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Market Analysis: Sep 03, 2010: Market Analyst John Roach

posted on September 3, 2010

Robust weekly export numbers supported corn prices this week, while a 10 percent reduction in Russian wheat output by the U.N's Food and Agriculture Organization sustained a rally in wheat prices.

For the week, December wheat gained 46 cents, while the nearby corn contract moved nearly 30 cents higher.

Hampered by weaker-than-expected export figures, soybeans followed the coarse grains higher, as the November contract gained 9 cents, while the nearby meal contract settled Friday with a gain of $2.30.

In the softs, cotton flirted with $90 this week as the December contract posted a gain of $3.38.

In the dairy market, October Class III Milk futures advanced 8 cents, while the deferred contract declined by 2 cents.

In livestock, the October fed cattle contract gained 35 cents. Nearby feeders were off nearly $2. And the October lean hog contract advanced by $2.30.

In the financial markets, the Euro gained 147 basis points against the dollar. Crude oil gained 1.24 per barrel. Comex Gold gained $10.20 per ounce. And the Goldman Sachs Commodity Index gained nearly 4 points to close at 515-even.

Market Analysis: Sep 03, 2010: Market Analyst John Roach Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, good to have you back.

Roach: Thanks, Mark.

Pearson: Well, another interesting week and more concern about what USDA is going to say next Friday. A lot of the firms are coming out with their own yield estimates. Almost all of them are revising them down just a little bit. We want to talk about corn and beans but let's talk about the wheat thing first. Obviously the situation in Russia continues to be a worry in that world.

Roach: Yeah, it certainly does. The Russian crop, final crop estimates are starting to come in as they are wrapping up their harvest and we're finally getting some number counts down more toward where some of their earlier trade estimates have been. And we may not know those numbers yet really for another couple of months but we're starting to understand that they lost a substantial amount of their crop because of the drought. We saw the smoke going across Moscow so we stimulated the emotions of the traders and so now we just have to find out what are those actual numbers and are the world surpluses -- because remember wheat is still a surplus crop -- are the world surpluses adequate enough to take care of what the world demand is.

Pearson: All right. Well, with that in mind, John, obviously the board in Chicago a 46 cent move this week the up side. We've seen this very bullish wheat market now for some time. What is your take? Where are we going from here?

Roach: Well, we think that the market is, all the grain markets are getting this bullishness fully dialed into their price structure and wheat closed very near one of our sell signals. We anticipate the first part of next week we'll be in a sell signal and so we'll be recommending for our producers that follow our service to be selling into the wheat market this week and hopefully we'll have good strength to do that on.

Pearson: What is your price target to make those sales then, John?

Roach: We'll just take the prices that are available. We basically look at the market from the standpoint of once the pendulum swings to the point where it triggers sales we just make sales every day for the next five days and accept whatever that average is. We think that what we have to do is count on the market to get fully adjusted over that period of time. But at the moment I would think the wheat market this next week has a real good opportunity to move 25 or 30 cents a bushel higher as we move through the week.

Pearson: All right. And you're saying take advantage of it.

Roach: It's a good opportunity to be making sales. We think wheat producers that harvested their wheat and put it into storage this would be time to take an increment of that and put it into the marketplace.

Pearson: All right. Let's talk about the corn market. Obviously this is all shaping up an acreage battle and this concern about the shrinking size of the U.S. crop. What is your outlook now for corn?

Roach: Well, we're getting early yield results, yield reports from areas, particularly areas that have had kind of problematic crops and those yield reports have been disappointing and so everybody's idea and our idea about the corn yield potential out there is coming down. But this is, again, this is not brand new news, this is old news and we think that the better crops as we get some of those yield reports we may find some surprisingly good yields. We think that the USDA report this next week is likely to lower the yield estimate a little but we don't think that it's going to be cut drastically and we're selling into the strength on corn. We have been sellers this week and, of course, when you look at Friday closing at new contract highs and we started making sales early in the week you feel kind of bad because prices have strengthened as you move through sales. But we think that making sales on strength and not storing the grain this year makes the best sense.

Pearson: What about 2011 sales, John, are you there?

Roach: We've started making sales on 2011. I know that's controversial and I know there are some people on this show that have thought that it's just not right to be selling 2011, 2012 corn but we think on the other side that this is similar to last year. Last year as we moved into the fall of the year and the early stages of harvest that was delayed, the prices were very strong and although people anticipated they'll be even stronger later we think this is a short crop phenomenon where you put the prices in early during the season, you have harvest time highs followed by disappointing spring lower prices as we did last year. Last year the harvest prices were considerably better than what we had during the spring and early summer. It was only once we started to have Russian problems and started to have late season problems in this country that we finally get back to last fall's highs. Now we're there again and we're selling into them.

Pearson: All right. Are you selling soybeans?

Roach: We're also selling soybeans soon. We had a round of sales when the market printed its highs back here a few weeks ago. We do not have a sell signal in soybeans today. It will take strength all through next week to get us a sell signal the week after probably. So, we're going to be a little more patient on soybeans but we're also a little more cautious on soybeans too. Remember this is the end of the short crop that was harvested a year and a half ago in South America. The South American short crop shoved demand up to the United States for our 2009 harvest and then the 2010 harvest in South America was a big new record and now we're facing a near record if not a record and we'll not have a shortage on soybeans as soon as we put a combine in the field in the United States unless there's a real surprise as far as yields are concerned. But we think at this point the yields on soybeans could actually maintain their high levels that have been forecast because that crop has had a better development here at the late season.

Pearson: All right. And, real quick, John, the cotton market.

Roach: The cotton market, 90 cents a pound cotton. It's real easy to know what to do with that, you sell that. There's been a lot of problems around the world, of course, in cotton production and most recently in Pakistan but South America will increase their cotton numbers. Soybean producers in South America to the degree that they are positioned to be able to do so will switch soybean acreage over into cotton and 90 cent cotton is made to be sold.

Pearson: All right. Let's talk the livestock market, fed cattle market first. We've had a great run up and we're seeing some profitability in these feedlots again. What is your take for the rest of the year?

Roach: Well, we're probably near kind of a high water mark. We saw the cattle market sag back a little bit this week. We've had excellent exports for the year, our imports are well off of last year's levels and we import a lot of beef into this country and as a consequence we've had, and smaller numbers and smaller tonnage, and so we've had a very strong, robust beef market. We think we're probably near the kind of the high point of that market and so we'll hedge in the strength in the cattle market and take a bit of a cautious approach as we move forward.

Pearson: Let's talk about the hog market as well and what you see happening with pork prices going forward. John, again, a nice rally there, nice recovery from the lows last year.

Roach: We had a really nice rally in the dress market. We think that the heat of the summer, particularly the warm nights just really slowed the progress of hogs through the system and as we have better quality corn and feed available, as we cool the nights off we think there will be some gains out there in productivity and we expect pork numbers to increase or tonnage to increase. There tends to be some firmness in the live market as packers stretch out a little bit here once they come out of this Labor Day weekend and so we think we may have a firm market as we move in through the next couple of weeks. But, again, we want to use strength to hedge hogs as we look out through the fourth quarter of the year.

Pearson: You mentioned exports, a little bit of a weakness in the dollar this week vis a vis the euro. Are we going to see the dollar maybe back off some after the big rally it's had?

Roach: Well, the dollar broke down below the 20 day moving average which is kind of our indication of where the trend is. If the price of a commodity is below the 20 day moving average it by definition has moved into a down trend and so that occurred this week and so we think further weakness is ahead.

Pearson: John Roach, thank you so much. That will wrap up this edition of Market to Market. Now, before we go we want to remind you again about the special rural economic summit we'll be taping at Husker Harvest Days in Grand Island, Nebraska at 1:00 p.m on September 15th. We'll assemble a panel of experts and you are invited to join the discussion by submitting your questions at the Market to Market Web site. Now, to get the conversation started we're asking you the following: What improvement are you seeing in your local economy? Visit the Market to Market Web site to share your story and submit your questions. And, of course, be sure to join us again next week when we'll examine USDA's latest supply and demand estimates and learn how Heifer International passes on the gift of self-reliance. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat