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Market Analysis: Aug 13, 2010

posted on August 13, 2010

Russia's worst drought in 130 years of record keeping continues to be the dominant factor affecting grain prices. And in USDA's latest supply and demand estimates Thursday, global wheat supplies went from being ample to adequate. The report was friendly to wheat prices, but not enough to negate losses in previous sessions.

For the week, September wheat lost nearly 25 cents. Nearby corn prices, however, moved 7 cents higher.

USDA increased domestic soybean ending stocks by nearly 200 million bushels from last year, but prices rallied. For the week, the September contract rose 13 cents while the nearby meal contract settled Friday with a gain of 10 cents.

In the softs, cotton tested $85.00 with the December contract posting a gain of nearly $4.

In the dairy market, August Class III Milk futures were up a penny, while the deferred contract moved nearly a dime higher.

In livestock, October cattle lost $1.17. Nearby feeders were off nearly $1. And the October lean hog contract was up 58 cents.

In the financial markets, the Euro lost 522 basis points against the dollar. Crude oil declined by $5.31 per barrel. Comex Gold gained $11.45 per ounce. And the Goldman Sachs Commodity Index lost nearly 25 points to close at 508.45.

Market Analysis: Aug 13, 2010 Pearson: Here now to lend us her insight on these and other trends one of our regular market analysts, Sue Martin. Sue, good to have you with us.

Martin: Thank you, Mark.

Pearson: All right, well obviously the situation in Russia and this monster wheat rally that we've had has been impacting all the grains, really all the commodities to one extent or the other. USDA's report came out, it's going to be an end of July, August 1 kind of a number. If we look at the wheat market and what has happened there in terms of declines in supply, is this still a bull market in wheat, Sue?

Martin: Well, it's a bull market but I think for now the market has spent itself. I think that the top is in for the rest of this year but that doesn't mean that we can take prices around to $6.17, $6.77 to $6.71 is a 50% retracement on Chicago wheat the December contract and we can pull it down even through that and go to $6.17, maybe as deep as $5.95. But we can also turn right around before the year is done and be right back up to $8. If we rally first to $8 before we break much the market will fizzle and fall back. It's going to kill time. We have overpriced ourselves. The most positive news when Russia banned exports starting this weekend on the 15th, what else is there to know. And so the market had priced everything in at that time.

Martin: And so now we're going to wait but next year we're going to see bull markets again in wheat and I would not recommend selling cash wheat unless you need the money right away. Otherwise -- and for producers because we're going to see a big increase in wheat acres now because of this price jump -- so that is going to have everybody thinking the bear is saying we're going to have huge supplies next year. Well, it might take us a year to get back to where we're in that situation. So, I think this next March timeframe we could see some pretty good prices on wheat again. Long-term charts you have a head and shoulders, massive head and shoulders bottom and that projects you well over $10.00.

Pearson: All right, Sue. With those kind of numbers and that kind of thought explain this huge disconnect between futures and cash because you mentioned cash sales only as needed at this point because basis is huge.

Martin: Well, and it's a sad thing because of the changes that has taken place by the exchanges and the CFTC for the -- because of last March, not last March, I guess it was in 2008, when you had Minneapolis wheat and deliveries and rule of thumb is they should come together and they didn't. And so they have made some changes with these basis levels and unfortunately the farmer has been hurt by that. And it's great for the commercial but not good for the farmer.

Pearson: All right. Let's talk the corn market, which was higher this week. USDA's number, again, not bearish by any means, a big crop but when they came back in with these demand numbers still looks pretty strong.

Martin: Well, it is and the thing is if you look at, first off, on wheat if you look at these demand numbers they are very, very strong because of the problems that Russia has got and the exporting they're going to do into the European Union. You're going to see seven to nine million metric tons of feed wheat that will not be exported into Europe and two to three million metric tons that probably won't be exported into Asia. That's going to turn -- because wheat is too high priced, feed wheat is too high priced. Corn is about the only viable vehicle out there that they've got to come to, corn is going to pick up that slack and, of course, the U.S. is blessed, we have lots of wheat on hand right now but we also have a good supply, not over burdensome, of corn. But in the meantime, it's the U.S. market that is going to get the benefit out of all of this. And I think that we have to be very watchful because China and the U.S. account for world supplies, 51% of world supplies. Well, China is a user, consumer, they don't export and so U.S. is the biggest exporter in the world and you've lost your biggest cheap competitors so what's left?

Martin: And just this week we exported 275,000 metric tons or sold to Canada who is a major competitor. And you say, Canada? What's going on with that? Well, it's being transshipped. Is it being shipped to China? I wouldn't be surprised. The one thing everybody got so focused on Russia they forgot about China. China has had horrendous weather problems all season long from planting to current time, from drought to flooding, horrendous flooding and they're not over with. I think China has got major issues coming down the pike here very soon and that's why they are busy buying rice, they have bought three times the amount of rice that they say they did in the first six months of this year, they're looking at inquiring about another 1.5 million metric tons of rice from Vietnam and in the last 20 years the largest sale or import that they had was 1.1 million metric tons. Huge, record amounts of new crop beans being imported, not to mention corn. I think China has got big issues and they're probably a bigger deal than what we're talking about with Russia.

Pearson: All right. Sounds like you're on the bull side of the corn market, Sue, if we can get back to that.

Martin: Well, we are. I am. I wouldn't -- to give you an idea of how bullish I am I would not sell December 2011 corn with wooden nickels. I wouldn't sell July corn of next year with wooden nickels, not at this time. Now, I think that we have a corn market -- first off, the USDA surprised us at the end of June with a million less acres. But look at the flooding we've had and the ponding. Now, the USDA always allows a fudge factor for ponding areas but the flooding has been horrendous and these storms in Iowa, we're the number one corn producing state, we vie for that with Illinois and then you've got Nebraska. Well, Illinois has had their share of issues too, too dry in some areas, maybe a little wet in some others and they've got some others that are okay. But in the meantime, the corn is losing nitrogen every day and these storms are lasting and they're not like little half inch, inch storms, they're three, four, six, seven, eight inches of rain in very quick time. The ground is so saturated you've got your nitrogen leeching away. Corn has got an issue but not to mention we keep underestimating these hot, warm nights that we've been dealing with all season. I don't believe these yields that they're coming out with, I think they are missing the boat, we're going to see less than trendline yields.

Pearson: All right. So, your corn price targets, Sue, what do you think?

Martin: Well, first wave count, which is nothing in a market, is $4.56 and three quarters on December corn. I do not see on a break corn getting under $3.90. So, I believe that corn, if it gets back down to that $4.00, $4.05 area, if it can do it, I just think we've got corn that's going to move higher, you may get you some setbacks but it wouldn't surprise me if we move corn higher into September. But as we go down the pike corn supplies are going to get tight. Mark, we have, in days of supply for new crop corn, 35 day supply and when you look at global stocks, global stocks are the third tightest in 35 years. It's not a market that you sell short that has been going sideways for two years.

Pearson: Could be a potential powder cake. Sue, we're running out of time. Let's talk about soybeans here. Are you equally excited about the bean market?

Martin: Well, I am although beans I can temper a little bit. I have to fight myself because when you look at the state of Iowa we have major, major issues with disease and when that pro-farmer tour gets out there and starts doing their crop tour they aren't going to miss it, you can not miss it. The beans started turning, whole fields of beans started turning a week ago and then this past week you couldn't miss it and yes, we've got sudden death and all of a sudden everybody's talking about sudden death but it's the whole field, Mark. Fields after fields, maybe three out of five fields in a row. We've got a problem in Iowa and we'll find it as we start doing these crop tour and the combines roll.

Pearson: All right. So where do you want to sell beans?

Martin: I think beans should try for a wave too, that is $10.59, something like that. But the high -- the one thing we've got to ask ourselves is are we going to take out last year's highs in corn and beans or last year's lows? The low of last year was $3.02 in the Dec. corn and the high was $4.73 and a half. The beans, $10.99 on the beans and $7.84. I think the highs are coming out.

Pearson: All right, the highs are coming out, that's a big move. We've got about 30 seconds, Sue. Can you tell us anything about the fed cattle market and the hog market, livestock sector generally?

Martin: Well, I think that when you look at the cattle market the wholesale beef was higher every day this past week. And packers stepped up and surprised everybody with better prices this week. This next week I'm looking for $1.00 less. But I do think that we have a cattle market that may be trying -- the board is short with the large trader but the fund money is worried about their stock investments and they're coming in and where's that money going, it's going into food and beef is food and our export market is looking good, you're coming into the fall when beef demand starts to pick up. We may be putting a seasonal low in before long and we've never hit a third count on October cattle which is over 98.

Pearson: All right, so it could maybe be into a buck?

Martin: I think so.

Pearson: Sue Martin, thank you so much. That's going to wrap up this edition of Market to Market. If you'd like more information from Sue, and she's got it, where these markets just may be headed visit the Market Plus page at our Web site. You'll also find expanded market analysis, audio podcasts and streaming video of our program and it's all free at the Market to Market Web site. Of course, join us again next week when we'll ride along with the sesquicentennial celebration of the Pony Express. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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