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Market Analysis: Aug 10, 2007: Sue Martin

posted on August 10, 2007

USDA also released its latest global supply and demand estimates Friday. And coupled with bullish production numbers the report was friendly to wheat prices.

For the week, September wheat gained 17 cents, while the nearby corn contract moved more than 6 cents higher.

Since soybeans need August rains for good yields, weather continues to influence the market. And this week's crop report supported higher prices. For the week, the August contract gained 11 cents, while soybean meal was up $10.30 per ton.

In the softs, cotton trended lower this week with the December contract posting a loss of $3.65.

In livestock, the August live cattle contract lost $3.38. Nearby feeders were off 94 cents. And the August lean hog contract lost 95 cents.

In other markets of interest, Comex gold fell $2.20 per ounce. Nearby crude oil prices fell more than $4.00 per barrel. The Euro lost 105 basis points against the dollar. And the CRB Index lost 8 points to close at 319.75.

Market Analysis: Aug 10, 2007: Sue Martin Pearson: Here now to lend us her insight on these and other trends one of our senior market analysts, Sue Martin. Sue, good to have you back.

Martin: Thank you, Mark.

Pearson: Good to have this big government report out of the way too, kind of get a snapshot as to where we were as of August 1. And let's talk about wheat first. Obviously near record prices in Chicago for wheat, the USDA number was considered friendly, the world number was considered friendly for wheat. As you look around the world right now there is no one currently producing a really good wheat crop around the world. What is ahead for the wheat market? What are you looking for?

Martin: Well, first off I think that this week, of course, we did close December futures on the Chicago board of trade over $7 and this has been long talked about that we would get to this price level, many have got targets of around $7.50 and higher. I think that the one thing we need to look at is, one, that the USDA did lower the Kansas production in this report and they also estimated revisions down or reduced down the spring wheat crop and there's still problems out there as far as we know in the Pacific Northwest. So, we think that the wheat market is in a year where I know there's a seasonality or a historical data that shows that in years when you put from a spring low to a July, early August high that you'll have a tendency to sell off in prices into September, October. But we think it's a little different this year. We think it's a year where you make higher highs in June, fall back higher highs in July, fall back and then you can make higher highs in August, maybe fall back, not super deep, but fall back and then in September you start to push higher on into the very end of September, probably even into October and then we think the market tops in October and, of course, it's right at the time that we start planting. You know, in 30 days we'll be planting wheat and we're telling producers we know they had a bad deal this year with the weather and ended up not having a crop out there that they had already sold and had to buy their way back out of that but those are very rare instances that that occurs and we're recommending that as you plant your crop you be looking forward. If the market goes in the pattern we think you look forward and you sell the further out months in the deferred for the new crop, get some marketing done. If you can't do that and you're a little bit leery of marketing it then at least get some strategies in place to protect you and also put a floor under you.

Pearson: Alright, so that's pretty much a great strategy as far as the wheat market is concerned. Like you say it's been this almost wave action.

Martin: Well, I think the one thing we have to remember is, it's not just the U.S. that's going to increase acres. You know, France is looking at a huge increase in wheat production or wheat acres this coming year and that's at the expense of rape seed. You've got nearly every country looking at the same thing. If the weather is kinder to us this next season we're going to have a lot of wheat around and the stocks will go from like extremely tight to not so tight.

Pearson: Okay, and that means lower prices.

Martin: Exactly.

Pearson: Keep that in mind. Would you go ahead and market a couple extra years in here?

Martin: I don't know if I could do two years out, I probably would say yes, you could, as long as you're able to be flexible enough to utilize futures when the situation arises that you can maybe protect yourself back on the board because once you've sold it, it's sold and you need to retain some ownership back at some point. We don't know what will happen in the future. But I will say this, another thing that we've got to keep an eye on is that in the near term is how well has the world buyer priced himself into the market? If he's loaded himself up on the front end we could be looking at some down time.

Pearson: Alright, let's talk about the corn market, record corn crop, 13.1 billion bushels, a big yield, big numbers pretty much everywhere in corn. As you look at this, Sue, and as this report came out and I was talking to a group of farmers it just happened when it came out and they said oh no, it's going to be terrible, this market is going to go down. It didn't go down very much, we're at a higher week in corn, I would say this is probably friendly going forward. What is your take on this? This was bigger than what most of the analysts were predicting.

Martin: Well, it was and yet that number 152.8 came out less than Informa's number and as quite a few analysts that were talking, that had been out crop touring that were talking a 154.9. So, to me when I looked at that 152.8 my first impulse thought was gosh, this doesn't look so negative at all. I think the key is when you look at the state breakdowns, Iowa, they targeted Iowa at 180 bushel per acre yield. That's one bushel under the 2004 record. They also targeted us above, of course, last year's yield of 166. To me that's a little ambitious for the state of Iowa. We've had a lot of adversity, some parts of Iowa looks awful good, other parts doesn't look so good. And then they took Minnesota and they dropped the yield in Minnesota by maybe five bushels to the acre yield from last year and then put it like three bushels under the five year average. Well, you know, Minnesota has had the worst crop conditions they've had in 17 years and Iowa's crop condition ratings are worse this year than they were last year. So, and Wisconsin is the same thing. I think what's happening in this report is, is that the USDA went through all their survey plots that they set in place for August 1st and they looked at the plant population and farmers planted more plants per acre and so the ear counts should be greater and every kernel germinated this year. And so they're looking at that and that's artificially propping it up. This next month they'll be out surveying those same fields again and they will be pulling back the husk and looking at the ears and they might get a surprise.

Pearson: Alright, so that might be the case. Between now and then what is a producer to do?

Martin: Well, I wouldn't be selling anything right now. I think that we've got the potential still to find a low in here. What holds me back technically is that I have a timing indicator that I have a lot of faith in and it's a long-term indicator and that indicator is flatlined at the present time and it's starting to give the indications that it's about to turn positive. When that indicator turns positive you don't want to be short in front of that indicator. I think the market have got the chance, we've got to fight for acres. As we start to plant wheat we're already starting to make our plans as to what our acres are going to be like this next year, we're going to lose a lot of corn acres to wheat and some say maybe back to beans but, you know, if the price changes between now and spring on corn and it rallies farmers will plant more corn instead of beans. So, things will change a lot but we're already changing things. And then you look around the world and we see rape seed and other oil seeds giving up ground to wheat. There's going to be some big changes but I think right now I would not sell any new crop grain.

Pearson: Alright, let's slip over to the soybean front and what you see there. Obviously the number there, 2.6 billion bushels, pretty much echoes what we saw in terms of acreage.

Martin: Oh, Mark, I'm so bullish beans I can't hardly stand it. I don't know if I can totally put a price to it right now. It may be that we see a 10 in front of beans. But when you look at the price of beans and they came out with an average yield, same as last month which I think kind of surprised people a little bit, that 41.5 is the largest bushel per acre yield estimated in the month of August ever in history. The last one was 40.7. And you look at the problems we've been having and yes, we've had rains in Iowa and northern Illinois and Minnesota and South Dakota but south of I-70 they haven't had the rains and it's been extremely hot. Now, there is some forecasts of some potential of cooling temps to come in as we get in the latter part of the month, the last half of the month and, you know, in the month of August normally you do start to cool down as you go towards September but this has been abnormally hot starting off. I think that there's problems out there, I think we've got fields that are an early variety of beans that have been brought ahead in time and I think they're starting to show a cast of turning. I think that this bean crop is sharply reduced, the USDA pleased me greatly today when they lowered the carryout from 600 to 575 because they increased crush and exports on the old crop, still a record but we're going the right direction. In the meantime that was fast tracked into the new crop and, of course, carryouts down to 220. I think you're looking at a bean market that we need every bushel we can get with the drop in oil seeds around the world in acres this coming season, we've got to have South America produce more beans and I don't know how much greater they're going to do and the weather we're on the border of an El Nino, La Nina -- El Nino turning into La Nina -- I think that if anything goes wrong in South America that market will go ballistic. I wouldn't be selling beans. I think our harvest lows are in.

Pearson: Alright, let's move over to the livestock area and talk about the fed cattle market first and as you look forward to this fed cattle market, again, there's been some concerns about liquidity in the equities market in the mortgage business but this economy seems to be going extremely well, it's got to be good for beef isn't it?

Martin: Well, I think the economy is doing pretty good. There's a lot of money, of course, invested into stocks and this type of thing but the market has certainly had a tremor this past week. The market may surprise us and turn around. We did close higher for the week on the S&P's and I think we might have on the Dow. And so what are you going to do next week, take out this week's highs or this week's lows? They might go back and try the highs again of this week. I think we have to have caution in the stock market and I really can't emphasize that enough. You know, I'm not known to say four letter words but sell is very important here. In years that every 50 year cycle of a year that ends with a seven they've been disastrous going all the way back into 1857, every 50 years has been like this and what's interesting is the year of 1857, the year of 1907, those years were bank panics. Then in 1957 it wasn't but it was a decline and, again, I'm thinking we're looking at a bank panic. How that rubs off into the cattle market I think that one, we're killing more cattle than we should according to the reports. Two, we've had a lot of heat here that has hurt our usage or consumption and I think that is wearing on the market, that has broken the cash market back a little bit. The October futures I think are going to decline to where they only are like two to three dollars over the cash, where the cash comes up to the futures or the futures decline more. When you get cattle up around $1 to $1.03 I think you better be selling them.

Pearson: Alright, real quick Sue, hog market, what do you see?

Martin: Well, I think we've got a fair amount of numbers out there. Again, similar situation as to what you've got going on in the beef. I think that we're killing way more hogs than what the USDA reports say we should and we haven't seen any proof that China is going to be buying pork from us and I think that is a disappointment for that market and that's what is showing up on the board. I would be hedging hogs.

Pearson: Alright, always some good insights and, of course, pork producers, livestock producers things ease off a little bit for them with this bigger number on corn. So, more corn availability is some good news. Sue Martin, as usual we appreciate your insights. That is going to wrap up this edition of Market to Market. Now, if you'd like more information on where these markets may be headed visit the market plus page at our Website where you'll now 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 learn how a national farm to fork program helps restaurants purchase locally grown foods. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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