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Market Analysis: Jul 20, 2007: Walt Hackney and Doug Jackson

posted on July 20, 2007


Weather continues to be the dominant factor in the markets as the trade weighs its impact on yields.

For the week, September wheat lost nearly 7 cents, while the nearby corn contract gave up more than 13 cents.

In the soybean pits, last week's dramatic move to contract highs disappeared this week, taking a hefty weather premium with it. For the week, the nearby contract lost more than 85 cents, while the August meal contract declined by $2.30 per ton.

In the Softs, cotton's impressive rally fizzled this week with the December contract posting a loss of $5.63.

In livestock, the August live cattle contract was down 80 cents. Nearby feeders gained $1.65. And the August lean hog contract advanced 42 cents.

In other markets of interest, the Euro gained 31 basis points against the dollar, Crude Oil topped the 75-dollar mark. Comex Gold gained $17.40 per ounce. And the CRB Index lost three-quarters of a point to close at 326-even. Here now to lend us their insight on these and other trends are two of our regular analysts Walt Hackney and Doug Jackson. Gentlemen, welcome back.

Market Analysis: Jul 20, 2007: Walt Hackney and Doug Jackson Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Doug Jackson. Gentlemen, welcome back.

Both: Thank you, Mark.

Pearson: Walt, Doug, let's first talk about the wheat market. Strange year last year, too dry in a big chunk of the wheat belt, particularly the hard red belt and this year too wet, big rally, we've backed off some. Doug, what do you think is ahead for wheat?

Jackson: Well, we've got a fascinating story, Mark, and it's still unfolding here. We have not only the dual impact with the frost and the excessive, almost unprecedented rain in the United States, it still leave a significant question about the size of the U.S. crop and what the yields and acreage abandoned may yet be. But we were doing the same thing to the European crop. The French crop is partly harvested, some yield reports were border disastrous. Late in the week we're at the deepest discount U.S. futures under European futures ever. The European market was up about 17 cents on Friday. It continues to skyrocket to new highs just as our U.S. futures basically have, we're at the highest price here except for the year we had $7 futures and $5 corn. We're still damaging the European crop, we're damaging the Eastern European crop drought simultaneously. We have the tightest world supply-demand situation by any measure whether it's major exporters, total world inventories or any other measure that we've ever had. And we have a quality problem with the shortage of higher quality milling wheat. So, the market is completely disoriented in these unprecedented circumstances and how high is high enough is really anybody's guess. Obviously it's hard to get bullish, I guess, at multi-year, multi-decade highs. But, again, what's happening in the world is that wheat being our one commodity that's not necessarily fuel directly related like corn and beans is in a situation now where it can not give up acres, it must increase production next year to have any hope of stabilizing the world situation as we descend into just a tighter and tighter overall world situation. I don't know how high is high here although the market is still afraid of pricing advancing even more sharply from here and it'll keep probably going up until we can stabilize our ideas on world production.

Pearson: Not a time to make sales in your mind?

Jackson: Well, these are multi-year highs, people are going to want to sell wheat, yes Mark, there's no question about that. But we need more production next year and this is not a short-term problem.

Pearson: Speaking of needing more production for next year in a market that's backed off let's talk about the corn market, Doug. As you look at what's happening in corn futures here the acreage report came out since you were last on almost 93 million acres, that seemed to really ease the market's mind. There's still some weather challenges out there. But what is your outlook for corn as we get in through harvest both cash and futures because there seems to be quite a discrepancy there?

Jackson: Well, Mark, you know, a year ago we identified the problem that prices need to go up to a level that would stimulate record acreage switching and, of course, low and behold after moving to very high prices we got that acreage switch. We were able to steal acreage from soybeans with large supplies there temporarily and we switched 14 million acres into corn. That's four times the biggest amount of acreage switch from year to year that we've ever seen. So, that helped to alleviate that problem to some degree and now even though the market went home a week ago, braced for hot, dry weather we turned out to have excellent rains, crop making rains in parts of eastern Iowa and Illinois, crop saving rains in many other parts of the belt from Ohio to Nebraska. And as we go home before the weekend now the market thinks the corn market is generally stabilized at a relatively high level. People are looking for generally stable crop ratings. Maybe 20 percent of the areas have still missed rain, there's still areas in northwestern Iowa to Ohio that are suffering tremendous drought, the Dakotas and other places and that can't be ignored. But at this point the market thinks the crop is largely stabilized, largely made with a decent if not good yield and with the large acreage stocks will build this coming year moderately. But unless we end up with a spectacular yield the key point here is we can't afford to lose many acres next year even after we secured all those extra acres this year. So, a sideways kind of a market, Mark, we're going to have the biggest amount of corn to store this fall ever, probably 7 percent more than the biggest storage problem ever at two years ago, maybe 13 percent more than last year, you're going to have a huge discount to the futures with cash which you're already seeing. You're going to have a huge crop in new crop corn in the southeast for early harvest. So, we may trade, you know, $1.50 under the December '08 corn. Every year now, Mark, we're going to have to have bigger and bigger crops, you're going to have to control and store those bushels at harvest and the dole that out to your industrial use ethanol market a little bit at a time throughout the year. So, you'll see wide spreads and huge basis appreciation over the year but the market will have to accommodate those excess stocks in the fall.

Pearson: Alright, and of course, you mentioned stealing acres from soybeans. Now, as you look at this soybean market, you know, well over $9 a week ago, down 85 cents this week is this more of the volatility we're going to expect or are we going to see prices up above $9?

Jackson: Oh, we're going to see more volatility here, sure. But a year ago we identified the corn market as the acreage problem. Now we've switched and the shoe is on the other foot, Mark, and we had identified the bean situation as largely similar to that of a year ago on corn. We had excess bean stocks for one year, this year regardless of kind of what the yield is going to be we'll cut our stocks in half and, of course, over time you can kind of imagine that you can't continue to juggle these acreages around and have enough of everything particularly when wheat needs more acres too as we go forward. So, we're now moving into a situation where the bean market must move to prices that will not only stimulate acreage switching into beans here but stimulate nearly record expansion of South America and we don't think that will happen at this price. We need 11 million more bean acres in the western hemisphere, Mark, in 2008 or the bean market will simply spiral out of control. Four billion more acres here and a five percent expansion in Brazil is not enough. So, the market is now basically seeking prices that will discount the short-term weather and get acreage expansion in South America. That is probably $10 beans without a weather problem in the U.S.

Pearson: So, at this stage you're not selling corn or beans?

Jackson: Not really.

Pearson: Alright, let's move over to the livestock side, the flip side of this, the usage side. And Walt Hackney, cattle market, been trying to hang in there. I keep hearing that there's possibilities for good fed cattle prices later on this fall. I hear that from producers saying, you know, this market should strengthen, kind of give us your outlook, what do you see for fed cattle going forward?

Hackney: Probably the USDA cattle on feed report today, Mark, maybe substantiated some of the optimism for the fourth quarter of this year, the first quarter of next year as far as cash markets go on fed cattle. A lot of our cattle feeders have been anticipating $95 tight market on fed cattle going into the end of this year. There's been a lot of jaundiced opinion about that. Now, with this cattle on feed report down 15 percent on placements, down 3 percent on marketing, down on the cattle on feed actually there all of a sudden is the eye opener that we might have needed to support this trade going into the fourth quarter. You know, in June this year there were a lot of interest in buying cattle, the availability made it very difficult. One of the options was to buy big yearling cattle, a lot of people wondered why anyone would want to be giving an excess of $1 a pound for nine weight steers. Now that might have been a very, very smart move going into October, November, December marketing of fat cattle. It does appear that there will be good optimism from the futures standpoint at least next week. As far as cash cattle themselves go there's such a disparity in this cattle market that literally no one knows what the cattle actually are worth. There is no established value from Texas to Illinois. There were cattle sold at 88 cents in Texas this week, there were cattle sold in the Corn Belt, Iowa at $1.44, there were 60,000 cattle sold Thursday in Nebraska at $1.40. Now, these were basically all the same kind of cattle so that is the confusion in this cattle market as we see it. Where will it go next week? $90 probably, $92 maybe, the optimism for a nearby $95 might not be there.

Pearson: Alright, corn market backed off some, that had to be good news for the cow-calf guy out there. What are you hearing on prices from feeders and going into this fall?

Hackney: Well, it really was, they had been watching, monitoring the $5 potential of corn and so forth and as that failed to materialize, as that market dropped this past week you saw a real, real movement to buy fall delivery contract calves, for instance. They probably went up $3 to $5 a hundred in one week. The yearling trade is higher but not quite as high as that calf market was. The fear of long-term feeding arrangements with high priced corn was holding that calf market down. Now that has somewhat failed to support the idea.

Pearson: Alright, Walter, as you look over the livestock sector let's talk about the hog business and what you see happening there. That last USDA report really didn't show much expansion, you really didn't anticipate much expansion. We're hearing positive reports about circle virus vaccine working and seeing maybe more numbers this fall. What is your take on hogs as we go forward?

Hackney: Well, I think the vaccine factor probably is going to create more marketable butcher hogs going into this year ending, into the first of next year than any kind of expansion that may have been suggested. I still, we do not see the elaborate expansion at all. When you look at the expansion figure you also look at the cost of production and you've heard Doug's comments about beans and bean meal. People are really looking at some acceleration in their cost of production. That is going to hold down the expansion idea but the vaccine issue is saving enough extra pigs that we probably will see extra hogs into the mix.

Pearson: Alright, so producers keep that in mind. As usual, excellent insights. Thank you, Walt Hackney. Thank you, Doug Jackson. That's going to wrap up this edition of Market to Market. Now, if you'd like more information from our astute analysts on where these markets just may be headed visit the market plus page at our Market to Market Website where, by the way, you'll now find streaming video of our program. Remember, you can download audio podcasts of our market analysis and market plus segments absolutely free at our Website. And be sure to join us again next week when we'll examine an effort in which corn, cattle an co-products are powering the world's first closed loop ethanol plant. Until then, thanks for watching, I'm Mark Pearson. Have a great week.


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