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Market Analysis: Jul 16, 2010: John Roach

posted on July 16, 2010

Wheat prices rallied again this week on weather concerns from Kazakhstan to Canada. ...

For the week, September wheat advanced nearly 50 cents while the nearby corn contract settled Friday with a weekly gain of 11 cents.

Soybeans also trended higher this week on the threat of decreased U.S. production due to soggy conditions in the Midwest. The September contract gained more than 30 cents. The nearby meal contract advanced $12 per ton.

In the softs, cotton trended lower again this week with the December contract posting a loss of just over $1.

In the dairy market, August Class III Milk futures rose 38 cents, and the deferred contract gained 13 cents.

In livestock, August cattle gained more than $2. Nearby feeders were off 10 cents. But the August lean hog contract was up $1.68.

In the financial markets, the Euro gained 297 basis points against the dollar. Crude oil fell nearly 10 cents per barrel. Comex Gold lost $21.60 per ounce. And the Goldman Sachs Commodity Index gained more than 3 points to close at 502-even.

Market Analysis: Jul 16, 2010: 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 with us.

Roach: Thanks, Mark.

Pearson: Well, certainly some fireworks in the wheat pit and certainly some nearby concern, some rallies in corn and soybeans over the last couple of weeks. Let's talk about some of the broader issues that are happening out there in the world and the global economy. It seems to be improving some. It seems like things have calmed down some in Europe. The euro certainly strengthened against the dollar this week. Are we seeing that elsewhere? Is this starting to be more of a trend where maybe things are starting to get a little bit better globally?

Roach: Well, the euro strengthened as the European countries, the southern European countries went into the debt market and they were able to secure debt and cover debt and so some of the fear and worry that had been surrounding the European situation abated a bit and the euro, which had been pressed hard -- if you remember the last time I was on the show a few weeks ago I said at that time it looks like we've had all the bad news really thrust into the marketplace, the markets discounted it so maybe we've had about enough of that and so the euro has bounced a little bit.

Roach: But, no, I don't think that the economic situation around the world is looking more positive. I think actually following the G20 meetings that occurred here a couple of weeks ago that we had most countries saying that they were going to reduce the amount of dollars that they are spending and increase taxes. And I think that tat's really the move that is afoot around the world and those countries that are already in that process of getting their fiscal house moving more toward the right track I think we kind of, we saw the world give a breath of relief a little bit.

Roach: But we're still a long ways out from having things turn around. In fact, I think what we're really seeing here is things actually getting a little more worrisome as we see the outlook for the next six months markedly slower. You can see it in interest rates where we saw this week the 30 year mortgages went to new lows, we saw three-year government treasuries at the lowest levels in a long time, at the lowest interest levels in a long time. So, we really have people about as cautious out there as we have been with concern that it's going to take longer to get these economies turned around.

Pearson: Well, that's certainly true in the old growth economies. What about the new growth economies, China, Vietnam, Brazil and those areas?

Roach: Well, China had good news out this week where their last quarterly growth rate they were a little better than anticipated running at about a 9.5% rate for the year which was better annualized basis than people thought they were going to be. But in general we have economies trying to slow down just a little bit around the world.

Pearson: All right. Let's talk about the wheat market which didn't slow down at all this week. Weather concerns around the world. The U.S. looks pretty good. It wasn't that long ago we had plentiful supplies of wheat, John. Is it just the outlook that we do have some problems, some dry spots around the world?

Roach: Change in weather. The weather situation in northern Europe and the former Soviet Union countries has turned hot and dry, it has stayed hot and dry I guess maybe that's the right way to say it and the thing to remember is that they have become big exporters. The 12 countries that make up the former Soviet Union will export coarse grains and wheat about 44 million tons this year, that is the July estimate from the USDA. The U.S. will export about 80 million tons. So they're a little over half of what our export quantity is and the talk is that maybe their crop is going to be reduced by enough that they won't be able to get close to those export figures. Some people are talking about maybe they'll be five to ten million tons short of that export quantity. So, that is what spurred the market.

Roach: The wheat market has been a favorite short of the speculative traders, the shorts got caught with the weather change and the market really ballooned up. I think it's really interesting across all the markets to see on the commitment of traders report today Tuesday to Tuesday, that's through Tuesday of this week, on the ownership, the net ownership of corn, beans, wheat, soybean meal and soybean oil the speculative trade increased their ownership by a little over 200,000 contracts. That is a big increase in open interest. It was just a few weeks ago they were net short about 4,000 contracts and now they have gone all the way up to their long about 350,000 contracts. This is the second time they have gone from short to major longs and then they went back short again and now they're major long.

Roach: So, what is fueling the fire here, and this is the thing that our farm listeners should understand, this is speculative demand that is coming into the market. On the other side, on those same commodities the commercials went net short an additional two hundred and some thousand contracts, a little over 200,000 contracts. So, farmers selling to the commercials brought their hedges to the futures being short and speculative buyers bought everything the commercials sold. So, we're shifting away from farmers owning inventory to speculative people owning inventory and remember the speculative buyers will not consume, they will turn around and re-sell the inventory when the price trends turn back lower.

Pearson: So you want to make sales?

Roach: We want to make sales. We think wheat particularly we want to step up and make sales into this strength. We don't want to sell everything out of the field but we want to step up and have significant sales and we're doing the same thing over in corn and soybeans.

Pearson: All right. Let's talk about that, your corn strategy, what's ahead there?

Roach: Corn strategy is we're getting a rally here because of weather concerns. Really the corn has been hurt -- or the demand for corn has been slowed down again by the former Soviet Union countries where they've sold wheat and coarse grains in competition to us. And so now as they are having some crop problems that has given a boost to our corn market. We're concerned about the weather forecast. We had hot weather this week in parts of the Midwest, most of the Midwest talk of 100 degree temperatures coming perhaps next week with a dome that may last for the next ten days or so shutting out the rain -- rains are due over this weekend but then after that shutting out.

Roach: So, the market is anticipating this heat and these weather concerns and is boosting up in advance. So, we're happy to get the rally. We want to sell inventory into this rally. We think that the corn crop is still in pretty good shape and has got plenty of moisture underneath of it in most areas and so we think that it's a good opportunity to be stepping up sales for the corn that is in the field. We're also stretching out and making sales in 2011 and 2012. We think in this deflationary kind of environment when we can get profit levels locked in out at those distance years at the kind of levels that we're seeing today we want to take advantage of it.

Pearson: Same thing in soybeans, we got a rally there.

Roach: Exactly the same thing in soybeans. We haven't had as many days of it but we're moving right into the selling of soybeans. Again, all inventories and looking out for the next two years.

Pearson: All right. Let's talk livestock markets. The fed cattle market, we've seen a little bit of improvement there. You mentioned this deflationary issue, you mentioned your concern about where we're going economically. In a broad sense what could that do with this cattle market?

Roach: Well, it's worrisome. The cattle market has had a fairly strong year when you look at where we've been and where we are today. The market was surprising rallying this week. People that I've talked to in the trade really just didn't expect that and yet we've had a decent rally. But the concern is that at the retail level, by retail level I'm really talking about at the restaurant level whether it's a family style restaurant or the high priced restaurants, they have discounted their beef featurings in order to try to bring people in. From what we understand that's going to be hard to continue through the second half of the year, that it's really pulled their profit margins down and we have increased supplies coming later. So, we think cattle need to be hedged here for cattle producers at current price levels and expect pressure on the market as we increase supplies into the third and fourth quarter.

Pearson: The hog market, similar story, we've had a nice rally and then we see a little bit of pressure. Again, up a little bit this week.

Roach: We're, again, we're selling into the hog market. In a general longer term view we really don't want to be aggressive hedgers because we think that industry is very slow to expand after the financial debacle they had over the prior couple of years. But we think that the summertime peaks will give away to some lower price levels into the fall and so we're a seller of that market or anticipate that market to be under some pressure as we move into the fall.

Pearson: Obviously for those on the end user side as far as feed usage not necessarily in a big hurry to cover feed needs at this point.

Roach: We've put a bulletin out to all of our customers the day of the USDA stocks in all positions report, cover their feed needs through August. So, hopefully people were able to take advantage and get some feed needs covered. Now we're at a wait and see period of time. We think that the market will peak out here at the worst of the weather worry and then cycle its way back down. We think the quality of the crop coming on, the quality of the corn is going to be considerably better. We think this old crop inventory with its light test weight is going to become a bit of an albatross as people wait for the higher quality corn coming on stream.

Pearson: All right. John roach, as usual, some great insights. We appreciate that very much. But that will wrap up this edition of Market to Market. Now if you'd like more information from John on where these markets just may be headed visit the Market Plus page at our Web site. You'll find expanded market analysis, audio podcasts, streaming video 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 impact of global weather patterns on commodity prices. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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