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Market Analysis: Jul 13, 2007: Elaine Kub, DTN Analyst

posted on July 13, 2007

USDA released its latest global supply and demand estimates this week, but the report contained few surprises for coarse grains and the trade now appears to be focused primarily on arid weather forecasts in much of the corn belt.

For the week, July wheat gained nearly 14 cents, while the nearby corn contract lost almost 3 cents.

The real action this week was in the soybean pits, where the government's supply and demand report pushed prices to contract highs.

For the week, the nearby contract gained almost 50 cents. The July meal contract, meanwhile, advanced nearly $20.00.

In the Softs, December cotton extended its rally with the December contract posting a gain of 88 cents.

In livestock, the August live cattle contract was down 88 cents. Nearby feeders were off 85 cents. And the July lean hog lost $2.30.

In other markets of interest, the Euro gained 16 basis points against the dollar, Crude Oil flirted with the 74-dollar mark. Comex Gold gained $12.50 per ounce. And the CRB Index gained four points to close at 323-even.

Here now to lend us her insight on these and other trends is our newest market analyst Elaine Kub. Elaine, welcome to Market to Market.

Market Analysis: Jul 13, 2007: Elaine Kub, DTN Analyst Pearson: Here now to lend us her insight on these and other trends is our newest market analyst, Elaine Kub. Elaine, welcome to Market to Market.

Kub: Glad to be here.

Pearson: Well, good to have you. Let's talk about this wheat market. We've kind of reviewed the problems in the wheat belt which have been way too much rain in 2007 after being way too dry in 2006. Hay problems down there, just all kinds of challenges facing the grain belt. We've had a nice rally in wheat. What are your thoughts on the wheat market? What do you think we should be doing right now?

Kub: Well, you mentioned the problems in the U.S. wheat belt but there's also problems worldwide, like the wheat market is in a worldwide state of flux. There's areas in Australia that have had drought, China has seen some drought, Europe has seen drought and so what we see is wheat moving in different patterns and different transport directions all across the world. You see all kinds of nations taking different steps to fix that. You see places like Moldova are completely eradicating their import tax for wheat and yet even South America is importing wheat. And so we just see a state of flux and you see that in the markets as well. And the Chicago wheat market is considered to be the worldwide benchmark for wheat but it's also including what you talked about is the U.S. wheat market that has really been hit this year. So, therefore that's why you're seeing a lot of increase in the wheat prices and the USDA released these reports on Thursday that confirmed that. And they also separated it out by class which reminded us that it was the hard red winter wheat coming out of Kansas and Oklahoma that was hit the hardest this year. And that's why we saw some inter-market spread action this week which was appropriate. Not only have the spreads been off of their historic relationships, the Kansas City and Minneapolis markets should tend to have a premium over the Chicago markets, but we also saw the hard red winter wheat deserving even more of a premium after the production declines they've seen this year.

Pearson: And huge production problems down there and I know people are more concerned about getting their crop in as opposed to pricing the crop but bottom line is you still have to get this crop sold. As you look at the 2007 wheat market and what's ahead is now the time to be making sales?

Kub: This would be a fine time to be making sales. There is technical indications that the market could be going into a sideways action, they've been pretty much consolidating the market throughout the past month. However, if you look at this from a perspective of a longer term perspective the last time we saw prices like this was the '95-'96 marketing year and there they did something very similar, they consolidated throughout July and then shot up later on when even more was known about the yields coming out of the fields.

Pearson: And then, of course, it remains to be seen what happens with the spring wheat and the other markets out there. Chicago wheat which is the poorest protein of the group has hung in there, like you say, fairly strong.

Kub: Right, and part of that is just its function as a benchmark and also the fact that it's on Chicago where we have so many non-commercial speculative traders that are interested in grains right now. They know about the story in wheat. They see the USDA reports and they see wheat as a really good investment right now.

Pearson: Alright, let's talk about another good investment or apparently has been for the last year since September 15, 2006 and that's the corn market. As you look at corn prices not really much movement this week. We have the acreage, I think the trade feels like they're fairly secure at almost 93 million acres of corn. But looking down the road here next five to seven days looks like a fairly dry forecast.

Kub: Yes, it is a dry forecast and that's adding some weather risk premium into the market. And you mentioned that we have saw some gains this week and those are really significant because of the decline that was seen all throughout June. However, after that has happened we've found some technical support, we're moving back higher and that is not only a function of this technical balance that we're seeing but because of the fact that non-commercial traders have liquidated the contracts that they no longer want to have exposed to this market. But it's also the weather on top of that. So, the fundamentals and the technicals are both lining up for corn right now. And, you know, these reports about large production, large acreage really aren't affecting the market because the market has already known about this. It's an effect of the high market prices in February rather than a cause for the market to go any farther lower.

Pearson: Alright, so thinking of that let's talk about this cash market. We've had a lot of people say they're very concerned about what the cash market could do this fall with potentially 13 billion bushels of corn, we've never had a crop that big, getting it moved to where it needs to be moved, the transportation costs. What is your thoughts on that? What should producers be doing?

Kub: Right now the cash basis is fairly strong. We have about 20 cents between the futures prices and the cash prices and so it's a fine time to be moving corn except that if you look at the future spreads there is carry in the market. There is about 14 cents between the September and the December contracts which is an indication that end users really aren't concerned about sourcing corn throughout the 2007 year. If producers can hold onto that corn the market will reimburse them for keeping it off the market. There isn't concern until we get into 2008. However, when you do get into the 2008 spreads it does look like commercial traders are aware that demand is ever increasing and they want to make sure that the corn is there for them at that time.

Pearson: A lot of producers I've talked to this week had long faces that they missed $4 corn. What is the outlook? We're not going to have to move more acres again, are we, for 2008-2009 to satisfy this ethanol demand?

Kub: It's going to be hard to find more acres. We saw a large increase already and there's only so much acreage in the United States as a whole. However, you know, if the market can keep these prices, if they can buy acres again in the next February round. It's possible that corn will increase more and the other markets will just have to adjust to make up for that. However, farmers shouldn't be too concerned about missing out on the $4 corn. We see lots of technical indications that it could head back that way. We've seen solid technical support for December corn around $3.36.

Pearson: Alright, so with that in mind, let's talk about soybeans too and obviously that's where the interest was this week. The soy demand and demand for the soy products worldwide, trying to get South America to plant more really are pushing these prices to amazing highs. Now, are these selling targets right now for soybean producers?

Kub: It's difficult to really talk about the prices in the futures contracts as being the highs because, you know, the futures rally it seems diluted to me and from a fundamental standpoint there's record numbers of soybeans still around in the countryside, the future spreads are very wide and as you mentioned South America is trying to unload their beans on the world market and they're getting most of the export business. We're really not meeting our shipment goals out of the Gulf and out of the Pacific Northwest and so there's just not this linkage between what the non-commercial speculative traders see as a demand driven market driven by biofuels, none of that is really coming out of the U.S. right now. U.S. soybeans aren't going to the biofuels producers in South America and in Asia yet. However, you know, the non-commercials they're doing this parallel reality like we saw in the corn ethanol based rally and that's why their interest is going to continue to grow. They have a very net long interest in this market and they'll continue to do so as long as they see this strong trend. It's a very strong trend in soybeans, Malaysian palm oil, soybean meal. So, whether or not this market is going to continue rising it's just going to depend on whether or not we can keep this bull fed whether the non-commercial interest is going to continue. If it starts to wash out it could wash out pretty fast. But in the meantime the people that are trying to sell cash soybeans the market is paying them to do that to some extent except there's about $1 difference between the futures price and the cash prices right now.

Pearson: That's right, basis has fallen apart on the bean market right now and actually there's plenty of beans out there. Fundamentally it's not that strong of a situation. What should a producer do to take advantage if we look now at what's happened with the cash index -- what should a producer do to take advantage? Strictly use the board at this stage of the game as opposed to maybe a cash or basis contract?

Kub: The board is pretty volatile. They won't get very good option prices if they try to go to the board for this. But what they can try to do is do some contracts for basis with their elevator to maintain the fact that it won't go any farther down for them. They can try to sell them now, it's a great time, it's a great price for beans just from a historical perspective. There's nothing wrong with selling beans for $8.20.

Pearson: Alright, let's talk about the cotton market and it's been an interesting one and, again, one that has driven largely what's happening overseas in China. What is ahead now for cotton?

Kub: Well, cotton is another market that has an incredible potential for rising on non-commercial speculative interest. They have built a solid trend, they've seen some very solid technical buy signals which really encourages non-commercial speculative interest and we're moving to record highs there. And, again, as you mentioned this is a strong demand driven market especially out of the U.S.. With the weak dollar the U.S. can really sell a lot of cotton because other producers like Australia and China have suffered from the drought and they are not going to be able to provide the end users the way that the U.S. can right now.

Pearson: Okay, so make cotton sales here?

Kub: Sure, especially because, you know, the crop is coming out quite well despite some of the drought in areas like Alabama and the other southeast, the crop condition is good, they're about halfway through setting their bowls, it's a fine time to be looking at selling your cotton.

Pearson: Alright, let's talk livestock, fed cattle trade. We have often been, you know, optimistic about what's going on in the fed cattle market based on the fact that we haven't had much expansion. What do you see ahead now for this cow herd and for this fat cattle market?

Kub: Well, the cattle is also in a trend and it's seasonally expected to move much higher so this is a good time for producers to sit back and wait for some higher prices to come into the market. Here is another market where, you know, we've gotten some interest from a non-commercial speculator, the funds are coming in but the problem with their participation is that they often get washed out. They can't go in there with their computer models and trade on the technicals the way that they can in some of the other grain markets just because so much of it depends on fundamentals and what the end users are looking for. However, the fundamentals are supportive right now. We hear good stories, you know, about demand, export demand, international demand and the consumer confidence in U.S. beef. There's better checkpoints on mad cow disease, things like that that are going to support this seasonal trend higher.

Pearson: Alright, and of course, the calf market moving opposite of whatever the corn market does, held in there pretty good.

Kub: Oh, absolutely. The correlation has been very strong between feed prices and the feeder cattle market. You mentioned corn, we also need to look at soybean meal which is following soybeans, much, much higher. And, you know, that is tied to biodiesel and there's basically no end for that to go higher. So, it will continue to be correlated to the fed prices but on the other hand this is also a market that tends to trade seasonally higher through August.

Pearson: Got about 30 seconds, Elaine, tell me about the hog market and what do you see happening there? A lot more pigs out there than we thought three months ago.

Kub: Yes, the hog inventory was bearish the market but this was a really interesting market this week. They had some rumors going through the market on Thursday about China buying 20 million pounds of hogs and that was really, that was really amazing, the market had a big reaction, the market went limit up on Thursday which was pretty exciting and some of that rumor is confirmed by ideas of higher pork prices in China and the diseases that they've had there so there is potential that this could also be a demand driven market.

Pearson: Very good, alright, Elaine, congratulations on your first Market to Market. Thank you so much. That's going to wrap up this edition of Market to Market. But if you'd like more information from Elaine on where these markets just may be headed visit the market plus page at our Website where you'll now find streaming video of our program. And remember you can 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 meet a scientist who is credited with saving more lives than any other human being. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn Mad Cow markets news USDA