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Market Analysis: Jul 18, 2008: Sue Martin

posted on July 18, 2008

As has been the case for much of this year, commodity traders are fixated on weather. While most long term forecasts are calling for arid conditions, traders were not able to ignore rain, particularly in the western Corn Belt late this week, as prices plummeted.

For the week, September wheat lost more than 26 cents and the nearby corn contract was down more than 81 cents.

Soybeans followed suit losing almost 10 percent of their value. For the week, August soybeans lost more than $1.45 while the nearby meal contract dropped almost $50 per ton.

In the softs, cotton slowed its downward trend, with the December contract posting a loss of 35 cents.

In livestock, the August cattle contract was down $3.70. Nearby feeders lost $2.15 cents and the July lean hog contract rose $2.25.

In other markets of interest, the Euro lost 40 basis points against the dollar. Crude oil traded sharply lower for the week with the nearby contract losing more than $16. Comex Gold lost nearly $1.50 per ounce. And the Goldman Sachs Commodity Index lost more than 83 points to close at 795.50.

Market Analysis: Jul 18, 2008: Sue Martin Pearson: Here now to lend us her insight on these and other trends one of our regular market analysts, Sue Martin. Sue, welcome back.

Martin: Thank you, Mark.

Pearson: Sue, what's this crude oil price telling us? We've seen some sharp ups, some sharp downs. Does this look like topping action to you?

Martin: I think for the moment it probably is a top that we have seen. I think you have a market here that will react or respond to any disruptions in the Middle East or in Nigeria. And that's kind of what sent the market a little bit higher today even though it was a dead cat bounce. I think that what we're looking at is a market that is now looking at the U.S. economy, maybe even economies after we get the Olympics over with they may look around the world and say, oh, all these economies are starting to slow down a little bit but the U.S. economy especially we see already that we're slowing and that we're basically using less crude and less energy than what we did before. People are becoming more efficient, whether they're riding bikes or whatever, they're becoming more efficient to save money because everybody wants a piece of their dollar.

Pearson: Is that going to slow down this whole bullish commodity cycle that we've been through?

Martin: Well, I think to some degree, yes. But not totally. I think that when you look at commodities as a whole we still have to go back and look around the world at the countries that are growing. And while they slow they're still growing, just maybe not as high of a pace as they have this year. China alone in June had a growth rate of about 10%. That's phenomenal. So, while we expect some slowing in the fourth quarter around the world and especially in the U.S. I think that what we're going to see is, is that there's still a huge growing demand amongst these economies that have, like third world countries, that have started to do better, China, India, Vietnam, various countries like that. And so the need for food is still going to be pretty ramped and, of course, we'll talk about that when we get to wheat.

Pearson: Alright, let's talk about the wheat market and what happened this week. Again, a softening. Harvest has gone pretty well, decent crop in the U.S. What's ahead for wheat, Sue?

Martin: Well, I'm not as negative as some people are on wheat. I think what's happened here is that we're in an old-time traditional market and people have been so used to bull markets for two years that they don't know what a traditional July feels like and they're getting the grasp of it now. The bean market is dropping, corn is dropping like a rock and wheat took a traditional break but put a bottom in for an early harvest low, lifted and then came back as it has dragged with the corn and then now the bean market. I think that as we wind up harvest in the wheat it's possible we can still have some softness here in July on through into August. But the one thing we have to look at when you, again, look around the world you've got production this year pretty good. Last year we produced 611 million metric tons. This year we're going to produce 664 million metric tons. But the bottom line is demand is outstripping what we're producing so fast that our carry is only going to grow one million metric tons. This next year we're going to see a big loss in wheat acres around the world but also especially in the U.S. because it's going to go to other crops that demand those acres.

Pearson: Let's talk about sales. Should we be holding off for the time being, maybe wait for this market to regroup and strengthen?

Martin: I think I would. I think there's something better coming. We may see some softness off and on as we go towards August, through August but I think I'd hold off with selling wheat. I think I'd concentrate on getting my other crops maybe marketed a little bit.

Pearson: Let's talk about the other crops. The corn market a big sell off this week. What are your thoughts there? Is this a beginning of things to come? Or is this merely the July setback?

Martin: Well, I think it's the July setback. I think when we went through that rally in June that was based on weather. It was on the fact that we were concerned about the flooding, the acres we were losing on a smaller crop in corn and, of course, losing acres in beans and the lateness of the crop getting in. Well, we rallied to $8 corn in June, that's a phenomenal price. And for that kind of a price that early we have to now say, okay, we're going to set back and see because once the flooding was done what was there left to keep pushing. A bull market has to be fed. In the meantime, the price rationed. We started seeing -- we're hearing talk already of euthanizing pigs, poultry producers cutting back, corn no longer has to pick up the slack for wheat around the world at this time. So, in a subtle way we have, along with the energy side of biodiesel and ethanol, we're finding that we are rationing. And so the usage is a little less. There's nothing here to push this market higher. And so I think corn is justified, as much as nobody wants to hear that, I think corn is very justified in declining. I think it's going to set up another beautiful opportunity and I think that there's going to be another bit of sunshine yet on the back side of this if people can be patient. You've missed $1.70 of this move so I would say now to producers don't sell now, I could see December corn futures getting down to $6.06, possibly $5.98, an extreme $5.77 but that would be an extreme. I think $5.98 to $6.08, $6.10 is probably going to usher in a bounce in this market and let's see how well we respond to this. We have to remember your summer is cool, we've had warm days but cool nights. We're so late that some of the crop is just starting to tassel. But you get into August and if we keep this kind of weather pattern it's a double edged sword. One is, is that it does help with the yield because the cool nights help these kernels fill, puts weight into the kernel and that's a good thing. It increases yield. But the other side of the coin is it doesn't help speed this crop towards maturity and leaves us very vulnerable for a frost.

Pearson: That's right and that will be the other key thing, the last piece of the puzzle to happen.

Martin: Exactly, we'll put weather premium back in again.

Pearson: And so same thing on soybeans, the back off was pretty intense there this week too?

Martin: Not intense enough. I think beans has been lagging corn. I know on all of our radio broadcasts we talked about corn having a top June 19th, June 27th and July 3rd and the beans would fit in with that and came in on July 3rd. So, about a week after the corn. And, of course, it should because it was later getting planted. But the beans last week didn't show improvement. They just stayed stable. I think this next week we'll seen beans show improvement. I think the bean market, here again, is a market that is having a hard time lassling the thought of an old fashioned July. Crops look good, even though they're behind, they do look good and I think that this market wants to move south. We've had huge -- to get a grasp on it the funds are liquidating and you've got tightening supplies of money coming for the credit side to these index funds and the hedge funds and that is creating liquidation in many, many markets. And I think that when you look at the bean market you had huge Chinese buying this week. China bought 15 to 17 cargos of beans, I think pretty much most of it came out of the U.S. They bought six to nine cargos of beans out of Argentina and Brazil. And yet the bean market couldn't hang onto it, it fell. I think that we have November beans headed towards $13.69, maybe $13.50, an extreme would be $12.73. I don't know if we'd make it that far. Probably more importantly I'm looking for a low around July 28th to August 4th, somewhere in there.

Pearson: And you think that will set up a rally?

Martin: Oh, probably set up a very good rally. To kind of give you an idea you go back to 1966 we've had 12 years in which you've taken beans in November contract and made new contract highs during the month of July. During that time you ushered in a pretty good setback only to find that six out of those years, so half of the time, beans came back and made new contract highs again.

Pearson: Let's talk about what's on the flip side of all these high prices, the corn and soybean products, a little bit of celebrating in the livestock sector and the poultry sector with similar prices, particularly that correction on bean meal this week. Now, let's talk about the fed cattle market and what you see happening there. There was some softness on the board this week for fed cattle.

Martin: There was and I think that one thing we need to watch is everybody is concerned because the box beef has been dropping most every day. But that's pretty traditional after the 4th of July. So, I would call this more of a seasonal. I think that, here again, you've been getting some liquidation by some hedge funds and index funds because of tightening of credit and so I think that's part of this along with a seasonality that beef demand dropping in the dog days of summer creates a setback and usually around as you go towards the early part of August you'll put in a low and the market starts up. It's very possible we've seen our lows already at the end of this week. But I kind of think that we'll rally in towards the cattle on feed report here this next week and then we'll have to see how well we hang onto it. We might have one more spill into the first week of August.

Pearson: So, what do you see ahead for this calf market? Typically we'd see a sell off in corn, we'd see feeders respond to the positive side. Didn't happen this week. Does this just go back to this overall kind of sluggishness in the beef trade?

Martin: Well, I think so although on Friday the feeder market did respond quite nicely with a good rally. And actually feeders have had a little bit of an overall rally from recent breaks. So, the market is somewhat responding. Now, there's a concern I have and that is if we start to see some dryness in the western Corn Belt that could influence a lot of pasture land and if that got bad enough in the month of August you could see cattle move off of pasture and into the feedlots and that could push feeder prices maybe a little south. But this corn market breaking like it has, has been very helpful to the feeder market and I think that's a ray of sunshine. And when corn turns back up for a rally then feeders and fats will probably follow that.

Pearson: Still got about 30 seconds, what is your take on the hog market as we go forward? I've heard about a lot of disaster scenarios for this fourth quarter of 2008. What is your take?

Martin: Well, long-term I'm very bullish to hogs and the demand for pork is huge. I mean, our exports are phenomenal and all this stuff going on with the Indy Bank and with the Freddie Mac and the Fannie Mae, very inflationary and but yet very negative to the dollar because we're printing more dollars to handle everything we're doing. And that's pushing our dollar down, keeps our pork very reasonable in the world market and we have a ton of it. We killed nine and a half percent more hogs again this week versus a year ago. So, we have plentiful supply. But my one fear is if hogs, because of the producer being so concerned, if corn gets to cheap to them that it looks attractive and they start feeding the hogs heavier again that's going to be another misnomer.

Pearson: That could be a big setback. Sue Martin, as usual, appreciate your insights very much. That's going to wrap up this edition of Market to Market. But if you'd like more information from Sue on where these markets just may be headed why not visit our Market Plus page at our Market to Market Web site where you'll find streaming video of our program and you can download audio podcasts of our Market Analysis and our Market Plus segments absolutely free. Again, that's all at our Market to Market Web site. And, of course, be sure to join us again next week when we'll examine a western water war that is pitting ranchers against roulette. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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