One sector of the economy needing little economic stimulus these days is agriculture. Bolstered by expansion of the renewable fuels industry and blistering global demand, corn, wheat and soybean prices ALL are in record territory.
The upward trend continued this week as the Agriculture Department released its monthly supply and demand estimates. And with USDA calling for the lowest U.S. wheat ending stocks in 60 years, prices moved limit higher.
For the week, March wheat gained $1.50 per bushel and flirted with $11.00, while the nearby corn contract wrapped up a volatile week with a gain of more than 7 cents.
USDA reduced both U.S. and global soybean stocks -- supporting "beans in the teens." For the week, March soybeans moved more than 50 cents higher, while the nearby meal contract went up $18.30 per ton.
In the softs, cotton trended higher again this week with the December contract posting a gain of $2.29.
In livestock, the February cattle contract gained nearly $2.00. Nearby feeders were off 43 cents. And the February lean hog contract declined $1.80.
In other markets of interest, the Euro lost 198 basis points against the dollar. Nearby crude oil prices gained $2.81 per barrel. Comex gold gained more than $26.00 per ounce. And the Goldman Sachs Commodity Index gained nearly 25 points to close at 620.20.
Pearson: Here now to lend us her insight on these wild markets is one of our regular market analysts, Sue Martin and a very special guest analyst, Mark Gold joins us as well. So, both of you, welcome to Market to Market and Mark, good to have you here. Sue, let's talk about today's numbers from USDA particularly as they pertain to wheat. The lowest carry in 60 years, that is a darn tight supply of wheat. The markets have been responding. What is ahead?
Martin: Well, basically the market is responding to a short hedge position in the board and needing to get out and the market is bidding limit. In the process we're rationing demand. But at the moment we haven't finished this off. There was news after the close today that starting Monday all exchanges on the wheat will go to 60 cent limits and if they block limit and don't trade on Monday they'll go to 90 cents on Tuesday but if they don't trade they'll go to $1.35 on Wednesday. So, this is the type of action you need to see to finish this out and clean up the market. There has been an ability to get rid of positions for the shorts if they did it through spreads whereby they would be buying the March wheat and selling the May or the July. And in doing so then they could turn around, and usually they were using the July, they'd turn around and buy back the short July as soon as they were finished off into March. I think the key thing here is that we need to look at this wheat market and it has far exceeded what most anyone thought it would do. The pasta makers are so intent on needing to have spring wheat to blend they couldn't get it and there is wheat in farmers bins in the Dakotas and in Minnesota, not majorly, maybe a third of the crop. But I think what has happened is they're not selling, they're sitting on it and usually that occurs when they overpass, make it too optimistic and then they watch the premiums disappear as the market goes down. And with these expanded limits what it says is the market can go down faster than it went up, which usually happens. So, when I look at the wheat now it's also driving the KC wheat because it's the next best protein out there and, of course, then it drags the soft red right along with it. So, I guess I would be telling producers that are in these protein areas in the KC and in the Minneapolis and even in the Chicago use these rallies here and get some stuff marketed.
Pearson: Alright, Mark Gold, as you look at these markets, again, record territory, an unbelievable move in wheat as Sue alluded to and part of this is the short positions that have taken place in Chicago, people getting blown out. But for a producer these prices, this is Disneyland without going to Orlando.
Gold: No question about it, you know, when you get historic prices like this I've been waiting for beans in the teens for 30 some odd years. Now we not only have beans in the teens, we have wheat in the teens. The March Minneapolis wheat basis the option theoreticals could trade as high as $20 to $21 before it's all said and done. Nobody in their wildest dreams would envision this. It's all about the protein. It's all about the short positions and the margin calls. I understand there's some of our friends up north in Canada have got some serious problems and it's causing a ripple effect throughout the whole industry. What's keeping the American farmer here is it's giving us an opportunity, this old crop is dragging the new crop up to incredible levels giving us an opportunity to be looking at pricing $10, $11, $12 new crop wheat out there and at least, in my opinion, buying a put option to protect the down side, let's see where we can go on the up side. It may not be over for a while yet but let's take advantage while it's here.
Pearson: Alright, so definitely get some pricing done is your opinion on wheat?
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Pearson: Alright, now Sue, do you agree with that? Do you want to get some sales made here?
Martin: I think so, I think this is an opportunity and you have a lot of volatility. I think another thing is happening here with the wheat and the beans will probably get there too and maybe are starting to. I think we're doing a new price structure in the markets, in the grains. Cattle went through this back from 2003, once they exceeded the 80 level and went to over $1 now they don't barely come back down to 80 cents. And I think the grains are doing the same thing at this time. You know, an example what might be cheap for wheat now might be $7 wheat.
Pearson: Alright, so Mark, what about that?
Gold: Well, I disagree with that. I think we've heard a lot about this new millennium and this new paradigm in agriculture and certainly the lows have gotten higher, the highs have gotten higher but in my opinion at some point we're going back to those lows. Now, the lows in wheat, are we going back to $3 wheat? Probably not. Can we go back to $4, $5 wheat? You bet. What we've seen in every historical spike in markets over the last 100 years is we're going to have overproduction, we're going to have demand backing off as Sue talked about and when you have a situation with over production and a lack of demand you ultimately lead to a crisis in the market. What concerns me most is with the input costs as high as they are for cash rents, for fertilizer, for seed a lot of the inputs that we have out there what will happen nine months from now? If we don't have a drought, we over produce and we have the lack of demand as the millers go out of business and other people go out of business can a farmer afford not to protect these prices? The farmer has to have $3.40, $3.50 corn this year in order to break even, he's got to have $6, $7 wheat, he's got to have $8, $10 beans and if we go back to the historical lows, even though they may be higher than they've been, we could have a real crisis in agriculture. So, we want to protect against that.
Pearson: Let's talk about that on the wheat side. The plantings for wheat was really disappointing that the USDA came out with because of seed problems, things we've talked about on the show periodically, being able to get the seed for one. Worldwide it looks like we're starting to pick back up so maybe we will see that worldwide, the Ukraine, Russia, some of those regions will start to pick up. Mark, is that what you're seeing?
Gold: Well, Canada, Australia this year, all the places you would normally see some big wheat crops, Russia, we know the Germans are going to be up about 7%, we were up 1.5 million acres on the hard wheat but coming into the spring wheat I know a lot of farmers in Idaho where they rotate the potatoes, fallow and wheat, wheat is just a cover crop. $15, $20 wheat is going to make it much more than a cover crop and that's how a lot of it is irrigated off the Snake River so they can get 100, 120 bushel wheat up there. High prices will make the American farmer look around and nobody is better at taking advantage of this than the American farmer and they will plant and get the job done and unfortunately this over production will happen around the world and ultimately it's going to lead to lower prices.
Pearson: Alright, Sue, following that I think follows what you're saying. Would you go out and sell some 2009 wheat?
Martin: Well, I think I would on this rally. Here's the problem. You're getting your commercials, your elevators that are not wanting to partake in that. They are a little leery selling say a new crop a year out because they know that that's margin money that is going to be on the hook for a year along with interest on that money and so we've got elevators backing away from doing so even in corn.
Pearson: Alright, Mark, seeing the same thing in wheat?
Gold: Well, not only in wheat but we're seeing it in corn and soybeans as well where the elevators don't want to be out on that hook. We've seen the banks now curtailing the commercial activities, the commercial is curtailing what the farmer can do. If the banks and the commercials don't want these margin calls I can't imagine why the American farmer wants them. That is why we'd be using put options, use '08 puts to protect '09 now. If we have a problem it's going to be now, use the '08 puts to protect '09 crops.
Pearson: Alright, let's talk about the corn market. You both brought it up already. As we look ahead for corn not quite the move this week in corn and the USDA number in terms of carry, 42 days of not a scary number. What is the outlook for corn? Obviously around $5, Mark, I mean, in my lifetime that's been a darn good price to sell corn.
Gold: It's been a historic price in our lifetime. You know, the price of corn is going to depend, in my opinion, really on one thing. If we have a drought this summer pick a number on corn, you'd be foolish to put a number on it, could be $7, $8, $10 if there's a serious drought. If we don't have the drought with these new seeds that we have out there, some of the yield guard stuff, we're going to see some big yields and prices can go right back to $3 a bushel here. I think what's key, again, for the American farmer is to protect it out here and to manage this risk while you have the opportunity. Don't let this slip away from you, manage the risk today.
Pearson: Alright, Sue what is your recommendation to a producer on selling? There's a lot of old crop corn out there too which I guess we should mention. But I'm making new crop sales, what would your strategy be for a producer?
Martin: Well, I think that when I would look at this market I've been looking at timing in this market because we still have an acreage fight that we're going to deal with. I don't think we've fully begun with it. The trade is hearing estimates of maybe only three to four, maybe five million acres reduction in corn acres. I think it's going to be much greater than that. I think it's going to be eight to nine million acre reduction. And so if that, right now I think the market is feeling pretty comfortable with the three to five. And so therefore I don't think you have an acreage fight really feeling its way right now but I think that's coming. I look at the timing of the market and I believe that we could have highs as early as April for this market this year. Then from there we'll take another look and possibly it could lead us into May but it's going to take a weather market to carry us on into June and July. Now, we have weather forecasters saying a dry summer, a potential drought. But the key is dry summer with cool weather or dry summer with hot weather? It's a big difference. And so we don't know which one we're looking at. I would say to producers that are looking to start marketing, I think with these high inputs costs you do need to lay out some back side coverage here. So, I would probably say if you can start to lock in $5 cash corn for new crop go ahead and start to do a percentage that protects those input costs and then let the rest of it slide because if weather hits we'll probably see beans, not beans but corn up around $9.
Pearson: Alright, Sue, then again, let's go out to next year, '09. Are there some things we should be doing for '09? You mentioned the margin issue, you know, is there an option strategy we should maybe look at for that?
Martin: Well, I would say you probably could go ahead and do puts but you're going to spend a lot of money for those puts. So, maybe some put strategies where you buy puts, maybe you buy the $5 puts or the $4.50 puts, maybe go to $4.50 puts and then sell some further deep out of the money puts to help lower that margin money that you have to put up for those because the odds are that you probably won't go back to $3 flat this year on corn. We're into a very volatile, bullish year and I don't see that volatility settling down much most of the year. I will say this, though, Mark, everything I've looked at in timing says we're going to have a traditional fall this year where prices do decline into October, November.
Pearson: Mark, same question, your outlook strategy wise for producers on corn?
Gold: Well, I agree with Sue, I think the corn acres are going to be much bigger than what we're hearing now. Some of the numbers, three or four million I think they're way off base. I think we're going to see a big switch back into the beans. I think ultimately we're going to see this acreage war continue. We've been talking about the acreage war for six or eight months and now the biggest problem has been the wheat on January 11th when we had the last wheat report, it said we want to play this game too. So, I describe it as musical chairs. We had corn and beans vying for the one chair that was left, all of a sudden the wheat came into the picture as well, now we had three players looking for that one seat. Until we settle this acreage war, now, things can change. Certainly if we take another look at the mandates on ethanol, now, it doesn't look like that's going to happen but some of these new studies coming out discussing some of the problems with ethanol and the environmental issues maybe people will start to take a second look at it. The EU has certainly take a second look at it. That could back us up in needing quite as many corn acres. But all things being equal we need the acres, the supply and demand numbers say we still have the fight ahead of us that, again, can launch us to much higher prices in the meantime.
Pearson: You both are calling for much bigger pullbacks in corn acreage than the industry is.
Pearson: Is part of that input costs, Mark, is that what you're thinking?
Gold: You know, certainly when you see fertilizer are going to be pushing $1000 for anhydrous you've got to take a look at it. I think farmers want to get back to a more traditional 50/50 rotation, they got out of it last year switching into corn. The input costs are incredibly high, they want to go back and from what we've seen from the seed sales it's going to be a bigger switch than most people were thinking of.
Pearson: Alright, Sue, same story?
Martin: Well, I agree, the seed sales are indicating that the acreage switch is going to be bigger towards beans. I also think that another reason for the switch is because of the disappointment in the corn yields that we've seen this last year, even though they were decent I think there was a little disappointment in the yields as opposed to the beans. So, I think that's probably weighing on this also. But it's a huge thing when you're looking at fertilizer prices where they're at.
Pearson: Alright, let's talk about soybeans and the other half of this acreage battle, as Mark says the third. And I'll tell you what, I get a lot of e-mails from farmers out there who are raising dairy quality hay who are saying we're trying to buy some acres too with this whole market and you can also argue cotton with its move this week is saying hey, I'm part of this whole mix too. Let's talk about soybeans, Sue. Again, you think we're going to see more soybean acres out there?
Martin: That's right, I do. But does that knock the prices down substantially just because we've got more acres? I don't think so. The one thing we have to remember is, Mark, we have a huge demand base in this world market for the soybean. Furthermore we dropped, last year what did we drop, about 13, it was even more like 15, 16% in production in the U.S. alone, we dropped in China 5.5% and we dropped in South American about 11%. And so that was a precursor for this bean market, laid a nice base underneath us. We've got stocks to usage ratios at record low levels. Now, our carry out today dropped around to 160 million bushels down from 175. I went back and I looked and in '72-'73, the year of the infamous all-time high $12.90 bean market, you had a carry out at that time of 60 million bushels. But the whole key is demand is outstripping production and therefore our stocks to usage ratio is way low. If you go back and look at years in which you have had a very tight March 1st stocks to usage ratio not only in the U.S. but in Argentina and Brazil and we have all three this year, we're going to have them March 1st all three, in the past you have had, I think there's been eight times this has occurred, you have had tremendous rallies in the bean market, especially towards the July contract. If you take the average or Olympic mean of that it would project that your July contract of beans would at least go to around $15.61. But we've got so much going on here and South America I don't think is producing really what we did want them to produce. Even if they come up with a decent yield in Brazil they just didn't plant the acres. And so when I look at the bean market I think it's a demand market but underneath all of this is China, the worst winter in history, or 50 years anyway, for central and southern China, I mean, it's worse than Hurricane Katrina and you look at that and they had price controls on food before this even happened, you're going to see tremendous bringing in of pork, beef, beans, that's a big staple in their diets is beans and bean oil and so I think demand is going to be very, very good.
Pearson: Okay, Mark, your take, Sue is very optimistic as far as the soybean thing. What is your take?
Gold: You know, again, without a drought I think the bean prices are incredibly overpriced. When you look at the world carry outs on soybeans we don't have a soybean shortage around the world. Yes, things are tight here in the U.S., we know the Brazilians are, our office in Brazil tells us that they're going to plant five or six percent more acres of beans this year. When we look at the demand that is here, mainly the Chinese, every time we've had one of these bull markets in the beans every spike within six to eight weeks you will back down for the historical prices. Now, I'm not suggesting sometime in the next six weeks, excuse me, we're going back down but I am suggesting that we're going to overproduce again at some point, demand is going to back off and we're going to have a serious problem in this bean market without a drought. Now, can we go higher in this acreage war and still battle through March until we get the final numbers March 31st or maybe even March 17th when we get the final insurance numbers in? Possibly. But ultimately without the drought bean prices in my opinion are way too high. I don't know where prices are going, I don't know if we're going to see $22 beans or $32 beans or $5 beans. But I do know you can buy an $11 put today for 50 cents. Yes, they're expensive but look at what it's protecting, it's protecting $6 to the down side. Let's see where the up side goes and protect the down side and manage the risk.
Pearson: Alright, so that's your strategy. Same question for next year because we've always talked to people about marketing through these bull markets, getting two years crop on the books.
Gold: You know, in '09 the biggest problem with going out and looking at '09 and '10 sales what are your input costs going to be? If you can tell me what your input costs are or if you're going to tell me I own the land outright and you're not that concerned about it fine, go ahead and make some sales out there. But if the input costs are going to be an issue what is going to be cash rent, what is going to be fertilizer prices, you know, if Sue is right and $5 wheat winds up being cheap historically do you want to be selling $5 beans or $5 corn that could be $10 corn two years from now? Probably not. So, again, I would use the '08 options to protect '09 crops, let's see what '10 brings, take it one step at a time.
Pearson: Sue, you go along with that?
Martin: Well, I guess I tend to, you know, I'm pretty optimistic so I'm having a little struggle here. But I think that we look at a bean market and, again, I go back to timing on the beans and in years that I look at timing for this type of a year we would have at least an April high, never a February high. And when you look at taking out these all-time highs like beans have done here this week we have done it by a mere 6.5% maybe where if you look at the previous highs taken out in corn and wheat corn did in 1996, exceeded their highs by 38%, wheat has done it by 14%. I think that the beans are not near as close to being done.
Pearson: Alright, let's talk about the flip side of all this. Half the commodities we produce, corn and soybeans, are fed to livestock and these livestock guys have been under pressure. Mark, you've seen it, we've seen it on the board, fed cattle market, there's a lot of concern down the road about consumers paying $3 a gallon for gas, how much beef are they going to buy and so forth. Prices are higher in stores. We've heard on the pork side of liquidations. What do you see ahead livestock wise?
Gold: Well, in 1996 when we had $5.50 corn we had $55 fed cattle and about $47 feeders. I'm very concerned about this cattle market. Historically we are at very high prices and, again, I'd be wanting to protect that down side in case this thing falls apart. I'm not suggesting we're going back to $55 fed cattle but at that time it was about a $30 break off the highs so if you take a $30 break off of these highs and we go back to the low 80's, maybe the high 70's, I don't think that's unreasonable. We've seen fairly robust demand for our beef out there. Certainly the export market has been good on the beef. As far as the pork goes we're killing sows and the Canadians are killing sows to beat the band. We've got this $15 discrepancy between the nearby hogs in the bad months, that can get even wider. For the next 18 months or so, not 18 months, let's say 12 months I can see these hog prices getting excited. Now, if we start exceeding some of those old highs pick a number on the hogs if we're starting to run out of these hogs and if the Chinese want to buy some pork. So, I'm a little bit bearish on the cattle, I'm very friendly on the hogs. Let's see where we can go long-term.
Pearson: Alright, Sue, same question, fed cattle what do you see?
Martin: Well, I think with the fats I tend to be a little bit negative towards the April timeframe. I think that as we go through the March and April period we're going to see a fair amount of formulated contracts of cattle and I think therefore the packer won't have to be aggressive in bidding for cattle. So, I think if you get the April futures up around 96.50 to 97 cents I would be hedging those cattle. I look at the feeder market and I think that the feeder market going into April and May also is probably going to be under fire a little bit. Once we get in towards the latter part of summer, you know, I think that the cattle market is going to be pretty good through the fourth quarter of this year. I think that our numbers are going to be down substantially towards the fourth quarter. You get past February and I don't think you're going to see the placements like we've been seeing. And so I look at the cattle market and I tend to be bearish up front, very friendly to the deferreds. Now, the economy might have something to do with that too because as people aren't making very much or losing, and I call the people as like our senior citizens or people that are retired, you know, they rely on the stock market pretty good for returns and that's not helping them right now. So, it might cut back on their going out to eat a little bit.
Pearson: Well, what about on the hogs? You mentioned potential export demand, some other issues out there. Near term some trouble but longer term some good opportunities.
Martin: Well, I look at the hog market and we had some issues last year in the latter third of the year with conception, breeding, that type of thing and so those numbers, it would indicate that we're going to have a tighter supply of hogs as we go into more of the June, July, August timeframe. Along with it demand for pork ought to be phenomenal on the export side of things and it's also a cheaper meat. So, I think demand is good so I would have to agree with Mark, I think we're going to see a better hog market and near-term probably good as well.
Pearson: Alright, well I appreciate both your insights, Sue Martin and Mark Gold, thank you so much. That will wrap up this edition of Market to Market, our special market edition. Now, if you'd like more information from Sue and Mark on these historic markets and risk management strategies visit the market plus page at our Web site where you'll find streaming video of our program and you can also download audio podcasts of our market analysis and market plus segments absolutely free at our Website. And be sure to join us again next week when we'll examine a controversial report on global ethanol production. Until then, thanks for watching, I'm Mark Pearson. Have a great week.
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