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Market Analysis: Nov 14, 2008: John Roach, Senior Market Analyst

posted on November 14, 2008

For the most part, USDA's Production and Supply and Demand estimates were interpreted as being neutral. Nevertheless, grain prices trended higher.

For the week, December wheat gained more than 33 cents while the nearby corn contract moved nearly a nickel higher.

Despite USDA's projection of a smaller soybean harvest, prices were under pressure. For the week, the November contract lost nearly 35 cents, while the nearby meal contract was down $6.20 per ton.

In the softs, cotton's long downward spiral continued again this week, as the December contract posted a loss of more than $1.00.

In livestock, December cattle lost $2.75. Nearby feeders moved $2.25 lower, and the December lean hog contract gained 17 cents.

In other markets of interest, the Euro gained 49 basis points against the dollar. Crude oil was down $4.00 per barrel. Comex Gold gained more than $8 per ounce. And the Goldman Sachs Commodity Index lost more than 20 points to close at 397.50.

Market Analysis: Nov 14, 2008: John Roach, Senior Market Analyst 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: Again, another week of turbulent equity markets, seized up credit market, concerns globally, talking about stimulus plans in China. As you interpret the farm commodity situation we're dependent on all these areas, John. What do you see from your desk at this stage in agricultural production with the harvest winding up eventually here in the U.S.? What do you see ahead for commodities?

Roach: The market right now is dependent upon all these outside markets. Our grains markets, which tended to trend opposite the equity markets, in fact, there was a lot of research done that said it was a good investment, that it would offset equities in varying situation, they are actually trending very closely together now. So, as the Dow Jones goes most mornings so goes our grain market. We've really gotten away from the fundamentals of supply and demand and instead gotten over to the side of greed and fear and uncertainty and it's causing tremendous volatility and until we see some stability we can probably expect more volatility and a continuation of what we've been seeing.

Pearson: The world has again gone back to the dollar it would appear. The dollar strengthening, that has to be a negative down the road for farm commodities doesn't it?

Roach: I think it's a negative right now. We expect that particularly for meat exports that the strengthening of the dollar will slow the meat exports which had really just started to take off a little bit. So, clearly a stronger dollar will slow down exports all else being the same.

Pearson: USDA gave us their numbers for wheat, corn and beans. There seems to be a lot of it, it seems to be a fairly fluid situation down in South America. What is your take on that?

Roach: I just came back from Brazil a week ago today and spent time talking with a couple of different analytical firms and a university with a correspondent and this year's crop, there seems to be enough money to get this year's crop planted. Producers in Madagraso and some of the areas furthest away from the coast two years ago had a tough year and so they have some backlog debts. This year they harvested their crops, I'm going back now six months ago, they harvested their crops and they went out and bought inputs to go in for the new crop rather than pay off some of their bank debt. So, this year they have the inputs for the most part. There were maybe ten percent of the farmers there that were still struggling to find input financing but the trade is no longer financing Brazilian production in the way it used to. They have cut considerably the percentage of the inputs that they'll finance which is forcing the producer there to either go into their own equity or else to go borrow. And in those areas where they haven't been paying back the banks it's going to be difficult to borrow next year. So, the real concern in South America is not so much this year, it's more of a concern next year. Either we have to see prices come up or currency relations change or additional government financing, something is going to have to come along and the people that I talked to there were predicting already the 2009 soybean crop to be down 7.5%, the planted acres to be down 7.5% from this year one year from now. They're right now making decisions on their winter corn crop, the Suprema crop that gets planted in March, February and March into April and those decisions right now are going to be negative because there are losses if they were to plant corn with the current relationship. So, they expect that their corn crop will be reduced, their winter corn crop. So, the impact of the economic slowdown around the world and the tightening of credit and the changing of business relationships and the lack of financing from some of the trade groups is going to impact the Southern Hemisphere. We think it will also impact the Northern Hemisphere as we go back into some of the areas that have geared up their production in the last year, costs are outrunning revenues in a lot of areas, any place where you have inefficient production and so we think that the news today which is relatively tight supplies but a worry that demand is maybe not going to be as robust as forecast we think that will be replaced next spring with concerns about further production losses around the world because of the high cost structure, the lack of credit and the poor profitability.

Pearson: Let's move over to what's happened a little bit here in the last couple of weeks here in this country and, of course, also impacted globally and that is the wheat market. A little bit of an up move this week in wheat, good crops worldwide last year. What is your outlook for producers right now maybe who are holding onto some of that '08 wheat?

Roach: Well, we think the wheat market was the first one to turn up back a couple of years ago, it was the first one to turn down this summer and we think it's the first one to turn back up again. We had a blip up in the bean market but it ran up and ran right into a sell signal and now we have wheat starting to get some momentum going and it's doing that in the face of a wet week. We've had a lot of rain through the wheat country this week, the crop is in very good shape and yet prices went higher. So, we think that's a positive signal that it may be our first grain to come up out of the mud here so to speak that we've been dealing with the last couple three months.

Pearson: Not in a hurry to make sales on wheat?

Roach: Not in a hurry to make sales but want to be ready to make sales. We pay very close attention to the oscillators and we get our slow stochastic up to generate a sell signal we'll want to be selling some wheat, not aggressively but we'll want to take advantage of every sell signal. There's just too much uncertainty in the world to not batten down the hatches when you get an opportunity to make some sales.

Pearson: What about on the corn, John?

Roach: Same situation on corn. Corn is probably the furthest one away from giving us a sell signal. It's still in the midst of harvest, we're still seeing that movement and that pressure but it's becoming difficult. I talked with a large buyer this afternoon and in order to buy a package of corn they had to pay up in order to get some corn bought. It's just moving into very tight hands. So, we think as the demand comes into the corn market it will spur both the basis and the futures market.

Pearson: So, again, hold off on sales. This is typically not a time when you recommend making sales anyway historically.

Roach: In November we really try to sell as little as possible. The two lowest priced months of the year are October and November. So, this isn't a good time to be making big sales. But when you get opportunities and you need to generate some cash flow you need to take advantage of sell signals.

Pearson: Let's talk about soybeans. You mentioned the situation in South America. So, you look for a fairly stable supply down there for this coming harvest year but you're concerned about next year. How does that add up for a soybean producer?

Roach: Well, I think what ends up happening the biggest buyer of soybeans is China. And China is not backing away. They had a very good sized crop but they're not backing away at all. In fact, we think this week China turned on the spickets to be buying literally everything. Around the Olympics timeframe the Chinese stopped buying everything, they just quit, they just walked away from the market. It's something you can do in a centrally planned economy, if the government says stop you just stop and we saw that happen. We saw them come back into our market here a couple three weeks ago on beans, they've been back in as solid buyers. This week we're hearing that they're back into the different metals and the industrial metals and so forth. We think that what really happened here with this whole meltdown in commodities really played into the Chinese hands. This gave them an opportunity to restock inventories of literally everything at half price.

Pearson: So, they're taking advantage of that. Again, this is not the time of year when you usually recommend soybean sells although you had a sell signal here.

Roach: Well, we had a sell signal a week ago Monday and so for those people who needed to generate cash we recommended they generate cash and the market quickly broke almost $1, it's still not back to that level so those sales were still good sales. But they're only just sales enough to pay off some bills. The really good sales tend to come in March, April, May and June and we think that that will happen again this year. We think we still have to raise a big crop next year. We still have relatively tight supplies in the United States. If you look at the supply-demand graphs we don't have any surpluses in the United States, the surplus in wheat is growing but the surplus in beans is tight, the surplus in corn is tight so we think that next spring will be the time to be making sales on soybeans.

Pearson: Real quick the cotton market under some pressure, again, you were talking about China buying everything and they are that market for cotton.

Roach: They are that market and the market has not reacted at all yet. We continue to see that market under pressure. I wish I had something optimistic to say but when they come back in to buy we'll get a run up in the market and we'll have a better chance to sell than today.

Pearson: Let's shift gears and talk about livestock. You mentioned the strong dollar impacting livestock, meat exports here in the United States. That is a big issue because that became so important particularly for pork but also for beef as we saw beef again open up on the world trade market. But as you look at this fed cattle market, you look at this shrinking cow inventory that we've had what is your outlook now for fed cattle? Is this global economy, are we going to see a balance up eventually in this fed cattle market?

Roach: I think we will. I think we have to look out and realize that we have been borrowing ahead and borrowing ahead and putting lighter weight cattle on feed and our herd continues to shrink. So, I think that the statistics are in general improving. But the most interesting thing is we've had some of the best opportunities in the last couple of week to be able to buy feeder cattle, buy grain and sell fat cattle. There have been some of the best margins of profits. We look at something called the cattle crush where we use feeder cattle contract, corn contracts and fat cattle contracts in appropriate percentages and we've seen in the last week records set on the profitability in the cattle crush. So, that says that out in the country that there are opportunities to buy cattle, put them on feed and make some money. The one thing I would caution everybody this is not a time to be playing with a lot of guts I don't believe in any of these markets. I think you have to play very conservative ball. And so my way of thinking is you buy the livestock, you've got to go ahead and be willing to put some kind of protection underneath of them either as a hedge or puts underneath to take the margin of profit and keep all your money together. There will be better times out ahead, we just don't know how long the bad times are going to last right now.

Pearson: John, as we look at the calf market you mentioned the feeder cattle market being under this pressure and you mentioned the shrinking cow herd. Will we see a bounce there? Will that be maybe where we'll start to see it particularly as these corn prices have softened up so much?

Roach: Well, they're working, the corn market is now working into the cattle feedlot and what tends to happen is the feeder cattle come bouncing right back up until they take away those guaranteed kind of profits. So, we think that's probably what will happen as you're going to have corn come up a little bit you're going to have your feeder cattle come up and you'll have fat cattle market maybe stay steady. Maybe you can get a little bit of a rise in the cattle market but we think that the margins will start to tighten, they don't stay profitable very long. But from the standpoint of the cow herd there's not much incentive for anybody to be expanding the cow herd at this point in time. We probably will still see some for the liquidation so that's what is going to make the cattle business better longer term.

Pearson: Let's talk about the hog market, again, very export sensitive anymore and still some pretty big numbers out there.

Roach: And I should have mentioned on the cattle we've had very good exports. The last month's worth of exports in beef and pork have been very, very good. But in the pork industry we don't see much positive to be talking about there. We do think that prices can firm as we move on into the spring and summer, we think there will be some opportunities to be making some forward sales. If you remember when I was on here last July we were selling forward, we were hedging up hogs and we think that now probably the best thing for a pork producer right now is to take a look at their financing situation. It's been so tough in the last year that people have got some debt out there that they're using working capital to actually finance what should be long-term debt. So, my best suggestion it's a good time to take a look at your long-term debt structure and to make sure that you can take some of those working capital debts and stretch them out on longer terms.

Pearson: Excellent, as usual some excellent insights. John Roach, thank you so much. That will wrap up this edition of Market to Market. But 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 where you'll find streaming video of our program. You can also download audio podcasts of our Market Analysis and Market Plus segments absolutely free right there at our Web site. Of course, be sure to join us again next week when we'll examine the comeback of the American Bison. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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