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Market Analysis: May 04, 2007: Darin Newsom and Erin Golly

posted on May 4, 2007

Coarse grain markets continued to focus on planting delays and weather forecasts this week, while the wheat trade ponders increased production estimates.

For the week, May wheat lost 18 and-a-half cents, but the volatile corn market moved higher with the nearby contract gaining 17 cents.

Despite Brazil wrapping up its largest harvest in history, soybean prices were up this week with the nearby contract gaining more than a dime. The May meal contract was up nearly five cents.

In the fiber market, the December cotton contract trended lower again posting a loss of $1.65.

In livestock, the June live cattle contract was off 53 cents. Nearby feeders lost $1.40, and the May lean hog contract posted a gain of 80 cents.

In the financials, Comex gold gained nearly $8.00 per ounce. Nearby crude oil prices were down $4.53 per barrel. The Euro declined 52 basis points against the dollar. And the CRB Index gained half-a-point to close at 312-even.

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

Market Analysis: May 04, 2007: Darin Newsom and Erin Golly Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Erin Golly and Darin Newsom. Welcome back.

Both: Thank you.

Pearson: Alright, let's talk about this wheat market with our boy from Kansas, Darin Newsom. Darin, the wheat market, Informa's numbers maybe a little bit more production out there. Do you go along with that?

Newsom: Yeah, and then we also just finished off the Kansas wheat tour today as well, excuse me, Thursday. And in some schools they're going to look at those numbers and be a little bit surprised. I think it came in at 41 bushels per acre and 393 million bushels total for the state. If we look back three, four weeks ago after the freeze moved through these numbers wouldn't have even seemed likely unless we remember, you know, back to 1997 where we had the very same scenario play out where we had the freeze move across, then we followed it up with 2-3 weeks of cool, damp weather, we allowed the crop to heal a little bit, re-till, all of these things, market reacted just as it should. When the freeze moved through the market rallied, spreads narrowed as the fears of the damage seemed to subside a little bit, we've seen the market come back down, we saw it, as you just mentioned, down 16, 17 cents this week, spreads widening back out ________. So, markets almost gone beyond the wait and see mode and is actually starting to turn a little bit more bearish now.

Pearson: Alright, and, of course, there have been opportunities to get some hard red -- and we're talking really about the hard red crop when we're talking about what's going on out there. What about on the Chicago wheat, the soft red wheat?

Newsom: Same situation, we saw an immediate reaction to this freeze because unlike 1997 this one was more widespread, it moved further into the soft red winter wheat growing area as well. So, both markets, both winter wheat markets saw this immediate reaction that has since backed off. I think they are going to wait and see, we are getting some support from the other markets in Chicago but we have seen some weakness coming back in, we've seen some renewed selling pressure on these markets and if these reports that the crop is going to be fine we could start to see this market really start to slide.

Pearson: Okay, let's look at cash wheat and see what's going on there. What's been happening there on cash wheat?

Newsom: Overall the basis levels have been doing fairly well. But, again, this is fairly seasonal and as we move closer to harvest, which is normal, we're going to start to see these basis levels widen out and what usually gets, starts to really hurt on the cash prices is that we could see the futures market and basis weaken at the same time.

Pearson: Alright, so those are the factors happening in wheat. Erin Golly, let's talk about the corn market in your neighborhood, not a lot of wheels turning, are there?

Golly: No, there isn't. I came down I-35 yesterday afternoon and only saw a few tractors out actually. Having a lot of producers very concerned that we're not going to be able to get that corn in. They're going to plant it the latest that they can, of course, but very concerned about the corn going in this year and what kind of acreage we're going to have actually for the corn this year.

Pearson: And the trade is following that up with a stronger week in corn prices. Do we make sales in here?

Golly: I don't think quite yet, you know, the market looks very bullish for the next two years. I think a lot of producers what corn they have left on hand they're holding and I think we're waiting to see a little bit of a spurt if we can get some kind of weather market that I think that you need to be making cash sales on those.

Pearson: Alright, of course, Darin as you know we've got plenty of time to get the crop in the ground. We usually do get the crop in the ground, it's just this is the year where we're got to have trend line or better yields if we're going to be able to do that.

Newsom: Well, you mentioned both things in an earlier piece. We talked about the 90.45, 90.5 million acres that are going to have to go in. We're going to have to average 153 bushels to the acre. Right now it just doesn't look, I mean, we have to take these hurdles one at a time and the first one is getting these acres in with the rain that we've seen moving through not only this week but some forecast for next. That could be a huge question mark. And the thing to remember is if we don't get both of those, if we don't get both of those factors coming through we're going to have our third consecutive year of a draw down in stocks. So, one thing at a time. Right now let's deal with getting the acres in and that certainly seems questionable.

Pearson: Let's talk about cash corn. Of course, this is typically the time of year where the basis really tightens up.

Newsom: And that's what we're seeing again. The index that we run which is the national average cash price as compared to the futures that shows us what the national average basis is and what's been fascinating for all of the '06, '07 marketing year and what speaks to the supply and demand situation on the local level is the fact that with this enormous rally that we've seen in the futures market we haven't seen a collapse in the basis somewhat like what we've seen in the soybeans. So, this tells us that not only are we looking at a global supply and demand situation in the corn market, we're also looking at a very localized situation as well helping to support these cash prices.

Pearson: Are you like Erin, are you going to hold off and maybe we'll see a bigger jump for a weather rally for corn?

Newsom: Well, if we look at the structure of this market, I mean, if we look at the both sides, the commercial and non-commercial side, both of them bullish, no reason to step in and start selling this market now. If you have some old sales on the books you're going to have to ride through these for a while because we're just coming up on the summer when the weather market is going to come into play, more to a higher degree than it is right now. We could see some very explosive markets this summer.

Pearson: Alright, now, Erin, what about on soybeans? Do you want to sell beans right now then?

Golly: I'd like to sell beans on this next rally up, this next leg up in the futures but longer term I'm very bullish for beans into the '08 year basically because we're going to have to move another 5.5 to 6 million acres over to corn acreage next year just to meet demand. Well, those acres are going to have to come from somewhere and I think that's going to be pulled from the bean market. So, I do feel real positive about the '08 market in the beans.

Pearson: So, defensive market for soybeans again next year?

Golly: I think everything is just going to push and pull from each other trying to fill this corn gap that we need.

Pearson: Alright, Darin go along with that? I mean, we do, we have to shift acres again. As we look at this ethanol demand it's like this has been the warm-up year for what is going to be a huge acreage shift going forward.

Newsom: Well, I'd have to disagree, that we've actually got quite bearish supply and demand situations going forward in soybeans. I think really the only thing holding soybeans up right now in the strength in the corn market, there's still some old-time traders looking at the historic price relationship between soybeans and corn. If it weren't for that and what we're going to see is each one of these markets head off on their own supply and demand situations, that realistically should bring beans down.

Pearson: As you look at pricing opportunities then with this rally do you want to make some sales?

Newsom: Well, they should be covered at this point and with the low volatility actually that we've seen in the soybean market, again, indicating we don't have the non-commercial interest in this market the puts have been a good purchase at this point when the market was up in the $7.50 to $8 range. So, folks should be covered fairly well going in. If you're not there's still some opportunities, the seasonal tendency is to put a high in, in the early May timeframe, sell off through May, hope for a weather rally at that point beyond that.

Pearson: Alright, cash soybean markets doing anything extraordinary?

Newsom: Yeah, this is what really gives us the backbone of this market is that this has been an incredibly weak basis year. You mentioned it earlier, we've got record yields coming out of South America, record production. There's no push for beans right now, there's no real local cash need for beans right now. So, we've seen this reflected in the weak basis and it doesn't look like it's going to turn it any time soon.

Pearson: Alright, let's talk cotton market and as you look ahead on the cotton market we've been under some real pressure in cotton despite the acreage loss there.

Newsom: Yeah, the structure of the market is actually very similar to soybeans, you're losing acres, but again, you don't have the demand, you have an over-supply. the market has been drifting down towards long-term support at 46. It might be able to find some footing down there. But overall there's really no reason to believe that this market is going to all of a sudden jump up and start to run. It certainly could rally a little bit off of this test of a long-term low but a long way from being a bullish market.

Pearson: Let's talk livestock, Erin. As you look at what's been happening in this fed cattle market which has really been pretty extraordinary, I mean, you look at what the margins have been for feeding cattle and yet people have held on and this market has responded. Has that changed a little bit? Have we cooled this cattle market a little bit?

Golly: Thursday we saw the $2 move down and that was basically due to fund liquidation. You know, funds have been a major player in the cattle pits, they've been participating on the market up and as we saw on Thursday they participate on the way down. It's not all good with the fund activity. But supplies remain very seasonally tight right now, demand looks good, the export market is starting to re-open up which is -- we're taking baby steps towards getting that fully resumed. But with the good export news long-term, high cow slaughter for the first quarter of this year was, you know, really high and cattle weights were down nine pounds compared to a week ago so I don't think cash cattle are going to trade below 90 cents for the rest of the year. And I do think we have another shot of reaching $1 cattle again some time in '07.

Pearson: Having that been said as you look at this calf market going forward are you seeing some value out there in some of these calves?

Golly: I do see some value in these calves, I think calves are going to trade right around the $1.10 to 1.15 area in the feeder cattle anyway, $1.10 to $1.15 area. If we get around that $1.15 area I'm telling producers please get some hedges on, look at some risk market opportunities because as I said before I think corn is very bullish.

Pearson: Talk about that, some of those deferred contracts. What would you look at right now for hedge opportunities?

Golly: I would probably say -- on the feeder cattle or the fed cattle?

Pearson: On the feds.

Golly: On the feds I would probably say, I would re-purchase in put options, not be selling futures. I'd be purchasing put options right around the 90 cent area would be a great way to lock in your bottom because we could have some hot weather this summer if we get the La Nina forecasted as some have said, we could have very high corn prices, pastures could burn up and we could see mass cattle herd liquidation. So, have your bottom side covered anyway.

Pearson: Cow-calf guy, what would you do there?

Golly: Well, I think calves have actually peaked right now. We're going to probably move lower into the summer, early summer timeframe. I think we've topped out a little bit in here.

Pearson: Let's talk about the hog market and what you see ahead for hogs. Again, really a pretty impressive week on the board and hogs have held in there. The last time you were on you were pretty upbeat but is that going to hold as we move to a seasonal time period where that's typically not the case? What's going to happen in this hog market?

Golly: Sure, well the markets ___________ now cash is trading over futures and I think it's going to continue to trade that way all throughout the summer. Summer months look real positive for the hog producers. That's really due to the disease issues that we've experienced with the circle virus. But once we get into the third and fourth quarter, actually the late third into the fourth quarter I'm starting to feel a little negative on the hog market, starting to hear some expansion from producers and we should have the vaccines in place to help curb some of the diseases and the pending ____ sale, we just don't know where we're going to be with that and if we lose packer capacity. But I would wait for the next leg up before we make any sales for the third and fourth quarter somewhere around the 68 to 70 cent area is where I'm looking.

Pearson: Alright, as a livestock producer right now are you covering some feed needs with this break we've had in the corn market?

Golly: You absolutely have to be buying the cash corn. And, Mark, I have a very interesting story I'm going to talk about on Market Plus about corn availability problems that we're having in our area.

Pearson: That's happening already. Alright, so at this stage of the game you'd be taking advantage of some of this down swing on prices to lock in some feed, maybe a little bit negative third, fourth quarter.

Golly: That's right, absolutely.

Pearson: Absolutely, good, we appreciate it. Erin and Darin, thank you so much. That is going to wrap up this edition of Market to Market. But if you'd like more information from Erin and Darin on where these markets just may be headed why not take some time to 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 Market Plus segments absolutely free at our Website. And, of course, be sure to join us again next week when we'll examine the market impact of next week's USDA crop production estimate. It's going to be big. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news wheat