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Market Analysis: Sue Martin

posted on October 5, 2012

Market Analysis: Sue Martin

Pearson: The Agriculture Department is scheduled to release its latest estimates on supply and demand next week.   Ahead of the “official” guess, however, private analysts at Informa Economics predicted Friday that USDA will raise estimates on domestic corn and soybean production.  And -- as you might expect -- grain prices declined.    

For the week, December wheat lost 45 cents while the nearby corn contract moved 8 cents lower. 

Soybeans also declined as the November contract settled with a weekly loss of 50 cents, while nearby meal prices declined $15.70 per ton.    

In the softs, cotton was one of the winners this week as the December contract gained 84 cents.              

In the dairy market, October Class III Milk futures gained 21 cents, while the deferred contract moved 15 cents higher.   

Over in Livestock, December cattle gained $1.50, nearby feeders advanced nearly $2, and the December lean hog contract rallied nearly $3.                

In the financials, the Euro gained 166 basis points against the dollar.  Crude oil lost $2.30 cents per barrel.  Comex Gold advanced by $7 per ounce, and the Goldman Sachs Commodity Index lost nearly 5 points to settle at 659.35.       

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, Mike.

Pearson: We're glad to have you here. It's been kind of a busy week. There's been some news out of China that their economy might be slowing down a little bit. What effect is that having on our commodity markets?

Martin: Well, China is such a huge player in the world market. And, of course, in corn, they are number two producer in the world, and at one time was number two exporter but have since became a major importer. So they've changed their complexion a little bit but, still, their slowing economy causes concern that you'll see crude oil prices fall. Less demand maybe on grains. As food consumption or as people earn less, they don't eat as well. Maybe that creates a little bit of a less of demand on grains, that type of thing. But still, all in all, I think that while their economy is forecast that it will slow or their growth will slow to 6.57 percent, we still have to keep in mind that that economy is 1.4 billion people. That's huge. On top of it, if you go back and look before 2005 or even 2003, when they got awarded the Beijing Olympics, the summer Olympics, that's what really set them in motion for growth. They were buying everything. They needed everything. It was all about image and they had so much work to do in those five years that it just set the ball rolling on commodities and the raw commodities. And in doing so, it put people to work and, of course, they've also been building cities that maybe nobody lives in just yet, but with time maybe. There is talk and I guess it's been approved out of Beijing that they will start enhancing their rail system across the country. So that's going to put people to work. So I listen to people get concerned and it's because at the height of going into those Beijing Olympics, their growth was up around 1011 percent. But I think it's not feasible to really keep thinking that's what it's always going to be. I think they're settling more into their own.

Pearson: Sure, and that's realistic to expect sort of a slowdown after growth like that.

Martin: I think so.

Pearson: Has the market priced in kind of this bearish news from China, or is this something people are going to be keeping an eye on for the next couple of months?

Martin: Oh, they'll keep an eye on it for some time to come. I think that because of the fact that they're going to be watching meat imports and there was some talk out of the finance ministry out of China that they were looking at adding a valueadded tax, or a vat tax, on beef  well, it would be on meat, pork, poultry, and eggs. I thought that was rather interesting. Yet, when they talked about that, the hog market here didn't skip a beat. It just sort of ignored that. And so  and even the cattle market just kind of took it in stride and ignored it. So I think what that was saying was that they're trying to support their own industries domestically. Then if the importer seems to think he needs to import, then he's going to have to pay a little bit of a fee for that or a tax.

Pearson: All right. Our market wasn't phased.

Martin: Not at all.

Pearson: It's a bridge they'll cross if that actually happens. All right. Now, looking into the grain market a little bit, which is kind of a bearish week all the way around in the grain complex. Starting with wheat, what caused our slide there this week?

Martin: Well, I think for one thing, the wheat market is it's like disgruntled a little bit because it's not catching the export business out of the U.S. yet. And Russia also announced  their ag ministry announced that they were going to release up to a million metric tons of wheat into their domestic market. It won't be allowed for export, but what they're trying to do is hold their wheat prices down. Wheat is at a fouryear high domestically over in Russia, and I think that's a symptom that they're running out of wheat to export. So that was taken as negative news. And then we've seen South Korea step in, and they went to Brazil and bought corn in place of wheat. But we're seeing some business being done in Brazil on corn because it's about $60 a metric ton cheaper than our wheat.

Pearson: So now with this recent slide in wheat prices, do you see this continuing? Should produces just beholding on to what they've got if they've got any available? Do you see a bounce back in the future?

Martin: Well, I do. I think that when you have a corn market  and wheat and corn are so tied together right now as feed and that type of thing. I think that when you've got corn stepping back on a seasonal selloff because of hedge pressure for harvest and you've got the bean meal stepping back, that type of thing, I think wheat is justified to have a pullback. We need to pace ourselves a little bit. But on the longer pull, I think that wheat still has the potential to make higher highs. I'm still friendly wheat. You look at Australia and their crop is expected or forecast to be down sizably, somewhere around 2122 million metric tons. USDA is around 26. But still there's expectations that that crop is not going to be the wherewithal. They're still very dry, and so that's a big player. And Australia is one of our major competitors right now, and we've also seen some business kind of get deferred over to France. Canada is the other one that we seem to share with a little bit. But we think by November that demand is going to be more at our doorstep.

Pearson: So what kind of price do you think we'll see in November?

Martin: Well, I think as we go down the road, I think there's potential to see wheat prices  Chicago wheat prices cross over the $10 mark. So I would say, you know, be willing  even though $8.50 wheat sounds good, I still think there's that potential that we do still push higher for a little while yet.

Pearson: Worth hanging onto.

Martin: Yes.

Pearson: All right. Let's talk corn a little bit. You mentioned seasonal pressure on hedge funds selling off. Do you see this continuing for a month or two? What's your time line there for corn?

Martin: It is possible that corn has put its lows in on the surprise stocks report quarterly stocks report out of the USDA. We had gotten down, just within a little before they came out with that report last Friday a week ago, to 705. And on our weigh count, that a weight of three, which a lot of times can stop a market too. And of course, then the news on the USDA's estimate showing, you know, ending stocks or beginning stocks, I should say, at 988 million bushels. That was, like, a big shock. You know, less in is less out unless you're finding another way to manipulate numbers, and we expect that to occur. So I think that that sent the prices absolutely streaking, of course, to the upside, went limit up. Sunday night markets were up a little bit more, but couldn't seem to race away. The market had done too much too soon. I think that  you know, it's interesting because I've got data going all the way back to 1912 on corn. And in years similar to this one, corn I don't think in the past has ever put a harvest low in, in September. It's always been late October at the earliest, and many times early November. So this is going to be interesting to see if this one sticks, or does the market come back with a little bit of negative news and then we start to filter back down and take a look at this again. But I think we're limited as to how low we're going. You know, $6.50$7.00 corn I think is very good and end users are still certainly looking at protecting themselves. So with that said, I would say that I wouldn't be surprised if corn started to filter backwards a little bit here this next week, maybe in front of the report, just kind of aligning itself. Still, 735740 might be a nice spot for support.

Pearson: All right. And we'll just keep an eye on next week's report and get some movement there.

Martin: Yes.

Pearson: Now, looking at soybeans, they followed corn higher last week on last Friday. And then they seem to have stalled a little bit. What do you see happening in soybeans?

Martin: Well, the bean market is the one place that I tend to be probably the most bullish. You know, corn did its way for, and that was at 852, and when it got to 849, that was close enough. So to me, corn really doesn't have the potential to really take that out by much if it's going to at all. So that's another part of corn killing time. On beans there's a difference. Now, I think part of what's going on with the bean market is first off, bean yields seem to be a little bit better in many areas than what everybody was expecting, so that's a good  a good thing. The Brazilian crop, the expectation of a record crop, huge plantings, record plantings, so they're talking an about an 81 USDA said 81 million metric tons.  came out at 82 million metric tons. So that's that high projection. Then, of course, Argentina is expected to plant a record crop too and then at the expense of corn and some other things. But all said, you know, a year ago they were looking at a record crop, and it didn't happen. Who knows. Let's say it happens. Well, first off, the U.S.'s export sales are already 81.7 percent of what the USDA has us targeted for, for this crop year. And so that said, we're very frontend loaded. At some point our export, you know, demand is going to just fall off the face of the earth. That's going to be a bearish thing for at least the time being. What I suspect is, is that if Brazil is able to get this crop home, like they hope so and when it's being planted, you have to assume the best. But if they get it home like they hope so, their infrastructure isn't going to handle it real well. They're going to have bottlenecks, probably a stevedore strike. The ideal timing. So I think what's going to happen is it's going to spread it out still. And their plantings aren't getting in as early as they'd like. A year ago they had 5 percent planted. They're only 3 percent estimated planted this week. So I think that we have still longer picture taking us into February, March, maybe April, and then we'll see where we stand. But I think once we get close, the world buyer is going to start going hand to mouth and just try to work himself to where he can get to cheaper products.

Pearson: All right. Just kind of make his way through and see what happens coming out of South America.

Martin: Exactly.

Pearson: All right. Well, let's talk livestock a little bit. There's been a good week in both cattle and hogs. What do you see happening in the feeder markets?

Martin: Well, in the feeder cattle market, I think that we have to keep in mind I think that our lows are in on that market for some time to come, but I also think that we've had a pretty good rally and now the market is kind of filtering down a little bit. We might see the market still step back a little bit more on the feeders. Maybe Jan. feeders get down to around 143, something like that, maybe 142. But I don't know as if they get much more than that. Lightweight feeders, 400 pounders, seem to be in good demand, and the reason being for that is because there's so much silage out there. And on top of it, they're also looking at those and thinking, boy, there's not much following them up behind them. So I think in light of all of that, you know, that's holding that market together. Corn prices, the market dropping here. Very beneficial to the cattle market as well.

Pearson: All right, fat cattle, similar?

Martin: Well, the fat market, I think that when I look at the cattle market, I keep thinking that the fats are going to see a little bit of a bounce here. You know, you look at October cattle, and I think in the last thirty years, the widest spread between October and June cattle has been about $6.14. And this week it got to $7.50, so it set a new record for as wide as that spread should normally be or the widest it would ever be. That said, it tells me that either Junes are going to fall, which I'm not sure I see that just yet. It would tell me that the Octobers are probably going to go higher. You had the packer willing to pay up this week for cattle. Even though he's cut the kill, he's stepped up to the plate and paid up, or he wasn't going to get them bought. So that said, basis says you have cash premium over the features right now, which is kind of what's to be expected. So I think when I look at the October cattle, I think there's about another $3, $4 in it to the upside. I don't know how much more than that. Dec. if they can get the Dec. cattle up around 130, that might be all you could expect there, maybe 129 something.

Pearson: All right. Really quick, we didn't get much of a chance; let's talk hogs just a little bit. Where do you see us going forward in hogs?

Martin: The hog market has been interesting. That market has been thrown some bearish news. You know, the hogs and pig report didn't show really much liquidation. The market went up. You had this announcement out of China about the VAT tax potential. The market went up. It's like it's ignoring the bearish news. And what's interesting is I think demand is pretty good for both beef and pork. In fact, Japan is back in our meat market again, so that's a good thing. But when you look at exports on pork, I think they're starting to maybe pick up a little bit. I think domestic demand is picking up a little bit. The hog market, there's an old saying in fact the first time I was ever on this show, I kind of talked about that thing. But higher prices in September means higher prices Oct., Nov., and December over the August timeframe.

Pearson: Thank you so much, Sue. That wraps up this edition of "Market to Market." But if you’d like more information from Sue on where these volatile markets just may be headed, visit the Market Plus page at our website. You'll find expanded market analysis, audio podcasts, and streaming video of our program, as well as links to our Twitter feed and Facebook account all free at the “Market to Market” website. Be sure to join us next week when we’ll examine the market impact of USDA’s latest supply and demand estimates. Until then, thanks for watching. I'm Mike Pearson. Have a great week.

Tags: agriculture cattle commodity prices corn drought economy feeders hogs markets Mike Pearson Sue Martin wheat