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Market Analysis: Sep 26, 2008: Sue Martin, Market Analyst

posted on September 26, 2008

The markets are in a holding pattern waiting for action from Washington. Consequently grain prices moved in a sideways fashion this week.

For the week, December wheat gained 2 cents and the nearby corn contract moved fractionally higher.

Soybean prices bucked the sideways trend. For the week, the November contract gained more than 20 cents, while the nearby meal contract gained $2.50 per ton.

In the softs, cotton trended lower again this week, with the December contract losing more than $2.00

In livestock, October cattle lost 60 cents. Nearby feeders gained a nickel and the October lean hog contract moved $1.43 higher.

In other markets of interest, the Euro gained 180 basis points against the dollar. Crude oil gained more than $4.00. Comex Gold gained nearly $24.00 per ounce. And the Goldman Sachs Commodity Index gained 18-and-a-half points to close at 657.02

Market Analysis: Sep 26, 2008: Sue Martin, Market Analyst Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Sue Martin. Sue, good to have you with us.

Martin: Thank you, Mark.

Pearson: Well, so much of the focus has been on what's going on on Wall Street. Let's talk about whta's goig on out in rural America and agriculture and the commodity sector. We just mentioned the oil was up a little bit, there seems to have been almost the air has come out of a big chunk as it has come out of a lot of the financial markets, out of the cmomodity sector really since oil started retreating. What is ahead -- what are you seeing happening out there from just a general commodity outlook right now?

Martin: Well, I think first off we had to realize that commodities in general were going to lose some steam after the Olympics because the funds had been buying and investing on the premise of China needing all these various raw commodities and investing in that. So, that need was now gone. And in the meantime you have funds that buy only. How do you operate in a marketplace that is on one side of the equation? At some point that investment gets overpriced and there's another commodity that is underpriced and they have to move out of one and move into another so that creates selling anyway. But this all also came at a time seasonally where grain prices tend to ebb lower anyway and, of course, this just added to the emotional landscape. But to put it in perspective in 1973 you had soybeans the July contract go up to $12.90. Now, that was a phenomenal percentage increase. It was phenomenally more than what we've seen this year. And yet everybody thinks $16 beans is phenomenal. Not really if you look at 1973.

Pearson: It's been a long time since we've been up there.

Martin: Exactly. And the market fell $6.60 straight down. Well, we've had a $5 and something break in the beans this year so far. So, we really haven't done anything as dramatic as we did in 1973 and yet everybody is more emotional because of all the negative news that you hear out of the media and on the newspapers, that type of thing.

Pearson: Let's talk about some specifics. Let's talk about the wheat market. Again, this week things are really in a holding pattern and really that's not true. The cash markets had some different things going on. Let's talk about the wheat market, Sue, and what would you tell a producer right now to be doing?

Martin: I'm telling the producer we may still see wheat prices get a little bit cheaper, I'm telling them to hold on. I think that come next winter, late winter maybe in February to March they're going to see a better opportunity to sell wheat I believe. The one thing we have to remember is we're losing acres now again for this coming growing season and so that should be a little bit supportive underneath and while we have increased stocks around the world after one good year of crops, you know, we've got stockpiles being done by various countries building their reserves back and in the meantime those carryouts have not grown appreciatively to where we can feel real comfortable and now you've got acres going back down again this next year because we're going to row crops around the world. So, then you look at Argentina, number two exporter in the world at this time and the U.S. being number one and we're losing acres in the U.S. to corn and various other crops but in Argentina we lost acres to soybeans because of the drought. So, when I look at wheat probably a bigger problem is, is that our demand is the side of the equation we need to keep an eye on and we're finding that Egypt has been a big buyer of our U.S. wheat before. Well, they continue to see their sales instead of coming to the U.S. we think that freight rates have dropped appreciatively and we think that maybe we'll qualify for some of that demand. We're still seeing it go to the Black Sea. And I think what has happened is that Egypt has really gotten stringent on their criteria of what kind of wheat they want. They have what they call a W factor and that W factor what it does is it basically categorizes the type of wheat for what its usage will be in baking needs. And the W factor for Egypt is basically 150 and the U.S. W factor in our wheat maybe in the last five years has averaged 105. So, it's kind of got us out of the ballpark right now and it's really not what the U.S. has but they don't really say that wheat has to be of a certain quality in the U.S.. We normally do have good quality wheat but for right now we're just not meeting the standard of Egypt.

Pearson: And we're losing business because of it and it's pressuring things. So, let's talk about the corn market which has been, of course, harvest is underway in many parts of the Corn Belt and I talked to a producer a couple of weeks ago who was in southeastern Iowa who said in one field the crop ranged from 60 bushels to 180 bushels, a lot of variability out there. USDA has their number. What is your take right now on corn?

Martin: Well, I think that for one thing when we get this next Tuesday we're going to have quarterly stocks in an all position report and I think we're going to find that the USDA has underestimated the amount of acres or production that we have out there on this new crop. And I think that that's going to show up in this report. Now, that might equate to 100 million bushels, we don't know but the other thing that we've got going here is that demand is dropping on the feed usage side. You've got Pilgrim Pride produces 25% or accounts for 25% of our poultry in the U.S. and they're looking at financial straights here now too and they utilize 290 million bushels or 292 million bushels of corn a year not to mention the short tons of meal that they utilize as well and so you look at egg sets and egg sets have been down 8% from a year ago, you've got chick placements down 4% for the eighth week in a row, we're seeing a drop in demand right now and that's a concern. On the flip side we have seen livestock producers feed cattle heavier and much to our amazement for as high priced as corn got this year. So, you've had that demand that has picked up a little bit in that side of the equation. And then you've got the ethanol plants that are really suffering and we've got a biggie out there that's really in financial straights also. And it looks like you've got some of these large entities, large exporters that would love to get a hold of that and may be waiting for a fire sell there. Well, in the meantime now you've got farmers starting to worry that they sold ahead $6, $7 corn to these ethanol plants and now they're starting to worry how good are those sales? They are willing to make them but will they be there to take it.

Pearson: So, producers are certainly concerned about that. But you mentioned the corn market in general and we look at 2009 and the chatter I get from everybody I talk to in the agriculture world and farmers is they are concerned that corn prices aren't high enough right now to buy acres because of these higher input costs.

Martin: Well, that is true. Your break evens are around $5 a bushel and so I would not disagree with that. I'm telling producers to wait with making any cash sales. If they have not made sales by now they need to sit back. They have missed the big ride down, I mean, they've missed the better prices and now we need to wait. There will be another move back up. We've got a lot of bad rhetoric. But my take is, is that a lot of the volatility with negativism that we have been seeing here driving us down I think has come to and end and that's a big thing to say but I think it has. If you noticed the market is slowing its pace down and I think that's going to be that way but I think there is another side here that takes prices back higher and we'll see some demand step back in here and maybe carryouts drop a little bit in the corn market and then we take the prices back higher on a more traditional phase maybe into January, possibly February but I think next year is a year where producers better be on the spot beacuse I'm looking at a bear year next year for prices and I think our highs are coming in early.

Pearson: So, keep that in mind. What about soybeans, same thing?

Martin: Well, same thing as far as timing so to speak but the soybean market I think here's a market that remember as we started the crop year last year the USDA had us targeted for low exports, exports considerably less than what we were the year before naturally so because we had a lot of corn acres and less beans. But we ended up exporting way more beans than the government thought we would or the USDA expected us to and so some are out there thinking that maybe the USDA underestimated the crop in the soybeans and therefore there's more beans out there, that may show up in the stocks report coming this week. That may happen and yet we still have to go back and look at the rest of the world and, again, soybean stocks are not burdensome. In fact, if you look at U.S. carry we've been dropping since July in carryout. Now, maybe this one will turn back stronger, who knows. I have a tendency to think it's going to stay softer and in the meantime you look at the world and I still go back to China and yes they are off of the Olympics but China has had a tough year and they had flooding in soybean growing regions, then they had drought come back at them. I think China needs to be buying beans and I think they'll be back in our pockets before long.

Pearson: So, what would be your price target then, Sue?

Martin: Well, I kind of think that the $10.99 area was a low. I don't think $10.45 comes out, that's your spring low for November beans. So, even if the makret comes back down and takes out $10.99 I think it's an opportuninty for livestock producers to use that as an opportunity to maybe lock up some soybean meal. Now, once we get in towards the winter, late winter like the January, February timeframe I'm going to be really looking at getting some sales made and being aggressive and that's a tough thing for a producer to do because I'm even looking at the '09-'10 crop that you start making sales there as well.

Pearson: Good point. Quickly the cotton market, you mentioned China, of course, they are so intertwined. What si your take on cotton at this point?

Martin: Well, cotton is losing acres again this next year and cotton has been kind of -- since it's not a food entity, so to speak, it is an oil seed but it hasn't been as popular as all the other oil seeds, so to speak. And so cotton has kind of gotten lost in the shuffle but when markets started to break down cotton went right along with the mix. Now, we know that the crop looks like it's coming off okay and it's going to be a decent crop. Still we're going to lose more acres again and the world carry is getting tighter and tighter and I think cotton next year is the one market that does have some sunshine in it.

Pearson: Let's change gears totally. Let's talk about what is happening in livestock and the fed cattle market. What do you see going into the fourth quarter? They're talking about all this economic weakness in the U.S.. What do you see for fed cattle?

Martin: Well, I think that the cattle market has been suffering. If it hadn't have been for the heavy weight cattle numbers that we have in Iowa, Nebraska and northern Kansas I think your cattle market would have already been better than it is. Demand domestically has been softening probably because a lot of the rhetoric but gas prices should be coming down so that should leave a few more dollars for the grocery store and I think that maybe the cattle market here around this dollar market basis has narrowed in also. We have to remember you had a huge basis on those October cattle and I think that has now narrowed into maybe less than $2 from what the cash market was this past week. And I think maybe the marketplace is back where it needs to be and now we start to look for some solidification and the market moves higher.

Pearson: Anything else this spring that you'd like to hedge cattle?

Martin: I would at least expect a $5 rally and when I look at the deferred contracts like April futures, that type of thing I think I'd look for something much greater, maybe $110 to maybe $115, something like that. I think there's more promise coming and not to mention we don't know yet what kind of winter we're supposed to have. We've heard that it's supposed to be colder than normal. Well, that's not good for cattle.

Pearson: No, it's not. The calf market, your thoughts on that as we look forward to the smallest cow herd since 1950?

Martin: Absolutely, in fact, our cow slaughter a week ago was 18% higher than a year ago and we continue to liquidate cows and that's also another reason why the fat market has not been real dicey, that we've lost some ground because of all this meat that is coming onto the marketplace. But at some point that's going to really bite us and I think that the calf crop is going to be where it's going to be. Coming towards next spring we should have a good market.

Pearson: About 30 seconds, we want to talk about hogs and we'll talk about them on Market Plus on our Web site too. But what is your take on hogs for the end of this quarter?

Martin: Well, the hog market or the report today was negative up front but friendly longer term. It just continued again to show us that we have more hogs than we really need right now. But if you're losing poultry in a big way they're going to eat something and pork is cheap I suspect that that demand is going to stay good.

Pearson: So, some opportunities out there. As usual, a very dynamic market in agriculture. Sue Martin, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more informatio from Sue on where these markets just may be headed visit the Market Plus page at our Market to Market Web site where you'll find streaming video of our program. Of course, you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free right there at our Web site. Be sure to join us again next week when we'll examine a California program that is linking established farmers with young entrepreneurs. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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