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Market Analysis: Sep 21, 2007: Erin Golly and Virgil Robinson

posted on September 21, 2007

Wheat and corn export sales this week were larger than expected which may have helped boost futures prices this week. For the week, December wheat gained 28 cents, while the nearby corn contract moved up 27 1/2.

In soybeans: For the week, the November contract gained nearly a quarter, while soybean meal jumped $12.70 per ton.

In the softs, the December contract moved up nearly 2 1/2 dollars.

In livestock, the October cattle contract gained $1.50. Nearby feeders lost 43 cents. And the October lean hog contract dropped $4.21.

In other markets of interest, the Euro gained 22 basis points against the dollar. Nearby crude oil prices ost just over $2.80 per barrel. Comex gold shot up nearly $25 per ounce. And the CRB Index gained nearly 11 1/2 points to close at 333.50.

Market Analysis: Sep 21, 2007: Erin Golly and Virgil Robinson Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Erin Golly and Virgil Robinson. Welcome back. Golly: Thank you.

Pearson: Good to see you. Virgil, let's talk about what's been the wild market for the last 30 days, that's been this wheat trade which has continued again this week to marvel and astound all of us who watch and wonder as to what drives markets. Apparently when nobody has any it really pushes the price high.

Robinson: Yeah, demand is pretty strong, Mark, when it's in short supply and that clearly is the message the market is sending. One of the issues, again, that surfaced through the week, Mark, was the state of the Australian wheat crop which is anything but good, at least from what I am able to gather. The USDA forecast a crop of about 20 million metric tons and a lot of privates, Mark, are significantly below that. So, that clearly is one of the factors. Our hard red winter wheat planting season off to kind of a slow start. So, we have some issues here in the United States as well. But bottom line, demand for wheat, despite the higher prices, significantly higher prices, remains very, very firm. We're well on pace to exceed USDA's projections.

Pearson: Virgil, I can remember in 2005 when we had $5 corn, I remember I went to a meeting in Indiana, spoke to a group of farmers and I said, how many of you sold $5 corn? And every hand went up. And then I said, how many of you sold more than a pickup load? Every hand went back down. We had $5 corn because nobody had any cash corn. Is that pretty much what we have going on right now with wheat?

Robinson: Well, supplies are tight, Mark. There are wheat supplies available to the market but, again, the premise here is that we need to expand world wheat acres and production significantly and that's not a given. The realignment for acreage will continue here for the foreseeable future. I see this week one of our reputable firms, Informa, the former Sparks Group, suggesting U.S. acres could be up a couple of million. I think they'll be more than that, Mark, personally given the price incentive that we have today.

Pearson: And not only in Chicago with the soft wheat but also Kansas City hard wheat, it's all in short supply. And like you say we're sending signals that we really want it. Now, producers standpoint, you look out there July of next year when we're harvesting this 2008 crop, those prices look pretty attractive.

Robinson: They do, Mark, I'm reluctant to finalize a price, however, under the circumstances we visit with tonight. So, minimum price even though I know the price of an option is very, very high. It seems to me to be the appropriate strategy for those that have done nothing to this point.

Pearson: Alright, let's talk about what's going on over in the corn market. And, again, everything I'm hearing is a bountiful harvest is underway out there in the countryside. The early calls I've received from producers throughout the Corn Belt, Illinois, Indiana, Iowa, southern Minnesota and Nebraska, have all been excellent. Now what do we trade, Virgil? We had this market going up.

Robinson: Well, I think demand, Mark, underpins the market as was illustrated this week. The price of corn has improved pretty significantly in the last three or four weeks yet this week's export sales one of the largest numbers in recent memory. So, I think we've caught many a buyer short bought, Mark, who is remembering as recently as one year ago the price behavior of the U.S. market through harvest of 2006, I don't think wants to be caught in that uncomfortable position again. So, demand underpins this market. But as you mentioned it's likely the USDA will increase corn production in either their October or November or both of those reports. So, I don't think there is a shortage of corn, Mark. But I think the demand for corn will remain strong for the foreseeable future here in the U.S. as well as global.

Pearson: Strategy wise, Virgil, what should we be doing now?

Robinson: Mark, I've made some sales and have to be content with those now that the market has moved significantly higher. If I had not made a sale to this point in the crop year I would be inclined to begin tonight even if it's just a minimum price. But these are awfully attractive prices, Mark. The economics of the ethanol industry in the U.S. are changing. That is something to watch and be very vigilant of over the course of the next few weeks. Erin will address the cattle on feed report this evening, fewer cattle on feed it's likely and she'll address hogs as well here. We may be seeing some contraction in the hog herd, Mark, as profits now are being squeezed and likely to be squeezed for the foreseeable future. So, our demand base here domestically could erode a little bit from recent forecasts. That's something to be concerned about.

Pearson: You mentioned the keel in exports and cheap dollar has been helping with that too, there's another factor. Alright, let's go over to soybeans then and with those same thoughts in mind, all those primaries still in place, this market just keeps going skyward. I don't know, Virg, I mean, we got up over $10.

Robinson: Yeah.

Pearson: That's a pretty magical number where I come from.

Robinson: I think you hit on a primary point, the exchange rate, Mark, is very advantageous for U.S. exporters given the fact we've plenty of product available, at least in the immediate future, to satisfy that demand. The Brazilian economics are questionable, Mark, and it remains to be seen whether they'll expand this year's sewn hectares by six to ten million hectares. I'm not sure they will. We'll have to wait and see on that because of the exchange rate and demand for a host of things including vegetable oil for human and industrial purposes and vegetable protein to fuel the appetite and the increasing disposable incomes across the globe and the edible protein demand associated with it, Mark, just continues to ratchet up year over year over year. Ten dollars, however, is a formidable barrier. If I had done nothing to this point, and I already have, I would be inclined at a very least, at the very least to create some minimum price protection here.

Pearson: Real quick, cotton market, Virgil, anything there that you see that you want to be doing?

Robinson: Well, we're at that $62 to $65 cash level, Mark, that when we talked last I thought was attainable. However, I thought it would be attainable this spring or summer, now we're there. I've already made some sales, Mark, and have, to this point, not re-purchased those sales. So, I'm looking for a pullback in the cotton market most likely into the month of December at which point I'll re-cover and re-purchase sales made. If you have not made sales to this point I think tonight's market is a good place to start.

Pearson: Alright, so Virgil's call to action tonight. Erin Golly, let's talk about the livestock market. Let's start first with cattle. You mentioned the cattle on feed report came out on Friday. What, if anything, was your reaction to that?

Golly: There is no big surprises in the cattle on feed report, basically everything the cattle on feed report stated all the traders seem to have had their estimates wrapped around anyway. But I think supplies are going to decline in the fed cattle in the next 30 days. Price are seasonally going to rally. And we should see some good demand for this market especially product wise. It's been slumping a little bit but I think it will pick up and usage should pick up once the cooler weather is here. Weights also increase seasonally this time of the year but I think that's just going to help to offset the shortage we have in the fed cattle inventory. I do think we're going to be trading at $1 cattle again some time in the next four to six weeks.

Pearson: Alright, as we go forward into the first quarter of 2008 do you want to lock up something? Do you think this market could go higher?

Golly: I think the market has a potential of moving extremely higher but I want to be very cautious about it because if we have some kind of economic slow down or we have talk of recession, traders are very concerned about that, and the very high crude prices, we need to be careful and at least put some options underneath of that by buying some put options at least.

Pearson: Alright, let's talk about the calf market real quick and what you see happening there. You know, we've had these phenomenal prices for feeders, talked to a lot of cattle feeders who are out there saying, you know, this is a trick to make all this work right now. They've been telling me that since I was a child. So, they always seem to figure out a way to make it work. But right now it's a little tougher. What do you see for this market? Obviously this corn market is going to have a big impact.

Golly: It is and feeder demand has just been outrageous and exceptionally strong right now. That's just due to the shortage in the feeder cattle and the high prices in the deferred live cattle futures. And we talk about herd expansion prior to today and I don't think we're going to see any herd expansion at all. You know, we're having a lot of increase in input costs, pasture rents are going up, land rents are going up so I don't think we're going to see any expansion in the cattle herd as well. But I think there's a really good support for the feeder cattle futures in here. They are trading discount to the index. I think we'll see good support here in this range.

Pearson: Alright, let's talk about the hog market. What do you see happening on that front?

Golly: Well, this week we had a real down week in the hog futures and that was funds basically getting over their China hangover is what I like to call it. But we need to forget about China. October is pork month. We know what the supply situation is at hand. And we need to start focusing in on what are going to be the issues coming at us. And one of the major issues that I believe is coming is the immigration issue. Now, the no match system for immigration is a big concern for livestock producers and the meat packing industry and Homeland Security has already stated they are going to aggressively pursue employers that do not comply with the new match system. It really troubles me that we're talking about packer capacity and slaughter capacity in a time that we could potentially start seeing lates again and trying to conform with this new reform that the immigration is coming through, it's very tough for packing plants. I've heard from a couple of packing plants that might have to shut their doors, some might have to cut shifts to equal their employment. So, it's a very tough time to be looking at possibly some stringent raids in the immigration when we have these large hog numbers coming at us.

Pearson: Alright, so good points. So, we might see things, the whole supply chain could get backed up.

Golly: It could and that's why I'm recommending that producers at least contract 50% of their production with a packing plant. And your other 50% buy out the money puts. And the reason why I'm buying puts is because there are some up side potentials to this market if China does come in and make a significant buy, if we see some renewed buying from Russia and from Mexico and there is a potentially explosive cattle market I believe. But you've got to remember the same year that we had all time record wheat followed by corn and then hogs were next. So, we have, if we think that corn is going to have to rally substantially higher to ensure corn acres for next year we could see a lot higher hog prices.

Pearson: Very good, Erin Golly, Virgil Robinson, thank you so much. That's going to wrap up this edition of Market to Market. But if you'd like more information from Erin and Virgil on where these markets just may be headed why not visit the market plus page. It's over 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 of charge at our website. And be sure to join us again next week when we'll further examine efforts to preserve salmon populations in the Pacific Northwest. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat