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Market Analysis: Feb 09, 2007: Doug Hjort, Independent Analyst

posted on February 9, 2007

The government released its latest data on global supply and demand on Friday, but the numbers failed to make much of an impact on the coarse grain markets.

For the week, March wheat lost a penny, while the nearby corn contract gained more than four cents.

Again this week though, the action was in the soybean pits where the nearby contract defied bearish fundamentals en route to new contract highs. For the week, nearby beans gained more than 12 cents. The March meal contract gained 5.20 per ton.

In the fiber market, March cotton trended lower again this week, posting a decline of $1.13.

In livestock, the February live cattle contract was up $2.15. Nearby feeders gained $3.15. And the February lean hog contract gained 92 cents.

In the financials, Comex gold gained $21.30. Nearby crude oil prices gained 87 cents per barrel. The Euro gained 14 basis points against the dollar. And the CRB Index gained more than three points to close at 303.50. 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: Feb 09, 2007: Doug Hjort, Independent Analyst Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Doug Hjort. Doug, welcome back.

Hjort: Thank you, Mark.

Pearson: Let's talk a little bit about what's going on in this wheat market. First of all, condition wise how would you rate it? Let's talk about the hard red crop first.

Hjort: Doing pretty good, got snow cover central part of the Midwest and so that crop is doing alright. You go down further south and the crop rating as of the first of the month was not very good, I think 35%, 37% good and excellent in the Oklahoma crop, Texas kind of spotty too. You go up in the northern plains, South Dakota and Montana, spotty conditions there they talk about some stress. It's been awfully cold up in that part of the country and not much snow cover in some areas.

Pearson: Okay, let's start talking about planting now for 2007 sales. Obviously holding around this four and a half mark, looks fairly positive and wheat plantings are up. What about it, Doug, do you want to make some sales?

Hjort: No, I don't think I would right now. Wheat prices peaked way last summer and then have just drifted lower ever since. In the last couple of weeks we finally started to see our export sales on wheat pick up pretty good. In two of the last four weeks we had very strong export sales, in fact. I don't know if this is a turn but you look at the world wheat supply as evidenced by USDA's report again on Friday of this week and it just kind of renewed how tight the wheat situation is. So, I think we're at a point here to where the U.S. is finally going to start to see a little better export of wheat and that should support prices both old crop and new. So, I think I'd hold off just a little bit on the hope that maybe this wheat market can turn the corner and get some speculative buying in there for a change instead of very quickly selling the rallies as they did on Friday once again.

Pearson: I've had a chance to talk to a lot of cattle feeders in the last couple of weeks and wheat is a big part of the ration right now.

Hjort: Yes, it is. It's going up quite a bit here in the United States, a lot more interest and in Canada there is speculation there was a lot of feeding there. Their December 31 wheat stocks report came up about two million metric ton short of expectations. I don't know that they fed all of that. There's probably some other negotiations going on there with that number but a strong indicator of feed being used.

Pearson: Alright, let's talk about the corn market where much of the excitement has been related to what is going on with ethanol, biofuels, you name it. Corn is king right now and a decent week this week in Chicago, some big numbers for the December contract. What about this one, Doug? What should a producer be doing?

Hjort: Well, on old crop obviously these are prices to be sold. I suppose if you want to hold onto a few Las Vegas bushels that's fine for summer because we do have to have a big acreage increase plus top yields worldwide just in order to keep ahead of this demand for corn. But you look at this whole picture and export activity has been good, our market here in the U.S. looks to be pretty good. We don't know for sure on feed use because we don't get a figure on that other than these quarterly stocks numbers, have to work backwards into it and, of course, the ethanol production just huge. So, this corn market battling contract highs here. As we saw on the chart prices peaked out here about two or three weeks ago after the January report, in fact, and then just drifted lower since. This week though we did turn up. That's a very good sign from a technical standpoint. I think we'll see tests now of contract highs next week. Maybe we can push on through that and it's kind of unusual here because you have corn supporting soybean prices but at other times soybean prices have been supporting the corn. So, the two are trying to move together and I still think the key here to everything rallying is that wheat. If wheat can move on up then that's going to take some of the pressures off of the corn and soybeans too. So, placed to sell here on corn that's for sure, old crop and new both. But boy on this new crop if we have any sort of a weather problem this year we're going to come up real short of corn worldwide and who knows where prices could go then. So, I wouldn't be too heavy on selling especially cash markets.

Pearson: Alright, and so let's keep that in mind and you mentioned cash is king too out there when it comes to this corn crop. Let's talk about soybeans who really had the wildest week this week. And, again, fundamentally, Doug, there's really not -- you can not justify almost eight dollar soybeans.

Hjort: No, you can't and the reports this week just added to that bearishness of the numbers, U.S. and the world. South America has got a big crop coming on, production estimates increased on this report once again and increased out of South America, their own governments have been pushing production numbers up. So, the whole picture fundamentally I don't know where we would be, two dollars lower or something like that, but that's not the game. We're playing money is what we're doing here. We've got all kinds of outside money into these markets. From a fundamental standpoint soybean prices have to try to keep pace with corn somewhat to prevent losing way too many acres on plantings this spring. It's kind of questionable to understand where you're going to get maybe seven, eight, nine, ten million acres of corn and not reduce soybean acres enough to make soybeans a rather attractive market for next year. I think that's part of what is being played out here in this whole process. November soybeans, by the way, leading the spot month by a considerable amount. So, that new crop pull for both old crop -- both corn and soybeans is very strong. I'm not selling new crop soybeans yet just primarily because the trend is up on these prices. I want to see some sort of topping action before I would start pulling the pin on that.

Pearson: Alright, and again, old crop beans, Doug? Get 'em to town?

Hjort: Well, yeah, I'd be selling some of those. I'm up to about 80% sold on the old crop beans. I just toy with it every week whether we should clean them out. It's just a day by day thing. Again, see some topping action there and I'm going to dump the old crop beans.

Pearson: Alright, let's talk a little bit about livestock and what's happening in these livestock markets which has been fairly positive here in the last week. Let's talk first about the fed cattle market. Obviously when you have margins squeezed like this the tendency is to not build the cow herd. Is that your thinking, Doug, this year?

Hjort: Oh yeah, that's right, we're not building it again. Four years in a row and we haven't been building that cow herd. Beef cow replacement heifers actually down just a little bit from a year ago. So, we're kind of maintaining the herd but we're not building it. Cattle prices this week, hogs too, but cattle prices put in a pretty shocking move. Nothing going on until Thursday and then prices jumped about three dollars live bids in Nebraska and I'm not sure where they wound up in the southwestern plains but I'm sure $91, maybe $92 was paid. That's four or five, maybe six dollars up in the last two or three weeks. Big turnaround in this cash market. Part of that might be coming from slow sales and lighter weights from carcasses from the winter weather they had out there in the western plains. But whatever it is production is down some and prices have responded very well.

Pearson: Going forward, Doug, it looks a little more hopeful doesn't it on some of those deferred cattle contracts?

Hjort: Yes, it does. There is a premium being paid out there over spot months. If we got $91 cash cattle April futures are running $95 and so on. So, that premium carries out into the summer. I don't think this is the time to do any hedging.

Pearson: Okay, what about the rancher out there, this cow-calf operator, what is his look and should he be pricing something at this stage?

Hjort: Well, it's kind of a tough call there because prices are off what they could have gotten last fall. If you're looking ahead to the new year it's way too early to look at that now. So, it's kind of a stand off. If you've got calves out there that you backgrounded over the winter I'd just hold off on marketing them right now. You probably don't have to move them just yet anyway and hold off as long as you can, put a few more pounds on them. I think that market could be moving up. Obviously it will depend on what corn prices do here in the next few months too though.

Pearson: Alright, let's talk about the hog market. Again, as we look at what's happening price action this week again kind of surprising wasn't it Doug?

Hjort: It really was and I've been kind of impressed with this market for, well, several weeks in fact. The market has rallied back up here and now this week it had every indication that it might set back, drifted a little bit lower for two or three days and then on Thursday, boom -- excuse me, on Friday it jumped sharply. Pork cut out values up sharply on Thursday. So, the demand is there, the kill numbers are down a little bit so production is down a little and this retail demand obviously must be holding very well for pork as well as for beef. So, I think we're looking at some pretty strong hog prices as we go on ahead. Again, I'm not really interested in doing any hedging on hogs right now. As far as selling the cash my recommendation is just take them up to your normal weight and move them. I think the prices will start to move consistently higher from here.

Pearson: You mentioned lighter carcasses on beef cattle moving pork in a timely way, higher guilt slaughter, much anticipation for expansion of this hog herd this year?

Hjort: No, there's not. The last hogs and pigs report we saw there wasn't hardly any expansion. As a matter of fact if you want to really dissect those farrowing intentions you might possibly be seeing to where our farrowings were relatively high in December, three, four percent up maybe and then gradually coming down each month as we go on into the spring. Maybe it isn't that way but in quarterly numbers they were larger farrowing intentions in the Dec., Feb. period and then scaling off into the spring. So, I think there was some indication that high corn prices have influenced expansion ideas in the hog market. And if that's the case we're going to see these kind of hog prices for some time and most likely something higher.

Pearson: Very good, great insights as usual, Doug Hjort. Thank you so much, we appreciate it. That's going to 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 why not 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 head out on the range to ride with the Bureau of Land Management on a wild horse round up. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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