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Market Analysis: Jul 30, 2010: Don Roose

posted on July 30, 2010


Vast sections of Russia were under a state of emergency Friday as more than 10,000 firefighters battled wildfires during the country's hottest summer on record. At least 25 deaths were reported in the past two days alone. And with rumors being heard, that Russia -- the world's 3rd largest wheat EXPORTER -- could become a net IMPORTER in the months ahead, the only things higher than the mercury in Moscow are wheat futures prices.

For the week, September wheat gained a whopping 65 cents, while the nearby corn contract also moved more than 20 cents higher.

Concerns over tightening feed supplies also supported prices in the soybean pits, where the September contract rose more than 20 cents. The nearby meal contract, however, lost $2 per ton.

In the softs, cotton added to last week's rally in a big way as the December contract posted a gain of nearly $3.50.

In the dairy market, August Class III Milk futures lost 3 cents, and the deferred contract gained 20 cents.

In livestock, October cattle lost 12 cents. Nearby feeders were off nearly $1. And the October lean hog contract moved $2 higher.

In the financial markets, the Euro gained 134 basis points against the dollar. Crude oil declined by 3 cents per barrel. Comex Gold lost $6 per ounce. And the Goldman Sachs Commodity Index gained more than 7 points to close at 523.50.

Market Analysis: Jul 30, 2010: Don Roose Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Don Roose. Don, welcome back.

Roose: Welcome, mark.

Pearson: Well, there's a lot of stuff going on out there we can talk about, but the big thing is the wheat market, Don. It's driven this summer rally higher. Wheat futures, anyway, have gone a lot higher. Give us your take right now on what a wheat producer should be doing.

Roose: Well, you're exactly right. These markets not only this week but the last few weeks, the market has been all about the wheat market. It's been all about the dry drought problems that we've had in the former Soviet Union, and we've pushed the market up to an overbought condition. We've got the funds sitting at levels that they haven't been for about a year. So from a producer standpoint, these are opportunities that you certainly have to take a look at as we're hovering close to $7 a bushel.

Pearson: Obviously the futures have been extremely strong. Is the cash market following suit? Last week I talked about if I were in Fort Scott right now, I've still got a huge differential between my cash price and, of course, what's happening on the board.

Roose: Yeah. No, the basis levels, you know, at the present time is record large -- record wide levels. And from a producer's standpoint, you know, you have to realize the tools that you have available. So you don't have to sell the cash. You can try and work the basis and sell the futures and wait for the basis to come in. So you like the futures but you don't like the cash so you have to use the tools that are available to change that.

Pearson: Sort this thing out for me, Don. I mean it wasn't but a month ago we were looking at USDA supply/demand numbers, and we've got a huge excess of wheat in the world. And now low and behold, this massive wheat rally over in Russia which, you know, through the years the Black Sea crew has been kind of unstable production wise. What's really changed?

Roose: Well, what has changed is the fact that, you know, we had -- you know, the end users were very complacent because we had a 40-million-metric-ton cushion as far as wheat, about 120 million bushels -- billion bushels. And in just short order, we got into just a massive drought, hundred-year drought in the former Soviet Union, the Black Sea region, an area that exports about 25 percent of your wheat. So what we're doing right at the present time is we're moving up to price levels to where we're trying to push these exports out to other traditional exporters. And, you know, as we do in our markets, we've got a massive in flow of commodity money coming at the market at the present time.

Pearson: Is this a big -- is this another -- you mentioned the funds were extremely long again. They're taking -- a huge position. They were short the wheat market, were they not?

Roose: Well, just, you know, a couple months ago, you're exactly right. We were sitting with a record short position on wheat. And that's part of the dynamics of the rally is because we went from a record short to almost, you know, a huge long position like we haven't had. So, you know, that's the big dynamic and that's really what's driven the market. At the same time you've attracted fund money into the market, and so it's money chasing money. And it's really distorted some of the spreads that we see on the wheat corn, the wheat soybeans. So it's really displaced a lot of things.

Pearson: All right. With all that displacement going on -- and, like I say, producers need to take advantage of this market. We need to sell the board. We talked last week about truisms. I think I used them all up, but I think one of them was short crops have long tails. Who knows when this weather market is going to end and when things are going to be rebalanced. But those can be fairly sudden and somewhat brutal.

Roose: Oh, most definitely. I mean that's the market that we have today because we have massive fund exit -- or entries and exits. So from a producer's standpoint, what you have to do is realize what state of the market you're in and take advantage of that. I can tell you right at the present time, you're huge overbought on wheat. And if anything goes wrong at all, you know, the market can skid very fast because we still have -- we don't have a shortage of wheat. What we have is wheat that is displaced and we have other exporters that are going to have to pick up that problem.

Pearson: All right. It needs to move. Let's talk about it because it's obviously had a huge impact on corn and beans, which again -- we've talked about some of the rougher spots around the country weather wise, and yet still USDA remains fairly strong on what their outlook is for the condition of the corn crop in the U.S., corn prices have moved up higher. I talked to a corn grower today, and he said we're still going to see a huge corn crop here in the United States this year. Corn producers should take advantage of this market too?

Roose: Well, I think most definitely. You know, realistically, if the yield is what we think it is on soybeans -- potential on soybeans and what it looks like on corn right now, without the wheat rally, we would have not seen corn move up at this last leg up to the upside again. So it is another opportunity. Now, if wheat continues to move higher, which is a big if, the spreads are so wide at the present time that corn is not going to back off. It's going to continue to follow wheat. But if wheat breaks, corn breaks just as quick.

Pearson: All right. So take advantage of this market if you're in the corn growing business. Do you sell some 2011 in here? That's getting pretty lofty, Dec. of 2011.

Roose: Yeah, Dec. of 2011 is up around $4.30 a bushel. And it's the same thing; when you put a carry on the market of, let's just say next year 30, 35 cents, you're talking, you know, $4.60, $4.65 a bushel out into 2012, and those are good opportunities. If you get a yield, those are numbers that you can live with. But at the same time we always tell people when you're selling make sure you don't get caught and lock in your inputs at the same time. That way you have your profit covered.

Pearson: Good point. All right, soybeans have also benefitted from this move.

Roose: Oh, most definitely. The soybean market, you know, has pushed to the upside. Soybeans, you know, we're still fearful I think partly of what can happen with weather in August, just because we saw what happened with the wheat situation in six weeks. So the soybeans I think are cautious right at the present time. But again, if we get a decent yield, the carryout could again blow up over 400 million bushels.

Pearson: And that's going to put some pressure on prices. So again, soybean producers should take advantage of these ten plus dollar markets.

Roose: Yeah, we think so. The only thing that's different with the soybeans is we do continue to have just huge demand underneath the market that hasn't gone away.

Pearson: That's true. That continues to underpin support for beans. That's been -- the story of the year really has been this unremitting demand for soy protein. I want to talk about the cotton market, Don, because that's another weather factor that is impacting beans somewhat. The delta hot and dry. Cotton prices exploding the last couple of weeks.

Roose: Yeah, they have. You know, the cotton market has a little different structure than the wheat market that we talked about. And you have inversions in the cotton market, so you've got some strong demand underneath the market as the supplies are a little bit tighter at the same time. So it's a little bit -- it's a better structure. The cotton is going to have to continue to compete to soybeans, so the price is going to have to follow along with the soybeans. So that's a big plus for the cotton market.

Pearson: One of the many acreage battles out there. Let's shift gears and talk livestock. You were friendly to the cattle market late last fall. You did all the right stuff. You feel pretty good about that. Tell us what do you see for the fall of 2010?

Roose: Well, the cattle market is -- you know, it is one market that has, you know, just tight fundamentals in it for the foreseeable future. We had a cattle semiannual inventory report, and it was the lowest on record reporting since 1973, the first time we reported. So it's not going to be about the supply. It's going to be about the demand side. But it looks like the demand, you know, is fairly solid for the future, but that depends totally on the economy. We know that from the beef sector. So what you're really looking at the cattle short term, seasonally this isn't the time to be positive on cattle. Usually we start to falter into Labor Day. Probably going to do that again this year. We did have two outside days closing lower this week, but then fund buying brought us back at the close of the week.

Pearson: All right. So target price for fed cattle for this fall, what do you see?

Roose: Well, I think probably we're going to put some lows in, you know, in August again. We'll probably push back down. Then we probably should start to march higher into that $96, $97 range. And probably if you carry it on, if the supply looks like -- the supply stays where it is and the demand stays together, you probably have a chance to go over $100 next April on cattle.

Pearson: All right. Calf market real quick, Don, what do you see there?

Roose: Well, the calf market is going to be partly dependent on the feed inputs. And if corn, you know, comes back down, you're probably going to have a good demand underneath the calf market. But the supplies on calves are just tight, Mark, so, you know, there's going to be a continual fight by the feed lots. You know, the capacity, as we know, on the feed lots, about 20 percent overcapacity. So, you know, it's going to be a constant battle and support underneath the calf market.

Pearson: I know it's tight for cattle and we've knocked poultry numbers back, so meat is not as plentiful certainly as it once was, particularly with what's happened with hogs and the cutback we've seen there. What do you see going forward in this hog picture, Don?

Roose: Well, what we've done on the hog market is, you know, we've cut the supply from the production standpoint. In the pork and cold storage in the latest report, we were 71 percent of last year, so the supplies are very tight. August is going to be, you know, tight from a numbers standpoint. The one thing that concerns us a little bit about the hogs, in the last six weeks we've had -- the sow slaughter has really changed and shows there might be an expansion in the sow slaughter, 14 percent under a year ago. Of course, under a year ago we know there was a bigger slaughter numbers. But, you know, I think we have to be a little bit careful. We've got some big numbers out there to look at for next year.

Pearson: You mentioned the inputs. Obviously we've got this rally going on in the grain market. You think we've got a chance maybe to lock in some feed inputs obviously closer to harvest?

Roose: Well, I think so. You know, at the present time -- that's what makes the most sense at the present time is that we get back into a normal seasonal pattern. The wheat tries to top out some -- probably sooner rather than later if we get some rain in the former Soviet Union area. So we should get a seasonal break where you should have a chance to lock in some inputs that are a little bit better than these prices. I mean we're on a stiff rally. You know, it doesn't make sense to try and cover stuff here.

Pearson: All right, well said. Don Roose, as usual, great insights, we appreciate it. Thank you so much. That's going to wrap up this edition of Market to Market. Now, if you'd like more information from Don on where these markets may be headed why not visit the Market Plus page at our Web site. You'll find expanded market analysis, audio podcasts and streaming video of our program and it's all free at the Market to Market Web site. And, of course, join us again next week when we'll examine the government's annual estimates on agricultural land values. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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