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Market Analysis: Feb 29, 2008: Corn, Bean, and Wheat Markets Continue To Hit All Time Record Highs

posted on February 29, 2008

Traders endured a wild week in Chicago, where nearby wheat prices swung between record single day gains and declines this week. But when the dust settled, prices were up again.

For the week, March wheat gained almost 24 cents per bushel, while the nearby corn contract gained more than 23 cents.

The bulls made their presence known in the soybean pits where bullish export numbers pushed prices into record territory. For the week, March soybeans moved more than a dollar higher shattering the 15-dollar barrier, while the nearby meal contract gained $14.50 per ton.

In the softs, cotton moved sharply higher again this week with the December contract posting a gain of $5.69. In the past two weeks cotton has moved nearly $11.00 higher.

In livestock, the February cattle contract gained 97 cents. Nearby feeders were off 27 cents. And the April lean hog contract declined $3.55.

In other markets of interest, the Euro gained 368 basis points against the dollar. Crude oil gained a little more than $3 to move into record territory. Comex gold gained $27 per ounce. And the Goldman Sachs Commodity Index gained 18 points to close at 678.30.


Market Analysis: Feb 29, 2008: Corn, Bean, and Wheat Markets Continue To Hit All Time Record Highs

Pearson: Here now to lend us his insight one of our regular market analysts, always good to have him, Virgil Robinson. Virg, welcome back.

Robinson: Thank you, Mark. Nice to be here.

Pearson: Well, let's talk a little bit. This wheat thing has been crazy. Is it over up in Minneapolis, Virgil, this spring wheat market? Was this the blow off top? Is it going to head south? What's your guess?

Robinson: What a great question, Mark, I wish I could answer that. The spot contract in Minneapolis had an $11 range this month. I don't think we've alleviated the supply concern. I don't think we've answered the question regarding acreage not only in the U.S. but in other wheat producing areas in the world. So, to answer your question, no, I don't think it's over. I think there is yet the prospect for additional price gains particularly in some of the deferred contracts, Mark, new crop, for example, the July contract specifically and beyond September. We need to address the issue of rationing the demand for that particular product and to this point I have not consistently seen that. Seen spurts, Mark, but not consistently seem that. So, to answer your question, if I had a clean slate tonight I would prefer not to finalize the price of Minneapolis wheat but rather create some type of minimum price, Mark, or at this point defer making the decision of finalizing price to a later date. It might be the March intentions report, the acreage intentions report.

Pearson: That's going to be the next biggie. Let's talk about Chicago, the soft wheat and, of course, the hard wheat markets as well. They were all over the board this week as well. It's been unbelievable. For those who have watched these markets like you and I have for these many years it's just shocking to see what's going to happen next. What do you see now on the board on the soft wheat and the hard wheat? Surely other countries around the world are gearing up to produce a lot of wheat?

Robinson: Well, I think they're making an attempt, Mark, but there are all kinds of different commodities vying for acreage. Interestingly enough rough rice wheat futures here in the U.S. made an all-time high this week. So, the two cereal grains that we predominantly visit about, wheat and corn are in the battle of a lifetime here trying to acquire acres and additional production to meet growing demands. There are some concerns in the southwest United States, Mark, as wheat breaks dormancy, the hard red winter wheat crop, regarding lack of sufficient moisture. The 90-day forecast that I saw, and there are many of them, Mark, but the one I saw isn't particularly encouraging if it's correct, dry and unusually warm. So, that should it come to fruition, Mark, will do nothing but underpin value and perhaps even fuel additional spurts from time to time. So, again, clean slate, at a minimum perhaps a price floor. For those that are in pretty solid financial position, Mark, and have the wherewithal to wait and view other fundamental and variable factors that are yet to be resolved I'd probably postpone making any new and final sales.

Pearson: Okay, well, let's talk about -- you mentioned the other cereal grain being corn -- let's talk about this corn market. You mentioned buying acres. Are we getting acres bought? I've been out and about and I've been in Indiana and good country over there and Wisconsin and Minnesota, South Dakota and everywhere I go the main topic I hear from producers oddly enough is not the high prices, it's the high input costs. So, are we buying corn acres here at these prices?

Robinson: Mark, I would argue we're not. I think more acres are being shifted towards soybeans and there have been two or three independent reports out just this week in that same direction, Mark, in contrast, for example, to what the USDA ag forum released in their budget numbers. The input costs that you mentioned, if you weren't fortunate enough to book and commit to those several months ago you are confronted with quite an issue here, the capital required to plant a corn crop given the input expenses is daunting, so to speak, Mark. And I think it is deferring and switching some producers towards soybeans, towards perhaps their rotations that they abandoned here the last year or two. So, to answer your question, Mark, I don't think at least at this point we have bought sufficiently large enough corn acres.

Pearson: That seems to dovetail everything that I've been hearing from out in the countryside and they are concerned about those input costs particularly fertilizer. Of course, a lot of them are already looking at a locked in higher cash rent for those acres. And, of course, we're hearing these farmland sales in the Midwest topping $7000, $8000, $9000 an acre too. So, all those costs in addition to what it actually costs to get the crop up and out of the ground. What is your take, Virgil, on making corn sales? You think the market still needs to go higher for corn?

Robinson: Mark, I think there is a strong argument in that direction. Now, it's very difficult to look at what is being offered price wise and suggest that's a poor value. I mean, historically it's not, it's very attractive value. But, again, here tonight if I hadn't already made some sales, Mark ...

Pearson: Some pretty good sales, Virgil.

Robinson: Well, on average I think they've been okay, Mark. But, you know, people need to understand this discussion you and I are having started back in the late summer, fall of 2006 addressing '07, '08, '09 and '10 production. There are a lot of people that have already committed to those time slots at prices that are now significantly below prevailing values. It's kind of important for them to think about averaging their sales higher because some of what they made earlier probably aren't profitable as we visit tonight. Now, for those who have not made sales I like the minimum price strategy, Mark, and I suggested that for as long as you've known me.

Pearson: And it's been very effective over time too, Virgil.

Robinson: On average it's worked relatively well, Mark.

Pearson: Let's talk about the flip side and that is soybeans. With the soybean numbers that they're kicking around in terms of acreage, you always use that example everybody is on one side of the boat and you've got to be careful or they all flip over, who knows what is going to happen with that March report. But as you look at things right now it looks like with $15 beans, Virgil, the advantage is on the bean side.

Robinson: Yeah, I think it's attracting some additional bean acres, Mark. And I think there will be more bean acres than what the USDA balance sheet suggested and their number was 70. I think it could be as high as 72 or 73 to the sacrifice of corn and other commodities that we've discussed here tonight, Mark. So, having said that it probably behooves those producers who are in fact moving in that direction if they have not done anything to this point thinking about well maybe I should create some type of an attractive floor here and if we should encounter some kind of weather phenomenon or some type of problem disease wise or a combination of all those things and bean prices move yet higher than these levels, Mark, they could capture much of that yet create an attractive floor, a floor well above their cost of production.

Pearson: I'm going to tape tonight's show when I get home because I said $15 beans. We have $15 beans. 18 years I've been doing this show, $15 beans. Let's talk about deferred sales. What about new crop corn and soybeans? Do you want to do any of that at this stage of the game? I get a lot of questions about '09 and '10 if things go awry somewhere could we see this thing go back down?

Robinson: Well, it's probably difficult in many markets to make an '09 and a 2010 new crop corn and soybean sale in as much as many of the vendors aren't offering a market that far in the future, Mark. So, that may force the producer's hand to have his or her own account and make futures sales, short sales and attach a basis at a later date and arrive at a delivery time. The 2008 I've already done and made some new sales, frankly well in advance of tonight's levels. And as mentioned it's probably important for those of us that started well in advance of tonight's markets to be cognoscente of our cost of production and the idea of adding to those earlier sales at much higher levels to pull our average up. Now, if at some point you want to create an inventory it can be done, Mark, with some type of option position or some type of vertical call spread or bull call spread. I still like that kind of risk management idea.

Pearson: Alright, some good ideas, as usual Virgil. The cotton market has moved $11 in two weeks. We were talking about wheat, that's a wild one.

Robinson: Yeah, and I'm not sure it's supply driven but here again there are some weather concerns, there are some acreage concerns and as you mentioned earlier that is a lot of equity tributary to various commodity markets that I think is in play here. The weakness of the U.S. dollar, the inflationary mentality, you were talking about stagflation, I would suggest there are some indicators that are pretty strong, in my opinion, indicating inflation. Often times commodity prices are attractive particularly when they are coming from an unusually low level, they do have some attraction to that type of investment capital and I think that's what's going on there.

Pearson: Just getting part of the snowball as it's rolling down the hill.

Robinson: I think that's correct.

Pearson: Virgil, let's talk about livestock for just a minute. The fed cattle market you get out and you hear the whole flip side of this high corn and bean market when you go out and talk to cattlemen and cattlewomen and pork producers and others out there, poultry producers, dairymen. Let's talk about fed cattle prices first. As you look down the road what do you see? Now, we've talked about stagflation, certainly there is concerns about job growth, there's other issues out there, consumers don't seem to want to bid up for high quality, those good inside cuts when they are not making as much or they're paying so much for gas. What is your take on the beef market right now?

Robinson: Well, in the context of your question or your statement, Mark, I would argue that I'm not seeing a significant build up at least in inventories, cold storage reports, for example, given the circumstances we have, worry about recession and higher prices and so on. I still think beef demand is relatively strong. We have increased our export trade, it isn't anywhere near what it was a few short years ago, Mark, but it has improved and I think that certainly is encouraging. The combination of beef production which year over year at least to date, Mark, is about a percentile less than 2007, I think that combined with the competitive meat supply is probably going to keep the live cattle market for the balance of '08 in the low 90's. So, if I had the opportunity, as a producer looking forward now through the balance of '08, if I had the opportunity to use a futures contract, attach some type of historical basis and lock in something near the mid 90's I would do that. I think that would prove to be a pretty good hedge over the course of the next several months.

Pearson: We mentioned buying acres, I've talked about this on the show several times but hay acres need to be bought too. We've had record hay prices throughout the Midwest. With all the snowfall it's been a very hard winter in the livestock sector. We're seeing prices for straw, for bedding that have been extremely high. Corn stalks being used as a winter feed. Talk to that cow-calf guy for just a minute. He's looking at some pretty rough numbers too because this calf market is following as that corn market strengthens.

Robinson: Yeah, numbers are down a little bit year over year in terms of calf numbers or projected calf numbers. And, again, as mentioned the deferred cattle futures contracts have kind of crept higher kind of quietly over the course of the last couple of months approaching some levels that I think will attract some hedges. So, again, my best guess feeder cattle futures wise is probably a flat to declining market given the input costs, the costs of grain, the costs as you described here earlier. I don't sense they're in position to put on any significant gain here.

Pearson: Got about 30 seconds, Virgil, real quick, the hog market what do you see?

Robinson: Again, combination of pork production which remains awfully high, Mark, in addition to competitive meats. My guess is through the balance of 2008 a live hog market somewhere in the low 40's. If I had the opportunity to protect $45 or better any futures contract less a basis I would capture that, I would make hedges.

Pearson: Alright, as usual some outstanding insights. Virgil Robinson, we sure appreciate it. And that will wrap up this edition of Market to Market. Now, before we go we'd like to leave you with this reminder. The Weekly Journal of Rural America is not just a slogan to us, it's the embodiment of our commitment to bring news and market analysis that is important to the people of rural America. So, if you value the information you receive on programs like Market to Market please remember to support your local public television station. You'll be making an investment in television programming that matters. Until next time, thanks for watching, I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news soybeans wheat