Weekly Roberts Agricultural Commodity Market Report

Mike Roberts
Commodity Marketing Agent
Virginia Tech

May 02, 2006

If weather markets aren’t enough to create hard-to-predict markets, we also have the usual … fundamentals, short-term technicals, emotions, and now … money “flows” into and out of commodity markets by large funds fueled by either tax time or something as simple as interest in the market.  Yes, sometimes when large funds get into or leave a market others quickly follow suit and the race is on.  Knowing the race to where is the key question.  Roll on, wheel of fortune.

Markets not agricultural in nature are providing plenty of influence on farm commodities … much more than they usually do.  Spillover buying from energy and metals have proved supportive.  When a lot of money goes into funds, they get active in the futures markets.  When the money drains out, so do the funds.   When crude rises, long-only funds get stronger and more money goes into investor pockets … adding more money … fuel … and volatility to commodity markets like corn and pork bellies.  Nothing’s changed.

CORN on the CBOT for the MAY’06 corn contract closed down 0.2¢/bu to $2.38, but up 0.5¢/bu from last week at this time.  The DEC’06 contract closed at $2.714/bu, off 0.2¢/bu but up 0.4¢/bu from last Monday.  Markets surged last Friday amid fund buying during persistent increases in other inflationary indicators such as gold, silver, and crude oil.  Like I said … “Up and Down!”  Futures closed mixed on Monday after losing gains made early in the day. Funds got more active moving cash and selling positions.  According to floor sources, global tension and soaring inflation indicators are encouraging funds to buy commodities like corn despite current stocks.  Slow plantings because of rain are also supporting price.  The market is carefully watching planting progress now as the best days to plant corn are dwindling.  Exports were quiet over the weekend as inspections were 1.5 million bushels below the expected 35-45 million bushel range at 33.6 million bushels.  Cash basis bids were weak in the Midwest Monday amid light farmer selling.  Basis bids in Mid-Atlantic States were very good with some places reporting bids 6¢/bu - 13¢/bu higher from Friday at $2.44 for old crop and $2.57 for new crop corn.  Friday’s Commitments of Traders report for futures and options combined showed funds were long 275,955 lots (1.4 billion bushels), down 5,169 lots from the previous week.  Shorts were down (no pun intended) 1,101 lots at 71,381 contracts.  Cash sellers who haven’t forward priced much of the new crop, should consider pricing up to 40%-50% of new crop corn.  These prices may not be the home run but they will put money in the bank.  The same ’06 crop recommendations hold true for hedgers.  Hedges against the DEC’07 crop may also be considered now at the 20%-25% level.

SOYBEANS futures at the Chicago Board of Trade (CBOT) finished up again Monday with the MAY’06 contract up 6¢/bu at $5.932/bu.  This was 19¢/bu higher than last Monday’s close.   The NOV’06 contract closed up 5.2¢/bu at $6.260/bu amid technical buying from funds and support from outside markets.  Funds bought about 4,000 (20 million bushels) soybean contracts.  As with corn, rain slowed soybean planting progress.  USDA is expected to show soybean seedings at 2% - 4% late on Monday, traders said.  South Korea passed on a bid to buy beans late Friday based on the high price.  Soybean cash bids fell in most places around the US except for the Mid-Atlantic states were old crop bids were 21¢/bu higher at $5.81/bu and new crop 11¢/bu higher at $5.96/bu.  Those in my neck of the woods waiting on $6.00 beans should not hold there breath and really, really consider selling some beans while these prices lasts.  Don’t let this good weather in this area stop those trucks from rolling on last year’s beans or those phones from calling on next year’s crop.  Cash prices at January ’06 levels are not likely.  The market gapped up in opening trading last Friday.  As has been pointed out before, the market loves gaps and will try to fill them.  The fundamentals and technical analysis do not indicate that this is a breakaway gap.  Last Thursday and Friday’s sessions look to be “blow-off” volume at best right now.  Friday’s CFTC Commitments of Trader’s report for futures and options combined showed that as of last Tuesday, funds were long 48,315 lots, down 3,283 from last week.  Funds in short positions were down 8,773 lots at 85,438 (428 million bushels).  Cash sellers not forward priced at 50% of the 2006 crop should consider getting there taking advantage of this rebound.  As the chart below shows, prices at these levels have not been seen since February 6!  Hedgers should have taken some profits on about half of the 50% crop coverage week before last.  Considerations of hedges on up to 40%-50% of the crop could prove favorable. 

WHEAT in Chicago for MAY’06 wheat futures closed 7¢/bu higher at $3.532/bu.  The JULY\’06 contract closed higher 6.4¢/bu at $3.65/bu, which was 1.6¢/bu higher than last Monday’s close.  Technical buying and thinking that rain did not meet expectations fueled the spree.  The wheat markets were affected by the outside commodity markets (gold, frankincense, and mir) just like the soy complex and corn markets.  Funds were net buyers of 3,000 – 4,000 contracts (1.5 million -2 million bushels).  Volume was estimated down 7,319 contracts at 4,791 futures.  Kansas City HRW wheat led the market for most of the day.  The KCBT JULY’06 wheat contract finished up 6.5¢/bu at $4.38/bu, above its 50-day moving average of $4.362/bu.  Floor sources said they are waiting on the Wheat Quality Council’s annual Kansas tour to see what the crop’s condition looks like.  USDA rated the U.S. winter wheat crop at 36% good to excellent.  This was down 3 points from 39% good to excellent last week.  Rains were delaying plantings of the U.S. spring wheat crop as well.  USDA reported spring wheat plantings at 42% complete, up 22% from a week ago and just about the 43% for this time of year.  Exports did not provide much support with inspections solidly in the middle of estimates.  Overnight exports were quiet as Japan said it will also skip its regular weekly offer this week due to a holiday there.  Australia’s largest exporter, AWB Ltd was reported as trying to salvage good relations with India after that country claimed excess pesticides in the latest shipments of wheat.  Deliveries on the CBOT were modest at 27 contracts.  Friday’s CFTC Commitments of Trader’s report showed funds increasing net short positions for the week ended April 25.  Funds decreased their net long positions for futures and options combined.  Cash sellers should have considered pricing up to 40%-50% of the ’06 crop last week.  Sit tight.  The Kansas City market looks as though it is past a major high point in the JULY’06 contract.  Hedgers in that market may consider up to 40% of the crop.  Hedgers in CBOT wheat should not have any short positions in place at this time but be prepared for action.

LIVE CATTLE in Chicago (CME) closed up significantly on Monday with the JUNE’06LC contract up $1.525/cwt at $75.025/cwt.  The AUG’06LC futures finished up $1.40/cwt at $76.95/cwt.  Both months moved above their 20-day moving averages amid fund short covering and support from the discount to cash pushing prices into buy stops.  One trader said that was a surprise to everyone.  Strong gains in feeders also provided support to live cattle.  Most of this rally seems to be fueled by expectations of improvement in seasonal demand offsetting the negative large on-feed supply bias.  Mother’s day, Memorial Day, and Father’s day (where the honorees grill their own supper) typically show an increased demand for meat.  This will prove friendly to both beef and pork but particularly more so to cattle with the big discounts of futures vs. cash now being registered.  USDA on Monday reported choice beef at $147.17/cwt, off $0.64/cwt.  This is still $3.92/cwt above last week’s $143.25/cwt.  Also making traders watchful were the immigration rallies and their effect on slaughter.  Several meat operations ran on Saturday in anticipation of the work slowdown.  USDA estimated Monday’s cattle slaughter at 31,000 head, off 85,000 head from last Monday’s 116,000 head.  Cash sellers should consider forward pricing 3rd quarter sales.  Hedgers should consider short OCT’06LC futures on 3rd quarter marketings.

FEEDER CATTLE at the CME ended up $1.65/cwt in the MAY’06FC contract closing at $102.175/cwt.   The AUG’06FC closed up $2.225/cwt at $104.30/cwt.  Carryover selling was expected following another declined in the CME index on Friday amid thoughts of light demand for a reduced kill pace.  However, to everyone’s surprise, feeder cattle led the beef market rally on common talk that cash feeders traded $2/cwt - $4/cwt higher Monday in Oklahoma City’s feeder auction.  As with slaughter cattle, seasonal demand portends good for price as grilling picks up.  Rain in the southern plains encouraged feeder cattle buyers on refreshed pastures.  Ranchers may retain some feeders that would have been sold, traders said.  The latest CME feeder cattle index for April 27 was $100.87/cwt, off $0.50/cwt.  May closed at $102.175/cwt.  Even with this market bounce, cash sellers should consider being forward priced to protect some of the 3rd quarter marketings.  Hedgers should be thinking about shorts positions in the AUG’06 and OCT’06 futures to protect 3rd quarter sales.

LEAN HOGS on the CME ended mostly lower on Monday as the premium of futures to the CME Lean Hog Index and talk of lower cash prompted selling, according to floor sources.  Futures opened mostly weak amid slaughter uncertainty and Russia’s ban on poultry imports last week.  The MAY ’06 was up $0.25/cwt at $68.225/cwt while the JUNE’06LH closed off $0.125/cwt at $66.875/cwt.  Spreading supported the June contract but tapered off after early support in reaction to steady to higher cash prices.  Seasonal traders are expected to be selling June and July next week but the cash hog market could hold firm in coming weeks as exports remain strong amid good demand.  The next two to three weeks are typically very strong cash weeks.  As with beef, immigration rallies may affect livestock slaughter with some traders saying the reduced production was being priced into today’s futures.  Monday’s hog slaughter was estimated at 183,000 head, down 192,000 head from last week’s 375,000 head and 193,000 lower than a year ago’s 376,000 head.  The composite pork cutout value on Friday was placed at $6.58/cwt, up $0.60/cwt.  This was the highest since March 7.  The latest CME Lean Hog index was up $0.80/cwt at $62.66/cwt.  According to HedgersEdge.com, the average pork plant margin for Monday was estimated at a negative $2.55/head.  This was down $2.30/head from a positive $0.25/head last Friday, as well as the Friday before that.  Below is a Hog/Corn ratio table.  Ratios are calculated by Dow Jones using industry-accepted FOB cash hog and cattle prices from USDA and cash corn prices from private sources.  Historically ratios at or above 20-1 for hogs (live basis) have resulted in expansion of production, while a ratio of 15-1 or less has resulted in contraction.

Hedgers should be out of all short positions.  Cash sellers should keep sales as current as possible pushing weights to the limit. 

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Remember, when working with futures, risk is involved.  Past performance does not indicate a promise of future results. 

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