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Market Analysis: Mar 30, 2007: John Roach, Senior Market Analyst

posted on March 30, 2007

As mentioned previously, the much-anticipated Planting Intentions Report from USDA had bearish implications on the coarse grain prices.

For the week, May wheat lost 23 1/2 cents, while the nearby corn contract that's getting so much attention, fell the 20-cent limit down immediately after trading began on Friday ... and ended the week down 28 3/4 from a week ago.

In the soybean pits, fewer acres being planted didn't boost prices. For the week, nearby beans lost 8 1/4 cents. The May meal contract was down $7.50 per ton.

In the fiber market, the report of fewer acres planted in cotton was friendly to prices, and the December contract moved higher, posting a gain of 88 cents.

In livestock, the April live cattle contract was down 50 cents. Nearby feeders gained $2.50. And the April lean hog contract was down 28 cents.

In the financials, Comex gold gained $5.70 per ounce. Nearby crude oil prices gained more than $3.50 dollars per barrrel. The Euro gained .006 basis points against the dollar. And the CRB Index gained more than 8 points to close at 319.50.

Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, welcome back.

Market Analysis: Mar 30, 2007: John Roach, Senior Market Analyst Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, welcome back.

Roach: Thanks, Mark.

Pearson: Red letter day, wasn't it, in agriculture? I don't think in my memory -- goes back probably 25-30 years -- I can't remember more anticipation behind a USDA prospective plantings report than there was behind the one released Friday. Let's talk first, I want to go through our usual order so let's talk about the wheat market first, more plantings. What's your reaction to what happened on that front for wheat?

Roach: Well, the wheat market found that there's more winter wheat that was planted this last fall than people thought and that the spring wheat plantings although going to be down we're going to be a little bit bigger than what people anticipated. So, we ended up with about a half a million acres more wheat. The wheat is in pretty good shape so as a consequence the wheat market is following the corn market down. When you do the supply-demand numbers -- and we put all the supply-demand numbers, the carry over numbers and so forth on our Website so people can look at them if they would like -- but when you look at those numbers the carry over stocks on wheat that we have one year from now, that's after we harvest the crop that's in the field, is going to be rather large. We're going to have to push wheat into the feed ration and that's what the market's job really is to do is to discount wheat relative to corn so we push more wheat into the feeding market.

Pearson: Alright, so right now a wheat producer who maybe has not made sales yet, what would you recommend he do at this point?

Roach: Well, with the market down the way it is we don't like to make sales when you're making new lows, the lowest levels we've been here now in some months. That doesn't make any sense to us. We still have to raise that crop, we still have to plant the spring wheat crop and get the winter wheat harvested. There's a lot of time between now and the time that you really need to do something with the new crop wheat. Interestingly enough in the stocks in all positions report in both wheat and corn we saw the smallest percentage of on-farm stocks for this March report that we've seen in the last 20 years. So, that's a significant movement that has occurred on the part of farmers both on wheat and corn. So, I don't think very many farmers have much wheat left, the old crop left so it's mainly new crop marketings and at this point I don't think I'd make any sales on wheat until we see some recovery in the market.

Pearson: Alright, well let's talk about the corn market, that's the big driver here. Obviously 90.45 million acres is a lot of corn acres. Now, a comment has been made and I know you've heard it, we've heard about these reports forever and that is most of the data was gathered early in March when corn prices were higher so that could be a factor. Are we going to plant 90.5 million acres do you think, John, or is it going to be a lesser number than that? I mean, obviously we don't know what the weather is going to do. But typically we have had quite a shift here in terms of direction price has taken for corn.

Roach: Yeah, we certainly have and I think in early March that's exactly what farmers intended to do. Whether they'll be able to accomplish that or not I don't know. I don't think the market is going to change their minds much. In other words, I don't think corn prices go down far enough to cause people to not want to plant corn. Corn is going to be a very profitable crop this year regardless of the number of acres that we're able to get planted. It's going to be a very profitable crop. So, I anticipate we will see big acres in corn. But the important thing for people to realize is we need to have these kinds of acreage numbers on corn and then furthermore if you look forward we have to increase corn acreage again as we look at next year's crop. We need to find another 8-10 million acres next year, more than we plant this year. So, we're going to be looking at 100 million acres of corn needed a year from now. That's when it's going to be hard to really get those numbers where they need to be. As we saw earlier on the show we're not slowing down the increase in our ethanol manufacturing plants, we're increasing them. We have substantial new plants coming online this upcoming year, the profitability that we worried about just a month or two months ago we were worried, well what if oil prices go down and corn prices are high, well we've had just the opposite, oil prices have gone up, we're going to have increasing demand, we're going to produce as much ethanol as we possibly can to supply this growing market. So, when I do the numbers, again, you have to look at the supply-demand numbers and look at the graphs on it, in order to supply the same amount of export and feed for the corn demand and increase our ethanol production by 850 million bushels, our corn consumption to ethanol of 850 million bushels we have to raise a crop of 152 bushels an acre. That's a very big yield on 90 million acres. So, I guess the message I'd like farmers to take home from me tonight is that don't panic in this corn market. Corn has become an investment commodity and you don't want to be making sales on down prices because you're worried about the longer term prospects. The longer term prospects on corn are just fine.

Pearson: Let's talk about soybeans, John, a little bit bigger acreage number in a way than what people were anticipating. What is your outlook now for soybeans? They had to be somewhat defensive price wise. What do you think is going to happen going forward?

Roach: Well, when the market came apart on corn and wheat the bean market had to follow a lower price level as well. Beans are too high priced if you look at the supply-demand tables. Beans are going to have a hard time maintaining these price levels if they plant the acres that were intended today and we get off to a pretty good start. So, my encouragement for a producer is to be willing to sell forward new crop soybeans and to be selling old crop soybeans. Interestingly farmers have not sold the same percentage of soybeans that they have corn. They are kind of in the middle of the percentage they normally have sold this time of the year. So, farmers have been holding onto soybeans and the caution here is the bean market from a supply-demand situation does not have the positive carry over numbers going for it that the corn market does.

Pearson: Okay, so on rallies you'll be looking at selling some new crop on beans?

Roach: Absolutely, cleaning up old crop and selling new crop on rallies.

Pearson: Alright, and again, we've got a lot of weather to get through before we even turn a wheel in the field in most parts of the Corn Belt. So, a lot of things can happen between now and then. Let's talk about the cotton market which, again, was robbed of a lot of acres. Were you surprised by that number, John, the amount of cotton acres shifted to corn?

Roach: No, I really wasn't and I think we may actually even shift a few more acres than what we've seen already. Again, the profitability on cotton is not very good. The profitability on both corn and soybeans is excellent. And so I can't see us doing anything other than taking a few more acres away and I think that will give that market some life as we go through particularly on the new crop. The old crop situation the supplies are just burdensome so recoveries and old crop need to be sold but new crop cotton at these price levels I'm not very interested in selling.

Pearson: Alright, let's talk about the livestock side, the flip side of this whole thing. And first off, for cattle and hog producers is this a chance maybe to get some feed coverage?

Roach: I think if a producer needs to be buying feed they need to make sure they have their coverage out through July. It's hard to buy feed actually, there's just not a lot of grain that wants to move down here at these lower price levels and I think that you look for opportunities to secure needs on further but I'd want further weakness before I did that but I sure would be covered out through July.

Pearson: Alright, let's talk livestock prices, let's talk fed cattle market. Again, performed fairly well, the cattle market looks to be in pretty good shape, we've had a pretty good rally in here. What's ahead for fed cattle? Can we sustain this?

Roach: Well, the interesting thing, Dr. Glen Grimes from the University of Missouri, has done some reports on what the demand really is for meat and last year's demand for meat was really relatively puny but so far this year demand has been just excellent. So, we see that continuing. We've got an economy that's doing fairly well, we have overseas economies that are doing well, we're starting to pick up some additional business out of the Asian market finally. Meanwhile the growth to Mexico and some of the other trading partners has been just very strong. So, we think that the whole meat market has good underpinnings from a demand side. We saw a hog and pigs report today that had a little smaller number, about a 1% increase on all categories which are smaller numbers than what were anticipated. So, we look at this market, this whole meat market as being on very solid footing, higher priced grain almost always and we believe will again this time give us higher priced meat.

Pearson: And, of course, we saw higher priced feeder cattle this week as well with the retreat in corn prices on Friday and this calf market has recovered nicely. Obviously we didn't have much herd expansion this year.

Roach: No, we really haven't and we've had optimism maintained out in the feedlot areas, they have paid more money for feeder cattle than maybe people thought that they would have to and yet they're working. We're seeing fat cattle prices that are able to sustain these feeder cattle prices.

Pearson: Alright, so the meat complex overall -- let's talk about hogs specifically. John, what do you see happening there? Let's talk about this hogs and pigs report that came out this afternoon, fairly friendly report.

Roach: Well, it was a 1% expansion on all categories and that was a little smaller than people anticipated, people were thinking it might be 1.5% so it's a little bit friendly. The problem we have in the hog market is we're slaughtering too many hogs on a weekly basis. When the weather turned bad and we had snow storms and so forth we backlogged hogs, finally the weather cleared and we had been running big kills every week since and we're actually slaughtering more right now than we really should be slaughtering which would either indicate that we're bringing some more hogs in from Canada or maybe the numbers weren't quite right before or perhaps we might even actually see a little bit of liquidation occurring. But the bottom line is that we're holding the numbers relatively constant while demand continues to increase. Pork exports are up, they're very strong and so we see that market coming back here as we move on into our normal summer peaks.

Pearson: John, we had a pull back in production particularly for the poultry sector, last October that hit. Now we've seen one of the smaller than expected expansion in hogs. We've got an ongoing drought in the West. The beef, pork, chicken markets seem to be fairly solid. Like you say, if the economy holds you're pretty optimistic?

Roach: I'm very optimistic. I think that the demand is going to continue to be strong and I think remember one of the things that we're looking at here when we're talking about corn and as we're talking in terms of we can use it for biofuels but food worldwide is in a demand phase as we see economies around the world simply growing at a fast pace and giving people more money to buy our products.

Pearson: Very good, that's the bottom line of what's happening, the back drop to this whole situation. John Roach, thank you so much, appreciate your insights. That's going to wrap up this edition of Market to Market. But if you'd like more information from John 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 our Market Plus segments free at our Website. So, be sure to join us again next week when we'll examine the corn market's resiliency in light of today's dramatic acreage projections by USDA. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news USDA