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Market Analysis: Oct 19, 2007: Elaine Kub, DTN Analyst

posted on October 19, 2007

After just six weeks, corn exports have exceeded one billion bushels. That's their fastest pace since 1980, but wheat exports were weaker than expected.

For the week, December wheat lost 2 cents, while the nearby corn contract moved nearly 20 cents higher.

Soybean export sales also were strong, but the trade appears to be focusing on the potential of a large South American crop. For the week, the November contract gained more 6 cents per bushel, while the nearby soybean meal contract lost $2.60 per ton.

In the softs, cotton put together back-to-back winning weeks with the December contract posting a gain of $1.53.

In livestock, the October cattle contract gained 80 cents. Nearby feeders were down $1.57. And the December lean hog contract declined $1.35.

In other markets of interest, the Euro gained 119 basis points against the dollar. Nearby crude oil prices set intra-day record highs and, for the week, gained $4.81 per barrel. Comex gold gained nearly $20.00 per ounce. And the CRB Index gained more than 7 points to close at 355-even.

Market Analysis: Oct 19, 2007: Elaine Kub, DTN Analyst Pearson: Here now to lend us her insight on these and other trends one of our newer market analysts, Elaine Kub. Elaine, welcome back.

Kub: Glad to be here.

Pearson: A lot of volatility out there in these markets as we move through harvest and a lot of volatility is the crop that's already been harvested here in the United States and that's the wheat market. This week a little softer on wheat, a little bit of a back off in exports. Do you think we've hit the highs in wheat? What is your outlook?

Kub: Well, the biggest thing about wheat is just what you said is the volatility. It's incredibly risky to be even involved in this market. We've had eight straight weeks where there has been at least one day where the market went its size up or down and that happened again today. We were locking it up by the end of the session. And so you really have to back off and look towards the longer term to even get a read on this market. And if you look there we have backed off from the high, we've backed off from the exports and that has also dropped the prices down a little bit. But we've had an 11% draw down and if you look -- technically that's not really even significant. So, you know, it could just be waiting for more bullish news before it tries to push up back toward the highs. However, it is risky on a lot of different fronts, we're waiting to see how the southern hemisphere really comes out. And if it starts to fall again it's probably going to fall another dollar and a half like it did before.

Pearson: Alright, now let's take us out to those new crop contracts because there have been reports, a couple of analysts have come out with reports on increased wheat acreage being fairly dramatic going into 2008. Would you go out and lock in some profit out there on those deferred contracts July of '08?

Kub: I would wait to see how the southern hemisphere crops show up because frankly there is a really large difference between the prices you're seeing now for these nearby contracts and the '08 contracts. There's about a dollar and a half difference and there's a real possibility that if the southern hemisphere doesn't come out even near where they are now, where they're expected to be now if we start to see the same demand for wheat those differences can really start to tighten up and you could be getting a much better opportunity for your '08 wheat contracts in the future.

Pearson: Okay, so maybe a dollar?

Kub: Maybe a dollar and certainly wait until March, February when we're really trying to look for acres for all kinds of crops.

Pearson: Alright, the acreage battle continues to grow. And, of course, as we look at some of our other commodities we track on the show the corn market is going to be right in the thick of all that. Obviously there is some harvest delays out there with wet weather in many parts of the Corn Belt. But near term do you see much happening in this corn market?

Kub: Near term we're on a short-term up trend and that's just something that the market has been doing for a while, kind of bouncing back and forth in a pretty neutral zone. We're on an up swing of that. But the good news about that if you're a long-term market bull as many participants are is that when we're off of the lows, we're not near the lows that really does encourage this non-commercial speculative sort of participation and they're back in. They were certainly in today. A lower dollar really does encourage that and so what we really look for again is a long-term perspective. They're in it for the long haul. They're waiting for one way or another the prices to go back toward that $4 level by March or February. I say that because either they're going to have to buy the acres now or when planting rolls around and they haven't bought the acres then we could be short, you know, we really do need to have as much corn as was planted this year at least throughout the world to even meet this huge demand that everyone has known about for a long time.

Pearson: Alright, and, of course, there is some concern right now about what the future holds for ethanol with ethanol futures under some pressure. What is your take on all that? Do you think we're going to see this market be strong and that ethanol demand will be there?

Kub: Well, the ethanol demand is always going to be there for the next few years because it's mandated by the government. The government has shown a willingness to support it so we saw John Thene trying to talk to President Bush and encourage E-20 versus E-10 use. There is a lot of reasons to be confident that the ethanol industry will maintain itself for the next five to ten years. The long-term profitability of it, on the other hand, on a plant by plant basis, that's something that is really going to have to play out and corn prices will play a bit part of that and so will crude oil.

Pearson: Absolutely, but export demand is extremely strong. Ethanol demand is going to be extremely strong, next year over 3 billion bushels. So, you're right, we're going to need acreage and we've already talked about bigger wheat acreage, we talked earlier on the show about bigger soybean acreage so the corn market, your opinion is prices have to go up to buy those acres.

Kub: One way or another we're going to see some higher prices in the long-term, yes.

Pearson: Alright, as we look at what's going on, we mentioned soybeans, let's talk about soybeans and what you see happening on that front. First of all, on the corn, you're not in a hurry to make sales. I just want to come back to that, you're not in a hurry to make sales at all. We'll wait until the market gets a little more pressure in early spring, March, that timeframe, see what happens in South America. So, let's talk about soybeans now. These are extremely profitable prices for soybeans.

Kub: Right, there's nothing wrong with $9 soybeans as a cash price. On the futures price what you're looking at there is a really uncertain market. I mentioned wheat was risky but soybeans are worse than risky, they're uncertain because the underlying fundamentals, you know, wheat and corn are trading on known underlying fundamentals, they know, they have a reasonable expectation of what's out there. Soybeans we really don't know on either hemisphere. Right now these harvest delays that you mentioned about corn, they're also delaying soybeans that can cause shattering. We really don't know what the final yield is going to be, that is one of the most variable numbers that the USDA has been able to provide and in the southern hemisphere, you know, they're getting rain in Brazil, they could certainly use more, they're in sort of a dry pattern and we don't know if they're going to get the increased acreage that this market really needs to even get us anywhere near the projections for carry out stocks.

Pearson: Alright, so as we look at the world and just kind of step back a little bit. We mentioned on the show earlier about the impact of the cheap dollar which has gotten cheaper, crude oil at $90. People are thinking things are getting kind of out of whack here. It's all great news for the export side, for wheat, corn and soybeans, all U.S. exporter product. What is your feeling for the dollar?

Kub: My feeling for the dollar is that, you know, we're seeing the lower balance, we saw it come up as kind of a dead cat bounce and these long-term trends in the Inforex markets tend to continue and nothing has really showed up that said that the fed is willing to back off on their interest rate drops. They are more likely to drop it than raise it up and that's incredibly bearish for a national currency.

Pearson: Alright, well, but extremely good news for those of us in the ag sector.

Kub: The commodities in general.

Pearson: Products overseas, yeah. But I want to talk more about soybeans, soybean oil certainly has been benefiting by these strong crude oil prices and it looks like meal demand has remained fairly good too.

Kub: Right, that's one of the most interesting things this week is that we saw soybean oil go to new highs. Soybean meal is still on a very high trend. But soybeans themselves stayed pretty steady this week. And like I said that's just this uncertainty. You get people on both sides of the market, nobody really wants to make or take off any major plays right now until we know more about the underlying fundamentals.

Pearson: A buddy called me this week and said, well, should I sell my soybeans or not? You know, I hate it when people do that and I'm sure you get into that because you're on TV, they expect you to know, but obviously I don't. Selling soybeans at these prices, like you say, can't hurt. What about -- should you take a precautionary look at maybe pricing some beans for '08 in case the soybean crop in South America is huge?

Kub: Right, if you can make a profit at these levels certainly book some of your sales because that is never wrong to make a profit and you can't regret not being greedier. On the other hand, if you can have the time and the storage space to make incremental sales and take advantage of this market whatever direction it goes, you know, take advantage of these prices now, lock some in before it goes down or take advantage of a higher trend led by more speculative participation then certainly that is the best way to go with soybeans right now.

Pearson: Alright, let's talk about the cotton market which has had a couple of back to back strong weeks. We talk about China's impact on corn, beans, wheat, you name it, bit impact on cotton.

Kub: Yeah, this Asian demand business is good for all of the commodities, it's good for the agriculture commodities and it's good from the standpoint that it's a story that can really attract the speculators and we've really seen that in the cotton market. It's kind of hard to really place a trend on the cotton market in the long-term but if you had to you'd definitely say it was higher, it's choppy but it's higher. Lately it's been holding pretty steady around 65 cents but, you know, really they're just waiting for what the speculators are going to do at this point. We've had some developments, as you mentioned, the cotton market and from a fundamental standpoint but as far as the seasonal anticipation we're about half harvested and we've seen the seasonal harvest pressure come off and really it's expected to go up more than anything.

Pearson: Alright, well, it's interesting because buying acres we have to throw cotton in the mix too.

Kub: That's true.

Pearson: Alright, now, let's talk about the livestock sector. On the flip side of all these higher prices for corn, soybean meal and soybean prices what is your outlook now on this fed cattle market as we hit the fourth quarter of 2007 into the first quarter of 2008?

Kub: Well, the cattle on feed report came out today, 11 million head on feed. That is actually a really interesting indication of the resilience of this industry. You know, with feed prices like this you kind of expect to see a lot more slaughter than feeding but we're not really seeing enough of that. Feed prices compared to last year you'd expect to see a lot less cattle on feed than there was last year at this time and, in fact, there's more. So, you're seeing people taking advantage and making a long-term value play. You know, they're seeing the fact that, of course, the meat industry is a little bearish right now just as far as supply but they know that they can take advantage of these cattle now, they've been able to hedge purchases, perhaps manage purchases of feed prices and the feeders are still buying, the feeders are still taking advantage of what they can.

Pearson: Alright, what's a good price to sell fed cattle?

Kub: Well, I think they're getting about $120 for 550 pound calves and I think that's, you know, again, that's a value play if you look for the long-term trend of this market.

Pearson: Okay, so the feeder cattle market you're pretty friendly there. This cow herd remains pretty small as we continue to eat the factory.

Kub: Right.

Pearson: An old expression.

Kub: Well, you're right, eating the factory is exactly what we're trying to get the consumer demand to do but there is a lot of meat out there from all the sectors. There's beef out there, chicken, pork, all of it is record kills. We're seeing a lot of meat that we're trying to shove down the consumer's throat and I think they're having trouble with that in the box beef market on the shelf. But as far as the actual live cattle market, feeder cattle market both of those are holding very steady.

Pearson: Alright, and the place where it's the biggest problem is over in the hog complex. What do you see happening with hogs?

Kub: I see hogs going down. And I mentioned the dead cat bounce, I heard someone call it the dead hog bounce in the hog market. We saw it kind of come up today, not today, this week be it a little choppy but really they're only expected to come down and especially if you look in the long-term. If you look out towards next year, if you're looking for Asian demand to look for U.S. exports of hogs and pork that's just not going to happen in the long-term because from what I understand China is finally getting their hog situation under control, they're finally being able to manage this blue ear disease and they're going to be more able to supply the entire Asian market for their veracious appetite for pork and that's really just going to drive down U.S. prices even more.

Pearson: Alright, so you're not very friendly for next year for hogs?

Kub: Not next year -- and part of me wants to put a caveat in there because if you look at just the tendencies of the hog cycle we should be approaching a low sometime here before spring certainly. That could be even within the next few months. If that happens certainly we'll see a bounce within this year but on the very long-term, you know, the export demand really is important for hogs.

Pearson: Absolutely, well that's going to end it right there. Elaine Kub, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Elaine 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 and 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 learn how producers are milking a profit from non-pasteurized dairy products. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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