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Market Plus: Dec 30, 2005

posted on December 30, 2005

Market Plus: Dec 30, 2005

Pearson: Welcome to the Market Plus page here at our Market to Market Web site, I'm Mark Pearson. Virgil Robinson, one of our senior analysts with us this week. And Virgil, what a year 2005 was. We didn't touch it on the show and I wanted you to touch on it now. We had oil prices were back above $60 a barrel. I don't like that going into 2006, Virgil. We had a rally in all commodities except, what did you say, lean hogs.

Robinson: For the year, the only commodity that closed lower year over year.

Pearson: I'm stopping off in convenience stores in rural Nebraska and people are talking to me about commodities. Then everybody thinks we're going to be real bullish and if not bullish we're going to at least be volatile in 2006 with this whole mix of managed money coming in and taking positions for the corn and soybean market. What does all this mean, Virgil, for a producer out there the "I" word inflation keeps coming back into discussions I have with producers and you talk to a lot of people one on one. What is your take? Now, gold prices are up, the CRB index, which we follow on the show and you mentioned on the show up 20% over a year ago.

Robinson: Yes, Mark, I think it's being driven by a number of things but clearly the emerging power of China and India, both large population countries, both countries enjoying year over year increases in their GDP's which correlates strongly with per capita incomes growing larger, Mark, and it is driving the demand for a whole host of things including agricultural commodities. I think that is underpinning this theme that you're referring to here, this inflationary and demand driven idea. And certainly it has legs. Our group, the company I work for, again, projecting that global GDP's, the sum or the aggregate of all of the notable global economies will grow in 2006 somewhere in the vicinity of 3-5% led, again, by China and India. Oil demand, commodity demand, food demand, protein demand, Mark, just continues to track and ramp up higher. And I think we need to keep that in the back of our minds but not lose perspective of our objectives. We're talking about large supplies, at least at present of corn and soybeans here in the United States. And we know, Mark, from last fall's experience that retaining and holding that kind of an inventory into the breach of another crop in 2006 can be a very dangerous event. So, let's use these opportunities that strengthen the basis, that strengthen the futures market to move some of the physical commodity that we own. If we want to be bullish there are a multitude of ways to repurchase inventories far more economically than lugging a physical inventory for month on end.

Pearson: Okay, so we've had a good run here, net farm income is decent for 2005. The inflation factor that you eluded to, a lot of that and a lot of this extra oil demand that we've been seeing, driving the price of oil, certainly been those developing countries of China and India. And so producers, you don't want to get starry eyed here and just think this thing is going to keep ramping up. We've got an opportunity to make some physical sales here, cash basis month of January, you showed me a chart where that is a huge month for grain sales, both corn and soybeans, bigger than our harvest sales.

Robinson: It rivals October sales, Mark, at least in each of the last 5 or 6 years and I sense this year will be no exception. Now, given the idea here or the notion that these funds and or index funds acquire huge positions, huge futures positions it is conceivable that the futures market handles this influx of cash grain relatively well. But I don't think the basis will and as a result cash prices here are in jeopardy, Mark, and that is what is precious, I think, to our viewers and our listeners is that part of our discussion, not necessarily the futures market.

Pearson: We may see a futures rally and we could see a flat to lower cash basis value as that crop starts to move to town.

Robinson: I would agree, Mark. I think the basis is at risk given its tremendous recovery post the harvest of 2005. And, again, if tradition serves us and history serves us well the pipe will be well supplied with grain in January, early February.

Pearson: Alright, as usual some great insights, Virgil Robinson joining us this week, one of our senior market analysts on our last show of 2005. And we'll see you all in 2006. Thanks so much for being with us. For all of us here on Market to Market, I'm Mark Pearson, wishing you a happy new year.


Tags: agriculture commodity prices markets news