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Market Plus: Jun 20, 2003

posted on June 20, 2003


Market Plus: Jun 20, 2003

Pearson: Hey, thanks for joining us on the Market to Market Web site and here on our Market Plus segment. With us, our guests this week, Doug Jackson and Virgil Robinson. What a great pair to talk about what's going on with these markets right now. Doug, you mentioned a couple of things. Farmers in the Midwest have been very concerned about what's happening with Brazil and no matter what it seems like demand continues for soybeans. You mentioned China, literally bottomless demand. What's going on over there and how long can we look forward to this continuing?

Jackson: Mark, the China situation is a fantastic variable really in all three grains and it's one of the great determinates of price and demand and yet it's probably still the least understood. The government has radically changed their China numbers retroactively month after month for the last three years. For two years in a row they were increasing grain stocks in China and now in the last couple of months they've been lowering grain stocks in China. So, we really don't know what perhaps one of our most important variables really is.

But in the case of the soy, of course, demand is just simply exploding, as we said, imports of beans this year will be up seven to nine million tons, an incredible story on top of that, they're buying an extra million tons of soy oil, returning back to the buying patterns of the last five years. And it is literally a bottomless pit of demand. Everybody has some vague notion of the numbers of the population and potential demand in China. One point we would make is that if we just look at a very simple indicator of meal usage per animal number, if they would just bring their feeding program up to something similar to the counterparts in the Western Hemisphere, the demand for meal, even if animal numbers would stay steady, would increase ten times.

Now, of course they're not going to bring their usage rates up to the comparable levels of the Western Hemisphere but even if they had just a moderate improvement in feeding efficiency, any kind of numbers that you apply to China are incredible on any kind of per capita disposal of food or feed. And so it is literally an unlimited demand market for the rest of our lives, the rest of our careers and the only limitation of the demand is going to be infrastructure considerations, ability to pay considerations and political policy considerations.

But literally unlimited demand, we have new crushing plants being added monthly, those plants, of course, increasing demand. So a fabulous situation. They're eventually going to draw their corn stocks down which will reduce their corn export competition and their wheat stocks are also being drawn down which could set the stage for them to import wheat. Remember that they haven't hardly imported any wheat the last several years but ten years ago they imported ten to fifteen million tons per year. So, China is going to continue to be a fabulous variable for years to come.

Pearson: Alright, and some good news there for this oncoming large crop. Virgil, we want to talk to you about the beef market. We talked about cattle on the show tonight and kind of where we were headed and what's going on but one thing you wanted to talk about was that cattle on feed report.

Robinson: This afternoon's report, Mark, I think was generally friendly. Total on feed at 96% which was really below most private analysts pre-report guesses placed in the month of May at 101 which means June placements this year are the smallest, June total placements this year, the smallest they had been since '99 and marketings with one fewer day this year than last at 103% of one year ago which underscores the fact that producers have been very aggressive, Mark, of late moving inventory to market for fear of the Canadian situation once that ban is lifted.

So, I think all due credit should be given to the American cattle finisher and producer in their effort to move inventory through this troubling time, they've done a terrific job. You talk about edge opportunities. It would seem to make sense to me with this looming situation in Canada.

The real dilemma here Mark is which of the two entities, cash or futures is incorrectly priced. You know, we have a live market that's 73-75 dollars and futures setting several dollars below that and when assuming a basis even less than what the futures market suggests, Mark. So, again I'm not terribly interested or aggressively pursuing hedging cattle at seven and eight dollar discounts to prevailing cash. I think the demand that we had generated for beef here in the United States, a little weaker dollar, we've increased our exports, Japan appears to be back on line and buying pretty significant quantities again from the U.S. despite the Canadian ban.

I think demand is very solid in the beef market, Mark, so I'm reluctant to suggest any hedging here. For those who have a horrible fear of what might happen, some type of out of the money put or near the money put to create a floor is certainly prudent.

Pearson: Good ideas as usual, Virgil and Doug, thank you so much. That'll wrap up Market Plus for this week. Be sure to tell your friends to stop by our Web site and say hello and listen in on our analyst's commentaries. For all of us here on Market to Market, I'm Mark Pearson, have a great week.

 


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