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Market Analysis: Dec 15, 2006: John Roach, Senior Market Analyst

posted on December 15, 2006

The grain markets continue to trade in a tight range, although wheat prices had a nice rebound late Friday. For the week, March wheat futures gained more than eight cents. The nearby corn contract was up by a half-penny.

Soybeans continue to trade on the strength of the leading corn market. For the week, nearby beans were up by a penny-and-a-half. The January meal contract lost $1.40 per ton.

In the fiber market, the nearby March cotton contract advanced by $2.23 for the week.

In livestock, the December live cattle contract was down by 55 cents. Nearby feeders lost $1.70. And the February lean hog contract dropped by $2.02.

In the financials, volatile Comex gold fell another $7.10 per ounce. Nearby crude oil prices gained $1.40 a barrel. The Euro lost 124 basis points against the dollar. And the CRB Index gained a quarter-point to close at 314.25.

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

Market Analysis: Dec 15, 2006: 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, nice to be here.

Pearson: Good to have you. Let's talk about what's going on here as we approach the end of 2006 and what a year it's been since the 15th of September when this wheat market, corn market and soybean market all started this unprecedented harvest rally. As we look at wheat, again, we had a little bit of an up move this week in the wheat market, we're down from our highs and looking at the Chicago wheat, which is what we track on the show, all classes of wheat have done extremely well, a little bit of a bounce this week. There's a wheat crop growing somewhere in the world at any point, John.

Roach: Continuously, almost continuously.

Pearson: Yeah, so what do you tell wheat producers maybe who are holding onto some old crop?

Roach: Hang onto it a little bit longer. The wheat market peaked back earlier this year. I think a peak actually came back in August sometime if I'm not mistaken and then has been in a slide ever since. We actually made new lows for the move this week and then we rebounded nicely and we did that in the face of the government saying that the ending stocks in the world are going to be 2.5 million tons bigger than what they thought they were going to be last month. The interesting thing with wheat is that it has the tightest supply-demand table right in front of us right now because we had such a reduced crop in this country and also in Australia during this growing season. So, we're very tight supply but the price moved up so far that the demand really slowed in wheat.

Pearson: Alright, so we want to hold onto our old crop, maybe see some moves a little bit later on. Worldwide, like you point out, there's wheat available and it looks like next year there's going to be a lot of wheat here in the U.S. with decent weather.

Roach: Well, that's the difference in the wheat market compared to the other markets. There is a very tight supply situation today with lots of wheat coming on stream. Now, Informa gave us a crop estimate or acreage estimate out this week, it was a little bit smaller than people had anticipated, up a little over 3 million acres from what was planted last year. Most traders think that that's going to be enough wheat to put wheat at a little different relationship to corn next year than it has been this year. The wheat will start to slip back into the feed ration next year which means a closer price relationship to corn. But in the face of the negative news this week and the acreage numbers from Informa we ended up closing the week higher on wheat. I think there's a further rally in store here on wheat.

Pearson: Alright, let's talk about the one everybody's talking about and that is this corn market and where it's headed. Obviously a huge move since about the 15th of September. We talked about ethanol on our feature tonight and there seems to be no slow down on the number of plants that are at least underway at this stage of the game so demand should be exceptionally strong for next year. The market was supposed to buy corn acres. Has it bought corn acres, or enough corn acres, John?

Roach: I think it has. We saw a report, again, from Informa increasing the corn acres a little over 7 million acres in their forecast. We see some people talking about numbers bigger than that. The interesting thing about acreage this year is that it's not just the price level that's stimulating farmers, it's also the understanding that we can't hardly raise enough. So, today's price level does not appear to be something that is going to be fleeting as we've seen in other years. You know, back in the 70's we had dollar corn and then we moved to two dollar corn and now we're into the three dollars and that attitude is not that we're going back to two. The attitude is that we're probably going to have to go higher. So, I think that really gives a stimulation to producers not only to increase their acreage but also to increase all the management that they can do on those acres because it looks like it's going to be a very profitable year out ahead.

Pearson: Alright, so you're a corn farmer and a lot of them were cleaning out bins Labor Day weekend and sold a lot of corn early then they see this corn market go higher. And then, of course, that causes you, at least in my case, to sit there and go I'm going to wait just a little bit longer here for a stronger corn market. Would you be willing to do that at this point?

Roach: Yes, I would. I think the corn market will be stronger in the spring of the year than it is today. I think we'll be more worried about what our crop is going to be like once we finally get toward planting season. That's normal. Normally we have higher prices in March, April, May and June than we do during the fall of the year and I think that will be the case again this year.

Pearson: Alright, are you anxious at all to cover, I've talked to a lot of producers who are talking about higher cash rents, higher inputs, getting some coverage on this 2007 crop?

Roach: We've actually had customers make some sales on 2007 and 2008 and even a few bushels of 2009. But those percentages have been very small and we want to keep those percentages small at this time. Come spring during that March, April, May, June timeframe we'll be looking at additional opportunities to make sales we believe. We also want to make more, make fewer cash forward contracts or plan to make fewer cash forward contracts this upcoming spring and use more puts. The reality of this crop year is we must have good yields. If we end up with any kind of weather problem the price of corn next fall could very easily be a dollar higher than what it is. So, we'd rather ensure the new crop '07 rather than contract substantial percentages of it.

Pearson: Alright, and using a put.

Roach: Using a put option to do that insurance.

Pearson: Alright, we bought seven million acres, more corn acres, I assume those came from soybeans. There seems to be a lot of optimism in this soybean market these days.

Roach: Well, we took some five million acres out of soybeans or at least Informa's estimate. We still end up with plentiful supplies of beans, however, if we have trend line yields next year. There's substantial surpluses in the bin but when we start to harvest next year in this week's USDA report the government raised world ending stocks on soybeans and increased the usage as well. So, the supply of soybeans is very plentiful. We'll find out more what we're going to see out of the southern hemisphere as we get further into their growing season. But in the month of November the Brazilians spent more money on farm inputs than any other month before in history. So, there's extra acres that are being planted, there's extra management decisions being made so that they're taking better care of that crop. It looks like they'll have the opportunity to make a profit for the first time in a couple of years. And so that, again, is going to increase our supply. So, I'm not in the camp that our bean supplies will be so short that we have to have high prices next year. We already have high prices for next year for fall delivery for '07 and I don't expect to see lots higher prices and that without some sort of a problem somewhere in a growing area.

Pearson: Right and, of course, as we run into a wet spring we could be looking at some of those corn acres going back to soybeans. So, it's still quite a bit up in the air where this acreage is going to come out isn't it?

Roach: It absolutely is up in the air and that's what the market is going to be focused in on next spring and that's the reason I think we have strong prices and good selling opportunities next spring.

Pearson: We had a nice move in cotton this week, reversing some pressure that's been there the last few weeks.

Roach: We had negative news out on cotton this week and the market went up. The cotton market is terribly under priced relative to these other markets. We're trading 60 cent cotton next fall. That should correlate to six dollar beans and we have seven dollar plus beans. So, we're way out of whack here. So, I think cotton acreage will come down. I think the cotton market will do better.

Pearson: Okay, let's talk livestock, John. Obviously it didn't seem to have a huge, immediate impact on the livestock business what happened as far as the illegal immigrants and the deportation issue with Swift. But going forward it's going to be a concern short-term in both beef and pork. But let's take a longer view. What do you see out ahead for this cattle market as we wrap up 2006 and head into 2007?

Roach: We're producing a lot of meat right now. We're producing 5-6% more total meat now than we did a year ago. The market content can absorb 2-3% so we're really producing more red meat that we're having to move out through the system and it's sluggish. We think that the cattle business is, we're current right now in the feedlots but it's just a lot of competition there. The market as we move on out into the second quarter and third quarter then we start to bring the numbers down. We'll have something in the neighborhood or the current forecast the government gave us on Monday is we should have something a little less than 2% more beef produced in the second quarter and a little less than 1% produced in the third quarter. So, the numbers, those increases are very small this next year. But we have to get through this first quarter, we've got a lot of tonnage that we have to go through. The reason the market bounced here late in the week is weather concerns down in feedlot country, there's snow on the way, at least that was the forecast today. That gave us the boost. But the market is going to struggle in here with this size of beef and pork and poultry production.

Pearson: Alright and, of course, you can't have them moving the corn market like this without clobbering the feeder cattle market and that certainly incurred some pressure again this week. This calf market, these cow-calf guys who are coming off three outstanding years are really taking it in the chops going forward. And with your corn scenario I'm assuming you don't have a lot of positive thoughts when it comes to this feeder cattle market.

Roach: No, I think the feeder cattle market has got a tough sled ahead although the market made a big adjustment already so I'm not expecting the market to really fall out of bed. We're at kind of the worst stage here in the cattle business from a standpoint of what the fat cattle are bringing out there versus where costs are. That will get better as we move on forward. So, I think we're looking at some of the worst here as far as feeder cattle pricing is concerned. Maybe I should say I think we have looked at the worst.

Pearson: Well, that's a positive note. John, let's talk about the hog market. There's been so many issues going on with pork. First of all, there's concern about the high priced corn, its impact on profitability, Circle Virus, disease issues have been out there that have certainly held numbers down. Going forward, like you say, there's a lot of meat out there right now, what's ahead for pork producers?

Roach: Well, we're dealing right now with a pork market, again, that's well supplied. I think 2.2 million head slaughtered this week even after having problems at the Swift plants. So, that tonnage is going to stay large. The government actually thinks, according to the report last Monday, that there will be 3.7% more pork produced next year than this year. We think that number is a little high. We think it may be closer to 2% but we still have some big slaughter periods to go through here as we move in particularly the second and third quarter of '07, we're going to have a lot of pork production. So, we think that the market will stick its nose back up here, that it probably makes some sense to be a hedger on strength in the pork complex.

Pearson: Okay, we've got about 10 seconds John, covering feed needs, has this been the pullback to do that?

Roach: I think you cover feed needs on all pullbacks. We're on a pullback now, it's time to be buying.

Pearson: Very good, John Roach, thanks so much. That will wrap up this edition of Market to Market. But if you'd like more information from John on where these markets 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 update the impact of the world trade talks of the next farm bill. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news wheat