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Market Analysis: Sep 14, 2007: Doug Hjort, Independent Analyst

posted on September 14, 2007

USDA released its latest crop production estimates this week but the report didn't contain any big surprises.

For the week, September wheat lost 2 cents, while the nearby corn contract gained more than 7 cents.

And with harvest just around the corner, the real action this week, once again was in the soybean pits, where the September contract gained a whopping 50 cents. The nearby meal contract advance by more than $12.00 per ton.

In the softs, the December cotton contract rallied this week, posting a gain of $3.36.

In livestock, the October cattle contract lost 90 cents. Nearby feeders were off by nearly 2 bucks. And the October lean hog contract lost 74 cents.

In other markets of interest, the Euro gained 102 points against the dollar. Nearby crude oil prices surpassed $80 briefly and for the week, gained $2.40. Comex gold gained $6.40 per ounce. And the CRB Index advanced nine points to close at 321-even.

Market Analysis: Sep 14, 2007: Doug Hjort, Independent Analyst Pearson: Here now to lend us his insight into these and other trends one of our regular market analysts, Doug Hjort. Doug, good to have you with us.

Hjort: Thank you, Mark.

Pearson: Well, you've been out in Montana wheat country and boy, everybody has been talking about wheat and the lack of it that they have to sell because of what we had for production this year and these amazing prices. Doug, is this what all the wheat market is going to do? Have we put a top in do you think?

Hjort: It's pretty hard to tell but the trading action of the last couple of weeks has certainly indicated a topping action is being formed here. The fundamentals are extremely bullish as we all know and we've known that for a long time. As a matter of fact, this week when we thought maybe we'd heard most of the bullish news we get other countries coming in and needing to buy wheat. And I say needing to buy wheat. They are buying the cash because they know, the end user knows that there is not enough wheat to go around if this demand stays at this level. So, buying futures wouldn't help them that much. They'd have profits in their futures account but would not have the cash wheat. So, the action this week, price action, the volatile action putting in a new contract high one day, closing lower that day and slamming down the next, 60, 65, 70 cent trading ranges is very indicative of a market that is very nervous, number one, and when you're dealing with all-time record high prices it's very difficult to say that, well, there's another target above this or how far do you have to go down to find support. that support level is probably from Friday's close probably another 70, 80, 90 cents lower before you find a solid support and that's because prices have been rising almost straight up here in the last two or three weeks. I do think that we're putting a top in this market. The reason I say that is that there is a tremendous interest in planting wheat, not just in the United States, winter wheat, but around the world and rightly so. Even though the new crop wheat price, July of 2008, is trading two and a half to three dollars below the spot month right now. So, farmers aren't going to get these high prices that they're seeing right now when they harvest next fall or at least that's not available to them now but still, at three dollars below current price it's one of the highest prices we've seen ever for wheat. So, I think there's going to be an awful lot more interest in coming weeks now and talk about the increased acreage. If you remember all the talk about how much corn we were going to plant and eventually did plant starting last winter and then through the spring and so on same thing is going to go on in wheat now. It's going to be a very difficult battle to be fought out here between all of the grains and even cotton as to where you're going to come up with enough acres for everything. But since winter wheat is the first to be planted for the 2008 crop they have the edge and they're going to plant heavily, I think, that will tend to put a top in this wheat price.

Pearson: Alright, so as we look down the road you mentioned the acreage competition and, of course, that's going to factor in with corn and what kind of switching we're going to see this winter and if we do have a big acreage number it's going to tighten things up for both corn and soybeans. Let's talk about the corn market first, Doug. You know, some of the bloom is off the corn rows as we go forward. A lot of people looking at these high priced soybeans. What do you see -- what is corn going to have to do to attract these acres?

Hjort: Well, you're going to have to bring these prices back up probably to a 2.5 ratio to soybeans and now we're about 2.3, I'm talking new crop, 2008 prices. Because of the increased costs of planting corn you're really going to have to tighten that ratio up to get farmers to stay with the corn acres. You look at the number of acres planted this year, we are building stocks. Now, we've got good yields this year, 155, 156, 157 bushel yield estimated out here, I think 160 or 161 was the record so these are high yields and on all these extra acres that we planted as well. So, even doing so though we've only increased the ending stock projections probably to 1.6 or 1.7 billion bushel. Now, that's plenty for this year, in the next twelve months. But as you go to next year if you pull those acres down very much you run the risk even with good yields of tightening up that supply-demand balance very much. On the other hand, you've got to have a lot more soybean acres planted just to satisfy the demand that is out there for soybeans. So, on corn I see corn prices this fall, I think we've almost put the bottom in. Now, when I say that understand the volatility of price here. Corn futures have been trading in about a 50 cent trading range, really 30, 35 is where the majority of the trade has been for two months. And I see that continuing so when I say a bottom is in you're going to have that kind of price swing here, that volatility I think over the next month or two. But then I see corn prices coming back after the harvest pressure is off and that's when we'll see some pretty strong excitement, I think, on corn prices.

Pearson: And wait to make sales at that point?

Hjort: That's right, I would not make sales right now.

Pearson: Alright, let's talk about soybeans. You mentioned the high prices and, again, volatility has been, you know, it's been gut-wrenching here really for the last twelve months for corn and soybeans and now throw wheat into the mix. The soybean market has been on a huge uptrend, Doug, that looks like it's going to attract a lot of acres.

Hjort: Well, it does. Of course, we've got a long time to make that decision too but at the present time it's the darling out there even though, like I said, I think wheat acreage is going to be huge, the increase. The other alternative here when you start talking corn, cotton or soybeans, soybeans is the one and rightly so. So, as we get through the winter and we start talking more and more about these acre shifts and I certainly don't know how that's going to be, my gut feel is that we're going to see an increase in soybean acres, a decrease in corn acres and if everything works smoothly an equal switch there of seven million acres or so from corn to soybeans, it probably won't work that smoothly, but if it did we'd have enough acres planted to both corn and beans to get through another year without prices going extremely high but if, only if we have high yields again, you see. So, cotton get mixed in there too, wheat gets mixed in too. You're really going to have to struggle to find enough acres to get planted to all of these crops to prevent another price explosion next year. And understand, I'm saying you have to have those normal yields. So, if there is a weather concern, again, any place in the world we would have prices exploding once again.

Pearson: Alright, well, it's going to be a wild winter, that's for sure. People are going to have to pay close attention and make a lot of tough decisions as we continue this winter. We had wheat torn up this last year so things change. Let's talk about livestock, another area that's been hit with certainly higher input costs, cattle feeding always a challenge, prices have been strong there, Doug. And last time you were on you talked about the fact we wouldn't see much expansion this year. Now it's looking like it may be zero. What do you see?

Hjort: I think that's right, I think it's going to be zero and the reason is that it's very profitable to sell the calves rather than keep them back for heifer replacement two years down the road when you start clipping that coupon. So, what you're looking at here in the cattle business, in the next few months the slaughter is going to be somewhat restricted because of the smaller placements that we've had for a few months now. The demand is very good, this export demand for beef is still kind of the thorn in the side of the U.S. especially as to whether Japan, South Korea and so on are going to really open their markets up and now on Friday of this week USDA announced that they will allow some more beef to come in from Canada. I don't think that's going to make a lot of difference in our price structure but you mentioned the high price and we've been bumping, futures have been bumping right up against all time contract highs. They backed off a little bit now in the last two weeks because can't go higher right at the present time. The cash price for cattle, fat cattle was down this week but it was down because the producer just let the packer take it down and sales were extremely light. Now, feedlots are in pretty current condition, I believe, so I don't think delaying sales for a week is going to hurt them. It puts them in pretty good position, I think, next week and you'll have to see higher prices coming in. I look for cattle prices to stay quite strong for many months yet, maybe two or three years.

Pearson: Same thing on these calves, Doug, as you look at this calf market, again, not much expansion.

Hjort: No, there isn't and calf prices are there, obviously it's time to get to market and start pricing those calves if you haven't and I would be contacting the buyers. Don't give into any pressures on the market, though, because the demand is there.

Pearson: Alright, finally let's talk about what's going on in the hog market. They had the good pork export news from China, didn't have much of an impact on this market. It's going to take a lot more than that isn't it, Doug, to get this thing rolling?

Hjort: Really is, the pork production is very high. It really surprised me that prices have dropped off as much as they have in the last five weeks I guess. In the last week butcher prices have started to firm a little bit. Futures prices run up when they get the China news out there and then nothing happens and boom, down they come again, ten, twelve dollar trading ranges we've seen in the last two months in the futures. I think the cash hog price and pork price is about bottoming right now and I think we can move this market a little higher during the winter on solid pork demand.

Pearson: Excellent, Doug. Thank you so much. Doug Hjort. That will wrap up this edition of Market to Market. But if you'd like more information from Doug on where these markets just may be headed why not visit the market plus page at our website 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 website. And be sure to join us again next week when we'll learn how farmers and fishermen are working together to save the salmon. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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