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Market Plus: Jan 07, 2005

posted on January 7, 2005

Market Plus: Jan 07, 2005

Pearson: Welcome to the Market Plus page here at our Market to Market Web site. We're so glad that you have joined us. We mean that sincerely. With us this week, one of our senior analysts, Virgil Robinson. Virgil, we were talking about soybeans on the show. And a lot of times we don't get a chance to talk about meal, we don't get a chance to talk about oil, the byproducts of the bean. You track soybean meal, soybean oil. You track that soybean index, which of course, we show now as a part of the show, what the cash index is doing, the national cash index. First, talk about the byproducts because from those prices that is where our price for beans comes from.

Robinson: Mark, I track processing margins, or at least I make a calculation that I think is very representative of the cash processing margin here in the United States. And as we visit tonight it's not very attractive. As mentioned earlier, the demand element for oil and meal has been primarily driven, in my opinion, by our pace of export sales and shipments. They have been very good to this point in the crop year. That is not to say that domestic processors don't need to source beans and/or inventory because they do. Whether they are working at 70% of capacity or 85% of capacity, they still have to source the bean. And that is underpinned the cash market; kept basis firm. It's narrowed the spreads. It has, I think, been an unusual set of circumstances. However, as mentioned, at some point in time we're going to slam into the reality of competition, very intense competition out of the southern hemisphere for those export or those importers' business. And at that point in time, should it coincide with the domestic market where processing margins are poor, you have a problem taking shape here in the form of inventory that is too high, soybean prices that would be too high. Now, as a precursor to that, maybe a clue, Mark, the futures market often times will think well in advance of you and I. So, with that as our -- with that in context -- Mark, I'm tracking bean and meal futures prices and there is a line of support in each of those two byproducts that is very, very well defined and very solid. In oil it is around $19.25 and in meal around $145. We have dropped to check there and rebounded numerous times over the course of the last three to six years. Should either of those products or both products simultaneously drop below those lines of support then it would suggest to me bean prices are in deep jeopardy. OK, so one can watch those fairly closely and keep track of how they are behaving because clearly without strong product leadership the value of beans is in jeopardy.

Pearson: Absolutely, and like you say it is underpinned by those byproduct prices. And, again, we're at $145 or so on bean meal, about $19 on soybean oil. This is something a producer can track readily. I mean, you can see what is going on the board.

Robinson: Those are the two points that I am most conscious of. Should we drop below $19.25 for a spot meal -- excuse me -- spot oil contract, $145 for a spot meal contract, be on alert that soybeans are likely to head south because without product leadership beans are in jeopardy.

Pearson: South below five dollars and this could coincide with the slow down in export trade as you mentioned sort of backing off.

Robinson: Absolutely.

Pearson: And also the arrival of this supposedly huge crop from South America.

Robinson: Yeah, and Mark, again, we haven't taken the time to talk about rust and this issue and how it will be handled here in the United States and how it will take shape. And frankly, I don't know how to address that. But there are a number of meetings being planned and soon to kick off from university sites, from the American Soybean Association and others that will address that issue and how best to manage it. So, you know, that is an issue that clearly is difficult to handicap and will continue to be a part of the price discovery process in Chicago for the next several months.

Pearson: It's never easy but as you mentioned with the South American situation and with the rust situation a lot of factors and a lot of variables going into the crop year 2005. Virgil Robinson, thank you so much as usual for some great insights. Thank all of you for checking us out here on our Market to Market Web site and our Market Plus section. For all of us here at Market to Market, I'm Mark Pearson, have a great week.


Tags: agriculture commodity prices markets news soybeans