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Market Analysis: Aug 29, 2008: John Roach, Senior Market Analyst

posted on August 29, 2008

Disappointing export inspections this week, a strengthening U.S. dollar and increased prospects for rain created a "perfect storm" which dampened prices.

For the week, September wheat lost 86 cents and the nearby corn contract was down nearly 20 cents.

Soybeans broke ranks with the grains and trended higher. For the week, the September contract gained 11 cents, while the nearby meal contract was up $7.10.

In the softs, cotton trended up slightly, with the December contract posting a 15 cent gain.

In livestock, August cattle lost 8 cents. Nearby feeders lost $1.80 and the October lean hog contract was down $5.33.

In other markets of interest, the Euro lost 127 basis points against the dollar. Crude oil closed almost 90 cents higher. Comex Gold lost more than $2.30 per ounce. And the Goldman Sachs Commodity Index lost a point and a quarter to close at 708.75

Market Analysis: Aug 29, 2008: John Roach, Senior Market Analyst Pearson: Well, John, there you go.

Roach: I'm just thankful I have hair.

Pearson: I know and it's amazing I haven't changed a bit. Thank you, sir, for 30 years with us with Market to Market.

Roach: Thank you very much.

Pearson: Let's look forward to another 30. Let's talk about this week. Commodities, we've had this huge pullback in crude oil prices, it feels like the air has been coming out of the bubble. Is that continuing worldwide? The strengthening dollar is adding into that, we've talked about that here on the show already. What is ahead right now? Generally from a commodity standpoint what do you see, John?

Roach: Well, one of the things that has driven the commodity market and energies and gold and agriculture commodities has been the weakening value of the dollar. And people's attitudes really up until about a month or so ago was that the dollar would continue to stay weak because of our economic position here in this country and what we've started to realize is that people around the world have also suffered some of the ills from the economic policies and the subprime mess and so forth. So, now we see people around the world having some problems of their own. The dollar has strengthened considerable. In fact, we moved almost back up to the levels that we were at the end of last year. And that's going to put an overall damper on the commodity market compared to what we saw just a month or so ago.

Pearson: Let's talk specifics, let's talk about what has happened first of all in the wheat market, a huge pullback this week. We keep seeing these charts showing us the worldwide demand for wheat is outpacing production and yet now there's kind of this feeling we had a huge crop in the United States, a great crop here, better crops around the world and plenty of feed wheat apparently. We're starting to have a little bit of a glut on wheat?

Roach: I wouldn't call it a glut necessarily but we've seen the tightest supply situation, that occurred back before the new crop harvest began in the northern hemisphere and then as the new crop harvest began we found that we had extremely good crops across a lot of the growing region particularly in the Ukraine and Russia and some of the other former Soviet Union countries. As a consequence of their increased production and the increased production in other areas of the world we no longer are tightening supplies on wheat. Wheat supplies are actually loosening a little bit. We still have a southern hemisphere crop, however, to raise and that has been bothersome but we started to get some rain finally. And so part of what happened in wheat was rain occurring in the new growing area in the southern hemisphere.

Pearson: For producers out there who are storing some of this 2008 crop, maybe looking at making some sales for 2009 with these higher input costs do you want to hold off after this pullback this week? What kind of a price target do you have in mind for making sales?

Roach: We're not wanting to sell any wheat here after this pullback. The market dropped precipitously. We had a sell signal that we activated a week and a half ago and so we were aggressive with sales for people who needed to make cash flow. But in general wheat prices ratchet higher from this time of the year into the latter part of the winter. So, this is really not a favorite time of ours to make any wheat sales or any of the other grains for that matter. We think we'll have higher prices and I know there is concern out there and people talking about maybe the market is ready to head lower and so forth but I'm really not concerned to the degree that I've heard some other people. I think we're going to have once we get through our harvest season here we'll have a nice move back up as we worry about next spring's plantings.

Pearson: Let's move over to corn. The corn market as we sit here in August there's a lot of pensiveness about some of the later planted corn, about the lack of heat out there in the countryside. The USDA is convinced it's going to be a 12 plus billion bushel corn crop. Are you in that camp, John? Are we going to have a crop that big?

Roach: I don't know. I learned a long time ago to not dispute the USDA on their crop estimates, it's not good to do that. And remember they are statisticians and so when they cut the yield back in the July report and then raise it in the August report I have to believe they might have held their increases back a little bit just to make sure that they're not going to have to cut it again in September. So, unless August weather really hurt the crop more than I think so I think the crop probably gets bigger on this September report.

Pearson: So, as corn producers out there who maybe didn't make those sales back at $7, $8 now kicking themselves what is your advice to them? As usual this is not a time when you like to make sales.

Roach: I don't like to make sales at this time of the year. I think producers who made that decision made the decision that we're going to use storage. That was really their only backstop. If they happened to be wrong they were going to store the crop. And I think that's what they should do. I think they should plan on putting the crop in storage. In the case of soybeans we're actually selling some beans. We've had sell signals all this week in the soybean market. So, for those who want to make soybean sales we're actually getting sell signals to do that. We had sell signals in the corn market that ended last week so if you need to really generate some cash flow and you've got good basis improvement then maybe it makes some sense to go ahead and make some sales. But by and large I would plan on putting the crop in the bin and holding it into next spring and making sales on price strength next spring.

Pearson: Three days at the Farm Progress Show, you were there too, the one constant theme I heard from producers was higher input costs, worried about 2009, higher cash rents, higher nitrogen, higher potash, higher seed costs and so forth. What about making 2009 sales and have you started that? At what levels are you looking at?

Roach: We started making 2009 sales back some months ago and we were aggressive as we saw the higher prices this past summer. But, again, this is not a good selling season. People who are making sales now are making sales out of fear. It's a lot better to be making sales when prices are at strong levels because you're afraid that the supplies won't be big enough. Now we're over on the other side, we're afraid maybe the supplies will be a little too big. But I don't believe they're going to be big enough to take away our opportunity to make good sales in the spring of the year. If we remember just a year ago people were worried, we had high prices and then they disappeared and so we had people making a lot of sales last fall out of fear. By the spring they were really sorry they did that. I think it's the same thing this time around. Wait for springtime to be making your sales. Again, soybeans are maybe -- we're still in a sell signal so you're still okay to be making some bean sales but we're not aggressive sellers at this time of the year.

Pearson: Let's talk about soybeans. Again, a decent week this week as far as the board was concerned on soybeans, trend a little bit higher the nearby contract. As you mentioned some sell signals are still out there. These are still attractive prices if you have to sell beans.

Roach: They're very attractive prices and we are still getting a sell signal. And so I have no problem with making some of those sales. But, again, I think what is important for producers is that they need to understand there's a good time to be making sales in the year and a bad time. Traditionally this is the wrong time of the year. People who make sales during this time of the year need to re-examine their selling process and what they use to make selling decisions and they need to get some of those sales shifted over into the spring of the year so they don't have to make any sales now.

Pearson: Same question, John, 2009 sales on soybeans? You made some, what is your outlook for the future?

Roach: I think we're going to have a lot of competition for acreage this upcoming spring and although we've got some nervousness out there about whether we'll maybe add to the beans or not add to the beans South America will add some beans but they're not going to add enough to take away our tight supply. Any of the analysis that I've seen shows very tight supplies coming for this next year. We're in a very tight supply situation right now with tight supplies maintaining all the way through this next year. And so we're just making very light sales that far out, we'd only be doing it during a sell signal, the only grain in the sell signal right now is soybeans so light sales, fine, if a person wants to do that but really the key is to get a program in mind where you'll be making the majority of those sales during the correct time of the year.

Pearson: That's right and that's that limited time period you like in the spring and always have and that's your time to make sales. John, the last 30 years you've been awfully right so we'll go with you on that all the way. But here's another question. You mentioned the strengthening dollar earlier, we mentioned it on the show twice. There is some concern that maybe we'll see that export business start to slide off a little bit. Are you concerned about that? What kind of an impact would that have?

Roach: The export business may well slide off a little bit as we have some economic issues confronted by some of our buyers. But right at the moment most people continue to be very concerned about that tight supply of food that is available in the world and I see a willingness on the part of overseas buyers to make sure they don't lose out on the available food. So, I think we'll have very good demand as we move into the harvest period.

Pearson: Let's talk the flip side, let's talk about what's happening over on the livestock front. Smallest cow herd since 1950, John, there's concern about what's going on in the hog business in terms of liquidation. We certainly have seen a pullback there on the board. Kind of give us your outlook. Look at fed cattle right now and what our demand stream is and what the number of cows we have out there, are we going to see stronger prices?

Roach: I think we'll see stronger prices. We saw on the last cattle on feed report it was the second smallest placement since they've been keeping those numbers. So, we've started to move those future supplies lower. That really just didn't get started until this summer. I think we surprised everybody with the willingness of cattle producers to continue to place cattle until just finally in this last month or six weeks or so. So, we think that the market will move higher as we move on in through the fall months and into the winter months. The market has already had a big selloff in futures so we think they're too low to hedge and we think that producers need to be looking at feeder cattle and looking for opportunities to place cattle on feed to come out in the spring markets.

Pearson: This feeder market also got clubbed pretty good this week.

Roach: We've really kind of settled that market down a little bit. We've also reduced our feed prices a little bit. So, we think that the opportunity starts occurring as we move on forward from here.

Pearson: Let's talk about the hog business, John, this big slide we've seen on the board in the pork complex. What is your take on this? Is this the correction we've been hearing about from all the hogs that we had thanks to miracle drugs and everything else?

Roach: I think that the catalyst that brought this market down is the Russian announcement that they're going to reduce the imports and they'll reduce imports of pork and imports of poultry and if they follow through with that promise then that means we have that tonnage to come back into this country. In the case of pork that amounts to about 2% of our slaughter number. Our total exports amounts to a little over 20% of our total production of pork gets exported. So, the Russian business is important. It's even more important in the poultry sector and, of course, that will bring real competition to pork if you start to pull poultry prices down further. So, we think that has caused the market to come down. But now that it has made the ratchet down we think that we may be down toward the lower side of where we're going to be for a little bit and should start to see markets firm.

Pearson: Alright, as usual, John Roach, 30 years, congratulations. Thank you very much for all that you've done for us, even more in the days ahead and your hair looks fantastic.

Roach: I'm just thankful it's there.

Pearson: You should be thankful for that. That's going to wrap up this edition of Market to Market. If you'd like more information from John on where these markets just may be headed why not 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 free at our Web site. And be sure to join us again next week when we examine the U.S. garlic industry's efforts to insulate its market from a flood of imports. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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