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Market Analysis: Jun 01, 2007: Walt Hackney and Doug Jackson

posted on June 1, 2007

Commodity hedge funds continued their wheat buying spree this week providing more fuel for the pre-harvest rally.

For the week, July wheat gained nearly 20 cents, while the nearby corn contract gained more than 10 cents.

Heavy fund buying also influenced soybean prices and the nearby contract moved a nickel higher. The July meal contract gained $3.20.

In the fiber market, the December cotton traded in a sideways fashion with the December contract posting a gain of 23 cents.

In livestock, the June live cattle contract was down 25 cents. Nearby feeders were off $1.75. And the June lean hog contract gained 15 cents.

In the financials, Comex gold was up $18.70 per ounce. Nearby crude oil prices lost 12 cents per barrel. The Euro lost 13 basis points against the dollar. And the CRB Index was unchanged at 313-even.

Here now to lend us their insight on these and other trends are two of our long-time market analysts, Walt Hackney and Doug Jackson. Gentlemen, welcome back.

Market Analysis: Jun 01, 2007: Walt Hackney and Doug Jackson Pearson: Here now to lend us their insight on these and other trends two of our long-time market analysts, Walt Hackney and Doug Jackson.

Hackney: Hi, Mark.

Pearson: Gentlemen, welcome back. Well, Doug, let's start with this grain market and obviously this very hot wheat market. This is Chicago soft wheat that's been showing this rally. What's going on over in wheat?

Jackson: We do have, the funds are re-initiating a long position in Chicago wheat but it's driven by a broad array of fears over fundamentals. An ongoing drought in the Ukraine has captured people's imagination, again, not knowing quite how much damage is occurring there. And then later in the week we had stories about unspecified but possibly significant damage to the U.S. winter wheat crop, specifically the hard red crop from persistently heavy rains from Texas to Kansas. And this really has rattled people, they don't know how big the crop should be. Based on the June 1 ratings which are certainly above average our stuff, our work would suggest that the crop should actually be larger. But with the ongoing rain that has thrown that question, you know, open for discussion, a re-evaluation of soft red winter wheat acreage will show up in the June 11 production number coming up here shortly. So, the market has really lost its orientation on just what kind of a crop we've got and we fear that the July 11 world numbers will see a further tightening of an already record tight world supply and demand situation so that has brought in a lot of new fund buying here just as we go into harvest with pressure from harvest activities still a week or two away.

Pearson: Is this a selling opportunity, Doug?

Jackson: Well, here we are at contract highs, Mark, it's difficult to say don't sell at these kind of prices, a lot of people have made sales already. Yeah, we'd sell some wheat at these kind of prices, it's imprudent not to do so. But in the general sense, assuming that we don't have major unknown losses in this world crop, I think wheat follows corn price action which brings us back, of course, to the Corn Belt weather.

Pearson: Alright, let's talk about the corn market. You talked about Corn Belt weather, overall fairly good, a little slow getting the crop in but looks awfully good at this stage, Doug.

Jackson: Well, we caught up on that late planting issue and we largely have eliminated that now, the crop is one of the best rated crops in years, in fact, the best since '94's record situation and this is just short of a classic case now with 12 million more acres that if we have bad weather we go up and if we have good weather we go down. The market is subtly worried about dry weather developing in the eastern Corn Belt coming up out, expanding the southeastern U.S. drought, that has kept the market very nervous this week, found more fund buying. We have rain chances forecasted in the next week and beyond so it's going to be very interesting to see if we can put rain in those dry eastern areas and eliminate the market's fear that we could have an eastern belt centric drought like we did two years ago.

Pearson: Doug, have you altered or updated your outlook in terms of how many acres were actually planted to corn? There's talk maybe we're over 90 million.

Jackson: Well, that's right, Mark, you have a chatter in the industry that we have even more corn acreage planted and that will show up in that June 29th acreage report. It's possible, some fertilizer data and other anecdotal evidence might suggest that which, of course, would even be more incredible than the record 12 million acre switch which is four times anything we've ever done before. So, the market is going to be concerned about that as we work closer towards that report but being month away we've got a world of weather to live through first.

Pearson: Alright, in which case you're not interested in selling corn right now?

Jackson: Well, not really, Mark, but if you talk about a good weather scenario we could have 160 yield or something like that there is down side to the corn market. This is not a down ten, up a dollar and a half item. This is a down a dollar, up a dollar and a half item depending on the weather. So, you've just got to make a determination of what you think the weather is going to be but any kind of a scare you'll see the funds grab for these corn futures dramatically.

Pearson: What's going on with the soybean market and the rally there this week particularly on Friday?

Jackson: Well, Mark, what we have here is the larger context that we think some time in the next 18 months we'll see $9.50 to $10 bean futures. We must take prices to a level where you will stimulate dramatic year to year acreage expansion in northern Brazil. Their cost of production is high, you're trying to overcome a very strong currency there and we certainly don't believe at these prices you're going to get the six million more acres of soybeans that we need each and every year in the western hemisphere. You've got to expand acres almost solely in South America now to compensate for acreage in the U.S. going to corn for ethanol and we don't think these kind of prices are going to do it. So, the big pictures is that we're moving higher, you've got the vegetable oil tightness thing working too with the biodiesel and we think the long-term trend is up. Now, that doesn't mean we can't have a record crop with record good weather this year and have a moderate break in prices into harvest. But the market understands already that we may have an '08, '09 crop cycle, not this coming year but the following year, that's out of control. We're going to go from the biggest stocks in beans this year ever to cutting that inventory in half this year and we could very well be on the road to running out of beans in 2008. That's the problem the market's trying to solve right now.

Pearson: You're not in a hurry to sell soybeans?

Jackson: No, we think they actually have better fundamentals than the corn, Mark, with the 12 million more corn acres having robbed acres away from soybeans.

Pearson: Alright, well there's a lot of people in the livestock industry looking at what the price of corn and bean meal has done, they feel a little bit robbed. Walter, let's talk about the livestock business these days. Fed cattle producers first, what do you see ahead in this finished cattle market?

Hackney: For three weeks, Mark, we've been going through a real dilemma in the fed cattle market. Three weeks ago we had 98 to $1 a pound. There were a few $1.02 fed cattle out there per hundred weight. There were some $1.60 to $1.63 dressed cattle out there three weeks ago. Today we're at $1.47 dressed and we're at 92 cents. Now, that sounds like a good market. The problem with that is many of these cattle that we're marketing today considerate of the high production cost that the high priced corn has created several of those cattle are not going to break even at 91 or 92 cents a pound. Now, as far as the outlook we've got to correct the issue of meat usage, the box beef is not moving as properly as it would to support a market around 95 to 98 dollars. So, the cattle feeder is sitting kind of in limbo waiting on more of a demand item to take care of the dressed beef or box beef industry.

Pearson: Alright, so Walter, walk us through the balance of the summer. We talked earlier about the fact that consumer confidence is up but higher gasoline prices have probably impacted the consumers to a certain extent.

Hackney: No question that it is impacting the consumer. On the same token there hasn't been that much restriction in travel, there hasn't been that much restriction in usage of gasoline. On the same token even with the high priced beef that we had there hasn't been that much restriction on the usage of the beef. It might be that with the increase in tonnage that we're looking at which is a surprise right now that the cattle in the feedlots are actually heavier than they were, that surprise, the extra tonnage may be part of the problem that is being created. As far as the summer goes, Mark, I think personally if we get to 95 dollar cattle and can hold 95 through the summer toward fall I think we'll be, we'll have done an excellent job in marketing.

Pearson: Bigger tonnage but fairly current, is that accurate?

Hackney: Yeah, we haven't recovered from the disaster of the spring or later winter/early spring, we haven't recovered from that yet. We still have set these cattle back six weeks. They're still current in regard to finish, nothing over done but the fact is they've had to feed them longer to get the weight back.

Pearson: Alright, speaking of feeder cattle and getting them bought, a pull back on the board this week and there's calves on the ground out there. Anybody pricing any of them?

Hackney: There is a few, it's very limited right now. You'll hear stories for the next ten days, possibly to the middle of June about a few cattle bringing $1.20 at 600 pounds in Montana, you might hear some stories of cattle bringing $1.15 to $1.20 weighing five and a half to six. But the fact is the numbers aren't going to be moving until we get more of a feel for the trend that will develop toward fall on this corn market that Doug's talking about.

Pearson: Alright, let's talk also, Walter, about what you see ahead in the hog business as you look at that right now. Again, that expansion, last time you were on with the hogs and pigs report was basically zero. They said one percent, you said maybe it would be close to zero. Are we starting to see that? Are we seeing more pigs?

Hackney: Mark, it was one tenth of one percent. But, you know, it was so close to zero, it's still close to zero. There is not that much expansion anywhere. This cost of production is such a serious item cutting into the bottom line so deeply that this 47 and 48 and 49 dollar hog is barely breaking even for the hog producer. There is no incentive for expansion. As we go through the summer I suspect that we will, in fact, entertain near 2 million head of hogs a week kills. We're going to be close to that. We're killing four hundred and some thousand hogs a day. It's a surprise to everyone. They're wanting to say the government report on the hog and pig report wasn't accurate. I don't think that at all. I think people are marketing these hogs better. They've got a better grip on their inventory control because of the high cost of production. Market weights are actually lower than they have been.

Pearson: What about pricing, Walter? What do you want to do at this stage of the game if you're raising hogs?

Hackney: I don't know that you can hedge but I think you can use an option program to protect your losses. I think a producer needs to figure out what is it that they can stand as far as loss. Anything beyond that if the hog market would go toward 45 cents a pound toward fall I think the producer needs to protect himself on that difference above what he can afford to lose himself.

Pearson: Alright, so get the pencil out. Walt Hackney and Doug Jackson, as usual some great insights, we appreciate your input so much on the show. That will wrap up this edition of Market to Market. But if you'd like more information from Doug and Walt on where these markets just may be headed visit the Market Plus page. It's at our Market to Market Website. And remember, you can download audio podcasts of our market analysis and our Market Plus segments free of charge at our Website. Of course, be sure to join us again next week when we'll learn how one producer is milking a profit for non-pasteurized dairy products. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news wheat