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Market Plus: Nov 05, 2004

posted on November 5, 2004


Market Plus: Nov 05, 2004

Pearson: Welcome to the Market Plus segment here at our Market to Market Web site. I'm Mark Pearson, so glad that you could join us this week for our Market Plus segment. Virgil Robinson is with us, one of our senior analysts and Virgil, it's been quite a year. We were talking about feeder cattle on the show and you never thought you'd say this but at $100 there is support for feeder cattle. And of course that cash market is way above that so feeders may want to consider that. I wanted to talk about a couple of things we didn't have as much time to talk about. First of all, cotton, we didn't get to it in the show. Was a lot of activity there this week, very sluggish, again, huge crop Virgil.

Robinson: Yeah, Mark, a big crop in the US, big crop in India in particular, big crop in China, big crop in Pakistan. So, global production is currently project at about 110 million bales, which obviously overwhelms demand, Mark. And ending stocks are projected at 42 million bales. So, we'll see if the USDA tweaks that this weekend but the supply argument here is pretty obvious, there is plenty of it. Demand is always subject to change. The dollar as you mentioned on the show weakening significantly, the weakest point of the dollar index dating back to the 80's, Mark. And that certainly will underpin to some extent various commodities that we produce. We're a little concerned in that context about China in as much as their corn crop is likely to grow from last month's project, their soybean crop is likely to grow a little bit from last month's projection. They've been fairly aggressive in the export corn market of late, Mark, I think as a result of increased production in select geographies over there. Now, again, many analysts including yours truly of the opinion that within a years time or thereabouts China is likely to become a net importer, not a net exporter. So, I'm a little bit taken back by the recent activity, China in the Asian market. So, we need to watch that very closely, USDA data will give us some indication of their supplies, Mark, next Friday afternoon or Friday morning.

Pearson: Well, I want to talk also about, on livestock, this hog market. A dramatic week and you made the statement somewhat suspect week on futures. What did you mean by that?

Robinson: Well, what I meant was Friday's price behavior in the futures market was what is known as a classic outside or reversal trading day, Mark, where futures opened higher, they gapped higher, made new contract highs, new highs for the move and then closed sharply lower. That is often times kind of a catharsis, if you will, a signal that this run in the futures market has come to a climax. So it is conceivable here that futures pull back three to five dollars, I would not at all be surprised to see that. Does this provide some hedging opportunities for producers? Mark, as you well know, I began talking about hedging hogs when cash values were at the mid 40 level and tonight as we visit, some areas are in the mid 50's. So, if I was of that opinion weeks ago I'm of the opinion tonight, these represent, at least for the balance of 4th and the first quarter of 2005, I think attractive hedging opportunities protecting something near fifty dollars live.

Pearson: And that just sounds like awfully good conservative business sense to make that recommendation. Real quick, Virgil, I don't have a lot of time. We talked about the feed grains and meal on the show tonight. Big crops out there, a lot of people are kind of thinking, oh, do I need to do anything in terms of covering some feed needs? Would you be doing that down in here?

Robinson: Mark, I did cover some meal earlier and of course it prices higher than this. I've looked at the soybean meal perpetual or continuation chart and there is a line of really solid support dating back to 1999 right above $140. I think that is an area of pretty solid support for futures, Mark. Now, there is a basis calculation for those that procure the cash so I make that, in my local area, but I think if you've not made any commitment to meal I'm of the opinion at or near $140 basis that spot futures contract is a place I would begin. I think that is a good starting place.

Pearson: What about covering corn?

Robinson: Cash corn I think, you know, the basis in some areas, Mark, is very attractive. Again, you've got a storage issue, a capacity issue from that. I could say buy cash at a dollar fifty or less. The problem with that statement is where do you put it, you know, if you haven't the capacities? I wouldn't be in a significant hurry, Mark, to procure corn for any great length of time simply because of the sheer size of this crop. But I think futures, Mark, as they fall below $1.90 and I think that is going to happen in the next couple of weeks I would be on alert and begin to think about if at only a minimum using some type of option strategy and create a price ceiling. And I think right now that is where I'll camp using that option as a price ceiling strategy.

Pearson: Excellent, to protect you in case of China demand, something happens you're covered. Good ideas, as usual.

Robinson: There is some poor weather, Mark, in southern China right now as well as South Africa. Perhaps that is the catalyst over time combined with the fact the speculative community has the biggest short position in corn, beans and meal on record.

Pearson: They're all on one side of the boat.

Robinson: Yes, sir.

Pearson: Virgil Robinson, as usual, great advice and great thoughts. That wraps up our Market Plus segment for this week. From all of us here on Market to Market have a great week.


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