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Market Analysis: Jul 11, 2008: John Roach

posted on July 11, 2008

Grain prices moved higher Friday after the supply and demand report was released, but the rally wasn't enough to erase losses in previous sessions.

For the week, July wheat lost more than 53 cents, and the nearby corn contract was down 66 cents.

Soybeans followed suit with the grains but still remained above $16.00 per bushel. For the week, July soybeans lost about 28 cents while the nearby meal contract was up $3.40 per ton.

In the softs, cotton trended lower again this week, with the December contract posting a loss of $1.76.

In livestock, the August cattle contract was down $2.60. Nearby feeders lost 15 cents, and the July lean hog contract declined $2.70.

In other markets of interest, the Euro gained 197 basis points against the dollar. Crude oil traded in a wide range this week and when the dust settled the nearby contract actually declined 21 cents. Comex Gold gained nearly $26.00 per ounce. And the Goldman Sachs Commodity Index lost more than 12 points to close at 874.50.

Market Analysis: Jul 11, 2008: John Roach Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, welcome back.

Roach: Thanks, Mark.

Pearson: Let's talk about these commodities in general first and obviously as we get close to watching what happened with crude oil on Friday and the up and down volatility that we saw and closing higher we're looking fairly strong Friday. Give us your thoughts in this overall worldwide commodity bullishness that we're seeing right now.

Roach: Well, we've seen bullishness at the end of the week but we really started the first of the week with really an overall bearishness. All market really sagged hard in the early part of the week. And then later on in the week we saw the rally come back and a lot of the rally I think was led by the energy market because of concerns in the Middle East and concerns about supply. So, what we're dealing with right now is we're dealing with a marketplace that is led by energy to the up side although in the agriculture commodities we're actually starting, with the exception of soybeans, we're starting to see increasing surpluses start to build.

Pearson: And, of course, that comes back to the issue certainly of rationing and so forth but this overseas demand remains fairly strong and a softer week, again, from the dollar. What does that portend?

Roach: Well, the dollar continues to struggle. We did have the dollar bottom earlier in the year and try to stage some recovery but here it's right back down on a weaker note. What we think that we're going to have to deal with here is a continual market of volatility where we have various news around the world that is going to scare people one way and then the other. We're going to have times when we're scared because everything looks bullish and we're going to have times when we're scared and everything looks bearish.

Pearson: Let's talk specifics. Changing gears let's first talk about the wheat market. Good crops coming in it appears for 2008 providing some relief from this ongoing food struggle that we keep hearing G8 and other talk about this week.

Roach: The wheat crop is good pretty much around the world. There's some areas in the Middle East that are having a little bit of a shortened crop. But Europe raised their crop estimates this week. The former Soviet Union crops have all been increased a little bit. We saw the U.S. crop increased in today's report. Ending stocks are increasing as well. There is increased supplies available for consumption that's going to take some of the pressure off of the corn market as we move some of that wheat into the feed rations. But we still are seeing solid demand coming from overseas even though U.S. wheat is priced a little bit higher than the Black Sea wheat. We think that the wheat market is going to struggle in here, however, as the harvest continues to move forward. We're going to have a hard time maintaining this price. The market started to fall this week, we think we have some further weakness to go through before we finally get the crop put away.

Pearson: Selling wise, John, what do you want to do if you're a hard red wheat producer in Kansas? What should they be doing?

Roach: I think you have to put the crop away. If you look at basis levels it's extremely weak. The carrying charges in the market are extremely rich so there's good carrying opportunity. And so I think that at this point in time you have to put the crop away. But you have to remember it was just a week or week and a half ago we had very strong prices in wheat, we were getting strong sell signals and when we get those opportunities we're going to have to take advantage of them. But right at the moment I'd be putting stuff in the bin.

Pearson: Let's talk about the corn market. Again, USDA's numbers coming out, some rationing appearing to occur, John, and this corn market maybe building some stocks up. What should producers do maybe who haven't done much in terms of sales in this market?

Roach: Well, I think producers who haven't done much in terms of sales will be looking back at this time period and wondering why they didn't do something. The price levels that we have been seeing are very strong price levels, there's not very many people that can buy your product at higher price levels and be able to make any money with it. As a consequence it's going to be difficult to maintain those higher price levels unless we have something stimulating the market. Typically this time of year that's weather but we've already had a very big stimulation on the part of weather with too much rain and flooding and a slow planting season and so forth. The crop is getting better. The last couple of weeks we're seeing crop ratings increase. We expect they'll increase again this next week. We're finally getting good, warm weather. We're getting periodic showers that come through. So, the corn crop is actually marching its way toward harvest and we really, if you think about it in terms of what is ahead, we just only have a matter of weeks before we start to harvest. As we saw in the stocks in all positions report back on the 30th the stocks were bigger than people thought which means livestock consumption has been pulled down compared to what they anticipated. On today's report we saw each one of the categories for demand pulled down. So, we think that the most bullish enthusiasm has passed. But now what we're going to do is try to figure out what's really available and who really wants it and it's going to get volatility in the market and on strength we want to be sellers of corn.

Pearson: John, I keep looking at these costs going into next year, trying to book fertilizer ahead, seed ahead and so forth. These costs are dramatically higher than they were a year ago and higher for 2009-2010. A lot of producers have been asking me this question, I'm going to put it to you. Should we be looking at making some sales for '09 even into 2010?

Roach: Absolutely. I think the most important thing for producers to get their arms around is this new farm bill that we're going to be implementing here for the 2009 crop. There's various levels of support under the marketplace at a much higher level than we've seen before and if you combine the new farm bill proposals or farm bill legislation together with crop insurance there's going to be opportunities to lock in significantly strong price levels, strong revenue per acre. What's going to be very important is that producers take a look at what their costs are going to be, take a look at what their revenue opportunities are out forward both from the standpoint of merchandising and from the standpoint of putting protection underneath the crop that you're not willing to merchandise. We think the opportunity is to be buying the inputs now and turning around and selling the crop out forward on an incremental basis.

Pearson: Talk about soybeans, John. What do you see happening there? Is it the same picture as corn?

Roach: The soybean market is the one market in the grains that actually has very tight supply and although we saw the ending stocks for next year increase slightly on the report this morning we still have very tight stocks for this next year as well. So, the soybean market is the one bullish component left on the grain floor and you can see the market has been able to hold much better on this weak sell off than corn and wheat. And on today's close we saw the bean market sharply higher. So, the bean market continues to have to ration out these available supplies until harvest comes. But once we get past our harvest then we look forward to seeing South America's harvest. If you remember last year South America raised 50% more beans, that is their harvest this spring compared to our harvest last fall. Brazil will again be a very big competitor most likely raising something in that substantially bigger crop than what we raised. So, that harvest that we have will give us our initial supplies and then we'll have additional supplies coming next spring. We believe this is a time to be making sales on soybeans when people are worried about the tight ending stocks. Take advantage of the stronger prices.

Pearson: Same thing '09 and '10, John?

Roach: Absolutely. We look out forward, we think these price levels are levels that you need to be taking home. You've got to sit down and you've got to figure out where your costs are and look at what your profit opportunities are. We think that farmers fail to do that. We'll look back and wonder what was I thinking? Some of the best profit opportunities we've ever seen in agriculture are on the table. Typically when big profits like that are on the table they don't stay there. Those profits tend to fall by the wayside. Now, we've had a longer period of time building some price levels this spring but we can identify weather as the reason that we push this market the last notch up. That weather issue has pretty well faded away now.

Pearson: Let's go over and talk about livestock, the flip side of all these record high prices. What do you see ahead for the cattle market, John? Take us through late summer and fall.

Roach: Well, the cattle market is struggling a little bit. We had the market softer this week. The cash market we couldn't quite get the market up to where the producers wanted to sell. We think that the market here over the shorter run we're kind of biding a little bit of time but we're concerned. We see the consumer being stressed by petroleum costs and all other increased costs really across the board, everything that affects transportation, affects the consumer's costs we're concerned about the consumer. You can see the stock market is concerned. We closed very weak here this week and there's really no relief in sight from those things that are causing us our worry. We don't see a relief yet in property values. And we don't see a relief yet in energy prices. We don't see really jobs developing the way we need. So, what we really have in front of us is a difficult economic time that we're trying to see our meat into. And at the same time on the cost side the cost of feeding livestock is just really hurting people. So, we think that in this timeframe what a producer should be doing is battening down the hatches. What that really means is look at your opportunities to make sales on the cattle that you're producing and go ahead and start taking some of the risk out of that market.

Pearson: Let's move over and talk about the hog market too and what you see happening there. Several analysts, university economists are very concerned about what could happen with hog prices this fall.

Roach: I'm really concerned about it. And there's a concern other than the supply-demand that we all talk about. And we know our supplies have been big on pork and although the producers are starting to reduce it's really been a slow process and we think that process is going to start to accelerate, the liquidation process will start to accelerate a little bit as people now look at these grain markets and say, you know, we're not going to have a lot of relief from our high grain prices. Although I'm talking negative on grain prices, I'm not talking about them collapsing. I'm just talking about cheapening a little bit. But for the pork producer cheapening corn down to $6, down to $5.50 that just doesn't give them enough relief. So, we think there will be some liquidation. We think that will cause pressure on the market. And so we're wanting to make some hedges. But in addition to the fundamental side, the index funds that everybody has been talking about and the excess speculations the index funds are the only owners in the pork futures. The commercials and the spec traders are both short and it's the index funds that are long. If the government starts to reduce the index fund's buying potential or their capability and they liquidate we think that could put extra surprising pressure in the hog market.

Pearson: Alright, we need to wrap it up and leave it right there. John Roach, thank you so much, as usual. Our senior market analyst joining us, John Roach. That will wrap up this edition of Market to Market. But if you'd like more information from John on just where these markets are headed be sure to check our Web site, our Market Plus page at our Market to Market Web site where you'll also find streaming video of our program. And, of course, you can download audio podcasts of the Market Analysis and Market Plus segments free of charge right there at the Web site. And be sure, of course, to join us again next week when we'll examine the impact of a new border fence on millions of migrant farm workers. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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