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Market Analysis: May 25, 2007: Doug Hjort, Independent Analyst

posted on May 25, 2007

There were more buyers than sellers in the wheat pits this week as harvest of the hard red, winter crop moved into full swing.

For the week, July wheat gained nearly 30 cents, while the nearby corn contract gained more than four cents.

The action continued to be hot in the soybean pits where the nearby contract gained 20 cents. The July meal contract gained more than $6.00.

In the fiber market, the December cotton contract put together back-to-back winning weeks posting a gain of $1.85.

In livestock, the June live cattle contract was down $1.60. Nearby feeders were off $1.22. And the June lean hog contract posted a loss of 68 cents.

In the financials, Comex gold lost $6.70 per ounce. Nearby crude oil prices were up 20 cents per barrel. The Euro lost 58 basis points against the dollar. And the CRB Index gained a half-a-point to close at 313.00.

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

Market Analysis: May 25, 2007: Doug Hjort, Independent Analyst Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Doug Hjort. Doug, welcome back.

Hjort: Thank you, Mark.

Pearson: Well, Doug, you're the wheat man and I know we're trying to get the winter wheat harvest started and getting it underway down in the south but it's been a challenge so far with the moisture.

Hjort: It really has, rain, rain, rain down there. Most likely number one, lowering test weight, for sure. But also probably maybe some actual loss of bushels there from flooding, from lodging, from whatever. So, the cash pressures on the market really haven't started to hit the market yet. Futures prices sold off earlier this week and some in the week before but found a bottom and started rallying and I think this market in the long-term is in very good shape. It doesn't have much to do with our harvest pace, we'll get the crop harvested sometime. But you're looking at this world supply-demand balance on wheat and this week the international grains council cut their world wheat production number by three million tons. Well, they're still about three million tons above what USDA came out with two weeks ago in their May report but using either one you're winding up with record or at least modern day record tightness in the world wheat situation. You also have that in the world total grain situation. So, as you look farther out, not next week or next month even maybe, but further out into the late summer and fall I would look for these wheat prices to continue to move up. And that is considering, those numbers consider basically pretty good production all over. And we've got some pretty serious weather concerns. Ukraine, Eastern Europe, China, even Australia they've been getting some rains there but not enough to make a crop yet, of course, they're just getting ready to plant now too. But several concerns there that might lower that production even more.

Pearson: From a strategy standpoint, Doug, with this 30 cent rally do you want to start some sales or do you want to hold off?

Hjort: For the long-term I would hold off. Now, obviously if you need to be making sales at harvest time I think this is a good time to do it. We're going to dry this thing out, we're going to get some harvest pressure on this market, we're going to be up and down, back and forth but I think in the long run I think you'll see prices, wheat prices most likely up substantially from where they're at right now. So, I'd store everything I could.

Pearson: Let's talk about the corn market and, of course, that's one that everybody's talking about despite, like you say, the tightness in the overall world grain picture and particularly in wheat. Obviously with the demand for ethanol the corn and obviously with oil prices the way they are the focus is so much on corn right now and it looks like that crop is coming along in terms of planting, emergence and most of the reports that we've had have been fairly positive about the direction this crop has taken now that we finally have it in the ground.

Hjort: Well, that's right and next week, next month it's going to look better and better. The one thing we have is an abundance of soil moisture, too much in some areas but even in the drier eastern Corn Belt area which, by the fact ,are supposed to be getting some showers and rain this weekend, they've got very good subsoil moisture. So, you just get those roots down into the subsoil and the crops will come on and be supported for many weeks. So, you've got an unusual situation in this corn, a huge increase in production acreage primarily, we don't know what the yield will be yet, but you've got this huge demand increase also for the ethanol. And the bottom line is, as we all know, we've got to plant all of those extra acres and still have trend line yield or very close to it just in order to balance out the supply-demand balance. So, there's no room for lower yields on corn. So, have we lost any yield potential yet from trend line? I don't know, I think maybe we have a little bit just because even though we're up on plantings a lot of that crop did get planted one to two, maybe even three weeks later than normal. And number two, a lot of it wasn't planted in the best of condition, some crusting problems and just too wet soils. Also, in the wet areas, really wet areas, western Corn Belt, eastern plains the plant doesn't have to send roots down, they'll be very shallow roots and as long as we keep getting these showers or rains here in the next two or three, four weeks those roots will not go down. So, if you run into some abrupt hot, windy weather in the summertime those yields could go down because the roots can't go down fast enough to supply the plant. So, lots of concerns here and that's what keeps this corn price just bouncing around. In the last several weeks we found a solid support level on the charts and I think that that's going to hold, we're not much above it right now, a few cents, but I think that will probably hold until we can prove that we've got a large enough crop coming in, not just here but worldwide.

Pearson: And, Doug, I think last time you were on I think we talked about this but the fact that you're going to need to pull a lot of acres over to corn again in '07 and '08.

Hjort: That's correct, demand will be increasing in the new year so, again, you're going to have to add more acres of corn coming from somewhere and still have that high yield. Now, somewhere down the road, next year, year after I don't know, we'll see this demand thing start to level off and maybe even start to come down a little bit but I don't think that's going to be much of a worry here in the next couple of years.

Pearson: You're not in any hurry to price new crop?

Hjort: I am not.

Pearson: Alright, let's talk about soybeans, Doug, and again, the flip side of the corn market and it goes back to this whole acreage issue and obviously planting timing and so forth as we're now in the start of that growing season as well, the soybean market we've got a long way to go before we harvest it, there's a lot of concern out there about exactly just how much of a crop they'll actually put in South America in soybeans, we're going to talk about cotton in just a moment but tell us about this soybean market first and where do you see it headed in the near term?

Hjort: Well, as I've said before when I've been on the soybean market is confusing. We've got this record supply of it around and yet prices keep going up. Well, it's not going up on the record supply that we have now, it's going up on what might be there a year from now. And the acreage that USDA talked about, the farmers said they intended to plant back in March it won't supply enough soybeans to handle or to equal the demand. So, we're going to pull those ending stocks down. 300 million bushel, that's kind of an estimate now, 320 maybe for a carry out a year from this fall. Well, that's still plenty of soybeans but it doesn't leave much room then for less acres or lower yields, whatever. And by the way, just this weather concern, this extreme dryness, excuse me, and expanding dryness that we have in the southeastern part of the United States, many times that is where our drought really comes from in the Corn Belt and with that expanding I'm watching that very carefully, not that I'm a weather person, but that could really be a serious matter if that dryness does pull up in a significant way into the eastern Corn Belt. So, lots of weather concerns here for beans and corn both and therefore the beans I think will hold this really strong position that they have, I'm not ready to make any sales on the soybeans either right here.

Pearson: Alright, let's talk quickly about cotton, Doug, back to back strong weeks there. You mentioned that Bermuda high or whatever they're calling it that is affecting the southeastern United States, certainly could be affecting cotton numbers too.

Hjort: It is, a couple of weeks ago the market put a bottom in on the charts and we've rebounded off that. We still haven't gotten back up to the down trend line so, you know, it's still going to be a struggle here. We've got too much cotton on hand and maybe too much for the new year. But the market seems to have bottom stabilized a little bit right now.

Pearson: Alright, let's move over to livestock and fed cattle market as you look at that and, again, demand has held in there fairly good. Are we staying fairly current?

Hjort: We are, this week it looks like we did a pretty good job once again of selling the cattle that are ready. The carcass weights are kind of bottoming out here now. Seasonally it's about the time that they do and then they start to creep up a little bit throughout the summer. Maybe we're not going to creep that up very much but we're still well below a year ago on the carcass weights so that's the positive part of it. On the demand side we just finished the buying here within the last week for the Memorial Day period but now we've got Father's Day and then the 4th of July coming up, both pretty good demand markets for beef. So, I think cattle prices will be pretty strong. We sold off some this week, one to two dollars, maybe three in some markets, for the fat cattle. But I do see that market strengthening again, maybe not next week, but the week after and for two or three weeks after that. I'd be sure that you're very current on your marketings during that timeframe.

Pearson: Real quick on the calf market, Doug, what do you see happening there? It's remained fairly strong.

Hjort: It is and pretty stable, there hasn't been much action going on out there and I'm not ready to do any contracting for fall yet but the prices are there, they're strong enough but I just think let it be for a while, maybe a month or more.

Pearson: Alright, let's talk about the hog market. Obviously no expansion according to that last hogs and pigs report and demand is good.

Hjort: It really is. The pork cut out value was a little bit softer this week. That's just a factor that beef kind of gets favored during this time of year. But pork demand is solid, it stays there, drops off a little bit, comes back but I look for that to stay very good. In cash virtual prices we rallied this thing up very strong, about eight dollars in a week's time by mid-week this past week now and that was an excellent selling opportunity. We sold off a little bit later this week on the cash price but I think those prices are good, I see them kind of chopping around at this level, trying to go much higher than we are right now is really going to be a serious problem.

Pearson: Alright, Doug Hjort, thank you sir, appreciate your insights as usual. That will wrap up this edition of Market to Market. But if you'd like more information from Doug on where these markets just may be headed visit the Market Plus page at our Market to Market Website. And, of course, 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 developments in a landmark civil rights case between black farmers and the U.S. Department of Agriculture. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news wheat