Grain prices followed Wall Street higher on Friday, but not enough to wipe out losses from earlier in the week.
For the week, December wheat lost 12 cents and the nearby corn contract was 21 cents lower.
Soybeans followed suit. For the week, the November contract lost almost 60 cents, while the nearby meal contract went $23.80 lower.
In the softs, cotton continued its downward slide this week, with the December contract losing exactly $2.00.
In livestock, October cattle lost 60 cents. Nearby feeders lost $1.65 and the October lean hog contract gained $2.10.
In other markets of interest, the Euro gained 322 basis points against the dollar. Crude oil closed at $104.55 after being below $100 for most of the week. Comex Gold gained $100.20 per ounce. And the Goldman Sachs Commodity Index lost a little more than a-point-and-a-half to close at 638.50.
Pearson: Here now to lend us their insight on these and other trends two of our regular market analysts, Erin Golly and Virgil Robinson. Welcome back. Good to have you two with us.
Golly: Thank you.
Robinson: Hello, Mark.
Pearson: Let's start with the grain markets and just a broad look at commodities in general. Obviously there was a flight into gold this week, a panic around the world so that went up, oil was down in the 90s and then closed back over $100. There just seems to be a lot of yin and yang occurring in these commodity markets after the huge run-ups that we had this summer. What is ahead, Virgil? What do you see happening and kind of what's happening behind the scenes? I hear about these funds and fund liquidation and so forth. What are you seeing?
Robinson: Well, you've described I think the volatility in the market well and I suspect that will continue moving forward. Crude oil, a couple of quick comments. We're rapidly approaching the end of the month. I place an emphasis on month over month price behavior particularly as it pertains to the continuation charts, the bar charts. My best opinion of crude is I think we're going to trade to about $111 or $112 in the very near term which would be positive. However, a monthly close, as you mentioned below $100 and we've only had one of those in the last several months, would be bearish and would suggest we're heading down into the 80s. So, we're kind of at a pivotal, a crossroads if you will in that commodity. The next seven trading days are important. Energy related kind of the same spin here. I think ethanol futures also very much at a crossroads. A monthly close on the lead futures contract in Chicago below 2.15 in my opinion based on this methodology very bearish. We're headed down towards 1.70. So, we're at a crossroads here in a couple of the primary energy products that we discuss routinely.
Pearson: The other thing that has occurred has been last week we had this strengthening of the dollar and people thinking maybe that's the beginning of typically I guess what is a long-term move in the strength of the dollar and then some weakness this week.
Robinson: Yeah, I think long-term wise two different questions I think there. One, what is the short-term ramifications of this week's behavior in combination with what we see long-term wise? And I think long-term wise, which is more important to our viewers, I think the dollar has bottomed and will over the course of time move irregularly higher. So, I'm not saying go straight up, that's not likely. But based on the methodology I'm comfortable with talking about which is a bar charting technique I would argue the dollar has bottomed and there are significant implications to that over the course of time including agricultural product.
Pearson: Both corn and beans and we'll talk with Erin in a moment about livestock because that export market has been so important there. Let's talk about the wheat market, under some pressure again this week. What do you see ahead? Aren't we in a seasonal period where wheat prices tend to strengthen a little bit?
Robinson: Often times they do, Mark. This time of year, however, to date we've not seen any visible signs, at least in my mind, of a bottom. Again, as mentioned we're approaching the end of the month and there will be an emphasis placed particularly in the work I keep on the soft red wheat index that is tracked in Minneapolis. I think we need to close above $5. Should we do that then I think there is an argument that that $4.60 level that was just recently traded to could well be the seasonal low. So, I'm going to place an emphasis here again on monthly closes and the parameters that close above $5 would suggest we're headed back up towards $6. Fundamentally you've heard the routine here on the show, we're forecast to grow about 676 million metric tons of wheat this year. That's 65 million more than a year ago and ending stocks are projected to grow. Old news, Mark, we've known that now for weeks. So, let's move forward here and let's use as our barometer that index that I have aforementioned and a close above $5 would suggest we've seen the lows which were around $4.65.
Pearson: An acreage battle is shaping up again isn't it, Virgil? Wheat, corn, beans, cotton, everybody will kind of be in flux depending on what happens with harvest 2008 is going to be a big factor, a lot of people are concerned about that. Is there enough of a weather premium in this market do you think? What do you think for corn prices going forward for those people who haven't priced anything yet? I'm hearing all these cash stories, not an uncommon sight, we're at the end of the year, end of the crop marketing year, cash markets have been really strengthening.
Robinson: The basis has been strong. Futures, as you mentioned, put in kind of a disappointing week given some of the inputs that you talked about earlier in the show. Here again a common and a quite transparent indicator in my mind is that cash corn index in Minneapolis and, Mark, it's closed only one time this year below $5 and tonight we settle at $5. I think this -- by end of month, for whatever reasons, should that index close below $5 I think we're headed down to around $4.25 believe it or not. Now, that is the cash index. I'm not addressing futures. But clearly there is a relationship between the two. Argentina is dry, Australia is dry in select areas, has an influence on corn and grain production. Those are kind of bullish. But the market has been aware of that now for the last couple of weeks and frankly it hasn't meant a thing to the market. So, I think the combination of rationing that has gone on -- we'll get an indication of that in the stocks in all positions report on September 30th as well as you alluded to some of the index and speculative fervor that we were privileged to witness here in the recent months has been pushed to the sidelines. So, some of the strong underpinnings of the corn market both fundamentally and technically have been removed and the market is vulnerable here.
Pearson: Virgil, at this stage of the game for producers who have not made sales yet would you encourage some additional sales of new crop corn?
Robinson: They can reconcile themselves to the fact they may have to handle a cash market that declines about 50 to 75 cents from tonight but has the prospect, as you mentioned, of the uncertainty of acres, the uncertainty of a growing season, the uncertainty of the world's response to these markets. The potential is still there over the course of time to see a recovery in corn and coarse grains to higher levels. So, if you can risk that 50 cents or 75 cents from tonight's marketplace and have the wherewithal to sit patiently for several months moving forward that's the position of the market in my mind. If you can't reconcile yourself to that kind of a decline then you better take defensive strategies now.
Pearson: Now. What about soybeans, Virgil, same story there?
Robinson: Well, soybeans we're projected to grow 20 million metric tons more beans globally this year than last, ending stocks are projected to grow modestly with a stocks to use ratio of around 16% worldwide wise. If we used that as our metric only that would imply there is a very adequate supply of soybeans and/or oil seeds in the world. Quite to the contrary in the U.S. stocks to use ratio of 5%. I think the strength in the U.S. market as a result of improved and strong processing margins will be a manifestation of the basis. I think the basis over the course of the next several months is going to get very strong.
Pearson: So, some good news on the cash side.
Robinson: At least for those who capture carry, sell the carry and then await for basis appreciation. You can always supplement these strategies, Mark, with simple option strategies to put yourself in position to capture some kind of a significant price rise should there be global production shortfalls or geopolitical events of a significant nature.
Pearson: Virgil, we don't have a lot of time left but I do want to touch upon 2009 crop sales. I've talked to so many producers who have told me about what their input costs are looking like for 2009, increases across the board, fertilizer, seed, you name it, everything has gone up and they're concerned about locking in some costs for next year. Are you recommending that? Or are you telling producers they should be doing some but maybe not now?
Robinson: I think economics should make that decision, Mark. Sit down and go through some kind of a crop budget and devise some type of objective. If it's return per acre, return on investment at least the crop budgets that I've been privileged to see still suggest additional corn or more corn. The battle will move forward but don't forget the global component here as well. A stronger U.S. dollar in my opinion will encourage an increase in hectares and production globally of the likes we have not seen beginning in 2010 moving forward.
Pearson: So, act accordingly if you're a producer. Let's switch over to the livestock side and the flip side of these very strong prices have been a lot of pressure on margins for livestock producers, cattle, hogs, poultry, it's been a tumultuous year there. Erin Golly, we've had this break in the grain markets so your livestock clients are they taking advantage of it? Are they booking some corn? Or are they waiting for what Virgil is talking about, maybe a further break?
Golly: I think they're waiting for a little further break to see the harvest low and then look at booking for the next six to nine months and getting something at least done on the cash side. But on the fed cattle we've had a great summer with demand. Due to the ideal grazing conditions I think we're going to have a shortage of choice and prime beef going forward and that's positive for the fed cattle going forward. I think Hurricane Ike is going to have some supply disruptions as well. So, I'm very bullish for the cattle market for the next six months. My price forecast due to these reasons is between $110 and $115 through the first quarter of 2009. But for right now the ongoing financial crisis is going to play a major role in risk management going forward with fund repositioning and as Virgil did say the dollar is going to continue to be a plus or minus for beef and pork exports as well. It's going to be a close situation to watch.
Pearson: I think somebody told me that in 2003 before the Mad Cow outbreak we were exporting 9% of our beef production and now it's more around 5% and we were just kind of getting the momentum going again and maybe if the dollar strengthens we could lose some of that.
Golly: That would be very painful to see with both the pork and beef industries because it's been such a price support so far.
Pearson: So, fed cattle prices you're pretty optimistic?
Golly: I'm very optimistic.
Pearson: I like to hear that. Now, talk about the calf market. Is the cow-calf guy going to be able to take advantage of this? What do you see for calf prices?
Golly: Well, cow-calf operators have had great growing conditions so far and they've had an ample feed supply. I would suggest if producers haven't done so already they should take advantage of these high cow prices and look at updating the herds and maybe taking more of a long-term approach towards herd management.
Pearson: And that would include maybe filling out some of those older girls who are fairly attractively priced right now.
Golly: They are very attractively priced right now and we're starting to see a little bit of that updating herds anyway.
Pearson: So, going forward and I think the other comment we had on the show here not too long ago was the fact that we have the smallest cow herd since 1950 now and so we can't continue to consume the factory and keep beef prices where they are.
Golly: No, we don't and I do not see an expansion going on within the cattle industry as well especially since we're living in this biofuels era, I do not see any expansion going forward.
Pearson: What do you see going forward as far as biofuels, feed costs? The producers that you talk to what are they doing to make this all work?
Golly: Well, cattle producers are utilizing DDGs and I believe that they're utilizing DDGs to the best of their abilities. Ethanol plants are continuing to modernize DDGs to work with the pork producers and the beef producers. So, I think that's going to be a very special component to working with the livestock industry.
Pearson: I had a complaint from a viewer who said we didn't spend enough time on hogs. We saved time to talk about hogs tonight. We should talk about what you see happening in this hog market. Frankly it's better than we thought it was going to be right now with hog prices isn't it?
Golly: It is but looking at specifically the fourth quarter which is what everyone wants to talk about with the large numbers looking at the butcher market for the fourth quarter production is projected to be 2.5% over last year's record slaughter level. Weights are 2.5 pounds heavier than last year but still 4.3 pounds lighter than a year ago. So, I think we could test packer capacity this fall in numbers but if weights continue below a year ago levels we're going to slaughter more hogs this year but may produce the same amount of product as last year.
Pearson: So, even with fewer hogs we could sell the same amount of pork. Again, we get into these numbers where we're trying to squeeze a lot of pigs through that door. That didn't work out too well for us back in '98. What is your outlook price wise now for the finished hog market?
Golly: Well, price wise a big key component is the export market, of course, with the dollar rallying exports are very key to the pricing within the pork industry and if the dollar continues to rally it could shed quite a little burden on the pork producers as well.
Pearson: Ballpark me, where do you think we could be in the fourth quarter for 260 pound pigs going to market?
Golly: Oh, probably in the 40s.
Pearson: That might be good you're saying?
Pearson: So, producers right now, take us into the first quarter of 2009 and what you see happening there?
Golly: Oh, first quarter of next year we're going to have less numbers available. All the producers ask me if we're going to have dollar hogs again next year. I say we need to make sure it's fundamentally based, not speculative based but I do see a chance for dollar hogs again for next year.
Pearson: So, we're going to be working through and maybe seeing some good numbers. You're optimistic for 2009. I'm not going to argue any of that. Do you think we're going to get a chance to buy some feed inputs cheaper here soon?
Golly: Yes, very soon.
Pearson: Great report, thank you Erin Golly. Thank you Virgil Robinson, appreciate it as usual, your insights on today's program. That's going to wrap up this edition of Market to Market. Now, if you'd like more information from Erin and Virgil on where these markets just may be headed visit the Market Plus page at our Web site. Jot it down, you'll find streaming video of our program there. You can also download audio podcasts of our Market Analysis and our Market Plus segments absolutely free right there at our Web site. And, of course, you can join us again next week when we'll examine a resource that is equipping the next generation of American farmers. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.
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