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Market Analysis: Apr 06, 2007: Walt Hackney and Doug Jackson

posted on April 6, 2007

The commodity exchanges closed a day early this week in observance of the Good Friday. And the markets remained volatile in the wake of last week's USDA acreage report. By week's end however, the small grains were moving higher.

For the week, May wheat gained 7 cents, but the corn market struggled again this week and posted a loss of 8-and-a-half cents.

In the soybean pits, the notion of fewer acres failed to stimulate much movement in prices. For the week, nearby beans moved fractionally higher. The May meal contract was down $1.20 per ton.

In the fiber market, the nearby cotton contract gave back most of last week's gains with the December contract losing 57 cents.

In livestock, the April live cattle contract was up $2.85, Nearby feeders gained $2.37. And the April lean hog contract was up $1.32.

In the financials, Comex gold gained $16.90 per ounce. Nearby crude oil prices were up $1.59 per barrel. The Euro advanced 69 basis points against the dollar. And the CRB Index lost more than 1-and-a-half points to close at 317.90.

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

Market Analysis: Apr 06, 2007: Walt Hackney and Doug Jackson Pearson: Here now to lend us their insight on these and other trends two of our regular market analysts, Walt Hackney and Doug Jackson. Gentlemen, welcome back, good to have you. Good to see you Walt and Doug. Let's talk first, Doug, about what's going on in the grain markets now that we have this prospective plantings report behind us. Let's start with the wheat market and what you see there. We're trading this week, Chicago up about seven cents, quite a rally on that soft red wheat. What is the concern? What do you see ahead?

Jackson: We're going into a weekend, Mark, where the market is very nervous about what could be some record cold temperatures in parts of the western United States, the hard red winter wheat belt. Trade is very nervous about temperatures plunging down to levels that will hurt this jointing wheat. And we go home Friday night with a lot of risk premium factored in as we evaluate the weather and we have a risk with the hard red and the soft red winter wheat this weekend. However, we also have excellent crop prospects, the crop ratings this week were the best in years, nearly 75% good to excellent, way better than a year ago, nearly twice as good as a year ago. So, the market can tolerate a certain amount of frost loss if in fact it develops and still not ultimately be bullish at these prices. If we evaluate the situation over the weekend, come in next week and don't have some unforeseen weather disaster these might be levels to make some sales as we head toward harvest, the crop prospects look good. U.S. stocks will build this coming year, maybe the only one of the three grains that will build inventories next year. So, we go home a little fluffed up but, again, the weather is the key and, of course, we will be, the wheat market will still take its direction ultimately from the corn situation.

Pearson: Alright, let's go over and let's talk about corn. Obviously USDA's prospective plantings report is now a week behind us, the corn market has started to trade again. As you looked at those USDA numbers, 98.5 million acres planted to corn, Doug, what are your thoughts on that? And how does that affect the thinking of the trade?

Jackson: Well, Mark, you know, months ago we identified the tasks that the market needed to move up sharply to buy in record amounts of corn acreage. And, of course, what we found out in that report was that we expanded corn acres 12 million which is 4 times the biggest amount of expansion year to year that we've ever seen. So, the market overdid its job modestly and the market has since then, of course, sold off and is really in the job of allocating a couple of million corn acres into soybeans to have a little bit more equitable distribution of acreage. The question is whether we're going to do that or not. Will acreage shift with fertilizer already applied, insurance programs already locked in? And we traded that for several days and then we made the immediate transition to trading the weather market. We ushered in the beginning of the weather market this week and, of course, we're worried now about wet, cold conditions delaying plantings. We all know we need to have record fast and record large absolute plantings this year and we go to the weekend looking for cold, wet conditions, very wet moisture situations across the Corn Belt which is good long-term but not for planting. And so now we're going to start to fall behind normal planting pace next week and really this market is simply going to be a good weather we go down, bad weather we go up situation with the whole summer ahead of us. It's a very difficult call at this point. We go home with some risk premium factored into these prices and to some degree this might start to look like 2004 where we topped out after the April stocks and acreage report with a large stocks and acreage report and then started down that year and never looked back with what turned out to be record weather. But we have people worried about transitioning into a rapid La Nina situation, Mark, that increases the odds of a wet, cold spring which ironically we're getting and, of course, increases the odds of a summer drought. We've seen a real plunge in the Pacific water temperatures, that is somewhat of a worst case scenario if you will. So, this turns into just a legitimate weather market now, Mark, and we've got big potential up and down from here.

Pearson: Alright, so again, a lot of volatility. Farmers need to structure their selling decisions based on that.

Jackson: Well, that's right, you know, maybe an options play or something like that or at least making some sales and they're watching for opportunities to replace that with futures or options because we've got all kinds of possibilities ahead of us. And, Mark, we want to remember that even though we bought in enough acres here in the short run all that really does is delays this ethanol and biofuels led acreage problem one year. Next year we need an additional five or six million acres barring spectacularly good yields and then more acres the year after that and the year after that. And with Washington apparently not willing to open up the conservation reserve program this coming year we still have that acreage problem long-term regardless of the ability that we found about six million more total acres of crops this year which was really the surprise in that acreage report.

Pearson: The '08 and the '09 issues are still in front of us.

Jackson: That's right and we have those deferred futures back about $4 as we go home over the weekend.

Pearson: That's right, those deferred contracts are very strong. Well, let's talk about soybeans, the opposite side of what happened with corn acres happened to soybeans with very short acres. Maybe buy a few of those back do you think, Doug?

Jackson: Well, that's right. We have the dramatic realignment of the corn-bean relationship that has taken place since the report. Whether that's going to shift acres is a question and also now if we get into a wet planting situation where we shift some acres back into beans too. So, the soybean market isn't quite sure what it's trying to do. We have record crops in South America and by the way, Mark, for both soybeans and corn it is true that we have record crops in South America. And, in fact, even though the government is forecasting much larger crops there already it's possible that both the bean and the corn crops in South America could be six million tons larger that what is currently projected. The corn crop could be 18 million tons larger and the beans sharply larger too. We have absolute supplies here that are at record levels, Mark. We also have the problem that we need more acres long-term of total oil seeds in the world for the biofuels thing and we've got to expand acres dramatically in South America. And, Mark, despite the fact that we have relatively high prices on these beans the cost of Asian Rust control in South America, the extremely high currency values that is thwarting the local prices there has a situation where northern Brazil where the expansion of acres must take place they are not making much money. And our people don't think they're making enough money to expand acres as we need it in these coming years and pay off several years of accumulated debt. So, we've got to take bean prices up to a level where you have constant long-term profitability in South America and so that may limit the down side here in the beans even though we have big supplies currently.

Pearson: Alright, Doug, would you sell old crop soybeans?

Jackson: No, I guess with the potential for moderate down side and all the summer weather markets ahead I guess we'd wait for that to unfold.

Pearson: Alright, let's turn over to the other side and Walter, this is all music to your ears and everybody else in the livestock sector to see this corn market come back down a little bit. And, of course, soybean meal prices under pressure as well this week and in the face of a stronger cattle market.

Hackney: It's been an interesting three months in the cattle industry and hogs also but particularly in cattle. You would have thought the threat of the potential of four and a half dollar corn would have shocked the industry to the point where it would be rare to have an animal going on feed. The fact of the matter, Mark, it really had very limited results. There was practically no concerns that were evident in the marketplace. Cattle were on feed, the people continued to make 1400 pound steers, we continued to buy feeder cattle at $1 a pound or in excess of it. The threat of $80 game costs did not seem to affect the industry and so as a result we did not go into this three month period we're coming out of as we speak with anything other than just a good average supply of cattle on feed. The thing that threw the industry was the winter storms that occurred in December and in January and carried on over into February. And as a result of those today as we speak we've got $1.01 fat cattle out here in the country. We've got cattle being bid aggressively at 99 to a $1.00 to $1.01. I have actual sales today of $1.64 dressed on fat cattle. That is the equivalent of $1.04 on a 63.5 yielding steer. So, the industry has adjusted itself due to the weather. We lost 80 pounds a head during the blizzards. We lost grading that was phenomenal in these cattle. The threat of 80 cent feed costs prohibited the cattle feeder from feeding it back into him so he started marketing those cattle. And as a result we've worked the inventory back down to an extremely current condition, we're marketing lighter beef than we expected to be marketing at this point. And now as it has affected it's the same thing over in hogs. We're marketing lighter hogs than we have and a 265 pound butcher hog is not out of the realm of possibilities now. And as a result the whole industry is as healthy probably as it's been for ten years.

Pearson: It's amazing what's happened here. Part of it was weather, part of it was Mother Nature on the beef side and the other part of it, like you say, it was a big clean up due to these high feed costs and people gearing up for it. Also we have poultry sets that were reduced. I want to talk about that hogs and pigs report, Walter, that came out last Friday night too which was largely ignored in the face of the big prospective plantings report. What was your reaction to that? And really, did it amount to very much of an increase?

Hackney: It was probably considered a non-event, Mark. You know, the total herd they gave a lot of talk about a 1.3%. They gave a lot of talk about the breeding herd being up .09%. You know, that's nearly a non-event. That really has got no play in the industry practically from any sector. And as a result it looks like that we're heading from 60 plus dressed carcass weight value in hogs. It appears that as we go through into June we possibly could be seeing 72 to 75 dollar dressed hog values, the equivalent, of course, back down to the 50 cent live hog cash and the hog producer is making good money, not as much as he would have if he didn't have the high feed costs, but he's still making good money. The cattle feeder at a buck a pound he's knocking them stiff. He's making a lot of money on these cattle as we're selling them today. The thread, you've got to understand, a lot of cattle feeders thought these cattle were selling for a buck a pound tonight would bring 80, 85 cents a pound.

Pearson: Not that long ago. It's been a huge shift in livestock. Walter thank you so much. Doug Jackson, thank you so much. That's going to wrap up this edition of Market to Market. But if you'd like more information from our very astute analysts on where these markets just might 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. So, be sure to join us again next week when we'll travel more than 20,000 miles into space to see how rural America is getting broadband down on the farm. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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