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Market Analysis: Jun 27, 2008: Grain Markets Rally in Advance of USDA Report

posted on June 27, 2008

The Agriculture Department will release its latest Acreage Report Monday, revealing the impact of severe flooding in the Midwest. But the trade already appears to be factoring in the reality of substantial crop losses.

For the week, July wheat gained 29 cents, and the nearby corn contract was up a more than 33 cents.

Despite drier conditions that enabled many growers to plant soybeans this week, prices followed suit with the grains. For the week, July soybeans gained almost 50 cents while the nearby meal contract was up $16.20 per ton.

In the softs, cotton trended higher again this week, with the December contract posting a gain of $1.29.

In livestock, the June cattle contract gained $5.40 cents. Nearby feeders were down $1.85, and the July lean hog contract declined nearly $4.00.

In other markets of interest, the Euro gained 155 basis points against the dollar. Crude oil gained $5.59 per barrel and closed at a record high. Comex Gold gained $27.60 per ounce. And the Goldman Sachs Commodity Index gained nearly 25 points to close at 866-even.


Market Analysis: Jun 27, 2008: Grain Markets Rally in Advance of USDA Report

Borg: Well, here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Virgil Robinson. Welcome back to Market to Market. I'd just like to start out with you, if I can, Virgil. We've talked a lot in doing the program about record oil prices, grain prices soaring. Grain prices seem to be driven primarily by weather at this point. You can disagree with me if you want to but that's the way it seems to me. But I thought that the market factored in weather already but this week, still higher.

Robinson: Well, the weather conditions remain adverse in several areas, Dean. So, that relationship is not likely to disappear in the immediate future. That's going to be an issue we deal with for the next several weeks to the extent that I saw a private estimate from a reliable source this week suggesting that 30% of the corn crop will not be mature by October 1 which is ten percentage points larger than normal. So, frost will become an issue as we move through the balance of this growing season.

Borg: What are you advising growers right now on those that have good looking corn, good looking soybeans right now? What are you advising?

Robinson: Well, I think it would be prudent to take a look at Monday's data, Dean, and in that context we can maybe establish a few benchmarks for our viewers. Corn acres the average of analysts guesses is 85.3 million which is down from the March intentions report, USDA report of 86. So, the point here is should the number on Monday be appreciably below that or above that it will clearly have immediate implications to futures, grain futures prices and subsequent cash. So, that's one benchmark. There's also a stocks and all positions report and the median of analysts' guesses there, 3.9 billion which would be above the previous year's 3.5. So, again, appreciably above or below, that will have immediate impact on the futures market.

Borg: What about wheat?

Robinson: A couple of things I think are worth noting, again, Dean, at present U.S. and world production and ending stocks are projected to grow year over year. Recent estimate world wheat production at about 663 million metric tons. So, the market is anticipating an increase and a growth in production and subsequent ending stocks. Therefore the underpinnings of the market are more bearish simply because of that than they are, for example, in the corn market. Please be advised, however, wheat does have a very strong price correlation with other coarse grains and primarily corn. So, should the price of corn continue higher it will serve to underpin wheat values.

Borg: Now, on corn itself?

Robinson: Again, we'll see the numbers on Monday, Dean, but the theme in corn and coarse grains for that matter is year over year decline in U.S. production and subsequent ending stocks as well as in the world. I saw this week the International Grain Council projecting corn production globally at 756 million metric tons. But given our base of disappearance that clearly isn't a burdensome supply and as a result of that the global implications of tight stocks and ever increasing demand in combination with the crop concerns here in the U.S., Dean, and the underpinnings there are more bullish and the price prospects, therefore, remain yet higher as we visit tonight.

Borg: Aren't you also watching -- the story that we had earlier on ethanol possibly being drawn back and some changes there in what is mandated?

Robinson: That's certainly a possibility as the leadership in Washington has become much more vociferous and concerned about the amount of corn that is being consumed for ethanol and ethanol production. However, that remains to be seen and the capacities that we have online as we visit tonight clearly margins have declined versus where they were a few short months ago. But there is yet economic incentive given the RFS and the mandated production capacities. I don't sense that we'll use anything less than perhaps 3.5 to 4 billion bushels of corn this year for ethanol production.

Borg: Now, soybean plantings ostensively, again, the report we'll see on Monday will confirm or deny this, but the soybeans taking the places of corn acres, what do you see on soybeans?

Robinson: Well, a couple of things that I think are fairly obvious. We did this week establish all-time highs in soybean futures. So, it would be kind of silly for me to say the trend of that market is down, Dean. It is not. The trend of that market remains higher. The situation exchange rate wise between the U.S. and Brazil, for example, leaves me a bit dubious of the fact or the given that the Southern Hemisphere will increase soybean acres significantly. I don't think that's the case. So, we have that uncertainty, we have the uncertainty of the Northern Hemisphere's production and crop prospect here again while there clearly can be corrections and pullbacks in each of the markets we've just discussed, the prevailing trend and the prevailing direction of both remains higher.

Borg: What do you see in the stability of some grain elevators in forward contracting and so on of soybeans and corn?

Robinson: Well, a new dynamic unlike I've seen in my 35 years in and around the grain industry to the extent that those who make a practice of buying and hedging grain from our producer base have been restricted because of capital concerns. That is a problem although I think it is being addressed by various lenders. It has caught the attention of political leaderships and I think it will be addressed moving forward. I think there will be, again, a full compliment in due time of new crop bids and bids extending several months forward for our producer base within this harvest season.

Borg: What are the factors driving the cotton market?

Robinson: Well, a couple of things. Again, U.S. production and stocks are projected to decline year over year as is the case globally year over year. So, in the supply-demand structure of that market as we visit tonight is more bullish than it was one year ago. Production remains uncertain in several major growing areas so my choice would be not to finalize price if one still has cotton for sale but rather to create some type of minimum price using a simple put option, for example, or if the basis is unusually strong and revenue is needed the producer could in fact sell that physical commodity and replace that production with some type of call option.

Borg: Walt Hackney, let's bring you into the conversation here. We're going to ask Virgil also to comment after we finish with livestock but give us a little discussion here on cattle, first of all. Where do you see that market going?

Hackney: Three weeks ago, Dean, we had from very serious financial ramification with the cash market being down in the upper $80 bracket, we had gained costs in the feedlots due to $6 corn. Of 95 or so cents a pound we had losses of roughly speaking $200 to $150 a head. Some cases, exceptional cases were more than that. Now, as we've progressed over the last two weeks today this evening as we speak we're selling fat cattle today out of the feedlots from west Texas through Iowa for $99.50. We've had a good $10 a hundred weight raise in the price of cattle. The gains of the cattle has been excellent. We haven't had any weather issues in the feedlots. The problem we have in the cattle is the price of the grain. Now, when we're talking $7 corn now and in some cases $7.50 some of the long haul feedlots in the western areas some of that corn is as high as $7.50 a bushel.

Borg: Is that changing the weight of cattle going to market?

Hackney: To an extent. We feel that common sense at the feedlot level would dictate that a cattle feeder when his cattle hit two and a quarter or two and a half percent of their current body weight in consumption he better sell them because the gain cost of a $1.00 to $1.10 today at this level of corn price, the longer he feeds them past their maximum efficiency of gain that's going to probably run his cost daily up to $2.00 or more per pound of gain.

Borg: And yet the feeder cattle market was down this past week.

Hackney: To, again, an extent created by the uncertainty of where corn was going to go due to the things that Virgil has been discussing, due to the threat of higher priced grain in the corn area. We feel the floods and so forth have cut back on production or may cut back on production enough that we could see continued depreciation in corn.

Borg: Well, that sounds to me like bad news for the consumer in the long run.

Hackney: It would appear the consumer needs to become familiar with higher priced foodstuff and especially in the protein meats and then again especially in beef. The hog producer is not going to be able to appreciate the value of his live commodity like we have in cattle. And subsequently that will allow you the carcass or the primals is not going to substantially raise compared to the primals in beef.

Borg: Where do you see the overall cattle numbers in the coming months and even projected a couple of years?

Hackney: Well, taking coming months it would probably stand to reason that we'll be three to five percent fewer cattle on feed for this year as we complete this year and go into the first part of 2009. It would stand to reason that the availability of yearling cattle on grass is not going to be plentiful enough to cause any kind of an implementation of cattle into the feedlots. We're going to see more in respect to interest in the calf crop coming in October. So, our cattle on feed is going to dwindle to an extent, probably three to five percent as we go into the latter quarter of this year.

Borg: As you look at the pork production market, high cost of production there, big numbers in the hogs. Is that what's driving the price down?

Hackney: Well, yes. To that extent, fuel, of course, is an extraordinary force in the production of pork. The cost of grain is extraordinarily high in this hog units. You've got soybean meal in excess of $400 a ton. You've got corn threatening to go to $7.50 in many of the hog units a bushel. As a result you've got a break even on the hogs that's going to be proportionate to 90 cents live weight, not carcass value. Now, tonight, for an example, carcass value was somewhere around 73 cents, 73.5. It has got the potential of costing 90 cents on a live weight basis to break these hogs even.

Borg: Does that continue to be looking like a depressed market for the foreseeable future?

Hackney: I think it's unavoidable. I believe that we've not had the liquidation of sows that were sort of expected by some of us, particularly myself, over the last three to four months. I would have thought the producers eroding their asset basis, they have been doing, would have in fact started liquidating sales and they haven't done that.

Borg: Virgil, from what you've heard Walt saying here, as it relates to grain and the overall market, comments?

Robinson: Well, again, I think Walt has made mention of the fact we've not seen the demand rationing that we would have thought to have occurred given the last several months of price increases in both forms of protein, corn and vegetable meal. Now, it appears there is some underway and will likely accelerate assuming we continue to keep the strong, flat price levels that we have tonight and I think that's what one needs to manage his or her business against.

Borg: Overall, it looks like grains are going to be expensive for livestock producers for the foreseeable future?

Robinson: Yeah, I think that's a fair assumption at this point.

Borg: Walt Hackney, Virgil Robinson, thanks so much. That wraps up this edition of Market to Market. But if you'd like more information from Walt and Virgil on just where these markets may be headed you can visit the Market Plus page at our Web site where you'll find streaming video too of this program and you can also download audio podcasts of Market Analysis and Market Plus segments. It's all free at the Web site. And then be sure to join us again next week. We're going to be meeting a woman who is on a mission to make the family farm safe for children. Until then, thanks for watching. I'm Dean Borg. Have a great week.

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