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Market Analysis: Nov 02, 2007: John Roach

posted on November 2, 2007


The trade continues to be influenced more by currency values and crude oil prices rather than grain fundamentals, but weak export sales this week pressured wheat prices.

For the week, December wheat lost 21 cents, while the nearby corn contract moved a nickel higher.

Soybeans traded in a sideways fashion but the November contract managed to close above $10.00, while soybean meal was down $3.80 per ton.

In the softs, cotton declined again this week, with the December contract posting a loss of 32 cents.

In livestock, the December cattle contract lost 40 cents. Nearby feeders gave up 70 cents. And the December lean hog contract declined $2.11.

In other markets of interest, the Euro gained 111 basis points against the dollar. Nearby crude oil prices closed just under 96.00 per barrel. Comex gold gained $21.00 and closed above 800.00. And the CRB Index gained 7 points to close at 353-even.

Here now to lend us his insight on these and other trends is one of our senior market analyst, John Roach. John, welcome back.

Market Analysis: Nov 02, 2007: John Roach

Roach: THANKS, MARK.

Pearson: I CAN'T THINK OF A PARALLEL YEAR WHERE WE'VE HAD ISSUES HITTING US LIKE WE'VE HAD IN 2007. AND I'M TALKING ABOUT THE VERY WEAK U.S. DOLLAR. VERY HIGH WORLD ENERGY DEMAND, OIL, CRUDE OIL CLOSE TO $96 A BARREL. NOT SINCE I WAS A BOY IN 1972, JOHN, DO I REMEMBER DEMAND IN THE MARKETS. WHAT'S GOING ON?

Roach: THE POSITIVE SIDE OF THE LOSS OF MANUFACTURING JOBS IN THIS COUNTRY IS THE GAINING OF MANUFACTURING JOBS IN THE INDUSTRIALIZATION OF CHINA AND SOME OTHER COUNTRIES. THE ECONOMIC GROWTH IS OCCURRING AROUND THE WORLD, IT'S ALMOST UNPRECEDENTED. CHINA'S MOST RECENT REPORT THAT THEY'RE GOING AT ABOUT 11PERCENT ANNUAL RATE. INDIA IS IN THE 9PERCENT AREA. UNITED STATES IS GROWING AT 4PERCENT. SO WE HAVE LARGE AREA OF POPULATION EXPERIENCING SUBSTANTIAL GROWTH. AND ONE OF THE STATISTICS IS THAT THERE ARE MORE PEOPLE MOVING IN THE MIDDLE-CLASS AROUND THE WORLD THAN WE'VE EVER SEEN. SO AS PEOPLE IMPROVE THEIR INCOME -- THEIR STANDARDS, THEIR INCOME, THEIR -- THEIR DIET CHANGES. AND SO WE'RE SEEING SOME OH THE AMERICAN FOOD INDUSTRIES MOVING OVER THERE SUCH AS MCDONALDS AND OTHERS. THAT REQUIRES AN INCREASE IN FOOD PRODUCTION, THE SUPPLY IN INCREASING DEMAND.

Pearson: YOU MENTIONED HIGH ENERGY PRICES, MORE MECHANIZATION, MORE USE OF OIL. HOW DOES THE WEAK DOLLAR GET ALL THESE OTHER CURRENCIES IMPACTED?

Roach: WHEN THE DOLLAR GETS WEAKER THAT MEANS EVERYTHING HAS TO GO HIGHER. GOLD IS MOVED ALMOST TO RECORD-HIGH LEVELS. PETROLEUM CRUDE OIL HAS MOVED TO RECORD-HIGH LEVELS. CORN IS A GOOD ASSET. WE'RE NOT ONLY SEEING THE INCREASE IN FOOD DEMAND, WE'RE SEEING A CHANGE IN EVALUATION AS THE CONSEQUENCE OF THE DOLLAR WEAKENING.

Pearson: WHEN IS THE DOLLAR TURN AROUND?

Roach: THEY ALWAYS SEEM TO TURN AROUND WHEN YOU LEAST EXPECT IT. AT THE MOMENT IT'S LEAST EXPECTED. MOST EVERYBODY THINKS IT'S GOING TO CONTINUE TO WEAKEN AND OUR INABILITY TO SURVIVE ON THE INCOME WE'RE GENERATING ARE LETTER'S TALK ABOUT THE COMMODITIES. DRAMATIC PRICE MOVES THIS FALL. AND AGAIN, THIS IS EXACERBATED BY THE WEATHER SITUATION. WEATHER SITUATION IN THREE LOCATIONS. AN EARLY -- A LATE WINTER FREEZE, FOLLOWED BY SOME REAL DIFFICULTIES GETTING THE CROP HARVESTED WITH TOO MUCH RAIN. WE HAD THE EUROPEAN PROBLEMS WHICH IS TOO DRY AND TOO WET. THIS IS A SECOND YEAR IN A ROW WHERE WE'VE HAD AREAS OF DIFFICULTIES THAT DROVE WHEAT PRICES TO THE HIGHEST LEVELS THAT WE'VE EVER SEEN BEFORE. NOW WE'RE IN THE UNWINDING PROCESS. WE'VE GOT A LOT OF DEMAND COMING TO MARKET. WE'VE SOLD DOUBLE THE WHEAT AT THAT TIME COMPARED TO LAST YEAR EVEN THOUGH THE EXPORTS ARE NOT EXPECTED TO BE NEARLY THAT MUCH. SO THE BIG MOVEMENT DOWN IN WHEAT IS COMING AS A CONSEQUENCE OF THE BIG RALLY THAT WE HAD AND THE DEMAND BEING SATISFIED.

Pearson: SO GOING FORWARD NOW, I REMEMBER YOU USED THE EXPRESSION "LONG CROPS LEAVE LONG TAILS." SHOULD WE BE GETTING SOME WHEAT PRICED NOW?

Roach: WE THINK WHEN YOU SEE SPIKES IN THAT MARKET, YOU DEFINITELY SHOULD BE DOING. SO THERE DEFINITELY BE AN INCREASE. WHEAT'S A GRASS. AND PEOPLE CAN RAISE IT IN A LOT OF DIFFERENT LOCATIONS. WE'LL SEE LOTS MORE ACREAGE.

Pearson: LET'S LOOK AT CORN PRICES. THEY'VE BEEN STRONG. THEY'VE BEEN STRONG SINCE SEPTEMBER OF A YEAR AGO. MAYBE SOME ACREAGE PRESSURE. IS THAT WHAT'S GOING TO BE MAINTAINING OIL PRICES?

Roach: WE'RE TRYING TO FIGURE OUT WHAT OUR SITUATION'S GOING TO BE A YEAR OR TWO YEARS FROM NOW. NOBODY CAN FIGURE OUT HOW WE'RE GOING TO GET ENOUGH ACRES AND ENOUGH BUSHELS TO SATISFY THE DEMAND. THE DEMAND IS GROWING BECAUSE OF WORLD ECONOMIC SUCCESS AND PROGRESS. BUT IT'S ALSO GROWING BECAUSE OF THE USE OF BIOFUELS. SO AS WE LOOK DOWN THE ROAD, WE'RE ALL WORRIED ABOUT WHERE ARE WE GOING TO FIND ENOUGH ACRES. SO WE'RE GOING TO SEE COMPETITION THIS YEAR. AND WE WOULD ANTICIPATE FROM FOR THE YEARS TO COME BETWEEN VARIOUS CROPS AND THE C.R.P. FOR EXAMPLE, WE'RE GOING TO HAVE TO FULL ACRES OUT OF THE PROGRAM IN ORDER TO SUPPLY THIS GROWING DEMAND. SO THAT COMPETITION IS GOING TO KEEP THE MARKETS ALL RELATIVELY ALIGNED. AND THAT'S THE MARKET'S JOB IS TO ENCOURAGE PRODUCERS TO PLANT ENOUGH OF THE RIGHT CROPS.

Pearson: RIGHT NOW AS YOU LOOK AT THIS MARKET IN CHICAGO, DO YOU WANT TO MAKE SALES HERE FOR CORN FARMERS?

Roach: WE HAVE BEEN RECENTLY ON SOYBEANS PARTICULARLY. WE THINK THAT THE SOYBEAN MARKET HAS BEEN BUOYED UP BECAUSE OF WORRIES ABOUT THE CROPS IN BRAZIL AND ARGENTINA. SOUTH AMERICA WILL RAISE A LITTLE MORE THAN 50PERCENT MORE SOYBEANS THAN WE'RE JUST IN THE PROCESS OF HARVESTING IN THIS COUNTRY. WE THINK THEIR SPRING WEATHER IS CAUSING THIS HIGHER MARKET. JUST LIKE OUR BRING WEATHER TYPICALLY HAS DONE IN YEARS PAST. WE THINK THAT THE CORN IS LIABLE TO HAVE ITS HIGHEST PRINTED DURING ITS GROWING SEASON IN THE SPRING WHERE AS WE THINK THAT THE BEAN HIGHS COULD BE UPON US. WE'RE SCALING OUT BEAN SALES ON PRICE STRENGTH, PLANNING ON GETTING SOME SOLD ON THE SOUTH AMERICAN WEATHER WORRIES. AND THEN THE BALANCE SOLD ON NORTH AMERICAN WEATHER WORRIES. WE'VE ALSO STARTED TO SELL 2008 SOYBEANS, BECAUSE WE BELIEVE BY THE TIME WE GET TO THAT TIME FRAME THAT THE ACREAGE WOULD HAVE BALANCED ITSELF OUT.

Pearson: GOING BACK TO CORN, AT THIS AGE YOU MAY BE INTERESTED IN MAKING CORN SALES.

Roach: WE'RE VERY SLOW WITH OUR CORN SALES. THERE'S NOTHING WRONG WITH MAKING SALES ON STRENGTH. WE DON'T THINK THE HIGH OF THIS MARKET IN CORN WILL BE SEEN DURING THIS TIME OF THE YEAR.

Pearson: AGAIN, ON SOYBEAN, THERE IS A SOME NERVOUSNESS ABOUT SOUTH AMERICA. WE NEED A BIG CROP DOWN THERE.

Roach: THAT'S EXACTLY RIGHT. WE THINK THAT THAT'S GOING TO CONTINUE TO BE THE CASE UNTIL WE'RE ASSURED OF A GOOD SOUTH AMERICAN CROP AND THEN ASSURED OF A LEAST A GOOD PLANTING IN NORTH AMERICA.

Pearson: WHAT WOULD BE THE BEST STRATEGY? $10 BEAN, THAT'S NEVER BEEN A BAD SALE FOR ME.

Roach: TAKE SOME OF IT. DIVIDING THE NEXT ACRE PRODUCTS INTO ONE INCREASE. WE'VE SOLD ONE OF THOSE INCREMENTS.

Pearson: WOULD YOU DO AN OPTIONS CONTRACT? WHAT WOULD BE IN YOUR MIND THE MOST EFFICIENT WAY TO DO THAT?

Roach: CALL THE BUYER, AND MAKE A SALE. AND I LIKE THAT IDEA TOO.

Pearson: LET'S TALK ABOUT THE COTTON MARKET, JOHN, AND DECLINE THIS WEEK UNDER SOME PRESSURE. AGAIN, A SUPERGLOBAL COMMODITY THERE.

Roach: THE COTTON MARKET IS STILL RELATIVELY CHEAP. WE'RE SEEING ENOUGH COMPETITION FROM SOME CORN GROWS THAT WE'RE JUST NOT ABLE TO GET THE EXPORT DEMAND. IT LOOKS LIKE THIS CROP COULD BE A LITTLE MORE INFORMAL. THEY INCREASED THEIR ESTIMATE OF THE U.S. COTTON CROP. THE GOVERNMENT WILL BE OUT ON THIS NEXT WEEK WITH THEIR ESTIMATE. COTTON HAS BEEN STUCK IN A RANGE FROM 62 TO 64 CENTS. IF YOU GET A SHOT AT OF 8 CENTS WE THINK IT'S A SHOT AT MAKING SALES.

Pearson: THERE'S BEEN SOME PRESSURE IN THE CATTLE MARKET. WHAT DO YOU SEE?

Roach: WE HAVE TWO THINGS THAT ARE HAPPENING HERE ON BOTH THE SUPPLY SIDE AND THE DEMAND SIDE. AS YOU REPORTED EARLIER, THE CONSUMER CONFIDENCE DOWN 3.9PERCENT. THERE'S A LEAD LAG THERE. IF CONSUMER COMFORTS IS ON A DECLINE, YOU CAN EXPECT TO SEE A WEAKER DEMAND PICTURE AHEAD IN LIVESTOCK. AT THE SAME TIME THAT'S OCCURRING, WE'RE PRODUCING 5PERCENT MORE POULTRY THAN WE DID A YEAR AGO. SO WE HAVE SUPPLIES UP. AND WE HAVE CONSUMERS CONCERNED ABOUT THE ECONOMY AND THEIR CONFIDENCE DOWN. THAT SPELLS LOWER PRICE LEVELS AHEAD. NOW THE FUELS ANTICIPATED THIS. WE SAW THE HOG MARKET MAKE KNEW CONTRACT LOW. WE SAW THE CATTLE MARKET GET LOW THIS WEEK. THE CONSUMER WHO'S LOOKING AT MILK PRICES THINKS THAT SOMETHING'S WRONG. THE PRODUCER IS NOT MAKING A LOT OF MONEY IN THE MEAT INDUSTRY, THE MEAT AND THE MILK INDUSTRY. WE'RE PULLING MORE IN THE PORK BUSINESS THAN WE HAVE FOR A LONG TIME. SO THE CULPRIT OUT HERE FOR IF CONSUMER, REALLY HAS TO DO WITH A LOT OF THINGS RATHER THAN BEING AT THE FARM LEVEL. THAT BEING SAID, WE'VE HAD A LOT OF NEGATIVES COME WITH THIS MARKET. MAYBE WE'VE SEEN ENOUGH OF AN ADJUSTMENT THERE. AND MAYBE WE CAN RATCHET MARKS HIGHER. BUT AT THE MOMENT WE'VE GOT TO SLUG THROUGH AN AWFUL LOT OF MEAT. AND WE'VE GOT TO DO THAT WITH A CONSUMER THAT'S GETTING TIGHTEN DOWN. AND WE'RE COMING TO THE HOLIDAYS WHICH TAKES MORE MONEY FROM THE CONSUMER. SO I'M CONCERNED. SPECIFICALLY LIKE THIS CATTLE MARKET THEN, IF YOU'RE BUYING THIS HIGH-PRICED CALVES AND THE FACT THAT WE HAVEN'T BEEN EXPANDING THE FACTOR, WE'VE BEEN EATING AT THE MEAT BUSINESS.

Pearson: WE HAVE.

Roach: AND WE KEEP WAITING FOR THAT PERIOD OF TIME WHEN THE NUMBERS ARE GOING TO TIGHTEN, BUT WE NEVER SEEM TO GET THERE, IT SEEMS LIKE. WHAT WE'LL BE DOING IS GOOD MARKETING. WHEN YOU SEE MARGINS OF PROFIT, TAKE THOSE BY HEDGING CATALOG. KEEP PROTECTION UNDERNEATH US. THEY COULD BE HEADING OFF INTO A REAL HARD TIME OF POOR PRICES. WE THINK YOU NEED TO BE VERY CAUTION AND KEEP YOURSELF PROTECTED.

Pearson: LET'S TALK ABOUT THE HOG BUSINESS. YOU MENTIONED ONE WHERE WE WEREN'T ANTICIPATING THIS LEVEL OF EXPANSION THIS HOG BUSINESS IN THE FACE OF THE HIGHER FEED INPUT COST. AND NOW WE'VE GOT THE RECORD SLAUGHTER RUNS RUNNING THAT'S REALLY THROWING KIND OF FOR A LOOP. THE PEOPLE I TALKED TO ARE SAYING WE'VE BEEN FORTUNATE, THE VIRUS VACCINE HAS WORKED. AND WE'RE SEEING THAT IN THE MEAT CASE. WHAT'S AHEAD FOR THE HOG BUSINESS?

Roach: YOU KNOW, WE MAY DO CONTRACT LOWS TODAY. SO I DON'T HAVE ANYTHING VERY BRIGHT TO SAY. IF YOU LOOK AT FEEDER PRICES THERE ARE EXTREMELY LOW. WHICH MEANS WE'VE GOT MORE HOGS COMING AT US. WE HAVE A MARKET THAT'S GOING DOWN. AND WE TYPICALLY ARE MOVING HIGHER. MAYBE THAT'S ALL IN THE MARKETPLACE. YOU NEVER KNOW. WE'VE HAD ENOUGH OH A BREAK. SO MAYBE WE'VE ALREADY MADE THAT ADJUSTMENT. BUT FOR A MOMENT I DON'T SEE ANY REAL BRIGHT LIGHTS BETWEEN ME AND YOUR END.

Pearson: LET'S TALK ABOUT MARGIN COMPRESSION. FLIP SIDE, JOHN, YOU WANT TO GET SOME FEED NEEDS IN HERE AS THIS COMES AROUND?

Roach: THERE HAVEN'T BEEN VERY MANY BREAKS. AND BASIS LEVELS ARE STARTING TO EAT UP TO. SO YOU'RE IN THE LIVESTOCK, YOU NEED TO BE ACCUMULATING FEED. BIGGER PICTURE FOR THE LIVESTOCK SECTOR. U.S. DEMAND A LITTLE SHAKY DEPENDING ON WHAT HAPPENS TO THE ECONOMY AS IT MOVES THROUGH HIGH ENERGY AND MORTGAGE ISSUES AND EVERYTHING ELSE. THAT'S ENOUGH REASON FOR PRODUCERS TO KEEP PROTECTION OF WHAT THEY'RE PRODUCING OUT THERE. SEE WHAT YOU CAN PUT UNDERNEATH THE MARKET AS THE FLOOR AND STILL LEAVE THE CEILING OPEN. LOOK AT OPTION STRATEGIES. LOOK AT THE OPPORTUNITIES THAT ARE OUT THERE.

Pearson: JOHN ROACH, THANK YOU SO MUCH. THAT WRAPS UP THIS EDITION OF MARKET TO MARKET. BUT IF YOU'D LIKE MORE INFORMATION FROM JOHN 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, EXAMINE A MIDWEST EFFORT TO HELP SMALL-SCALE FARMERS MARKET THEIR LOCALLY PRODUCED FOOD. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK.

Announcer: FUNDING FOR MARKET TO MARKET IS PROVIDED BY PIONEER HI-BRED BECAUSE SOUND INFORMATION PLUS CONSISTENT YIELDS CAN HELP FARMERS STAY ON TRACK. THE PEOPLE WHO BRING YOU PIONEER BRAND CORN HYBRIDS PROUDLY SUPPORT MARKET TO MARKET.


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