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Market Analysis: Nov 09, 2007: Walt Hackney and Doug Jackson discuss the markets.

posted on November 9, 2007

USDA released its monthly crop production and Global Supply and Demand Reports Friday with some bullish changes to corn, but the expected dynamic wheat rally didn't happen.

For the week, December wheat lost 16 1/2 cents, while the nearby corn contract moved up 9 3/4.

U.S. Soybean yields also were cut in the production report and the November contract gained 41 1/4, while soybean meal was up$7.80 per ton.

In the softs, cotton reversed its loss of last week with the December contract posting a gain of 33 cents.

In livestock, the December cattle contract was up 77 cents. Nearby feeders gave up 40 cents. And the December lean hog contract gained $1.48.

In other markets of interest, the Euro gained .0169 basis points against the dollar. Nearby crude oil prices flirted with $100.00 per barrel. Comex gold gained $26.20. And the CRB Index gained 1.54 points to close at 354.54.

Here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Doug Jackson. Gentlemen, welcome back.

Market Analysis: Nov 09, 2007: Walt Hackney and Doug Jackson discuss the markets. Pearson: Walt Hackney and Doug Jackson. Gentlemen, welcome back. Walt, good to see you. Douglas. Doug, let's talk just real quick, just generally, worldwide. We alluded to it at the very start of the show, commodity prices are exceptionally high, crude oil up close to $100, virtually all sectors of the agricultural economy very strong demand. What's happening out there, just generally, what's the underlying push in these commodities?

Jackson: Well, Mark, the markets being driven by three very clear driving pistons that really relegated Friday's crop report near meaningless. It's basically those three factors are, of course, the inevitable linkage now between food and fuel, with the biofuels industry that we have worldwide, the collapse of the dollar is going to lead to massive realignment of price perspectives, now, for the foreseeable future. And then the third, of course, being the inevitable lack of acreage that we're going to need to satisfy this demand base next year and for years to come.

Pearson: Is there an end in sight, Doug?

Jackson: Well not really, Mark. I think a lot of those trends that we've mentioned on, are inescapable and, in fact, they're going to accelerate. You know, first, we don't want to underestimate the impact of this revaluation of the dollar. The marketplace is starting to realize that, lead by the baby boom generation, that the United States is never going to make the financial sacrifices necessary to bring our financial house into order. Trillion dollar deficit in Medicare, billion dollar deficit in Social Security, and nobody's really going to do anything to cut those programs. So, the world trader is starting to say, "I don't think I want that U.S. dollar anymore." And the loss of confidence in the U.S. dollar, Mark, as we started to see this week, an accelerated depreciatiation with the dollar is going to revalue everything that is typically dollar denominated. Oil and gold being of course, the two obvious, but if I told you soybeans are worth 75 Chinese Yuan per bushel, 1200 Japanese Yen per bushel, or 10 or 15 or 20 U.S. dollars, now greatly depreciated what is the true value? So a lot of our historical perspective on valuation of many commodities is going to be out the window.

Pearson: Alright, thinking of that and also in terms of an old fashioned reason in the wheat market is certainly reduced supply after the weather conditions in the U.S., Australia, Europe this year, wheat prices very dramatic this fall, what's ahead for wheat for Doug?

Jackson: Mark, the long term picture is probably a lot more acres, bigger production in the world, and significantly lower prices over a long pull. Now of course, here we are, $2.00 a bushel off the highs, and so we are seeing tremendous volatility from record levels. But how we're going to make that transition from now to these inevitable lower prices later next summer is still going to be a volatile ride. If we see Russia put export taxes on, if we see Ukraine shut down exports after record pace here in the last couple of months, we could still see the U.S. carry-out drop well below the 300 million estimated Friday, is something closer to 200, and we're already forecasting the tightest carry=out ever. So, again, we're into unprecedented territory, and the tightness of old crop wheat and yet of course prices are already unprecedented too. The trend is down, new crop sales expecting a lot more acreage in the United States, is probably the smart thing to do, but we're going to see erratic trade all winter long.

Pearson: Alright, let's talk about the corn market. You mentioned food and fuel, obviously, ethanol demand, overseas demand, the cheap dollar driving exports another factor out there. What do you see ahead for the corn market as we wrap up the '07 harvest?

Jackson: Well relevantly, corn is probably the least interesting story. The government, lowered the crop 150 million Friday, much in line with the normal pattern, we've still got a 1.9 billion carryout. And that isn't really the point, we're not running out of corn this year, we found 15 million more acres, and with decent weather, we had stocks building. But the smaller crop, combined with all the other smaller crops we had Friday, still makes the long term acreage story next year almost out of control. The corn balance table next year can relinquish about 7 or 8 million acres that's all. And stocks will drop sharply next year and that's going to maintain that premium in those December '08 futures for months to come as we desperately try to reallocate acres between corn and beans. Funding in corn is probably a little overvalued, the spreads will widen out, but it's that lack of acreage long term, that will now be the focus all winter long as we move towards the march acreage report.

Pearson: You're not in a hurry to sell new crop...

Jackson: I think we could be in the same sideways range, Dec '08 corn might be at the same price it is today in February, just a big sideways trade with not too much excitement as we contemplate this acreage switching issue.

Pearson: Well, lets talk about a more interesting one that's soybeans. Now, what do you see ahead for soybeans?

Jackson: Well, just as we said with the corn, of course, the markets are now going to scramble to try to solve the acreage shortage problem on beans, just like we identified the acre shortage on corn last fall and spent all winter trying to solve that and ultimately we did. But this year we don't have the luxury of any little switched millions of acres back into bean production as we've just said. The new crop bean table, next year, needs 10 to 11 million more acres. That's going to be about 8 million more corn switched acres and about 3 million more double crop acres. And then even if we have a surgically precise reallocation of acreage between the commodities, you'll end up with a situation in where neither corn nor beans could tolerate anything but perfect weather and could be explosive if you have any kind of a weather threat. It takes no imagination, Mark, at all to think in terms of $11 to $12 bean futures, November '08 beans need to gain on corn to pull those acres and reallocate. And if you don't find out if your allocating acres appropriately by next February and March, you could see a situation where the market would have to go up a dollar and a half a bushel in weeks in an attempt to move acres prior to planting. With Washington not opening the conservation reserve program this year they're playing Russian roulette with our food supply with an inadequate acreage base. Longer term, opening the conservation reserve program must be done or the long term equilibrium on bean prices will be the price that pulls millions of acres out of hay, cotton, and pasture ground in the United States, of which there is a hundred million. That's unconventional, we've never done it. What kind of price is it to bring those acres or expand acreage dramatically in South America? That probably means that $10 beans are going to be the rule rather than the exception.

Pearson: Alright. Let's switch over to livestock. Walt Hackney, as you look at this fed cattle market, going forward, a what's your take, what's happening out there? The consumer a has got some pressure, we've seen, in these equity markets.

Hackney: We've got a tremendous volume of red meat per se, coming into the market, as we speak. We're killing record numbers of hogs, possibly this week, we should go like 2,350,000 hogs, that'll be an all time record. We're looking at big kills; 130,000 to 131,000 a day in the cattle. The only asset we've got to suspect the market may stabilize on cattle is we're looking at 7 or 8 or 9 pounds less weight than we had possibly a week, 10 days ago. That would certainly indicate that we're getting more current in the feedlots. We're finally working our way through the big cattle, if you will, that we experienced back here a month ago. Hogs, it's the same story. We're looking at 427,000- 428,000 a day, but we're also looking at a reduction in the average market weight of about to 2 sometimes looking at 3 pounds per head. Those are good factors that would encourage us that make us to believe that our market may stabilize somewhere around these levels. 93-cent fat cattle, possibly we should see some appreciation to 94 or 95. Hogs we should start to work away back up out of a lower 30-cent bracket closer to a 40-cent hog market as that tonnage goes down. There isn't any real reason to believe that the volume of actual animals is out there enough to hold the daily kills at anything more than we're killing but there again, it's going to be a tonnage thing in the red meat end rather than animals going through the packers.

Pearson: Alright. Walter as we look at this fed cattle market and what's happened here lately, we've had some pressure certainly. Take us out of the first quarter of 2008 what are you going to see for fat cattle? You think we'll hold that 93-94 level through there?

Hackney: It's got every good indicator that we will. It's also got a good indicator that the appreciation in feed costs is going to encourage people to market cattle at a lighter weight. Same thing with hogs; we've got tremendously high feed costs in regard to high-pro protein going into the rations and so forth. And if Doug's comments are going to be accurate those are not going to go down, they're going to get higher. And so, we should see lighter weight carcasses going into the market, as a result, less tonnage going into the market. I don't thin the actual animal on the daily slaughter is going to go down much at all.

Pearson: Walter, what about this calf market? What do you see ahead for the cow-calf guy?

Hackney: Well, the cow-calf guy has got himself a little bit of a problem. We've got the fuel. Extremely high freight rates coming out of the western states back into the Midwest for the calves, for instance. Yearling, the cost of growing rations is working higher and higher. So, the calf guy, the cow-calf operation may be under some pressure compared to this past June or even earlier. Yearling market? It will probably hold at about the same level we're looking at as we speak. These calves have cheapened up, uh, considerably. And, actually, the heavier calves, right now, are the best buy in the market for a guy wanting to buy cattle that'll work for him.

Pearson: Walter, I've got about 15 seconds. Look at this hog market, what do you see for highs and lows, again, first part of 2008, what do you think we'll see?

Hackney: I think we'll see a 40-cent hog market first quarter of 08. I think fat cattle are going to be around 93 to 95.

Pearson: And again, Doug's comments, your staring at a much higher feed bill for both the cattle and hogs as this progression continues. We'll look forward to covering this on Market to Market. Thank you, Doug and thank you, Walt very much.

That wraps up this edition of Market to Market. But if you'd like more information from our astute analysts on where these markets just may be headed, visit the "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 "Market Plus" segments -- free -- at our Web site.

And be sure to join us again next week, when we'll examine some of the presidential candidate's positions on farm policy. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news USDA wheat