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Market Analysis: Jul 06, 2007: Darin Newsom and Erin Golly

posted on July 6, 2007

The market appears to have moderated over last week's news of a record shift in corn acres by closing slightly higher across the board.

For the week, the July wheat contract gained 18 cents. After giving up almost 90 cents over the past two weeks, the nearby corn contract rebounded by 15 cents.

Soybeans slowed up a bit on their three week climb to close higher. For the week, the nearby bean contract trended upwards by almost 15 cents. The July meal contract slowed as well advancing almost $5 per ton.

In the fiber market, cotton continued its rally with the December contract closing up $1.30 for the fourth week in a row.

In livestock, the August live cattle contract reversed direction from July's downward trend and closed up nearly $2.50. Nearby feeders were ahead of last week by more than $3. And the July lean hog contract gained a dime.

In the financials, Comex gold rose $1.30 per ounce. Nearby crude oil prices stayed over the 70 dollar mark. The Euro gained a mere 2 basis points against the dollar. And the CRB Index gained three and a-half points to close at 319 even.

Here now to lend their insight on these and other trends our two of our regular market analysts, Erin Golly and Darin Newsom. Welcome back.

Market Analysis: Jul 06, 2007: Darin Newsom and Erin Golly Pearson: Here now to lend us their insight on these and other trends two of our regular market analysts, Erin Golly and Darin Newsom. Welcome back.

Golly: Thank you.

Newsom: Thanks, Mark.

Pearson: Alright, well let's talk about the grain markets first, Darin. As a Kansas boy we always like to talk to you about what's going on in the wheat market. And in parts of Oklahoma and Texas we're 30-40% behind on harvest if it is going to get harvested because of the wet conditions. But in your home state I'm hearing some big yields in parts of the state that aren't under water.

Newsom: Exactly and that's the western third, hearing very nice yields out of there. But, you know, visiting with my family down in the center third, south central Kansas just a horror story down there and if we go further east we're into the flooded area where, you know, they're probably not going to be able to have anything. So, I think overall they're looking at a very serious problem in the wheat market right now. We are going to get a little bit coming out of the western part. But yields are going to be very questionable in the rest of the state. I know visiting with my brother he was saying test weights are coming in about 45-48 on the wheat and so there's going to be a lot of quality issues and we're seeing that being played down on the board every day and it's leading to a lot of interesting situations not only in the wheat market and some of the others that it relates to but, yeah, overall harvest is very slow, usually done by this point getting ready to put into some double crop beans. Just isn't the case this year.

Pearson: Let's talk about what's ahead and what a producer should be doing. For those who have sales to make what would you recommend?

Newsom: You almost have to sit back and let this thing run. You know, looking at the charts it's a very similar situation to what we saw in the '95-'96 marketing year where we had a bullish breakout in the June timeframe, July was very quiet basically consolidated before we finally eventually worked up to a high April of the following year, April '96, so we look like we certainly still have some time in this market, a lot of distance particularly if funds start jumping back into this thing and the volatility increases.

Pearson: Patience is the key word.

Newsom: I would say for those who can. Now, so many times wheat farmers have to sell just because they need cash but if they can hold on and wait to see where this thing might go. I think it might pay off.

Pearson: Alright, last week we had the big USDA report and the acreage shift and, you know, it was bigger than what everyone was expecting on corn and corn producers now are thinking boy did we miss the highs for 2007. What is your take on this corn market now in light of the USDA report, in light of what's happened in this five days since then?

Newsom: Well, the interesting thing is it was met with this huge amount of shock and surprise but, you know, really the market itself two weeks in front of the report was indicating we had seen this dramatic shift where you mentioned earlier the market was just collapsing in front of the report. We saw the spreads widening out in front of the report. The market itself was giving us indications what the traders believed the situation to be. DTN's agronomist himself had gone out to Illinois and visited instead of two out of three fields planted to corn he reported four out of five. So, the idea was that we had a lot more acres. You know, the old adage is we all know that once the planters start rolling they don't stop until they run out of seed. It happened that way again. Now, what the producers are looking at now is that the corn is in a very solid down trend. Is it going to be dramatic? Is it going to be severe? We may have seen the worst of it. December corn came right down to some key support down around $3.31. How it reacts down here and I think one of the key relationships that we have look at is its price relationship to wheat. It's gone to an all-time high, premium to the wheat of $2.50 in Chicago. For no fundamental reason whatsoever from an investment point of view that could pull some money back into the market.

Pearson: Alright, as we look at this corn market the other comment that I get from producers and if you do extrapolate this crop out and we get about trend line yields you're talking a 13 billion bushel corn crop. That's a lot of corn coming in this fall. There is a lot of concern about what could happen to these cash markets. What are your thoughts on that?

Newsom: Well, the interesting thing is that that's one side of the supply-demand equation and, you know, everyone was talking about we've got this demand that's supposed to grow. But then they were tailing it back because we were going to run out of corn. That's what the talk three weeks ago we weren't going to have enough corn. If we now have this 13.5, 13 whatever billion bushel crop that is being projected at this point demand can certainly increase again as well. Those who are sitting back and looking to go to alternative feed stocks might all of a sudden jump back into the corn market. So, we don't have any idea where these supply-demand tables are going to play out. You know, price wise it's going to be a real tough game this summer. There's a lot of cards left to play. The summer, the weather is going to still be an enormous issue but it certainly looks like we're into our seasonal down trend at this point.

Pearson: Okay, so with that in mind not recommending sales I would assume?

Newsom: No, we've already, you know, we've done that, we've been able to take advantage of the rallies because there was always this question out there, what if we aren't moving to a demand market. You know, we had some earlier indications that we could. Basis, though, is telling us that we've still got some very solid demand out there. The basis remains firm and this is the key thing between this market and the other markets, basis for the most part and particularly on the interior markets has remained very strong. So, you know, if you can get some sales on, if you have to have some on do it, if not sit back and wait to see what happens a little later down the road.

Pearson: Looking at some of those deferred contracts and they're still up over $4 if we go far enough out.

Newsom: Yes, they are.

Pearson: Alright, so there's some good indications there and we still have to move a lot of acres over in 2008. So, like I say, show's not over yet.

Newsom: Exactly.

Pearson: Let's talk about soybeans. That's been interesting, the flip side, obviously with fewer soybean acres and we've seen this tremendous rally. As you look at soybeans tonight, you know, we're not the only ones looking at this soybean market. I've got a feeling that there's a lot of producers down in Brazil who are thinking, boy, that's getting around $9, that's looking pretty attractive.

Newsom: Already hearing reports of possibly 5% increase in soybean acreage next year in Brazil. So, you know, that's the thing, the soybean market we're not coming into the '07, '08 marketing year short of any beans whatsoever. We still have a bearish situation to deal with. The soybeans have basically ridden the back of soybean oil which has been helped by palm oil rallying to new highs. So, we don't really have a lot of fundamental support as least in this market what we talked about last time. It's been kind of a little bit of a house of cards up here. Now, what's interesting to me is that a lot of these non-commercial traders are looking at the situation in soybeans. It ran its head up against some overhead resistance, long-term resistance at $8.77 front month contract, couldn't get through. Same situation we saw in corn at $4.37. What happened in corn? Dropped over $1 in two weeks time. Same situation in beans possibly. If these traders decide to start getting out because we couldn't get through the resistance, couldn't start triggering those new buy orders the market is a little bit vulnerable in here. Longer term acreage is a huge question. What are we going to produce? What is ultimately demand going to be? We just simply don't know. Short term market looks a little bit vulnerable.

Pearson: Yeah, this would be a selling opportunity then?

Newsom: Yes, seasonally this past week is the high that we tend to put in before we start slipping lower through the fall so, you know, all these things are going to have to come into play. How much more support are we going to get from the palm oil market? How much pressure could corn possibly put on the market? What is wheat going to play into this situation? A lot of things going on, seasonality of the market. I think it's going to be set up to be a very interesting summer.

Pearson: Alright, but, again, this is a chance maybe to be making some sales?

Newsom: Yeah, I would certainly look at it, get some sales on right in this $8.90, $9.00 area, if you can get some puts on better yet. Basis is a wreck indicating that we're not in the tight supply-demand situation. Play it this kind of way, protect yourself because of the market's vulnerability but by all means leave yourself open to the up side.

Pearson: Cotton is rallying, what do you make of that?

Newsom: Very solid rally, again, going back to the non-commercial. Who kicked this thing off? The funds jumped in this market, the market was undervalued so from an investment point of view they jumped in. And then all of a sudden you start getting some fundamental support and as well you throw the acreage in where corn even sucked some cotton acres out of it. So, we could be looking at a little bit of a supply shortage, we're seeing the spreads tighten up, very good sign for some commercial buying going on, non-commercial is continuing to push forward. We broke out of a long-term resistance area. We were up into some free air here on the charts now. The market is actually looking a lot better than the last few times we've visited.

Pearson: Alright, sales here for cotton?

Newsom: Yeah, you could certainly make a few but it's one of those things where you might want to let it run. It's sat in a sideways trend for so long it may actually have some up side room in here.

Pearson: Built a tremendous base.

Newsom: It really did.

Pearson: Alright, well, talk about basis, let's talk about the livestock markets. Erin Golly, as you look at this cattle market we were on a slide. The board came up some this week. What is your take on this cattle market, this fed cattle market right now?

Golly: You know, back in May when I was on the show last time I had a hard time believing that cash cattle would trade under $90 for the rest of the year and that was looking at the promissory of the great export trade we were going to have especially with South Korea. We've had some hiccups in that trade with South Korea and we've got actually South Korea inspectors over viewing the plants this week which it's turned out to be very positive. But we had less demand than expected and so we slipped below that $90. But I do think we're going to be back up at that $90 very shortly and things look real positive for the rest of the year.

Pearson: Hold $90, think we'll do that going forward or what is your take for that guy out there who is buying cattle right now who's now seeing a break on corn finally? That's got to be a huge gift for these cattlemen.

Golly: It is a huge relief for the cattlemen, especially in the feeder cattle market as well. But looking forward the deferred live cattle futures look really positive, demand looks real strong for the cattle futures and I think we have a chance of hitting the dollar cattle again yet this year.

Pearson: Alright, so what do you want to do here?

Golly: I would put puts, place puts underneath just in case we have some kind of fallout, you never know if we're going to have any kind of fallout within the United States. But just protect your profitability and looking forward I think prices will be better.

Pearson: Alright, let's talk about feeder cattle too. Feeder cattle market, like you say, it's been on the teeter-totter with corn price and it's been a good market. Doesn't appear like there's much expansion out there in this cow herd.

Golly: No, there is not at all and corn has really provided many heartaches and headaches for the feeder cattle market this year. The feeder cattle haven't even followed a seasonal pattern this year because of the corn volatility. But the key things for the feeder cattle looking forward is that we have to have high deferred live cattle futures which we do have and we have to see that the fed cattle market has bottomed and I do believe it has. So, looking forward I think we're going to have great demand in the feeder cattle market. Corn prices have cheapened up and I think that's really going to put some solid support underneath of the feeder cattle market.

Pearson: You mentioned the hiccup on the fed cattle with Korea and that kind of came out of the blue. Are we starting to see some of that export business start to come back elsewhere around the world?

Golly: I believe we're starting to see that, there are some trust issues that we need to get over but I do think we're on the positive and the right steps to maintaining a great working relationship with South Korea.

Pearson: Alright, if you're a cow-calf producer tonight and you're sitting out there and you're looking at some higher input costs if you're buying hay, if you're buying anything input wise, what do you tell that feeder cattle producer? Do you want to use an option strategy there to get some coverage?

Golly: Well, especially on the corn I would be out buying as much corn as you could getting your hay secured. I know that haystacks are probably going to be up I think about 2% compared to a year ago. But get your user needs covered going forward and I think the market is going to be higher so I wouldn't provide any hedging on the top side of the feeder market.

Pearson: Okay, alright, let's talk about hogs. Now, since you were last on we had a hogs and pigs report and you were talking about, you know, maybe some expansion thanks to maybe the circle virus vaccine and some of these other factors. We've got a little bit of expansion going on. What do you think is ahead for hogs?

Golly: We do have expansion going on in the hogs and that is one of the things that everybody seems to understand now. The circle vaccine is working great within curbing the disease issues that we've had to experience and we're going to see a lot of large numbers coming at us this fall and winter. Packer capacity is not going to be an issue this year so producers shouldn't have to worry about that. But going forward we really need to wrap our arms around demand issues, where we're going to see blips in demand just as the cattle market did. We have to be careful what kind of demand issues we could see such as Russia I know we're having some political issues, you never know if something is going to come of that. There is some potential trade issues with Mexico that we'll talk about in market plus a little bit further tonight that we need to keep a close eye on. But strategy wise I'd just recommend purchasing put options underneath the market because you never know if we could have, China had disease issues, many disease issues and you never know if they might step in and start buying as well.

Pearson: But it's going to take some like that, in other words, some kind of export demand is going to have to come in here with this rising herd that we have?

Golly: Right, and, you know, these food trade agreements have done really well for the pork producers. The South Korea trade agreement alone added ten dollars per pig to all the U.S. pork producers. So, any kind of trade agreements or any kind of slippage we see can greatly affect us.

Pearson: We've got about fifteen seconds, obviously covering feed needs you'd be jumping all over that now?

Golly: Especially on this breakdown in the corn market, you need to be out there getting as much corn as you can get your hands on. On the meal side of it go ahead and book as much as you can where it's worth versus the basis and where you can't go on the board and get those options covered.

Pearson: Alright, so get the feed needs covered, look out, things look pretty good in the livestock sector. Things are interesting in the grain markets. Looks like it's going to be a fascinating 2007. Thank you, Erin. Thank you, Darin. And that is going to wrap up this edition of Market to Market. But if you'd like more information from our analysts on where these markets just may be headed visit the market plus page at our Market to Market 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 examine one executive's attempt to prove the safety of produce irradiation by consuming a potentially lethal strain of E-coli. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news