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Market Analysis: Feb 27, 2009: Walt Hackney and Don Roose Analyze Late-Winter Commodity Markets

posted on February 27, 2009

Grain markets moved in a sideways fashion this week as the trade factors upcoming acreage estimates from USDA.

For the week, March wheat lost more than 8 cents, while the nearby corn contract moved fractionally higher.

Soybeans turned in a winning week as the March contract gained 12 cents, and the nearby meal contract was up $5.80.

In the softs, cotton nearly matched last week's losses as the March contract moved 97 cents lower.

In livestock, February cattle gained $1.85. Nearby feeders were up more than $4. And the February lean hog contract gained nearly $3.

In other markets of interest, the Euro declined 140 basis points against the dollar. Crude oil gained nearly $5 per barrel. Comex Gold wiped out all of last week's rally with a loss of nearly $60 per ounce. And the Goldman Sachs Commodity Index gained nearly 20 points to close at 335.70.


Market Analysis: Feb 27, 2009: Walt Hackney and Don Roose Analyze Late-Winter Commodity Markets

Pearson: Here now to lend us their insights on these and other trends is one of our regular market analysts, Walt Hackney and the newcomer to show, Don Roose. Gentlemen, welcome to the program, Don and Walt, good to have you back. We'll talk about this livestock situation here in a moment and I'm hoping you've got some good news to report. We'll get started with the grains with Don. Don, let's talk a little bit about what happened as far as the commodity markets are concerned this week. Just in a broad sense oil prices came up a little bit, you got a little bit of a rally going in the corn and bean pits and then it kind of faded. Just broadly as you look at the commodity world what did you see this week?

Roose: Well, it was a pretty flat market overall. I think we had a big focus on the macro markets, particularly the financial community and every time we tried to move to the up side we were reminded again of the downturn in the financial community and so that really put the pressure on it, that really limited our up side and I think really that in the end was our telling tale.

Pearson: When are we going to move out of this financial thing? What is your outlook on this?

Roose: Well, I think what it's really done is it has put everything in real perspective. Last year we were in this market that we were trying to buy acres, we were just trying to increase demand and it was kind of that go, go era and I think where we're at right now is we're very much in a slow down in the world trade around the world and I think what that really means is a contraction in the trade, a contraction in prices also.

Pearson: Let's get started with the wheat market first, Don. If you look at the Palmer drought index it looks like a big chunk of Walt's home country down there in the panhandle of Oklahoma and Texas down there looks awful dry.

Roose: Well, that is a big concern and I always tell people the great equalizer is always weather. We look at all the numbers and the economy and everything else but in the end we can have a negative supply situation, a negative market and the weather will be key. So, we're starting to watch the forecasts and the latest forecasts, the six to ten and eleven to fourteen are both dry and it's going to be something that's going to be on the radar sooner than later.

Pearson: Absolutely. At this stage of the game what are you telling producers on making wheat sales?

Roose: Well, I think at the present time you have to say that we're down at the bottom end of the range here short-term. You have to make sure that you're very aware of the price that we're at. We have deflated a lot of the price and we can build some risk premium back in. So, we're saying on hold for right now and wait and see how things unfold.

Pearson: I was out in Denver and San Antonio this last week and there's a lot of long faces right now with this wheat market. You think we're going to see some potential, some chances to make some better sales?

Roose: Yeah, I think so. I think because one thing it's been a big acre switch around the world and we've had a contraction in the U.S., we've had a contraction around the world and it doesn't take a lot of weather problems to spark us back up again and get some movement to the up side. So, yeah, I think that we've got better opportunities ahead so I would be on hold and let's see how the weather unfolds down the road.

Pearson: Do you have any price targets in mind for wheat?

Roose: Well, I think when you look at new crop wheat July I think when you get up around that $6.00 range you have to be very careful again because I think it's going to be very hard to make significant moves to the up side. The last two years price moves are probably behind us.

Pearson: Let's get that rock out of our backpack. You're absolutely right. Let's talk about the corn market, same thing, this is not 2008.

Roose: No, it isn't. Last year what we really had to do is we had to buy corn acres and we had new demand coming at us and this year if you really look at it what we really can probably get by with is contraction of acres so what that means is really that price rallies are going to be very limited. Again it's going to come down to the weather for any substantial moves to the up side so like we're telling people I think that it's probably two steps down and one up.

Pearson: Been a lot of bad news in this market so far. We've seen corn back around the $3.50 mark and cash prices under that although the cash market has been pretty decent. Producers typically we get that chance to sell in March, April, May and June when everybody is on the tractor seat. Is that going to be our opportunity to sell this year?

Roose: Well, I think we have to be very careful because the analog year that we're actually looking at is 1997 and that comes after a year of 1996 when we had record prices and what we did from '96 to '97 we went from over $5 corn to June $2.40. I'm not saying we're going to $2.40 but I'm just saying the producers are sitting tight right now but we are very leery that if we don't get weather problems that this is a market that wants to erode.

Pearson: Keep that in mind. Let's talk about the bean market. We had that nice rally with concern of what was going on down in South America as far as the dry weather is concerned and a lot of that concerned has abated. What's next for soybeans?

Roose: Well, I think when you look at the soybean market it's not going to get too far out of line with the corn market. We're going to watch the weather and we're going to watch the acres but then again I think we have to remember in soybeans we really have a six month window and we've got South America that is right on top of harvest, in fact, we're about 15% done on harvest in Brazil so probably the export pace could dramatically take a decline and I think the soybean market is one that can buy acres probably easier from an input standpoint this year than last year so I think the same thing on soybeans. We're really not that optimistic. Rallies, weather rallies are probably opportunities.

Pearson: Target prices, anything particular in mind that you want to make sales? Talk about new crop.

Roose: Well, I think in the new crop when you approach the $9.00 to $10.00 range certainly I think that's where your antenna comes up very aggressively.

Pearson: So, get aggressive out there in the new crop months. Remember this is not 2008. Your analog year '96-'97, boy after the '96 year that was a wild one and people did kind of think when is this going to happen again.

Roose: Well, that's the last time that we had record prices and we find a lot of times in the commodity business we repeat the same type of program so our analog year is that unfortunately. But weather can always change it.

Pearson: That's right, that is the great equalizer and certainly we've got some trouble spots out there. Well, let's go over and talk to the guy who should be smiling from ear to ear because he's a big livestock guy and livestock producers complaining about these high feed prices and Don's telling us that prices are cheap and maybe getting a little cheaper. What's happened? How about the fed cattle market first?

Hackney: Well, you know, anyone can smile regardless of the condition they're in and maybe that's sort of my problem. Mark, we're losing $200 to $300 a head on these fat cattle coming out of the feedlots now and that's from Illinois to West Texas. I was interested in your point about the dry area in the southwest. Their figures in the last cattle on feed report showed an increase in placements. What it didn't discuss very thoroughly was so many of those wheat pasture calves came off prematurely in January rather than March because of the drought down there. Those people are in the feedlots with light cattle that are going to be marketed on down more toward the third and fourth quarter of this year rather than 120 to 150 days from the 10th of March. So, all of that is relative to the condition created by that drought. Grass in that country is going to be in a real challenge this year. There will not be the amount of grass cattle coming out of that country due to the drought and the spring grass just simply isn't going to be there. The northwest, the near west, Wyoming and so forth are going to be in pretty good shape and they're going to have their usual amount of contract cattle coming out of the grass in July and August. But the numbers are going to be limited and that brings up the cow-calf issue of this next 2009 fall calf delivery out of the western states. That call that came in in 2008 and was two to three percent fewer cows in the beef herd is going to have a dramatic effect on availability of numbers in the fourth quarter of this year. So, the cattlemen sitting out here are in real limbo right now not knowing whether corn, as Don has said, is going to take a drop in the summer, whether that's going to make it prudent to put more cattle on feed rather than go to the cash route like some of them did this last year, it's going to make a big difference. One thing it isn't going to change is availability of these feeder cattle. We're going to be somewhat limited, in fact, conditions are going to dictate a real limitation of available cattle going into this spring, summer and fall.

Pearson: Walt, let me as you a question I've heard brought up in a few sale barns around the Midwest that I've been to -- concerns about that feeder. We talked about the equity markets and the financial issues and the government's investment in banks and so forth. Availability of capital, is it out there for these feeders? Are they able to get their financing?

Hackney: So far that has not been the overriding issue in making the decision to buy feeder cattle or not buy the feeder cattle. You recall in 2008 there were cattle feeders that were given the opportunity with their own insight to the markets of watching the MERC and when that Dec. went up there and hit over $1.10 a pound and they work out $1 to $2 back basis with the packer a lot of those cattle got delivered in on the basis contract, same thing in January off a February contract. Now, it wasn't $1.07 like a lot of our clients enjoyed but it was in the upper 90s and a lot of those cattle, sort of severity of the losses came from those that were either too bullish to hedge or forward contract on a basis or simply felt that the market was going to get better than the MERC was reflecting and sat on their cattle and then when that happened is when we took the nose dive from something in the $90 bracket down to something in the extreme high 70s with in the last ten days. So, we're very thankful that we've been able this week -- that's where this model may come from -- this week we're fortunate that our inventory of live cattle in the feedlots is regressing, we're very fortunate that the cash market has finally come back and showed decent evidence over 80 cents a pound. They're still losing money but just simply not as much money as they were when the packer was bidding at $78 the front end of this week.

Pearson: Real quick Walter, your price target for fed cattle second half of the year? Will we get back into the low 90s, mid 90s?

Hackney: I would agree with that a hundred percent -- to say where in the 90s but 90 or a little better as we get toward the third quarter and beyond that into the fourth quarter.

Pearson: Fourth quarter is what you're looking for. Tell me about the hog market right now.

Hackney: We've got too much weight if you can imagine in the hog industry regardless of the money that hog producers have lost. The farrow to finish operations have lost lots of money and you would think that we'd have an automatic ten percent collate in the sow herd in the country and it's not happening. It looks like we are going to drop our federal inspected slaughter within the next month under or near only 400,000 head of hogs a day instead of the 425,000 and 430,000 we've been seeing. In other words, there's a good chance we'll drop under two million hogs a week. As a result of that if they lighten these hogs up to I'd say five pounds then we've got an opportunity to put the hog industry in the third and fourth quarter back to at least a break even to a black level.

Pearson: So, again, probably mid summer would be your best opportunity to start seeing this hog market ... ?

Hackney: Yeah, I think that would be a fair estimate is sometime around mid summer.

Pearson: With this economy and this turn down I want to get back to beef and pork -- obviously when we have a recession the number one increase in sales last year for appliances was a deep freeze. So, with that in mind looking forward to the fed cattle market prices are relatively cheap right now certainly as far as the cattle feeder is concerned and as far as the consumer is concerned and that typically doesn't last too long in a better economy. So, we're going to have to have a little bit better economy to start pulling out those big center cuts that we like to have.

Hackney: Well, you nailed it right there. You're very aware Monday of this week for the first time on record select beef was worth more than choice beef the simple point being the shopper, the budget minded consumer is picking up the economy cuts of beef and in lieu of the prime ones and the luxury cuts and that may continue for a while until there's some evidence of a floor in this economy on Wall Street.

Pearson: Walt Hackney, good comments. Don Roose, back to you, covering these feed needs what do you tell livestock producers?

Roose: Well, I think at the same time we're talking about some negative situations in the grain. You're also at levels that I think you have to make sure that you do solid risk management. I think that this whole market boils down to risk management. At these levels I think you have to use some different strategies to cover yourself. If you buy the cash grain down here I think you go to work and buy some insurance below it. But certainly I think these are opportunities to get covered and look for some kind of a spring rally but I think I would also have insurance behind a lot of stuff that I do.

Pearson: Absolutely. Good thoughts out there from both sides of the cattle industry. Hopefully some more opportunity for the hog industry if we don't go back to those heavier weights. Don, we'll see what happens. Some erosion in the commodity markets would be my things I will take out from this discussion here today. Walt, thank you so much. Don Roose, thank you for being with us. That will wrap up this edition of Market to Market. Now, before we go we want to let you know our program may be airing in different time slots on some stations in the weeks ahead due to public television fundraising efforts. If you value programs like Market to Market why not phone in a pledge to invest in the service that provides you with timely and accurate market analysis. Until next week, I'm Mark Pearson. Thanks so much for watching. Have a great week.

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