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Market Plus: Jan 31, 2003

posted on January 31, 2003

Market Plus: Jan 31, 2003

PEARSON: Welcome to the Market Plus page on our Market to Market Web site coming out of your computer today. I'm Mark Pearson, host of Market to Market. My guest is Virgil Robinson and Virg, good to have you with us. Now, let's talk about this bean market. We've got analysts on here saying that we could scoot up to eight bucks, we could see this market collapse totally, tonight on the show you're saying, you know, you've got cash beans to sell, let's start moving them.

ROBINSON: Mark, the argument of an eight dollar bean price, I understand that argument, it's based on some very solid logic and that is the supply of beans in the United States, at least, is measured by historical levels, is tight, it's unusually tight and could be tighter than we're currently being projected by the USDA. So, from a supply perspective that could conceivably happen particularly if there is a crop shortfall or excessive rains develop in the southern hemisphere curtailing the harvest and the quality and so on. I understand that, that's certainly possible.

But on the other hand, producers, I think, need to realize and understand that domestically, here in the United States, processing margins, Mark, tonight as we visit are less than half of what they were a year ago. Crushing capacities in the United States are declining. As they decline you create less end product and as you mentioned in the show tonight soybean meal, meal prices have improved. And clearly two reasons, it's winter and normally consumption increases and crushing capacities have declined thus creating smaller meal supplies.

Meal, is the bulwark right now of the soy complex but my point is this, if processing margins do not improve appreciably over the course of the next several weeks and we simultaneously slam into what could be record production out of the southern hemisphere, it's conceivable that both demand polls in the United States wane and weaken. If that's the case, bean prices are vulnerable. They're a dollar a bushel higher today than they were a year ago, Mark, and they could weaken appreciably given the scenario we've just outlined.

So, how do you manage those two extremes? To me, the best way to manage it is go ahead and take advantage of the no carrying charge situation in the cash market as well as the futures market by selling that inventory, cashing in on that and then buying or repurchasing some type of less expensive strategy like a vertical call bull spread where you buy one call and sell another that's sixty or seventy or eighty cents out of the money. If, over the course of time between now, let's say, and the first of June or the middle of June, bean futures spike a dollar higher, you're going to capture fifty cents or sixty cents of that.

If bean prices flatten out here or even decline fifty cents a bushel you'd lose, perhaps, that fifteen cent premium for that opportunity. I think it's a reasonable insurance play and a reasonable way to handle the risks in this bean market.

PEARSON: Real quick, Virgil, I want to just revisit this cattle market, cattle inventory report. You've got to be friendly to these cow/calf guys out there.

ROBINSON: Yeah, and Mark, it didn't come as a big surprise, it did not come as a big surprise but yes, I would concur with that and probably underpins the values that we're seeing today. My concern in the live market tonight, Mark, was based on the combination of what I feel will develop here in terms of total beef/pork/poultry tonnage. If, for example, this New Castle problem continues to trouble the markets and it's perceived that we have all of this additional poultry to distribute here in the United States, it's going to take a toll on the red meat markets.

And technically, I like to look at the charts, Mark, there is a big old gap on the live cattle continuation chart around seventy-seven cents. I think that April live cattle futures contract is going to close that gap between now and its expiration. That's why I like the idea of using next week's weather scare, should it develop, April futures pop up there around eighty-one dollars or better, I think it's a good hedging opportunity.

PEARSON: Okay, be ready to jump folks. Some good ideas, Virg, as usual we appreciate it. Virgil Robinson, our guest this week on our Market Plus Web page. I'm Mark Pearson, thanks for joining us.

Tags: agriculture commodity prices markets news