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Market Analysis: Aug 03, 2007: Doug Hjort, Independent Analyst

posted on August 3, 2007

Private estimates on 2007 crop production were released in this week with Informa for example, reducing their production estimates of a month ago for both corn and soybeans. The forecast may have lifted corn prices a bit but there were few surprises for wheat.

For the week ... September wheat dropped 3 1/4, while the nearby corn went up 5 1/2.

In soybeans, the August contract is up 23 1/2 cents from last week and the meal contract $8.60.

In the fiber market, cotton trended higher again this week with the December contract posting a gain of $1.39.

In livestock, the August live cattle contract was up down 2 cents. Nearby feeders were off $1.60. And the August lean hog gained nearly 1.60.

In the financials, Comex gold gained $12.40 per ounce. Nearby crude oil prices are still over $75 a barrel but closed down just over $1.50 from last week. The Euro gained 138 basis points against the dollar. And the CRB Index gained nearly four points to close at 319.75.

Here now to lend us his insight on these and other trends is one of our long-time market analysts, Doug Hjort. Doug, welcome back.

Market Analysis: Aug 03, 2007: Doug Hjort, Independent Analyst Doug Hjort: Thank you, Mark.

Pearson: Let's talk a little bit about what's going on out there and I want to go first to the wheat market and obviously Chicago wheat, we're at some pretty attractive levels, granted a little softer this week but obviously we've had huge problems getting this hard red wheat harvested and there's some concern about tghtness in the wheat market worldwide.

Hjort: There really is. We're looking at probably one of the tightest supply-demand balances we've ever had in history especially when you look at the stocks to use ratio. One of the things that rallied prices a week ago was the continued wet weather in Europe. If you remember in Europe they started off dry, had some crops less from that for their wheat and then when the wheat was ready to harvest is started raining and delayed harvest and most likely hurt quality somewhat. Following our big quality problems here in our central and southern plains this summer it left a lot of milling wheat quality pretty short relying a lot on the spring wheat crops in the U.S. and Canada, high protein stuff to fill that need for bread wheats here in this country, for example. We're looking at a wheat market price wise that put a new contract high in a week ago and then on Monday started to falter and sold off pretty hard by Tuesday and then Wednesday, came back pretty good share of it. Actually we had an inside trading week on the wheat chart and that could be termed as consolidation to where we're getting ready to move on higher but it could also signal a topping in the price action. And that's what really is a concern right now I think. Remember wheat prices are the second highest in history right now and producers really haven't been selling very much. Anybody with good quality wheat hanging onto it for good reason. And those with poor quality wheat have already moved it off maybe into feed channels or whatever. So, very, very tight supply-demand balance. The question is can wheat prices rise any further if corn and beans are not going to go up so therefore it brings weather into the picture again, obviously for soybeans and for corn but also for wheat in this condition.

Pearson: Let's talk about the corn market, Doug, while we're moving in that direction. As we look at the corn market today and we look at the forecast today it's hot and dry, we're going to see some triple digit temperatures in parts of the western Corn Belt where there already are some dry areas, we're hearing from a lot of producers who were saying they obviously need a rain as this time of the year they are so critical. What is your outlook for this corn market as we go forward? We still need to produce a pretty good sized crop.

Hjort: Well, we do and as mentioned earlier we did get some of the private estimates out and even though they're pulling their horns in, Informa in this case pulling yields down a little bit, they're still running in there 148 to 153 bushel per acre. Keep in mind with this huge acreage increase we have this year 146 bushel per acre nationwide would produce about the same amount of corn that USDA is currently predicting that would be used in the coming year. Now, obviously that's a long ways off, those demand estimates might change and so on. But we're still under the Informa numbers and the Stone numbers that came out this week, in both cases, we'd be adding to stock a little bit. So, there's some nervousness in the corn market alright that we've got to have a pretty good yield even though -- then weather comes in and really creates a problem there. But that is more critical perhaps in the next couple of weeks for soybeans than it is on the corn market.

Pearson: Alright, so at this stage of the game, let's talk about soybeans and there are some other issues there. Soybean aphids are out there requiring treatment, requiring scouting and some of the drier areas spider mites are an issue so there's some things out there. And we're talking the flip side here a much smaller acreage number for soybeans.

Hjort: Much smaller acreage which means that you have to have that average to trend line yield just in order to kind of keep stocks from getting too terribly tight this fall. It's really an odd situation going from record high stocks that we've been talking about for a year and a half or more and then possibly coming into a shortage a year from this fall. Right now I think the soybean yield still has a chance of being at trend line and that's what the private sources were predicting this week. However, weather in the next week or two is going to be very critical. If you've noticed these fronts that have been moving in through the Corn Belt this last week the forecast gives some pretty good rain and it petered out before it got into the Corn Belt very far. And if that continues in the next week we could be having some serious concerns coming in on the soybeans keeping in mind, again, just the opposite of corn. Corn you can take your yields down some more and have enough corn but on the beans you can't bring that yielddown very much.

Pearson: Do you want to sell beans here, Doug?

Hjort: No, maybe Monday morning I might if the weather is bad but right now I'm telling my clients let's just hold, we've already got some sold ahead, of course.

Pearson: Cotton market has been on a nice little rally here lately, what's your take on that? Hjort: Well, the cotton market we've had those prices really on a yo-yo here in the last couple of months. I think the market can get a little bit better but it's going to be that slow, slow grind that we've just been fearing in that market for a long time.

Pearson: Let's talk about the livestock business, fed cattle market. As we move through, Doug, what do you see? Would you call it a current status right now for fed cattle as we go forward here in August and head into fall which is typically a troublesome time?

Hjort: I think we are but the feedlot trade really never got going until Friday afternoon again this week, that's kind of typical any more. But when they did get going the packers had to pay a couple of bucks more to get them bought it looked like, I didn't have the full numbers when we came in for taping, but that market I think if we did get $2 higher I would guess that the feedlot manager is just really cleaned out this week. Enough nervousness there at these prices -- the nervousness is not necessarily in the cash price or in the beef product market. The nervousness is the futures market. We're within about $1 of the all-time contract high on December futures right now and, you know, can you push on through that? Is our market really that good? Keep in mind that the long-term demand, supply-demand balance looks very good for cattle because we're not increasing the cow herd. As a matter of fact we're not holding, the number of heifers held back for beef cow replacement were down 4% on the July report. So, that means that it'll be two years before we could start increasing cow numbers again. Long-term this beef demand is going to be very good, supply tight and demand is very good for beef.

Pearson: You're right, we haven't been replacing this cow factory and looking at this calf market going forward you have to be pretty friendly there don't you?

Hjort: That's right, very good. I have not recommended selling calves or contracting for the fall yet even at these prices. Feeder cattle futures right up there next to the contract highs as well.

Pearson: It's been a strong month. Let's talk about the hog market where we had seen some expansion and part of that has been due to some advances we made in vaccinations on circle virus and some of the others that we're hearing from. How much of an impact do you think that's going to have, Doug? And what do you think we'll see for fourth quarter hog numbers?

Hjort: Well, this week was kind of a puzzling one. Cash markets really did not come alive, they didn't do very well. Pork product market was down most of the week indicating a little bit of reluctance at the retail level. Probably it's just an oversupply situation. Our pork production on a weekly basis has been running about 5% over a year ago for a few weeks. That's pretty hard to consume that extra amount in a short period of time. Whereas the futures market went nuts this week, running up sharply new contract highs and so on, primarily because they're hoping that they could sell pork to China. I don't know if China is going to do that. They're short of pork but that's going to be a problem between cash and futures in the hog market.

Pearson: Alright, we'll see what happens. Doug Hjort, as usual, we appreciate your insights. But that will wrap up this edition of Market to Market. Now, if you'd like more information from Doug visit the market plus page at our Web site where you'll now find streaming video of our program. And at the Website you can also download free audio podcasts of our market analysis and market plus segments. And be sure to join us again next week when we'll examine the impact of the government's latest crop production estimates. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news soybeans