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Market Analysis: Dec 14, 2007: John Roach

posted on December 14, 2007

The prospects of tight ending stocks and a shift in acres moved grain markets higher. For the week, December wheat gained more than 35 cents, while the nearby corn contract went 20 cents higher.

Soybeans followed suit as they spent a second week in a row over the 11-dollar mark. For the week, January beans gained nearly 40 cents, and soybean meal went up $14.00 per ton.

In the softs, cotton stayed on the positive side this week, with the March contract climbing a $1.30.

In livestock, the December cattle declined $1.42. Nearby feeders were off again this week by $2.15. And the December lean hog contract lost 37 cents.

In other markets of interest, the Euro dropped 230 basis points against the dollar. Nearby crude oil prices went over $90 gaining $2.99 per barrel. Comex gold declined $1.10 cents per ounce. And the CRB Index lost more than five points to close at 348.60.

Market Analysis: Dec 14, 2007: John Roach Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, welcome back.

Roach: Thanks, Mark.

Pearson: Sputtered out the oil update there, I finally got things together. Oil and, of course, all these commodities and the strength that we've seen in commodities for some time now -- I want to ask you something kind of off beat about the dollar. There's a feeling out there that maybe the dollar has bottomed. Do you sense that? Or could this thing soften up some more?

Roach: Well, I don't see really anything on the horizon that would suggest to me that the dollar is ready to recover very far. But certainly everybody became very well aware that the dollar was collapsing and typically, when it's filing out there across Main Street in all the newspapers and the taxi cab drivers are talking about it, typically that's about the end of the move. But, again, I don't really see anything to change the fundamentals that have weakened the dollar.

Pearson: Let's talk about one of the offshoots of that and that's been huge grain exports, huge grain demand from the United States worldwide and that has happened in the face of the wheat market, in the face of very tight supplies after not much of a crop in the United States in 2007 and not much of a crop worldwide for wheat. This wheat market has been wild, it's been wooly, it's been sharply higher. Is it going to be a short crop with a long tail, John? Is that the scenario we're going to see for wheat?

Roach: Well, we thought that would be the case. We thought that when we harvested the U.S. crop, saw the prices advance, saw the prices peak and then start to decline we thought that might be the end of it. As we frequently have happen all the demand is pent up, the supply, the number gets as bad as it's going to get and then prices start a long tail of deterioration. But what happened differently this year is the South American crop, first of all starting with Australia, also started to be reduced and that occurred well after our harvest. And then following the Australian crop now the Argentine crop was injured with a late season frost and some dry conditions. So, we've continued to add fuel to the fire and in India, who said they weren't going to add to their stocks, then came in and started adding. And when they started to add that was it, that lit the fire all over again and ran the market back up again. So, now we're dealing with a crop in this country that is in the dormancy stage and it's dry, it's been very dry. The crop ratings for the United States are very low relative to history. Now, we're getting some precipitation, some freezing rain and so forth, there's a little bit of an uncertainty as to what kind of damage that might do but at least we're starting to see some precipitation. We hadn't been seeing any of that. So, we're not going to be able to continue the long tail until we start to feel some comfort about a new crop growing somewhere and we really don't have that yet.

Pearson: The Informa numbers showed an increase in winter wheat plantings and increased winter wheat numbers. The demand has remained so strong. As you look at those deferred contracts, and I'm talking about July and then September, those contracts for next year, are these sales opportunities or could this thing still, as you say, reignite?

Roach: Well, a market at any time can reignite. You still have another growing crop that you have to contend with here in the northern hemisphere. And you have to finish off the crops in the southern hemisphere. But they are excellent opportunities. These are price levels that represent significant profits on most farming operations. And so we think that it makes very good business sense to be taking advantage of some of those higher prices if you've got wheat that is developing normally and you can have some comfort level in that. And if you're concerned about the crop you could certainly look over to the put options and do some insuring on these price levels.

Pearson: Let's talk about the corn market and what could happen there. Just now the first few shots have been fired for this acreage war and you've got spring wheat, we talked about the winter wheat numbers and, of course, people wondering just how many acres are going to shift from beans to corn and corn acres total as we go forward. So, let's talk about this corn market. These are going to be pretty attractive numbers again on corn, up in the $4.20, $4.30 area. It looks pretty good and the numbers look pretty good for more corn acres. Are beans going to have to go higher? Is corn going to have to go higher? What do you see ahead for this corn market, John?

Roach: Well, we saw in the Informa numbers out today that there is already a shift occurring from corn back over toward beans and the markets are kind of ready for a six million acre shift, five or six, maybe seven million acre shift but I believe that acreage war actually began as farmers were completing their harvest here in this country. Farmers made a lot of decisions already about what crops they're going to plant, they've already put down lots of nitrogen, they've already purchased a substantial percentage of their inputs in order to put the expenses in 2007. So, I think we've already had the war, the opening part has already played. And if you remember last year it ran until the end of February. It'll probably be over a little quicker this year than it was last year. But the question from a standpoint of is it enough, is it enough? I don't think we really know. I think that the real question is what kind of crops are we going to get out of South America. If the South American crops are substantial, if they have good yields there that takes a lot of pressure off the United States.

Pearson: That's right and that could shift acres back to corn and away from beans here?

Roach: Well, it's possible and remember they raise a lot of corn in South America as well. So, we just have to look at that area. The South Americans will raise 50% more beans or a little more than 50% more beans than we raised this last year. So, they're going to dominate that soybean market here and I believe already have been dominating it as we pay very close attention to their weather.

Pearson: $4.40 corn in March, we're showing close to that again. When it comes back to making prudent business decisions, which you alluded to earlier, isn't that a price where we should be taking some money off the table?

Roach: Well, typically we don't see our highs in the corn market until the March, April, May, June timeframe. So, we're not thinking that this market is all done at this point. But what we do think is it makes very good sense to be taking care of enough sales to cover cash flow needs. We've just dug -- we've been in a sell signal on corn now for about seven days. We've advised our clients to sell enough corn to take care of cash flow needs to take you out into February.

Pearson: Alright, let's talk about soybeans, a similar scenario, obviously a little bit different concerns. But, again, hinging again on what happens in South America.

Roach: Well, the soybean market really is moving up here partially because of concern in Argentina. The El Nino, they worry that that's going to maybe reduce yields there. They've had a little bit of dry situation occurring but we're just in the midst of the growing season. They just finished planting in Brazil and Argentina and so we're going to have to see what the acreage numbers were, we're going to have to see what kind of yields they're going to be able to produce and I'm of the opinion that the South Americans are getting a huge signal to plant lots more acres next year. So, I'm of the opinion that you need to be making some soybean sales in here. We're on the fifth day of a soybean sell signal, we've already been moving percentages of the old crop inventory in the bin and we've already moved an increment of the new crop inventory that we plan on raising this next year.

Pearson: Alright, of course, in our nearby contract we actually went off the chart for soybean prices. So, alright, so we're going to take advantage of that. Now let's talk about the cotton market too. Again, part of the acreage battle but not much of a factor right now.

Roach: Well, it isn't battling very hard at all. In fact, it's sort of lying down and playing dead. The cotton market had slid back down again. We think if we get March cotton back up in the 70 cent area we're going to be back to being sellers of cotton.

Pearson: Alright, let's talk livestock, John, and the flipside obviously had a cattleman call me this afternoon, you know, talking about these high feed inputs, high input costs and continually on the show we haven't been that friendly to the cattle market going forward. And the cattle market has certainly been under some pressure since this fall which, again, is a lot of seasonality to that. As you look at these cattle numbers and, of course, we'll talk about the hog numbers, which are huge, a little bit which obviously is impacting it. If you look at just the straight cattle market aren't we in pretty decent shape?

Roach: We are in pretty decent shape in the cattle market. And beef exports have been picking up nicely. Our numbers are tightening, the herd numbers are tightening. But we're still -- we're seeing liquidation occurring because of dry pasture conditions. We're seeing liquidation out of Canada because of the currency relationship. They're really struggling in Canada right now. So, our attitude is that the cattle market is going to be a little bit tough here. In the government's report that came out on Tuesday the USDA forecasts cattle prices to be down 1.6% in '08 compared to '07. So, the forecast longer term this next year is really not all that bright. And that has some impact back over on the grain farmer. The grain farmer has to understand that the majority of their crop grows through livestock and the livestock producers are struggling out there. That being said, there's still opportunities or have been opportunities recently to buy feeder cattle, go ahead and buy the corn and lay off the fat cattle either in a cash market or in the futures market. We've seen opportunities that we seldom see where you can buy the inputs and sell the product and have a margin of profit. So, even in these times sometimes there will be opportunities you might not find other times.

Pearson: Okay, so not by and means giving up the ship. Obviously with the corn market rallying like it has the feeder market has been under some pressure.

Roach: Feeder market has been under pressure and, again, producers look at the value of the corn and say I don't think I want to gamble that kind of money and so they back away from feeder cattle.

Pearson: Yeah, and so we've seen that one but you also mentioned herd size, no expansion, virtually no expansion, hasn't been for the last several years and the international issues, again, are impacting us with Canada and so forth. Let's talk about the other big factor that is impacting red meat and that is all these hogs out there. It just seems like they keep coming and they keep coming, John. What's ahead for this hog market?

Roach: Well, the hog producers received some very good vaccines to take care of some of the duck loss issues that they had and as a consequence there's more healthy pigs at that young age and we're just producing more hogs and surprising everybody with the numbers that we're seeing and the attitude is that after sort of a multi-year period of very strong profits that building process continued and continued and now we're going to have to go through the liquidation process and it's harder to do when you have so many of these firms vertically integrated. So, we think that the hog market is going to have a tough slug. The government is forecasting prices to be down 3.4% next year compared to this year too.

Pearson: Alright, well that's what is ahead for the hog sector and the face of stronger feed prices so we'll see what happens. John Roach, as usual, we appreciate your insights as our senior market analyst here on Market to Market. And that is going to wrap up this edition of Market to Market. Now, if you'd like more information from John on where these markets just may be headed why not visit our market plus page at our Web site where you'll find streaming video of our program. You can also download audio podcasts of our market analysis and our market plus segments absolutely free. Check it all out at our Web site. And be sure to join us again next week when we'll visit the world's largest farm toy museum. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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