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Market Analysis: May 02, 2008: John Roach, Senior Market Analyst

posted on May 2, 2008


The downward trend in wheat prices continued again this week while corn broke back into positive territory.

For the week, May wheat lost 45 cents, and the nearby corn contract gained nearly 25 cents.

Soybeans also were under pressure this week with the May contract down 33 cents, while the nearby meal contract lost more than $9.00 per ton.

In the softs, cotton had another losing week as the December contract posted a loss of $2.20.

In livestock, the June cattle contract was down $1.25. Nearby feeders lost $2.10. And the May lean hog contract gave up $2.67.

In other markets of interest, the Euro lost 176 basis points against the dollar. Crude oil lost $2.20 per barrel. Comex Gold lost more than $30.00 per ounce. And the Goldman Sachs Commodity Index lost nearly 13 points to close at 731.70.

Market Analysis: May 02, 2008: John Roach, Senior Market Analyst Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, we just had the story with Bruce Rastetter talking about ethanol and the success that they have had and the success that biofuels have had as we pointed out earlier in the Iowa State report of reducing gas prices at the pump here in this country. But if you look at the news you hear about rice rationing at Costco and Sam's Club. You see the gas pump where people are daily surprised by what is going to happen. We finally saw prices come down a tenth of a cent this last month but these high crude oil prices, high commodity values worldwide, John. What are your thoughts?

Roach: The commodity market is enjoying a huge bull market move. And it's lifting all boats, if you will, with the exception of maybe cotton. And what's happened is we've created exchange traded funds that allow people to go online in their retirement account and very conservative investment vehicles and click on a fund that basically owns a basket of commodities. The Goldman Sachs Index was one that you just quoted here on the lead-in and we've got several other different indexes, they're all balanced in different ways but the bottom line is it allows everybody to participate in basic commodity inflation. And people look at this and wonder maybe what that is really causing but I think what's clear is we have brought a lot of new people into the marketplace looking at commodities as a new investment vehicle and new asset class. And most of the people are coming in as buyers and because the trend, up until just the last couple of months, has been nothing but straight up, those people have made a lot of money and like any other kind of a marketplace when people make money more people put their money in there and they put increasing numbers in and so forth. We saw similar situations many times here over recent years. We saw a dot com asset class that took off and everybody made a lot of money until it collapsed. We saw the real estate markets take off and everybody has made a lot of money until they've collapsed quite a little bit. And now we're into the commodities and people, as we see with all these big bull markets, people can't come up with the reasons that the market should end. And that's the way it always is in the middle of the market. Until you print the high and until you turn down people can't see how it can possibly change. And that is what we're in right now. We're right in the midst of that and it's in the newspaper every day, it's on the television every day and we have a market that is bubbling because of that.

Pearson: And that bubble some tell tale signs, John, the strength of the dollar this week, are we starting to get some signals that maybe we have run out of legs in this current commodity bull cycle?

Roach: Well, part of the reason that we have the commodity bull cycle going is because the dollar has sunk considerably from its peaks back a couple, three years ago. And as it has sunk that means the commodities priced in dollars can all go up in value and for someone in Europe, as an example, the price really didn't go up quite as much as it appears. But you're exactly right, the dollar quit going down, started going back up for whatever reason, not because of solid economic reasons that we can see, not because of any promises from the politicians that they're going to change their way of spending money but for some other reason the dollar has started to strengthen and with the strengthening of the dollar that may, if that continues, that certainly will take a lot of the umph out of this marketplace.

Pearson: Like you say, we'll see the peak in the rear view mirror and we'll see what happens from then. We are trying to watch these little things. Obviously wheat coming down some again this week. From an inflation standpoint and from a commodity bull cycle we're backing up there and seeing some decent crop prospects now.

Roach: I remember talking with a customer who had $20 wheat, he was offered $20 for his wheat, had his entire crop and he said, I'm not selling it because it's just too cheap.

Pearson: No protein premium.

Roach: No protein premium on top of it. And now all of a sudden that wheat is worth half or close to half of what it was worth just a few months ago. The cotton producer saw prices spike up in February and March only to erase all those gains here in just recent weeks. So, we see some markets in there, in our total mix that is starting to get unraveled. The one, of course, that is really leading everything, the oil market has not yet started to unravel but we are seeing some caution flags flying on the overall index for commodities. And grain producers need to be understanding and livestock producers as well need to understand that if the overall index is still inflating then commodities that they produce will tend to inflate as well. But if the index turns and starts to deflate then it's hard for anything to get stronger.

Pearson: Alright, let's talk about the corn market, John, just what your take is on there. Still an acreage question out there, what that's going to look like, a little slow on the planting so far this year. What else is this market looking at?

Roach: Well, we're a lot slow on the planting and we're really uncertain about acreage and we're really uncertain about yield and as we look forward with the energy prices having moved up we can make a little bit of money with high priced corn going through the ethanol business, even the corn price we had this fall, not a lot of money but a little money as long as that all holds together. So, that is what the corn market is dealing with right now. We're really trying to figure out will we have the potential here to raise the size of crop we need. And that is the reason the corn market is staying strongest of all the markets right now because it's in the greatest period of uncertainty.

Pearson: And the flip side of that is acres for beans might go up, as you pointed out, as behind as we are in getting this corn crop in the ground in 2008. It starts to give us a scenario where we could see maybe that acreage not shifting back into corn that had shifted over to soybeans.

Roach: Well, we thought, after we saw the March 30th acreage report, we thought there's probably the smallest bean acreage number we'll see and we'll see some of this corn acreage move over to beans and now we're uncertain because of the weather situation. But the thing that producers need to remember is when you're in this uncertain weather situation that is typically when prices make their high. And I know it's easier to understand when we're in the heat of the summer weather scare but right now we have a solid weather scare that has been underway fro about two weeks, maybe even three weeks in the corn market and the market really hasn't made any new highs in the last three weeks. We made the high, backed off and now we keep bumping against them but we're not able to go on further. It looks to me like the corn market is fully priced. That is my way of looking at it. And it's too soon to say that the corn crop is going to be reduced by the weather. We know that it could be but it's been a cool winter, it could be a cool summer. We may not have the worries in the summer that people think could possibly happen. It may not actually happen at all. So, markets are putting highs in here and producers need to use this as an opportunity to get some marketing done of the crop that they have in the bin, the crop that they're going to produce this fall. We're nearly sold out on all the corn that needs to go to town this fall for our customers. The corn that a producer does not want to store we sold nearly all of it. We've got one more increment we'd like to sell and we're debating whether we want to do that next week or stall it off into the summer. But this is the time to be securing the profit levels on the farm. People need to remember that it was less than 24 months ago when I was able to buy cash corn in northwestern Iowa for $2.05 a bushel coming out of the elevator. Now, that same corn for this upcoming fall is nearly $6 a bushel. That's three times the price it was. We can't look at this market and fail to recognize that we are in a bubble.

Pearson: Okay, John, what about the soybean situation? What is your take there?

Roach: Soybean situation -- the soybean market I think has got some problems. We never had the tight world supplies on soybeans that people imagined that we had. We had tight world supplies on wheat but if you look at the stocks of soybeans in the world that we're going to have this fall before we harvest any new crop we didn't ever have really a tight supply. We knew we would get a tight supply if we didn't have acres and so forth. Well, now we're going to get the acres it certainly appears like. The soybean market could do exactly the same as the wheat market which is to after putting some very high price levels in the winter we could have some very disappointing kind of price levels as we move forward if we have a decent growing season. So, rallies in the soybean market are meant to be sold in my opinion.

Pearson: Let's talk about livestock, John. Obviously who hasn't benefited? It's been those folks who are in the livestock sector who didn't have those feed needs covered. What do you see ahead for the livestock producer? Are we going to have to see beef prices, pork prices align much higher to keep this thing going? Or will we get a break in these feed grains?

Roach: Well, if we're going to maintain feed grain prices where they are right now where we're looking at harvest time prices at $6.25 for December corn livestock prices have to go dramatically higher. Meat prices at the grocery store have to go dramatically higher in order to put a margin of profit in there and pay for all the transportation costs that are involved with these higher energy prices. So, if you look at the grain market without looking at the livestock market or vice versa you're going to get a bad picture. I don't see livestock producers able to make much money now at all, for this upcoming year at all and I think that they have started the liquidation process, we're seeing it in the sow herd liquidation, all the numbers show that leaving cattle out on pasture and raising them to a heavier weight is the only way to go rather than putting them into the feedlots. So, we're going to slow this whole meat process down. And so as we look out forward we think we'll have higher prices on out forward but we think it's only going to occur as the livestock industry slows down its production numbers.

Pearson: You mentioned hogs, you mentioned sow liquidation, that's where the impact has been the most dramatic of the higher feed costs. We keep hearing about liquidation, keep hearing these disaster stories people trying to liquidate sow herds, just finding somebody to haul them off. What is your outlook now for hogs? What would be your timeframe for these prices to improve?

Roach: Well, I think the prices a year from now will be better. But I think in the interim period between now and then we've got to go through the liquidation process and we're seeing a little bit of reluctance starting to show up on the export side of things. Russia backing away from some of their exports. So, what we think is that the market which has had a pretty good run up, has gotten itself nearly fully priced for right now, the futures market stalled out and backed off a little bit this week so it looks to us like we're fairly well priced at the moment. We should have stronger prices in the summer but as we look at the stronger prices out a month from now we would want to be hedging the fall hogs at that timeframe. We'd like to get the rest of this year covered on stronger prices and then we're going to have to see what we can do here for this upcoming year. If there is profit margins in there it may still be okay to go ahead and do the first quarter of '09. But by and large higher prices are coming down the road.

Pearson: Alright, John Roach, as usual, some excellent insights. We appreciate it, John Roach, our senior market analyst here on Market to Market. That's going to wrap up this edition of Market to Market. If you'd like more information from John on just where these markets are headed visit the Market Plus page at our Web site. You'll also find streaming video of our program there and you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free right there at our Web site. And be sure to join us again next week when we'll examine a cooperative effort in Wisconsin that is providing health insurance for farmers. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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