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Market Analysis: Apr 11, 2008: Walt Hackney and Doug Jackson

posted on April 11, 2008


The supply and demand estimates pushed corn and wheat prices higher briefly, but not enough to offset losses during other sessions.

For the week, May wheat lost more than 75 cents, while the nearby corn contract gave up about 15 cents.

USDA revised its estimate of soybean stocks upward from last MONTH, but predictions of dramatically lower supplies than last YEAR were friendly to prices. For the week, May soybeans gained 55 cents, while the nearby meal contract advanced $11.00 per ton.

In the softs, cotton broke out of its recent downward trend with the December contract posting a gain of $3.64.

In livestock, the April cattle contract gained 80 cents. Nearby feeders were up nearly a buck. And the April lean hog contract gained 43 cents.

In other markets of interest, the Euro gained 114 basis points against the dollar. Crude oil was up nearly $4.00 per barrel. Comex Gold gained 14.60 per ounce. And the Goldman Sachs Commodity Index gained nearly 20 points to close at 707.50

Market Analysis: Apr 11, 2008: Walt Hackney and Doug Jackson Pearson: Here now to lend us their insight on these and other trends two of our regular market analysts, Walt Hackney and Doug Jackson. Gentlemen, welcome back. Good to have you. Let's get right to it, let's talk about these grain markets. Obviously a lot of things are now in the market that weren't there a couple of weeks ago. The prospective planting reports are in now, the WASDE estimates are in. Doug, no matter how you slice it it's a tight market for almost everything that comes from the soil.

Jackson: Well, that's right, Mark. We're still basically dealing here with an inadequate acreage supply. As bizarre as it is USDA's priority apparently has shifted from providing enough food or guaranteeing enough food to guaranteeing enough fuel. USDA is clearly playing Russian roulette with the food supply, they are playing brinkman ship here with a policy that looks like it's simply that of pray for rain. We see no move over the CRP program, we see no move to change the mandates, the imports or subsidies on ethanol and they keep waiting to want to see the next June 30th acreage report before any policy changes. They want to see the summer weather this year when, of course, we can not tolerate anything but weather perfection or we'll need to see prices ratchet higher to start the job of demand rationing. Clearly USDA's policy is to be willing to accept a relatively significant reduction in the livestock sector, maybe as much as 10% which would cut about 500 million bushels worth of feed demand to ensure minimally adequate supplies for biofuel. So, what we have here is a situation where on December corn we may be near a $6.00, $6.10 equilibrium price, if you just froze Dec. corn at $6.10 for a year we'd probably get another million and a half acres, that is what USDA is betting on. And if you have average trend yields and we ration some hog demand, feed demand in '08, '09 we'd end up with about an 800 carry out and that is pipeline minimum acceptable levels but it wouldn't be out of control. So, we may be in a sideways market here at this price for several more weeks until we start to either add or subtract premium for the weather market. If we have a weather market we have to move sharply higher to ration demand to some degree.

Pearson: Let's talk about the wheat market first. That market being pulled by some other factors too, excellent demand but also you mentioned crop problems. The wheat crop was a mess last year, not just here in the United States but virtually everywhere in the world.

Jackson: That's right, Mark. But the trade is looking now at the likelihood of about a 40 million ton increase on the world wheat crop. So, even though U.S. crop prospects are mediocre with the first national rating some 20 or 30 points below a year ago still the probability here is with good crops coming along in Europe, Russia and the Ukraine, good moisture in Australia, a dramatically changed situation so far to last year's situation you have two dollars a bushel down side in Chicago July wheat from current levels. Even if we end up with a mediocre crop in the United States we'll still rebuild inventory here and we will rebuild inventory in the world. So, what we'll see in all probability is that wheat collapses to a more normal premium to corn. So, even if you have $6.50 corn, $1.50 premium still takes Chicago wheat substantially below where we are today. And even though we're well off the highs, of course, after Minneapolis exploded the odds favor substantially lower prices on wheat to where it becomes at least a marginal feed grain down the road. So, the trend there is lower, people need to make sales and we need really a disastrous reversal of prospects today to really change that scenario. It's the only scenario in the grains that we think is negative from here.

Pearson: Real quick I want to talk again about the corn market. You talk about $6.10 if we maintain that drawing in enough acres. Can we do that? And with this acreage, with the prospective plantings report last year we still had a huge shift from beans to corn. Could we see a shift from beans back over to corn do you think in June?

Jackson: A reversal of the directional change in acreage is not unprecedented, Mark. But getting more acres switched after the March report, my final of more than 2 million has only happened once and that was, of course, last year. So, to bet on a big acreage shift is difficult. But we do know that people are making shifts in their intentions with fertilizer and seed purchases immediately after the March report. The market is going to assume one to two million more corn acres and that much less bean acres in the June 30th report. We're going to be debating that all the way practically to the 4th of July.

Pearson: And would you make corn sales?

Jackson: No, we think the thing is such a hair trigger situation as we've talked for so long that we just don't really have enough acres. And, of course, we need six or seven million more corn acres in 2009. So, see the problem never goes away. The slightest suspicion of a weather threat, real or imagined, and you'll have prices explode to start the process of demand rationing. That's why we're where we are today. And if you had to actually discount the possibility of a five or seven bushel yield decline with weather you could have $7.00 futures very, very quickly. And we're going to be behind normal planting next Monday, the following Monday and even maybe the last week of April so it is imperative here that the weather clear up and warm up to start getting this planting underway. But that is the forecast as we go home this weekend. The weather market will start to unfold now next week.

Pearson: I was down in Texas a couple of weeks ago, not in a big hurry to get things planted. They're in a big hurry, just waiting for the weather and certainly up to the Ohio Valley, southern Indiana, southern Illinois and those regions. So, it remains to be seen what happens there. But what is that going to mean for soybeans?

Jackson: We have a situation that the May 1st official new crop supply-demand situation will probably look negative to the market. They'll have about a 250 carry out. Mark, we know with two stocks reports behind us now that the government drastically underestimated last year's bean crop, maybe by as much as 140 million bushels. So, that error is floating around in these statistics, the government took the residual use down to nearly zero. We really don't know how many beans we have out there but the demand is still above expectations. U.S. stocks this year could still be at minimum levels and the market is not going to accept that government number in May but rather try to discount the probability of somewhat less acres and a bigger demand. The bean situation is not out of control but if you have any weather threat there it becomes explosive too. We're going to be in a giant, choppy, sideways market for months to come with 70 cents a day moves not uncommon. Long-term, though, we need higher prices to get millions of more acres planted in South America. Mark, we need 6 million more acres in the western hemisphere every year forever to balance the long-term supply-demand and with ethanol stealing corn acres in the U.S. it's all got to happen in South America. We won't expand acres at this price long-term like we need in South America.

Pearson: Final question, Doug, real quick is the weak dollar. Do you see any strength ahead?

Jackson: It makes the U.S. dollar denominated futures work even higher to overcome that problem with the currency to get the acreage expansion in South America. So, it helps foreign buyers but it makes it harder to get the acres we need in South America and that is the key impact on the beans.

Pearson: Walt Hackney, let's talk about how this is affecting the livestock sector. And all I'm hearing from producers from dairymen in Wisconsin to pork producers up in Minnesota to cattle feeders in Texas and Nebraska is red ink. What is your outlook now for fed cattle prices and what are you seeing ahead for the industry?

Hackney: As we speak cattle bring in $88 in the feedlots. At that level they're losing from two to three hundred dollars a head and the same token, at the current rate of cash price on hogs they're losing $40 a head. Unprecedented losses in the hog industry. We're going to see an exodus of the smaller, independent group of hog producers go out of the hog industry probably in the next four months. There will be an enormous call rate of sows coming in first out of that group. After they have liquidated then we'll see the corporate hog farms, the big ones that are primarily owned by the parent companies of many of our packing companies, now they have been able to orchestrate a hedge program that has kept them somewhat level. But as this cash market retains its level, as the corn as Doug has been speaking here, $6.00 corn in the cash for heaven's sake, that will put gain costs totally prohibitive even for the corporates. The question being interestingly do we have enough sow-packer capacity to take care of that exodus of sows out of the sow herds. So, that happening, if it does, we will see 2009 as a lot more lucrative kind of an opportunity for hog producers than right now just simply due to the lack of numbers. In the cattle industry we had a fairly good asset base up until a few weeks ago and then as that market broke down from $91 or $92 and went down to $85, $86, $87 we got into some monumental losses and the only thing that has kept this market anywhere near solvency lately is when we approached April 1 there was nearly a record amount of April hedge contracts sold to packers on a basis back when April was at $1.01 and they were able to get $1 to $1.50 basis back on the board and sold their cattle. Now, those cattle are being delivered this past week and this week. So, that has helped in that respect to firm up some of the asset base that producers are losing forgetting, of course, that we're sitting here with an enormous cash crop of cattle that are uncontracted, ready to come into the market as soon as the packers can take them. Those cattle are going to lose over $200 a head. The industry is looking at about -- I was interested in Doug's remarks about 10% -- we're looking at about a 10% reduction in the availability of feeder cattle this summer and the calf crop this fall. The calf crop primarily was due to an enormous raid of cows out of the southeast states and then again later on out of Montana and Wyoming, Colorado. So, as a result we're going to probably see 10% fewer calves this fall. It's probably going to be just about right actually. The demand, the economy, the budget of the shopper is not allowing her to go into the supermarket and pay supercharged prices for choice beef. So, as a result she's buying the economy cuts and she has cut down on that buying opting to go with the pork or the chicken in regard to her budget. So, as a result of that this 10% that everyone is somewhat excited about probably is not such a big thing because demand for the product is going to probably be dropping down to that level.

Pearson: Walt, about 30 seconds. Fed cattle price, where do you think we'll hold?

Hackney: Well, today at $88, after they get done April deliveries hopefully $90 to $92.

Pearson: So, going to continue on the cattle side. Hog prices, what do you see ahead at least on the board or cash prices?

Hackney: Straight out base price on the hogs somewhere around $37 to $39 with premiums added somewhere around $43 to $45.

Pearson: Another 15 seconds, Canada hogs. Is the rate still increasing? Are they still coming down?

Hackney: Not really, I think the Canadian producer is strapped because of production costs and has already cut back on his inventory.

Pearson: Alright, Walter as usual we appreciate it, Walt Hackney. Doug Jackson, thank you very much. That will wrap up this edition of Market to Market. But if you'd like more information from Walt and Doug 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. And, of course, you can download audio podcasts of Market Analysis and Market Plus segments absolutely free. And be sure to join us again next week when we'll learn what 16 million barrels of beer have in common with a gallon of gasoline. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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