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Market Analysis: Oct 10, 2008: Elaine Kub, Market Analyst

posted on October 10, 2008


The Agriculture Department released its latest crop production estimates Friday, increasing its monthly forecast for this year's wheat and corn harvests and pressuring prices.

For the week, December wheat fell more than 75 cents and the nearby corn contract moved nearly 50 cents lower.

USDA's upward revision of soybean production fueled the downward spiral in that sector as well. For the week, the November contract fell 82 cents, while the nearby meal contract declined nearly $14 per ton.

In the softs, despite weaker production numbers due to hurricanes Gustav and Ike, cotton trended sharply lower with the December contract posting a loss of $13.70.

In livestock, October cattle lost more than $6.00. Nearby feeders followed suit moving more than $5.00 lower and the October lean hog contract declined 42 cents.

In other markets of interest, the Euro lost 342 basis points against the dollar. Crude oil lost more than $16.00. Comex Gold gained $25.80 per ounce. And the Goldman Sachs Commodity Index lost 92 points to close at 491-even.

Market Analysis: Oct 10, 2008: Elaine Kub, Market Analyst Pearson: Here now to lend us her insight on these and other trends one of our regular market analysts, Elaine Kub. Elaine, obviously a wild week in the capital markets, a wild week in the commodity markets. How much of what was happening over in the capital markets fund impacted what we saw this week in commodity prices?

Kub: Well, speaking of Friday alone I would say everything. You mentioned these bearish reports and the interesting hypothetical I thought of today is if we didn't have this outside selling and these reports came in and they just brought the attention into the fundamentals would the markets have actually gone up even though the reports were bearish. It's a mute point because there was all of this selling and that is entirely the story of what is bringing these corn and soybean and wheat markets and all of these ag markets down right now is just this outflow of fund money. And I can speak to a specific example of that. We saw corn and soybeans limit down on Friday, lock limit down with thousands and thousands of trades that were blocked by those limits whereas wheat came down because obviously the commodity sector was bearish but the funds had already moved out of wheat and so it was not locked limit down, it wasn't as heavy of a selling in there simply because they're already out of it.

Pearson: So, these are people who were in the capital markets and the commodity markets both, hedge funds, whatever and they've got to come up with cash?

Kub: Exactly, they're facing very steep losses and even if they aren't concerned about covering their losses in some other market this is just a very risky environment and there is no reason for them to be taking on this extra risk in their minds and they're just getting out of anything that they see this volatility in.

Pearson: You mentioned the wheat market, let's start there. Wheat prices sharply lower this week. And point of fact we had a great harvest in the U.S. this year, numbers are certainly up. Worldwide wheat demand has been extremely strong. Take us through at this point. Are we at lows here? Should we be sitting tight on wheat sales looking for better prices towards the end of the year and the first part of 2009?

Kub: If you had to get some of these sold before the end of the year I wouldn't necessarily expect the prices to come up before then. We're playing a waiting game right now. It's not so much a matter of where on these charts any of these grains are going to stop or what technical support or fundamental level, that really doesn't matter to the selling pressure and wheat is really following corn so even if wheat already has all the fund money out of it, it will still continue to move lower and the trend indicates that especially on Friday, it moved through any support that it was experiencing in previous weeks and this trend has just continued lower and lower and lower. So, it's a matter of when -- when do we stop all the fund selling in the other markets? I would say that these are probably going to move much lower before they move higher before they turn around before we get into some battle for acres again. So, with wheat, no, this is not the best selling opportunity of let's say the next six months but if you need to get this sold in the next two or three months perhaps.

Pearson: As we look at the other factor that emerged this week strongly was, again, the strength of the dollar as foreign currency has moved into the U.S. our dollar has strengthened. Wheat is a big dependent on exports. There's going to be some negative impact there, is there not?

Kub: Right, absolutely and you see that on the day-to-day, the speculation as the dollar moves up, wheat moves higher. But as far as actual export demand for U.S. wheat goes it's not an elastic market. The countries and the consumers that need to have wheat they will continue to buy wheat and we saw that early in 2008 that the demand there is no place for them to go. This year they will have Australia to turn to and Canada has had a very good crop and we saw that in the USDA report this morning so that was a little bearish for wheat also.

Pearson: So, wheat sales only as needed for the near term. We'll see some better opportunities when we start the acreage battle probably after the first of the year, certainly in the spring. So, let's talk about the corn market this week. Again, sharp selloff in corn. The USDA report was pretty bearish in and of itself and then you add in all the other factors of the capital markets, it really turned into a rough week and has a lot of producers scratching their heads going what's next, what do we do?

Kub: Well, the really notable number out of that report for corn was the yield number, they bumped it up to 154 bushels per acre which is really strange because they had just bumped it down the month before and ordinarily you see throughout the summer and fall that they'll move in one direction, that they'll keep pumping things down or keep pumping things up and here it's just back and forth. But that's consistent with kind of what we're hearing out of the fields. You get some fields that have much better yields than expected and you get some fields that are much worse and all fields are very variable even from fence row to fence row. So, nobody really knows what the final number is going to be and we're two or three weeks behind depending on where you're talking about so it's really not a timeframe that the USDA can come out with a pretty confident yield number. So, that's why I say that this report on the face of it it's nominally bearish but there was the potential, before all this fund selling came in, there was the potential that this just brings traders in here and looking at the fundamentals. If these numbers had come out a month ago even this bearish would we have come off the last dollar and a half that we came off in the past two weeks? I don't think so. I don't think that we're as bearish as all of this fund selling has taken us.

Pearson: Sit tight on corn sales. This is typically not the seasonal time of year you want to sell corn anyway.

Kub: Right, exactly and there has been a lot of storage built up in the country and we're seeing that with basis, absolutely as we're seeing this idea that everybody knows that the fundamentals might support something stronger in the future and we have tightening basis' happening not only in corn but in soybeans which is a big thing right now because they were going so weak coming into this.

Pearson: So, don't lose heart, probably get some opportunities at least if the cash markets continue to strengthen you think for a while?

Kub: Yeah, absolutely. I think that the owners of corn, the harvesters are going to keep putting this into storage.

Pearson: Let's talk about the impact this has on livestock producers but let's talk about soybeans next. Obviously a huge selloff there, again, a lot of producers are thinking wait a minute, I thought we were tight for soybeans. This USDA report said that we've got a lot of soybeans.

Kub: Well, yeah, it said that there's going to be a lot more soybeans around at the end of the 2008-2009 marketing year and we won't know that for the next year or so. But it was really kind of funny how they arrived at or how they made the math work out for that conclusion because they actually dropped soybean yield which, again, may or may not be appropriate, we don't know, it's too early to tell and the reports from the fields and the harvest are very variable at this point. But the way the USDA arrived at that is they increased acreage 2.2 million acres and I don't understand how in the past 30 days when we've had flooding in Illinois and Indiana where did we come up with this extra 2.2 million acres? I guess it's really just kind of an algebra problem at this point but long story short they're seeing maybe some less demand, less demand for biodiesel, that kind of thing and they're seeing more comfortable ending stocks at the end of this year.

Pearson: It's an algebra problem, one of my best classes in school, I got a D in it. Quickly, again, we talked about the strength of the dollar, we talked about what's happening with the soybean prices. I talked to a buddy of mine this afternoon who has been talking to folks down in South America who are saying they're looking at these prices dropping down there, they're in planting season down there. He thinks it's going to have a negative impact on just how many acres wind up planted in South America. They've got big currency problems, credit issues down there. Could that play into this thing?

Kub: Absolutely. But it plays in positively for soybeans at this point because they don't have to plant those necessarily until November or December so they have some time for this credit crunch, for this currency fluctuation to come back towards normal for them and it has really collapsed, that real has really collapsed for them over the past two weeks, two months. So, it really plays positively for soybeans because what they're trying to plant right now is corn and we have already seen that they're not planting corn, they can't get their hands on any fertilizer that is priced at any normal rate and so this just begs the question of what happens in the U.S. or in North America if we have these same input costs and credit problems as we come into spring.

Pearson: Real quick input costs, crude oil is down under $80. Shouldn't we start seeing input costs start to break, nitrogen?

Kub: We have actually. It really stabilized over the last couple of weeks and just over this last week it actually started to come down and that's appropriate, it's something you could almost see happening when you saw the dollar start to strengthen these foreign products and fertilizer is a foreign product and we're competing against all of our other growers across the world for this. So, as the dollar strengthens it actually does improve our input cost situation.

Pearson: Huge sell off in cotton this week, not the greatest crop, again, weakening worldwide of consumer demand particularly China is always a big player in cotton.

Kub: That's one of the problems and the other problem here, again, is that whether or not the fundamentals are this bearish, you could say the fundamentals are bearish but do they really support the kind of losses that have been seen in that market? Whether or not that's true we've definitely seen some short fillings, some speculative short filling in the cotton market and we've seen the commercials, even the bullish commercials back away because the risk is just so great in that choppy market. The volume overall has really kind of drawn down over the past month.

Pearson: Another area that everything is falling sharply this week, let's get it over with, fed cattle on the board down sharply. I'm hearing cash prices dropping sharply. Again, smallest cow herd since 1950 and we're looking at these kinds of returns right now. This can't be fundamental is it?

Kub: Not entirely. As you mentioned the futures are coming down much faster than the cash market is so that does funny things to basis. But the fact is that they can put that pressure on the cash market too particularly when you think of this word recession. If we come back with a correction and we see fundamentals come back we'd come back maybe $10, $15 more over the next several months but it doesn't do much in the near term. But even if that happens we'd never come back to the summer prices simply because if there is a recession particularly a worldwide recession people aren't going to be coming to protein. It's a relative luxury really as far as your diet goes.

Pearson: And the flip side of that for the livestock producer is we've got some cheaper input costs on feed, some lower DDGs, a change to lock some of those in. Would you do that at this point or could we see more pressure?

Kub: You could see more pressure. I would definitely have at least half of it locked in at this point, through early 2009, through mid 2009, in fact, simply because these are profitable prices if we look ahead to a correction for all of these other markets for the markets you'll be selling into. But yes, these are favorable prices for most industries that use corn or that use grain but there is volatility on both sides. And like I mentioned before I'm pretty sure we're going to go down before we head back up. But we'll wait and see how Monday reacts to that. We could see some support for corn right at that four dollar level. We haven't broke through the four dollar level on the futures market yet.

Pearson: Let's talk about the calf market. Cow calf producers have struggled here, higher costs, sharply higher, I read 25% higher for some cow calf operations. And if you look at this feeder market that has broken I've got people telling me that part of this goes back to the credit issue, people not being able to buy the number of calves that they want and so we've got some opportunity maybe to turn some profit on these calves.

Kub: Yeah, absolutely. And I think that's why we see that market, the cash market for that stay pretty resilient even as the futures market comes down. And we've seen the futures market for feeders be a little more resilient than the live market has so you can see that there is some support in there and there is obviously buying interest when corn is at these prices. So, that's something to look forward to as we go ahead.

Pearson: Let's talk about the hog market and what you see there. We had a quarterly hogs and pigs in September kind of confirm we haven't liquidated a lot. What is your outlook?

Kub: Similar situation, the packers haven't been passing along their favorable margins and now that's looking like a very smart thing to do, that they're not maybe going to get the best prices that they expected in the retail market either. We saw pork bellies very strong recently but these recession ideas that I talked about they'll hit any kind of fad, even the fad that we had for bacon that could come off too. So, there's a lot of stability but nothing back like what we saw earlier.

Pearson: So, not a lot of upbeat there on the pork side for right now. Elaine Kub, thank you so much. That will wrap up this edition of Market to Market. But before we go we want to alert you to a new addition to our Web site. We invite you to share your perspective on rural issues at our new Market to Market blog. With less than one month to go until the presidential election viewers are encouraged to participate in a dialogue on renewable energy. Of course, you can also hear more from Elaine on where these markets just may be headed by clicking on the Market Plus page, view streaming video of our program and download audio podcasts of our Market Analysis and Market Plus segments all free at our Web site. And be sure to join us again next week when we'll examine efforts to minimize the impact of climate change. Until then, thanks for watching, I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat