Pearson: Early season corn harvest numbers were better than expected and the prospect of burdensome supplies served to move prices lower. For the week, December wheat lost 6 cents while the nearby corn contract moved 14 cents lower. Soybean prices trended upward in the light of hot weather and lack of new harvest data as the new crop contract rose a dime. Nearby meal prices increased $5.20 per ton. In the softs, the December cotton contract lost 28 cents per hundred weight. In the dairy market, September Class III milk rose 22 cents, while the October contract lost 30 cents. Over in livestock, October cattle fell $1.13, nearby feeders shed nearly a dollar and the October lean hog contract posted a weekly gain of $3.28. In the financials, the Euro lost 26 basis points against the dollar. Crude oil gained $2.88 per barrel. Comex Gold lost $9.60 per ounce and the Goldman Sachs Commodity Index gained 8.5 points to settle at 655.50.
Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Naomi Blohm. Naomi, welcome back.
Blohm: Thanks, Mike.
Pearson: We've got a busy month this month beginning today with the Labor Department's jobs report. Talk to us a little bit about what we saw today and what we can expect throughout the rest of this month.
Blohm: Yeah, today's report actually was a little bit less than what was expected in terms of jobs and the bigger issue was the revisions that they had done for prior months. And the reason today's report was supposed to be so important was primarily because it sets the stage for the Fed meeting later this month. The month of September is going to be a very crazy month for reports and global activities. There's 10 reports and big economic news that is happening and it's almost like if you took everything that gave investors, kind of rattled their chains over the past four years and put it all into one month, that's what we have in September. So we've got the Fed meeting, we've got Congress coming back to session, we have a big election in Germany coming. USDA report next week, hogs and pigs report, cattle on feed and the big quarterly stocks report at the end of the month. So this is one of those times where just when you think you can look outside your back door and say, well, I think the corn price is going to do this or that, these outside markets can come in and trump at any time so you just have to be ready for any scenario that might unfold this month.
Pearson: It's going to be headline driven throughout the month.
Blohm: Every other day it's going to be headline driven and it's one of those things where you say, why is corn up or why are the beans down? And it will be because something that has happened somewhere in the world. So just be ready for a wild one.
Pearson: Well, let's dig into it. With all of that in mind, as we look at the wheat market, continuing to stay relatively flat to a little down this week, what is the broad story there? How should producers be protecting themselves throughout this month?
Blohm: That's a great question. The wheat market continues to just kind of slough along sideways, watching the corn and soybean market for direction, and that is going to continue. There was a little bit of excitement earlier in the week that perhaps the crop in Australia or even in parts of South America had some frost issues that had happened. But it's, of course, not enough to make the market really rally because you don't know what the damage is until you get on down the road a little more. So we'll continue to see that wheat market just trade sideways and try to stay competitive with the global markets. But, again, the same issue is that there is such a large global supply of wheat that in order for us to stay competitive the prices have to stay lower. Ending stocks in the United States continue to shrink and we'll probably see that a little bit on the report next week from the USDA but at the same time what we're going to be watching for domestic is just more in terms of the feed for animal and see if maybe that category has grown and just kind of continue to see it limp along.
Pearson: And we did see wheat really take off as a feed stock versus corn this last year. Is that projected to continue depending on harvest? I mean, could that be a support, a source of support through this fall and winter?
Blohm: Yeah, that's a great question and I think you hit the nail on the head. You're right about that, especially in places in parts of the Midwest where the forage is so low that they're chopping corn early and the yield is horrible and so the nutrition is low and so they're going to probably want to continue to use wheat as a substitute for helping with that nutrition. So I think you're right and we'll continue to see that happen, Mike.
Pearson: Alright. Now, as we take a look at corn, as you mentioned, places where they are chopping early, we are seeing some reports of lower yield, we're getting close to harvest. That is what producers looking out their back door are seeing. Again, same question, how do you prepare yourself for this month of activity?
Blohm: Yeah, that's a wonderful question and the likeliest scenario for December corn this month is that we'll continue to see it in that $4.50 to $5.00 range that has been holding it for about a month now. $4.50 is a tremendous support line and fundamentally this is a great time for end users to be buying because there is so much variance as far as what is out there for a crop. Early harvested corn in southern Illinois and southern Indiana was actually yielding in the 200 bushel area so that is kind of what pressured the market a little bit lower this week. But then when you look at the weekly crop progress ratings being down three percentage points this week and then when you look specifically at Iowa and how it is 20 points behind the ten year average it really tells a different story. So one of those things that we're not going to know what is out there until harvest so most likely we'll see prices trade sideways just until harvest comes. Now, the thing with corn though is that if the beans can muster up some strength and continue to rally it's going to take the corn right along with it. But right now corn is actually following soybeans.
Pearson: Alright. Now, you mentioned beans potentially picking up some strength. Is that a strong possibility do you think?
Blohm: Absolutely and I do think that on the USDA report next week we'll see the USDA cut that soybean number. As long as the soybean yield is still projected to be anywhere around 40 bushel then we'll see the price of beans easily stay between like $13.00 and $14.00. Right now though the November contract is trying to defend the $13.50 area because that was that breakaway gap higher. So right now it's saying we want to defend it, we're going to defend it and then we'll see if the USDA report comes in any lower than 40. If it's lower than 40 that's the news that is needed to get us through that big resistance area up ahead at $14.09.
Pearson: Now, is the trade thinking that 40 bushel is still going to hold? Or is everybody just waiting to see what the USDA says?
Blohm: Well, right now the market is trading 40 so if the USDA says 40, it's old news. If the USDA says lower than 40 then that will acknowledge the extreme heat that we've had over the past two weeks because we are talking to a lot of producers who are telling us how the pods are aborting and how they're not filling out and it just does not look good. So it is going to be a fight to the finish and ultimately, of course, we have to wait until the combines get going to know what is out there.
Pearson: And that being said, on the supply side things are a little hit or miss, we'll see what happens when the combines roll. On the demand side, are we still seeing very strong international demand? Has that continued?
Blohm: It is continuing to stay along. For the past couple of months though, of course, Brazil has actually had most of our business and that makes sense. And so now when our harvest starts again we'll probably see our demand pick up for the export market again just because with the dollar still overall being a little bit lower we can be competitive again once actually harvest begins. So I do continue to see China as a major buyer overall and they'll be buying not only from us but from South America just on a continuous basis.
Pearson: Now, looking back at corn and beans there have been reports that the American farmer really hasn't sold much compared to historical years. For folks in that position a lot of uncertainty in the field, a lot of variability in the prices. How do you best manage that risk rolling into harvest?
Blohm: Yeah, that's an important question to talk about because you hit the nail on the head, there's a lot of guys that just aren't priced. So you have a couple scenarios you can work with here. If you want to just protect yourself just to have yourself peace of mind, of course, you can do it one of two ways. You can make a cash sale which I'm not necessarily recommending because they don't know what they have out there. But you can also easily put a floor under it with put option strategy. At the same time, though, with the potential really being for higher prices you can just be ready but have targets higher that you're going to be selling at along the way but part of that scenario planning and all the big reports that come out this month, if investors say phooey, we're done with this, then prices go south even though it has nothing to do with the actual fundamentals of the marketplace, you have to be mentally prepared for that too. So you have to be ready with your plan A if the market goes a lot higher or lower but overall any time we get a little bit of a push higher here I think it's a good time for a producer to be making some sort of a cash sale if they're comfortable with it and then a put option strategy if they don't have anything at all.
Pearson: If they're uncertain, defend those prices, try to lock in some --
Blohm: Absolutely, especially the beans, they're at all-time highs for this particular November contract.
Pearson: Alright. Now, as we take a look over to the livestock. We have seen fat cattle trade a little bit lower here the past couple weeks. Cash bids are staying relatively strong. Is that going to continue?
Blohm: Cash market for cattle probably just stay firm for here on out. There's a lot of tip-toeing around to see how long the demand can hold up at these prices. We have traditionally in the month of September that is when the retailers will put out specials on pork and specials on chicken because usually there's a supply surplus of pork coming in at this time. So I think people are kind of watching and preparing for that. But at the same time, the production end is so low still of cattle, expected to get lower yet into fourth quarter that we can't really drop prices. So I think we will see it well supported. And the cattle on feed report that will be coming up also this month, that will be another big sign to tell us about demand and what actually is out there so lots of excitement in that market. But overall firm prices to hold is really how I feel it will be.
Pearson: Now, as we get ready to roll into the cattle on feed report, is the trade talking assumptions to expect on the report? Are they expecting any surprises? I know last month we saw big declines. Expected to see more declines?
Blohm: I think they'll show further declines but with such a big chunk last month I don't think that they would do too much this month. And I would just, they haven't come out with any of the specific pre-report guesses yet. That will be probably another week or so. But they are just looking for smaller numbers overall.
Pearson: Alright, keeping the supply tight.
Pearson: Now, as we look over at the feeder cattle market with these prices, as you mentioned, on corn being time for end users to get some corn bought, we're seeing feeder cattle also drop a little bit. Is that just a response to the slightly higher corn prices this past week?
Blohm: It's partly that but I think the bigger thing is that there has been such a large disconnect between the live cattle price and the feeder price that it kind of needs to come together in some way. Also if you look at a continuous chart on feeder cattle prices we're at all-time highs and so we don't have the news to take it through those levels yet. $160 on the September contract is the high from last year and we were at $159 this week. So we're seeing a little bit of profit-taking and we're also just continuing to watch the demand and things like that. So my thought would be if you are an end user book your feed needs and then at the same time if you were a person that had to buy your feeders right now then maybe, in case prices retreat lower, do a put option strategy underneath so you're not feeling so sour if prices do go down.
Pearson: We get that uncertainty shock --
Blohm: Yeah, exactly. But at the same time the outlook for the cattle market, because the supply is so small yet and not expected to grow any time soon, we'll probably see firm prices overall.
Pearson: There is some bullish support there.
Blohm: Yeah, there is.
Pearson: Now, let's talk a little bit about the dairy market. Again, we've been treading water really all year in dairy. What do you see here for the next week, couple of weeks here in the dairy market?
Blohm: Sideways prices and even into fourth quarter we're looking at an outlook over $17.00 to $19.00 range. What has been happening in the milk market, production levels are up 1.1 percent from a year ago and that makes sense because the drought really hit production hard last year. So normally when you have a one percent increase in production on milk that's something that can make the market fall a lot lower. The reason that we're not is because our dairy exports overall are up 13% and that is what is really supporting the market. Also this week when the soybeans have gone higher that has also helped support the milk prices to go higher as well. And just a reminder for those at home who aren't maybe familiar with the dairy industry, break even now for these guys is $17.00 to $18.00. It's really shocking when you stop to think about it. So if we can keep prices between $17.00 and $19.00 at least that keeps things afloat but the outlook still is just firm prices for now and hopefully not any big drama down the road.
Pearson: Yes, but that export news, that has got to be perhaps a light at the end of the tunnel for these guys. Hopefully that will help suck up some of this extra production as we roll into the winter?
Blohm: Absolutely and the butter market, of course, put in a strong low and seasonally butter demand is going to pick up, cheese demand will pick up as we start to go into the holiday season. So not only will the export market stay strong but now we'll start to see some domestic demand improve as well.
Pearson: Alright. Now, before we let you go talk to us a little bit about the hog market. What do you see here coming shortly?
Blohm: Well, the hog market is having a counter seasonal move right now. Normally we see prices slide lower because production is increasing because of breeding patterns. But what has been happening right now is that the weights have been down a little bit because of the heat. And the demand has been hanging in there overall. So the futures market has rallied, it has been partially driven by speculators being in the marketplace and so it seems like traders are just waiting for the market to drop but it's not and the cash market is actually kind of hanging in there. The big hogs and pigs report is at the end of the month and that only comes out four times a year. So what everyone is going to be watching on there, we're expecting this increase for production levels, and so we'll see if it happens or not.
Pearson: Alright. Thank you so much, Naomi.
Blohm: You're welcome.
Pearson: That wraps up this edition of Market to Market. But Naomi and I will continue our discussion and answer some of your questions in our Market Plus segment on our website. You'll also find audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account exclusively at the Market to Market website. Be sure to join us again next week when we'll take a look at the most recent supply and demand estimates report. Until then, thanks for watching. I'm Mike Pearson. Have a great week.
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