK AND REOWN THEM. ALL RIGHTY. JOHN ROACH, THANK YOU SO MUCH. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." JOIN US AGAIN NEXT WEEK WHEN WE EXAMINE ENTERPRISES THAT ARE MAKING A DIFFERENCE IN RURAL AMERICA. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK.

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