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Market Analysis: Sep 07, 2007: Darin Newsom

posted on September 7, 2007

With tight global wheat supplies of historical proportions, U.S. wheat prices hit at all-time highs of $8.10 early in the week and settle even higher by the end of the week.

For the week, September wheat gained 73 cents,

while the nearby corn contract moved up 7 and 1/4 cents.

In soybeans, the September contract inched up a nickel, the nearby meal contract went up $7.60 per ton.

In the softs, the December contract dropped just over 70 cents from last week's close.

In livestock, the October cattle contract lost 80 cents. Nearby feeders gained $1.28. And the October lean hog contract declined just over 50 cents.

In other markets of interest, the Euro lost 126 basis points against the dollar. Nearby crude oil prices gained $2.66 per barrel. Comex gold gained over $30 per ounce. And the CRB Index gained nearly 1.50 points to close at 312 even.

Market Analysis: Sep 07, 2007: Darin Newsom Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Darin Newsom. Darin, good to have you back.

Newsom: Thank you, Mark.

Pearson: Alright, you're a boy from wheat country. This has to be Disneyland for you guys, isn't it? I mean, this wheat price is so high. Anybody have anything to sell?

Newsom: That's what keeps it from being Disneyland. I mean, if you look at the market and you look at what the price has done, yeah, it's a phenomenal situation, I mean, at the prices you just showed. How often can you say, you know, when soybeans are pressing up towards $9, $10, wheat is within $1 per bushel of soybeans? It's a phenomenal rally. Unfortunately, there hasn't been a lot to sell and that's one of the reasons why we're doing what we're doing. You know, as we've talked about in the past, two-thirds, the eastern two-thirds of Kansas simply didn't have much wheat. A lot of the southern plains, parts of the Ohio Valley, the winter wheat area just simply didn't have much wheat this year. Weather dictated it, you know, it just wasn't to be. This is what we're left with, you know, we're left with a market that has one of the more bullish, along with crude oil and some of the other commodities that are really taking off, have a very bullish structure where both sides, the fundamental side that we just visited about and the speculative side, the non-commercial side, are very bullish and it continues to push the market higher. Now, an interesting thing about wheat, we had the December contract in Chicago go up limit twice, went up the limit 30 cents. Any more if we don't see a 30 cent move either up or down it's a calm day. It's just going to be that way and we don't know how long it's going to last. In '95, '96, probably the closest anyone can do to compare the situation that we're looking at right now. We saw the rally market into the spring. Is that possible this year? Well, we've got some factors coming along that might start to put the brakes on, you know, fall planting, we're going to see some extra acres go into the wheat. That could slow the rally down but right now picking a top almost impossible to do.

Pearson: What has this cash market been doing as the futures have gone up unbridled?

Newsom: It's actually held together fairly well. Now, someone will sit and say, yeah, we've got 70, 80 cent basis levels here, how can you say that's holding together pretty well? But if we look at, as you mentioned, futures going to $8 and cash following along at only 70 to 80 cents underneath that, that's really holding together, in my book, holding together well. What's helping to support? We continue to have solid export business. The dollar remains low making the U.S. wheat, despite how high it is, attractive on the export market. That's helping to keep basis levels from being a disaster.

Pearson: That's right and, of course, a weaker dollar helps a lot of that too but also the fact that there's not a good wheat crop growing anywhere right now.

Newsom: No, you look at Australia, Canada, Argentina, the Black Sea region of Europe, France, there are problems everywhere and this is just another piece of the larger pie that is coming together right now, kind of a perfect storm situation pushing us to these all-time prices.

Pearson: Alright, so how is this going to play out? Let's talk about its impact on the other markets. Let's talk about the corn market next. Obviously a move like this in wheat, and in terms of a sales strategy for wheat, let's talk about that too. You know, even the July wheat contract historically that's high.

Newsom: It is and that's a key point and that's one that as I go out and speak to groups one thing we have to remember when we're starting to talk about 2008, we have to compare the 2008 market, like you just said, the July contract. It's trailing by two, three dollars what the old crop market is doing. That indicates that we are in a typical supply driven market where next harvest is going to bring about some relief in this supply problem. If it doesn't we're going to see next year's crop go up as well, next year's market go up as well. Very difficult to say go out and sell but what we're suggesting is get some on the books. Don't get overzealous because we have no idea where this thing is going. Keep it small. We learned this year that even the smallest amount turns into a very large amount if weather doesn't cooperate. But by all means get some on the books because we could certainly see a large correction next year.

Pearson: That's right and as we start -- somewhere every eight weeks grow a wheat crop somewhere we start to see numbers build. How is this going to play out as you look at wheat in relation to corn. I've talked to a lot of farmers over in my home state of Illinois and in parts of Iowa even and Missouri who now they're all concerned about the Heshing Fly date when they can get in there and plant. So, are we going to see a lot more wheat acres?

Newsom: I think we're going to. You know, initially it's hard to imagine a lot of Iowa, Illinois and parts of the, the key parts of the Corn Belt going over to wheat. But, again, as we go out and visit with producers, as we go out and visit with folks throughout the Corn Belt we're hearing more and more interest at that level. The input costs of corn, seed costs of corn, all of these things coming together with wheat right now more than double the price of corn it's very attractive and we're hearing about the possibility of acreage and then double cropping into soybeans so that they do have something going on next fall. This is going to cut into the corn acres and one of the things that is helping to support the market in here, if we look out to the December 2008 corn contract, it's not really wanting to roam very far from that $4 level. It's keeping itself in play for next year, trying to buy acres, probably going to be unsuccessful but it's setting itself up for quite a rally as we move forward into 2008.

Pearson: Alright, so we're going to start -- we're taking a look at the cash corn market now, the national market and really we've been flat for corn now for a while as you see on the chart and on the board too. That is the big question. When are they going to start buying acres? Obviously with this wheat situation combined with soybeans they still need to buy a lot of corn.

Newsom: They do and as that chart just showed the cash market does look like it's going to continue to gravitate a little lower going into harvest, nothing unusual with that and, again, we're seeing a disconnect between the 2007 market and the 2008 going forward, you know, going into 2008-2009 so we're going to see some pressure in the cash market. Now, are they going to be able to maintain the acres? As the piece before talked about ethanol demand is supposed to increase over the next few years. We're probably not going to have the acres next year to fully meet that growth and demand so, in other words, we're going to see a decline in ending stocks next year in the 2008-2009. That's what everyone is banking on, that's what the investment community is banking on, that even though this ethanol boom may be, you know, relatively short-lived, three, four, five years we're still building a demand market that is going to help to support corn and if we don't have the acres I think we're setting ourselves up for a pretty substantial rally in the corn market in 2008.

Pearson: So, at this point you're not ready to sell corn? Move cash I guess if you have to to clean up?

Newsom: Move cash for the 2008 market, you know, look at that December contract out there around $4, start getting some on the books because we don't know what's going to happen and it's hard to pass on $4 corn, $4 futures. So, get a little bit on the books but allow plenty of leeway for the spring rally and further on into next summer as well.

Pearson: Alright, let's talk about the soybean market, obviously another competitor here for acreage as we go forward, particularly, hopefully with South America maybe picking up some of the slack from here in the U.S. Is that going to happen?

Newsom: It could but the interesting thing to me about the soybean market it's just defied logic, defied gravity throughout the '06-'07 marketing year. Now, and going on into the '07-'08, what we've got is we have huge, we've got record large world ending stocks still on the books, coming forward but the market doesn't seem to care. And one of the things I've learned over time is that when the market doesn't seem to do what it should do there's a reason for it. We don't know what that reason is yet. We could have a much smaller production U.S., worldwide stocks could drop more than what was earlier anticipated. Something out there is providing support not only in the November to January contracts but further out in March and May. Now, having been said, as we're looking at the cash market right now, the cash market right now is incredibly weak when you look at its comparison to the futures market. That is not, again, all that unusual. We're talking about soybeans up around $9, possibly moving to $10. We're dealing with record large world ending stocks. There's really no reason for basis to be strong. This is one of the things that keeps this basis about $1 under the November contract right now. That's not going to improve much. As we go forward into '07, '08 and even further than that I think we're going to continue to see some support in this market. I think we've got enough support worldwide both on the commercial and investment, could continue to push this market higher.

Pearson: Let's move over to the livestock sector next and let's talk about what's happening on the fed cattle front. Again, strong prices, feeder market's nuts, we're not expanding the cow herd. We just showed you Montana is burning up. It's a charcoal lump out there the way it looks and we're not getting much in the way of expansion certainly in the West with the continued drought. With that in mind where is this cattle market going?

Newsom: Well, you know, I was all prepared to come on and talk to you about how bullish this thing was, we were going to have a strong cash market this week. You know, if a person was looking at the charts in the cattle market they were going to push higher. It didn't come about. We saw the $200, 200 point decline in the stock market, put a little bit of pressure on the livestock contracts. Now, longer term as we go forward I still think we've got some pretty good opportunities in the December contract. I think if we look at the spread structure we're still seeing some pretty solid cash opportunities further out in the third and fourth quarter. Going to be a little rough here, a little bit of disappointment this week coming in about $95 unchanged from last, they were expecting some $97, didn't quite get it. We'll see what happens next week, if they back some cattle up could keep a little bit of pressure on the cash market but I think, again, longer term good things are, the higher prices are possible. December futures still seem poised like they could continue to rally through the fall.

Pearson: Alright, real quick on this calf market, what is your take there? Obviously the corn prices softening up the way they have this feeder market has just taken off.

Newsom: Yeah, it's increasing the demand and so I think we're going to continue to see that particularly if we start to get some of the harvest pressure in the corn market I think you're going to see more demand for the calves if the live cattle market can stay strong as well.

Pearson: Alright, real quick final comment, hog market, what do you see ahead?

Newsom: A little bit of weakness, probably more seasonal, look for this to stay under pressure for the next 30, 40 days and then hopefully we can start to build some pretty good demand in there.

Pearson: Alright, thank you so much, Darin Newsom, that's going to wrap up this portion of Market to Market. I want to thank you for joining us. But if you'd like more information from Darin 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 our market plus segments absolutely free. Check it out at our website. And be sure to join us again next week when we'll visit a rural community that fell victim to flood conditions in the early 1990's but is still kicking due in part to new farmers in town. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices markets news wheat