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Market Analysis: Feb 16, 2007: John Roach, Senior Market Analyst

posted on February 16, 2007


Oftentimes, the wheat market tries to tag along when corn prices rally but in recent weeks wheat has been unable to move upward – until this week.

For the week, March wheat gained 7 3/4, while the nearby corn contract 10 3/4.

Notions of a large shift in planting this coming spring pushed soybean prices upward for the 4th week in a row week. For the week, nearby beans gained more than 17 cents. The March meal contract gained $9.40 per ton.

In the fiber market, March cotton reversed its downward trend of the last couple of weeks and gained $1.24.

In livestock, the February live cattle contract was up 70 cents. Nearby feeders gained $1.40. And the April lean hog contract gained $1.65.

In the financials, Comex gold gained $1.30. Nearby crude oil prices dropped 50 cents per barrel. The Euro gained 148 basis points against the dollar. And the CRB Index gained three points to close at 306.50.

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

Market Analysis: Feb 16, 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: Alright, let's talk about wheat did have a rally this week and there are some concerns about, of course, this year's wheat crop which we have to lose about four more times before we harvest it anyway. But some of those are legitimate concerns particularly about ice. What is your take on this wheat market?

Roach: The wheat market has been selling off now really for some months. The worry has been that the wheat acreage worldwide is increasing and prices moved high early in the season on the problems we had in this country, the problems in Europe and then the problems in Australia. So, the prices moved high, we rationed off the demand and now we've been struggling to try to get demand to come back into that marketplace. We are the cheapest wheat right now in the market as we see the numbers and we think that that means more business comes our way but so far it's been relatively slow and wheat has really been a follower. The new crop conditions are going to be watched carefully by everybody as we come out of dormancy to see what we have. But the moisture conditions in the southwest have been very good and even in the east has been very good. So, the question will really become how much of the wheat will we actually keep in the field to harvest and how much of it might get torn up because of any kind of growing problem.

Pearson: And that is going to be a question and perhaps acreage shift. What is your strategy, John, for making wheat sales?

Roach: I think at the moment you have to be patient. We have good leadership to the upside in both corn and soybeans. As I said we're coming out of dormancy, we're seeing some profit opportunities for producers to tear up poor quality wheat and replace it with corn and so we think that the wheat market can have a couple more surges here as we move into the spring. But it's not an optimistic outlook as we see it. We think that the wheat market on a longer term basis is going to have a lot of worldwide competition and we'll move more into a parallel relationship with corn and start finding itself more of a feed grain instead of a food grain.

Pearson: Alright, well let's talk about the feed grain at the moment which is corn. It seems like no matter what we talk about whether it's wheat, corn, beans, cattle, hogs, it all comes back to corn. Let's talk about what happened this week, again, stronger prices this week, John, on the board of trade for corn. As you look at this market is this a market that should be sold? Are we going to look back and say this is where we should have made some sales?

Roach: Well, we're getting a sell signal on the system that we follow. We're in the third day of it today. And so there's certainly nothing wrong with making sales if you're needing to generate cash flow or if you like the looks of the price. If you like these prices it's okay to go ahead and make some sales. But I would not make sales with an idea that the market is going to fall out of bed. We think that the corn market is on very solid footing and that what we're doing here in corn is something similar to what happened in 1973. And I know farmers out there have heard from many people over the years that we're moving to new plateaus but they've never heard that from me until now. In 1973 when I started in this business the industry was having to adjust to a new environment which was an economic demand coming from around the world. We turned into a world trading type of a market in the early 1970's and we never looked back from that. Now we're turning into a fuel based market and I'm of the opinion that we're not going to turn back from that either. And so I think we've created a new type of demand similar to what happened when we started really seeing exports come alive in the 70's and I think that brings prices up to new levels. And the thing that I'm saying to farmers is be really careful about thinking you understand where price levels deserve to be because we really don't know in this environment. We really don't know how far up prices will go if we have petroleum at these kind of prices. We don't know how long it will take before we start to ration the livestock demand and so we all have to learn that. And what I'm saying is to keep a very kind of an open mind here. Let the market show you. We use our sell signals to point out peaks in the market and I think this peak will be followed by four more peaks as we move through our prime spring selling period. So, this is one of five peaks I think. So, don't rush with an idea that the market is going to fall out of bed. I don't think that's going to happen.

Pearson: Okay, so again, cash flow needs or whatever you would make those sales. So, John, new crop then you would wait for another one of those crests in this market to make some more sales?

Roach: I would divide up the inventory that you want to sell for fall delivery or even on into the beginning part of 2008. I would divide that into five increments. I'd particularly be concerned about the corn that you can't store on the farm or in your own storage. And those bushels I would divide into five increments and I would be selling one of those increments now, I would wait and sell four more increments as we get sell signals later on through the spring of the year.

Pearson: John, the next critical USDA report is going to be the acreage report and we'll get an outlook. Then, of course, we have to get through the actual planting of that crop. So, we've got a ways to go here. Typically you've always been a proponent of making sales during that key planting season.

Roach: Yeah, the sales in March, April, May and June have always been a major part of what our whole marketing program has been. And it works almost every year. Now, of course, remember last year the springtime sales turned out to be way too cheap when the fall came around. But that is one of those things that occurs occasionally. It's not one of the things that occurs regularly. So, we want to continue to make those springtime sales. This acreage report may have a surprise in it that we actually have found enough corn acres and if that does happen we could actually have some problems holding these prices. But then again we have to get the crop planted and we have to have a good growing season. We have no room for any kind of crop problems out there.

Pearson: Alright, let's talk about soybeans also being driven by corn. Soybeans up over $8 on some of those deferred months. What is your take now on soybeans? Should we make sales there?

Roach: The soybean market is also giving us a sell signal but it's really a protracted one. We've been in a sell signal now for about 20 days as I recall and what that normally tells us is that we have higher prices to see yet and so I would be willing to make some sales in here. But, again, I would be making sales with the idea that I think I'm going to see some higher prices later.

Pearson: Okay, how would you structure it? Would you use options at this point for beans?

Roach: We like, in both corn and beans, we like doing what we call synthetic puts. That is making a cash contract for new crop delivery and then owning a call option to defend that contract in case we have something happen with the weather or some other unusual factor that would take markets sharply higher.

Pearson: Let's talk quickly about the cotton market also impacted by corn and concern about acreage there. We did see the cotton market finally turned around this week on the nearby months. What is your take, John, going forward on cotton?

Roach: Well, we saw the USDA report a week ago that cut the exports by 8%, increased the ending stocks drastically and the market didn't go down. So, we had the bad news come into the market and we didn't go lower. We believe there is going to be substantial cotton acreage that shifts over to other commodities such as soybeans and corn and we think that that's going to tighten that supply and we think once that really becomes known by the marketplace prices will have to move some higher.

Pearson: Alright, let's talk livestock on the flip side of this whole issue. Obviously margins are getting squeezed in the cattle feeding business and certainly in the finished hog business they've taken, in the cattle business they've take some hits on the calf market but really not that severe. Talk us through, John, we don't have that big of a cow herd. We have a lot of cattle on feed. What is your outlook there?

Roach: Well, the cattle on feed that we have are leftover from numbers that were placed earlier. We think those placement numbers are going to be tailing off, we think that the cattle market is on very solid footing. Markets moved higher this week, we pushed into some new highs in the futures. We think the market is on real solid footing. We think in general that the entire livestock industry is going to have to adjust to this higher price of feed and we think that means higher prices over longer term.

Pearson: That's good news for cattlemen right now and if we look further out in some of those deferred contract months there is some profit opportunity out there.

Roach: If you're able to buy replacement cattle and you're able to buy the feed and you're able to lock them in and have a profitable hedge there is never anything wrong with doing that because it's just good solid business. But from our perspective here we think that this cattle market will be moving at higher price levels as we go on through the year. So, if you're making sales you're doing it because you're locking in a secure profit margin. I wouldn't be making sales out of fear.

Pearson: Talk about the calf market, John. Have we seen kind of the hit on the feeder cattle?

Roach: We had a big hit in the feeder cattle market and interestingly enough we've moved eight to nine dollars higher in the nearby feeder cattle market over the last two weeks. So, that market has proven to be pretty resilient and it says that the cattle industry continues to want to participate in the feeding business. We did see in the last cattle on feed report that we're moving some of the cattle further to the north, the southern feed lots were down from what their placement levels were. But the calf market is going to be tied to that corn market and to the fat cattle market. And as long as the fat cattle can come stronger then the calves and the feeders can also maintain some strength.

Pearson: Alright, talk about hogs. Obviously another protein out there. Similar strategy? Are we going to really have to go to the consumer to get our profit now for both cattle and hogs?

Roach: We're going to have to go to the consumer on all food items. If you think in terms of sweet corn or peas or green beans these are field crops that compete directly with corn and soybeans and as the profit opportunity increases in corn and soybeans they must increase the contracts for some of the other crops. And it's the same thing over in the livestock industry and certainly in the hog industry. We're going to have to have higher prices over time and we're going to have to have the consumer willing to pay more money for meat both here and overseas. Exports out this week for last year we exported about 15% more pork than we did the year before. Big growth in Russia and Hong Kong. Our beef industry a big growth in Mexico, it's our biggest customer there. Some growth coming back in from Japan although slow. So, we're optimistic about the longer term aspect of the market but we're going to have to go through this near term where we may actually see a little bit of liquidation in the hog industry. We think the market might be fully priced today and could have some sag as the weather improves. We've had a weather back up here. We're not killing the numbers we should and we think those numbers will catch up as the weather warms. So, we think maybe that market is up near its near term peak. But, again, longer term we have to have higher price to meats and we think the outlook is positive.

Pearson: Very good. John Roach, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from our astute analyst on where these markets just may be headed visit the Market Plus page at our Market to Market Website. And remember you can download audio podcasts of our market analysis and Market Plus segments free at our Website. Now, be sure to join us again next week when we'll visit a dairy farmer who started his own on-farm milk processing facility. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


Tags: agriculture commodity prices corn markets news wheat