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Market Analysis: Sue Martin

posted on December 2, 2011


Market Analysis: Sue Martin

Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Sue Martin. Sue welcome back. Martin: Thank you, Mark. Pearson: Well, I guess, you know, we've had so many related issues to the farm markets that have been impacting our prices, and certainly the potential world slowdown situation in Europe, Greece, Portugal, Italy, Spain. This week maybe a little bit of closure on that front. We certainly saw the equity markets respond. We saw commodities, oddly, corn go the other way. Martin: Well, I think the reason that the grain markets, we did have a little bit higher in beans and wheat. Corn tried but couldn't hang on to the rally. I think the reason for that being was that China came out overnight on Friday and said that they had a record crop for the eighth year in a row, a record crop that was up about 8.2 percent from a year ago and that their production was actually 191.75 million metric tons versus the previous estimate that ranged from181 to 185 million metric tons. So that really put a black cloud over the corn market, and of course, you had the Ukraine in the surprise move also overnight, lowing their estimate of exports on wheat in which they lowered it from 27 million metric tons down to a range of 23- to 25 million metric tons, which was a pretty good drop. So that, then, gave a boost under the wheat market. I think you had some spreading, whether you were selling corn, buying wheat, and then buying beans and selling corn. Because of the weather in South America, it does look tenuous over the next couple of weeks. As we go towards the middle of December, La Nines tend to kick in and you will see drier weather more assert itself. And already there's places in Brazil that are dry and parts of Argentina and, of course, Paraguay. Pearson: All right, let's get down to some advice here. Let's talk to the wheat farmer first. Like you say, a little bit better in wheat. There's some good news there finally. We talked about these huge supplies weighing on price. A little bit of improvement this week. Should we make some sales on this rally? Martin: Well, I do make some sales of this rally. I did not think our lows are in. I think we are getting a temporary rally here. One, it's partly seasonal from the day after thanksgiving to the first week of December to lift in a bearish year. And even in a bullish year, you'll get a bounce in here, so it's a strong seasonal. But also on top of that, we do have technical indicators that we watch. One of them is called a floater, which is in percentage. It's part of a timing indicator that we use, and that turned positive on beans and wheat this past Monday. Corn turned on Tuesday but the weekly charts on beans and corn isn't turning yet, but on wheat, it did turn on Friday's close and it turned positive so that should give us a little bit of support under the wheat market this coming week. I think any pullbacks will at least support it and will try to bounce. You have the USDA numbers coming out, supply/demand on Friday but we also have on Friday the meetings by the EU Prime Ministers and, of course, they are going to try to come up with a more solid plan, or it's hoped that they will. This banking situation that we had on Wednesday, where many of the central banks around the world and the Fed pumped in a unison endeavor, pumped money in to help out the European banks, was more of about a liquidity issue than really a sovereign debt issue. So we still aren't out of the woods just yet, and so I have some windows coming up here in the next week around the 10th, which will be probably Friday. Also around the 13th, 14th, and it's a very big concern because these are volatility cycles. Makes me wonder what's going to come out of this because we have so much pending here on this coming Friday. When we get into this report, what can we expect? Well, I suspect that wheat exports have been a little bit disappointing, So, exports maybe slip backwards on the wheat, and in the meantime, because of the fact that U.S. prices are just a little overpriced to the Black Sea wheat and then I look at the beans and, again, exports are a little bit disappointing, so we're probably going to see that number ratchet back. Probably the same thing on corn but then ethanol usage, demand, should be pretty good for industrials so that should help the other side of the coin. There we should see an increase in ethanol usage and yet it's thought that the blenders credit is probably going away at the end of December, so how will the USDA address that? Will they look ahead and say that could slow up some demand or will they just look at where we are today? Of course, with crude oil over a hundred dollars a blue barrel and corn prices dropping like they have, I would think ethanol profitability is still there. Pearson: So getting back to wheat, we are going to make some sales on this rally because we could have moisture going forward and you expect an increase in volatility going into next week, and that's true for corn too? Martin: Yes. I think corn closed rather poorly for the week and we have a low this past -- the day after Thanksgiving, on the March contract at 589.25 and then the low in October. On October 3 was 588.and then you go back to --or maybe it was 88.25 and 86.and then you go back to July, and it's 89, and to me, this is like a tabletop flat support underneath this market, as it looks like we have a descending triangle going on in corn. If this breaks out to the downside, it could flip to $5 pretty easily. Now we have to ask ourselves, this early, we know that farmers have a ton of grain to sell and they haven't sold much this year ahead, unlike the previous two years. They haven't anything the year of 2012 crop as well. So the trade knows, the commercial knows that all this corn is going to be starting to look like a place for a home, at least while farmers are needing to make money, you know, earn money to make -- Pearson: Pay their bills. Martin: That's right. They've got to pay taxes. They're going to have their farm payment, cash rents. Pearson: Cash renting -- Martin: No, it's not. And inputs are expensive so they are going to have to find some cash, and they're going to have to part with some of their crops, and the I think bankers are going to say to them they need to be doing something. So I think that's going to allow for basis levels to fall back to normal levels, and in the meantime, prices are low. What are we going to do here? Are we going into a fall and then going into a sideways range for a while? We may do something like that. Pearson: Of course, as you mentioned earlier, there's the La Nina issue out there, so it's a long way to even getting this next crop in the ground and utilize the weather. Martin: One thing we have to remember, you can have the weather issue and, yes, it will tighten world supplies that are already tightening on beans and corn, but if this sovereign debt situation gets worse and they start fearing --and you already have China slowing -- their economy is slowing. Just this week we've seen them, the Chinese Government, lower the reserve amount of the reserve -- the percentage of reserve requirements. Pearson: That's a big deal. That's a huge deal. Martin: That is a big deal. The percentage of reserves -- but what it was is that it was aimed at trying to sort of stabilize that drop. They don't want it to drop super far, and we are seeing issues within China that are concerning. So you've got that going on. All of a sudden it becomes, gee, maybe they keep avoiding the U.S. We've watched them in beans and wheat go elsewhere. Well, we've seen Japan and South Korea go to the Ukraine and buy corn, and they're our two biggest customers. So there is a concern here. If the economy in the world gets worse, maybe that sort of still offsets this weather issue in South America. We just have to take it one step at a time. Pearson: Either way, there will be plenty of volatility. You're not in a big hurry to make a lot of sales in 2012. Martin: Well, I think if you can get new crop beans up around the $12 area or a little under it, if that's the worst price you are going to take, I'd say get some sold. At least get started and hope that's the lowest. Pearson: What about on corn? Martin: On corn, 550.if you can get new crop corn back to 550, I'd go for it. I don't know if we can get back there before we drop much more. Eventually I think the potential, since we are looking at between 94-96 million acres of corn, some say where you going to get it. Well, you've got crop acres that -- first I was thinking it was 1.3, but it's 1.6 million acres that are going to come out this year. You've got 9.6 million acres of prevent plant that some --a chunk of that will be able to come back into production, not all of it along the Missouri River, but a chunk of it, and I know this week, I was up in Fargo, North Dakota, at the Great Plains Expo -- land expo, farmers were telling me up there that they were going to the plant corn at the expense of wheat. They were a little disappointed in -- and disillusioned with wheat. So that said, I think we are going to be able to get the job done. That's going to keep a little bit of a lid over this market on rallies. There's going to have to be some stimulus, and right now we don't see a lot of that. Pearson: So bean sales, a little bit of a rally, you'd be making sales there too on new-crop beans. Martin: Absolutely, on new and old, 1152 to about 1175, if you can get it, take it. Pearson: All right. Let's talk real quick about the cotton market, which we just had a little bit of a pullback. You mentioned China, in fashion, a lot of things impact what's going on in the cotton. Martin: That's right. And, of course, manufacturing has slowed down. We've seen the PMI out of China drop to a 48-percent number, and that's --you know, anything under 50 is concerning, it's the lowest number they've had in a long time, since 2008.so consequently, I think that's a concern. We know that cotton production was big this past year. In fact, cotton seed and sunflower seed is competing against soy oil, and so, you know, we have issues there. It seems like there's just no market right now that --if we had tight supplies, that would be one thing, but really cotton is turning the corn the other direction, and you have a slowing economy in the world. That means less demand for clothes. The U.S. is not buying near the amount of products or merchandise out of China. Neither is Europe. Pearson: All right. I want to also --we're driving a lot less too. I want to get to that in just a little bit. I want to first talk about the meat, which is a reverse situation. We've got some on-fire calf sales going on. A buddy of mine was out in Montana, called back, said these calf prices out here are phenomenal. Bred heifer, bred cow sales are hot. What's your outlook for fed cattle going forward first quarter 2012? Martin: Well, when I look at the fed cattle market, first off I think that the cattle market has been phenomenal to have been able to avoid all the demise that other markets have felt. And part of that is because, yes, we've had the cow/calf liquidation -- the cow liquidation, and we've had drought, you know, coming in, but now that kind of picture is looking like it is getting a little bit of moisture into the planes -- southern plains, so that could behoove more demand for these calves, but in the meantime, we are starting to hear more talk about holding back heifers for breeding purposes, which tightens up our meat further. We're very dependent on what this dollar does. If the dollar rallies, it isn't going to be super long and you're going to start to see imports of Australian beef coming into the U.S. Pearson: And a slowdown in U.S. beef -- Martin: That's right. And that will nick --be our first nick in the bull side. In the meantime here, and presently, you look at the December contract, and our December contract should taking the lead, and it's not, it's acting very lackluster and then the Feb and Aprils are gaining number wise it should be bullish. It's hard to get too bearish, in a way, because you don't know what kind of winter you're going to have. So that could be a nemesis towards the June contract, but what I would suggest is getting some put spreads underneath you. Maybe selling some calls above the market in strikes and also buying the puts underneath you so that you get this market solidified under you, should this thing cave in, because I do think that potential exists for cattle. It's not going to last forever, and somewhere we're going to price this bullishness in. Pearson: We've had some bullishness on hogs but not on the board this week. Martin: No. Hogs, with the slowing economy in China, I think the trade is nervous about the hog market, and seasonally, pork tends to soften a little bit here. The other thing that I think we need to watch is with the February losing to the April contract. That's another sign of a topping market here. I think producers need to be doing a little bit of hedging. Again, maybe buy puts underneath you to get yourself protected, because these are high markets. We've already seen what's happened to the grain farmer. The other thing is with the slowing economy, China may slow up at any time from their buying of U.S. pork, and we've seen it a year ago in poultry when they -- all of a sudden they thought we were dumping too much pork --poultry into them and they switched to Brazil. They didn't change the amount that they were buying. They just changed origin. Well, this past week the first load of pork came out of Brazil to China. Pearson: All right. Well, there you have it. And the export market has been extremely important in the pork business. Martin: Exactly. Pearson: All right. Sue Martin as usual, we appreciate your insight. That's going to wrap up this edition of "Market to Market." now, if you'd like more information from sue on where these markets just may be headed, visit the market plus page at our website. You'll find expanded market analysis, audio podcasts, streaming video of our program and links to our twitter feed and Facebook page, and it's all free at the “Market to Market” website, and be sure to join us again next week when we'll examine the market impact of USDA's latest estimates on global supply and demand. So until then, thanks for watching. I'm Mark Pearson. Have a great week.


Tags: agriculture cattle commodity prices corn economy feeders hogs markets news soybeans wheat