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Market Analysis: Sep 28, 2007: Sue Martin

posted on September 28, 2007

USDA's latest ending wheat stocks estimate came in at 1.7 billion bushels, well below the average trade guess. And once again the fundamentals pushed prices higher.

For the week, December wheat gained 65 cents, while the nearby corn contract moved more than 3 cents lower.

Ending stocks of beans were projected to be larger than previous estimates. Nevertheless, speculative buying supported prices. For the week, the November contract gained more than 12 cents, while soybean meal was up $3.60 per ton.

In the softs, the December cotton contract posted a loss of $1.23.

In livestock, the October cattle contract gained 25 cents. Nearby feeders were up 10 cents. And the October lean hog contract declined $2.45.

In other markets of interest, the Euro gained 191 basis points against the dollar. Nearby crude oil prices gained 4 cents per barrel. Comex gold gained $8.40 per ounce. And the CRB Index gained less than one point to close at 334.25.

Market Analysis: Sep 28, 2007: Sue Martin Pearson: Here now to lend us her insight on these and other trends, one of our regular market analysts, Sue Martin. Sue, welcome back.

Martin: Thank you, Mark.

Pearson: Wow, what a month it's been for this wheat market. I mean, every week we think we're at a new top, we've put a new top on the nearby wheat. I look at some of those deferred contracts and they're pretty strong too.

Martin: Well, the July contract today did hit $7.02 in the KC and we do have a price target of around $7.67 on the KC and $7.47 I think it is on the Chicago. I think that it's possible we see a seven in front of the new crop wheat. But all in all the market is demanding acres and that's part of this push along with demand by world buyers who held off probably because of high freight prices out of August. I think that now they're stepping up to the plate and they just keep coming to the table and buying. But here the market is trying to say we really need the acres, they know there's two and a half plus million acres coming out of CRP, they'll probably draw those acres and in the meantime they're saying we want to make sure that they actually are planted so I think you're seeing a wheat market that will probably see higher highs again in October. The price counts on December wheat, Chicago wheat is $10.18. That is a fourth wave count up, it's a major, major stumbling block if we get there. Do we get there? I don't know, we don't have to. We crossed the $9.50 mark today and so I think that when I look at the wheat market I think that we have to realize we will have huge, huge production this next coming growing season and unless Mother Nature is not kind but you're also looking at the world's second largest exporter, Australia and they're not catching the rains like they need and there is major concerns if we go another week or two without rain there is another major exporter going down the drain, that's going to probably be if they're lucky around 15 million metric tons exportable, or production I should say.

Pearson: And, of course, that's kind of a repeat of last year's Australia crop too that kind of acted as a catalyst for the rest of the market.

Martin: Actually Australia has been three years in a drought but I will say this, I think things could be on the table for turning but yet if you look at South America you've got drought in Argentina and northern Argentina and also parts of Paraguay and those are also areas where they want to plant sun seeds and, of course, the wheat production so not all it totally well yet. But I think we're going to see a tremendous acreage increase this year and the U.S. certainly has good moisture to sustain that.

Pearson: I would think a producer of wheat would be looking at those July contracts, Kansas City and Chicago, and want to make a position.

Martin: Well, I think they should. If you go back and look at historical markets, you know, the all-time bean market, the emphasis market of 1973 when we went to $12.35 and the November contract was $5.62 or something like that lower in price, it topped -- when the July topped slid back and then came on stronger for about maybe a couple two or three weeks and then water followed to the down side. Dec. corn of 1996 topped exactly along with the July contract when it got to $5.55 and then water followed to the down side. So, we can't look on new crop wheat on the old prices, it isn't going to happen unless something really detrimental occurs again. I think that we have to remember third world countries are eating better than they used to and the demand for food is extremely high and hungry people fight and governments are very concerned and food inflation is with us.

Pearson: Alright, so something to keep in mind for producers out there on the wheat front. Well, let's talk about the corn market. Again, we just talked about 156 bushel perhaps national average, 13.3, some are saying 13.5 billion bushel corn crop in 2007. As you look at this market, Sue, and as we see what is happening with corn prices, I see a four in a lot of those deferred contracts in corn, we've got a long, tough winter going between buying acres for wheat, corn and beans. What is your take right now in making some sales?

Martin: I wouldn't do it. Now, I've been asked a lot this week should farmers be making forward sales on next year's Dec. corn, the new crop '08 and I've been saying no, let's wait until November and think about that and then make more sales again in May. I believe that you're going to see a tremendous acreage fight between beans and corn from February to May of next year. I think that's where the ultimate is. But in the meantime I think corn prices on the old crop even though the crop might get bigger, you know, sometimes big crops get bigger I think that we have to also realize there is a huge demand base under this market. We're certainly going to have the supply to export if we so wish and corn is trying to pick up the slack for feed wheat. I think that, you know, we've got 77 more plants of ethanol coming on, not that ethanol is doing so well right now, it's not. And in the meantime you've got crude oil prices making new all-time highs but just this week you had ADM and Conoco-Phillips ink a deal on biocrude and so I think that the grains are going to be fine and I think that Dec. corn is going to see a four in front of it before it before it expires off the board.

Pearson: Alright, so again, for '08 sales you're not in a big hurry at this stage.

Martin: No, I think that what I'm wanting to do is target that as we get in towards the November timeframe. I just think this Dec. contract, until old crop Dec. corn gets a four in front of it I don't want to sell the new.

Pearson: Alright, as you take a look at what's happening, now let's switch over to soybeans. Again, another glamour crop here. And you said you were an eight dollar girl at one point and then ten dollars is what you anticipated. Well, we've gotten it here in the last two weeks, $10 in front of a number of contracts in Chicago. These have historically been extremely good prices to sell so would you do it?

Martin: Well, I would say this, I expect higher highs on soybeans, on November beans in October and I wouldn't be surprised if higher highs are exceeded again in November. Now, when you've seen beans get up to what, $10.22 or $10.18, I guess we got to $10.17 this week in the day session, you have to ask yourself how high is high going to be. And, you know, you've got South America -- I think what really beans are all about is making sure we get those acres in South America and when you've got a dollar that is taking out the 1992 low on the cash index and falling to the floor and the real is making new highs against the dollar for the year you've got some concerns down there that we may not get the increase that we need. And the U.S. right now probably China imports 95% of their beans from the U.S. and so, you know, they're looking at us for demand but yet we have to have South America raise not six percent increase but eleven percent increase and that is what they lost a year ago and then maybe that will solidify things or stabilize us but you've got the northern part of Brazil and the central part of Brazil running into some really bad issues with drought, major drought. In fact, 65% to 70% of Brazilian production is vulnerable with the drought that's going on right now. So, that is a concern because it's not going in easy and then some areas are already trying to say well they may have to re-plant like in Madigraso. That may happen. But the concern is they're not off to a good start. And if we go another two weeks down the road and they don't have rain that's going to really have some thinking we're going backwards especially if the dollar continues to demise because, remember, those farmers down there are not in the best financial condition.

Pearson: That's right. I think the last time you were on the show you said there would have to be a ten in front of the beans to get the Brazilians to get that South American production up and, of course, that was with the dollar at its current level. Since then the dollar has done nothing but slide, the real has gone up. They're caught in a pretty tough situation.

Martin: Well, on the high this week before the dollar took out the lows on the cash index of 1992 you had beans yesterday when they got up to around $10.17. Your high beans adjusted in dollars and world value was around $7.95 or $7.91 maybe. Now that is back down under $7.70 and in the meantime if you look at 2004 when you had $10.64 on beans on the board your value of beans in world market was $9.57, $9.51 so, you know, we're not expensive yet. And so to get that South American farmer these beans are having to do double duty. If you get a problem going in South America you're going to have beans in the teens because we have to have them. We don't have sun seed acres, we don't have rape seed acres, we're losing cotton seed acres. All the oil seeds are giving way to wheat around the world so it's so important because bean oil is a major entity in veg oils, like I think it accounts for close to 54% of the world's usage in veg oils along with palm oil. So, it's an important thing and it just can't be stressed enough. I'm telling producers that are talking to me, I'm telling my clients let's start looking in October to maybe sell a few beans. Let's look in November and we want to really get more aggressive. I believe that when we get into November the markets are going to have a peak somewhere in November and I think there's one whale of a break coming after that and then we'll be able to pick those positions back up probably in early February.

Pearson: Alright, let's talk real quick, you mentioned cotton. What do you see now for this cotton price, Sue?

Martin: Well, you know, we have to look at the U.S., we're the second largest producer in the world on cotton and we're losing a lot of cotton seed acres. You know, we lost what, eighteen percent this past year and this coming year we're going to lose a lot more and so it's a big concern because you have these growing economies, these vibrant economies over in southeast Asia that love cotton. If you look at China their, I think since 1995, '96, you know, their production has gone up about 48%. If you look at consumer demand it increased about 157%. And they are importing like crazy from the U.S. but I'm afraid we're failing and that's one market I think that goes higher. But there is another market on the off side too in these markets and that nobody is hardly paying attention to it, it's the rice market. I think we have a phenomenal market coming in rice.

Pearson: Alright, again, the acreage battle is going to continue and it's going to continue throughout the winter so it's going to be an extremely volatile year, producers need to be cognoscente of that. Alright, let's shift gears and talk about livestock. Fed cattle market, feeder cattle market really seems to be in pretty decent shape right now. Sue, talk about the fat cattle market first.

Martin: Well, the cash market today on Friday did hit $96.06 1/2 in the plains and I think that would be up about $1 from last week. We were $150 in the north and I think that we have a pretty good cattle market going here. I think seasonally we get stronger at this time of the year and I don't see any reason for that not to happen again. I think supplies are very tight and packers are losing money. But in the meantime I think they're going to lose more because I have a feeling the demand is going to be phenomenal for beef. Exports have been up I think three, four weeks in a row. I'm very friendly to the cattle market. I think October futures if you can get them back up through $98.35 to $98.50 the market will start to get more explosive to the dollar-one mark. December cattle, you know, if you can get through that $101.50 area then you might make it up to $103.60, $104.00. I just think the cattle market has more promise here than what some want to give it. The basis levels have narrowed, this week basis is like 60 cents to maybe a dollar apart from the cash to the futures and that's kind of normal for this time of the year so we're okay there too. So, I like the cattle market. I think the cattle producer is in good hands.

Pearson: And it was a decent week for feeders. We'll take a look at what feeder cattle have done but cheaper corn this week I'm sure helped that market.

Martin: Well, I think it is, the one thing I will say and this is in a different mode is the hog producer and the poultry producer could get really caught in a lurch here if corn starts to lift and in the meantime soybean meal explodes because if there continues to be problems in South America you could see a soybean meal market that could go to 400. And these pork producers and poultry producers are sitting on their hands. They have not locked up meal, they didn't do it all of last year, they didn't do it so far this year, they could be really caught behind the eight ball.

Pearson: Alright, we've got about fifteen seconds, what do you see for hog prices in the next three months?

Martin: Well, you know, the hog and pig report came out, the quarterly report and it was bearish, it was kind of a surprise to some. I think most traders did expect to see some expansion and that's what the report showed. You know, what was really a surprise is North Carolina increased in expansion of about two percent, you had Minnesota three percent, Nebraska four. I think we're looking at probably a bearish market overall between now and the end of next April but exports should be good.

Pearson: Alright, Sue Martin, thank you so much. That's going to wrap up this edition of Market to Market. But if you'd like more information from Sue on where these markets just may be headed visit the market plus page at our website 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 website. And be sure to join us again next week when we'll examine the state of Nebraska's controversial ban on corporate agriculture. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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