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Market Analysis: Dec 08, 2006: Doug Hjort, Independent Analyst

posted on December 8, 2006

The grain markets retreated under a barrage of fundamentals this week, including weak export demand. For the week, December wheat futures lost 31 cents. The nearby corn contract dropped nearly 20 cents.

Analysts are waiting to see what happens with the leader corn market before trading on soybeans. For the week, nearby beans were down 21 cents. The December meal contract lost $3.00 per ton.

In the fiber market, the new nearby March cotton contract dropped 95 cents for the week.

In livestock, the December live cattle contract was up by $1.45. Nearby feeders gained $3.45. And the December lean hog contract advanced by $1.20.

In the financials, volatile Comex gold declined $18.60 per ounce. Nearby crude oil prices fell $1.42 a barrel. The Euro lost 140 basis points against the dollar. And the CRB Index plunged 10 points to close at 313-even.

Here now to lend us his insight on these and other trends is one of our senior market analysts, Doug Hjort. Welcome back.

Market Analysis: Dec 08, 2006: Doug Hjort, Independent Analyst Pearson: Here now to lend us his insight on these and other trends one of our senior market analysts, Doug Hjort. Doug, welcome back.

Hjort: Thank you, Mark.

Pearson: Well, we've had all this talk about ethanol and, of course, the drought in Australia impacting wheat and what is going to be ahead for these commodity markets and then we had a pullback this week and there were a lot of people that were somewhat relieved they were in the livestock sector. But now there's a pretty serious move down in the wheat market. What is your take, Doug?

Hjort: The wheat market is really in trouble here and on the futures charts we're right down against the major, major support levels. If that gives way we've got another 40 cents down and it could come fairly quick. So, that market needs to find its feet next week. Fundamentals aren't going to help much because there's not much going on. The trade has been expecting better export sales here in the U.S. all fall because of shortages around the world. Well, wheat is a funny animal, it's raised in every country in the world and you can scrape up a little bit here and there and get by if you're an end user and that's kind of what's happening. Case in point, this week the U.S. sold 60,000 ton of white wheat to Egypt but they also announced that they're going to buy 750,000 ton of what from Kazakhstan. Kazakhstan is an on again, off again exporter and not a reliable one because of weather conditions. But that's just kind of the condition of the market. In my opinion I think the U.S. will pick up on their export sales after the first of the year. But from then on it's not too long until the South American crops come online again too.

Pearson: Well, it's going to be interesting to see for wheat producers out there. There were certainly stimulus to get fall planting in and increase wheat acres. Is that going to come back and maybe put some pressure on us in '07?

Hjort: Yeah, and I think that's part of the pressure even on the old crop too. Again, when you go around the world you see reports coming out every week of this country or that country increasing wheat acres a little bit. It may not be much, one, two percent in some countries, as much as eight or nine or ten in others but it all adds up. And the futures boys rightly so are looking ahead to next year and especially if there is good weather in the northern hemisphere we could have a huge wheat crop next year. So, weather becomes very important as we go into next year. We've got some concern here in the United States, it's too wet in the eastern Corn Belt for the soft red and too dry in parts of the southern plains yet. But it's fall and, you know, springtime is the real time when you can make or break a wheat crop. China is kind of in the same situation. Other parts of the world, Russia and some of the former Russian countries are in the same situation. So, it's going to be just kind of walking on cut glass here during the wintertime trying to figure out why this market should rally. I think wheat will continue to be a follower of the corn market.

Pearson: Alright, let's talk about the corn market, Doug. That's been the driver here. What is ahead now? We've had a pretty good pullback on corn, a 20 cent pullback. Obviously we've been close to some record prices for December contract. We did hit $4 in the July contract earlier in the week. Now, that was an odd deal with supposedly misplaced trade. But as we go forward now have we maybe seen the top for the year for the time being?

Hjort: Well, I think we have for the time being, yeah. And then down the road it's just a question of how supply-demand balances change and primarily looking ahead to the January crop production report and finalizing of supply-demand balances then. But as you look at what we've got right now, what we know from a supply-demand balance on corn, prices rallied more than they should have from a fundamental standpoint. And we rallied so fast that it's kind of like the animal running over the cliff, you know, and then he hangs there and pretty soon falls. That's what happened to the corn market I think. It just couldn't go up anymore, it just ran out of legs. The question is, is the 20 cent or whatever drop, is that enough? It was interesting to note is on Friday afternoon's report the corn, the commodity funds are still heavily long in the corn market. That was as of Tuesday, of course, and then Wednesday was a hard down day but, you know, even Tuesday -- or Wednesday and Friday -- the funds were not listed as heavy sellers. So, they're still optimistic, they're still hanging onto those long positions. The key is to keep them optimistic because if they start to liquidate that fund or that heavy amount of long positions this market is going to go down real hard. I think we can probably hold it together here because there's a general feeling that the corn production number in the United States is still too high and it will come down in the January report. I think that, whether that happens or not is one thing but I think between now and then enough people will be talking about that to kind of stabilize corn prices here. I'd look for corn prices in the next month to move sideways in a rather wide trading band. That's going to be very important for wheat prices and for soybean prices too.

Pearson: Alright, as you look ahead to 2007 and 2008, Doug, because we're not out to there in terms of those deferred contracts, are prices enough that obviously if we do move a lot of acres we could see a lot of corn produced in 2007, should we be locking in some gains in December, in the December '07 contract even on out to '08?

Hjort: Yep, I think so. Even in the cash market -- being able to sell corn off the combine at $3 plus just about every place in the United States, you better do that, that's all I can say. I haven't made big sales for my clients but I've started them out there and very willing and ready to add some more to that. That's a huge price. On the other hand, if we don't get enough corn acres or if we have a weather problem these prices will have to shoot sharply higher to get the rationing job done quickly. So, it can be a little touchy out there in selling too much and being in the futures market the way this thing can swing and turn with the funds in there and so on, that's pretty risky. As long as you're used to trading with the futures, have a good broker, that's fine. But if you're not used to it this is not a time to try to learn how to use the futures market.

Pearson: Let's talk about soybeans, like you say, following corn for the time being. But they can also take on a life of their own as we get into '07 couldn't they?

Hjort: Well, they sure could but there it's a different thing, it depends on acreage again and if we take too many acres away from soybeans and then have some sort of a weather concern we might be a little short of soybeans. We've got a huge surplus on hand right now worldwide and in the United States so there's really no reason for soybean prices to go up. There was no reason for them to go up this fall as they have had except that corn was going higher. So, soybeans had to try to keep that price relationship alive there to a certain degree. But the soybean fundamentals are very bearish. I think a person should be looking pretty seriously at liquidating the rest of the old crop soybeans. Trying to sell new crop, that's a whole different thing because you could have the reverse of the corn market depending on acreages. So, I'm not, excuse me, I'm not selling soybeans out into the new crop yet but it is something that should be looked at. Those prices are good but not as attractive as the corn prices are.

Pearson: Alright, just real quick on this cotton market, Doug, as you look forward we could be losing some cotton acres maybe to soybeans or corn.

Hjort: Well, we could. This week the market was focusing on Monday morning's production report and not so much on the U.S. but on the world. They expect the Chinese production to be raised but be offset by losses in Australia. So, actually they're not looking for much change either in the U.S. or in the world numbers on Monday.

Pearson: Are we going to see much change in this cow herd? Talk about this fed cattle market. What's going to happen there with these high beef prices?

Hjort: Well, that's really a tough one. And those corn prices aren't going to come down materially. You're looking at prices still well over $4 a bushel down in the Texas panhandle and you try to, well there's no way you can make any money at doing that. I'm kind of surprised that feeder cattle prices have stabilized here around this $100 mark and maybe it's just a timing, pretty good demand for some wheat pasture cattle and so on in some areas so that probably helped things a little bit. When you look at the live cattle prices this week it looks like they probably traded up $1, we don't get to know all of that until Monday morning any more it seems like. But they were firming on Friday afternoon. Volume wasn't very heavy as of about 4:00 but if they got the $1 more I think they probably cleaned the lots up pretty good. Have to do that because boy there's a lot of meat in the channel, all types of meat. Going into the holiday season you usually don't have a special on one kind of meat, pork or beef or anything, it's kind of a smorgasbord out there. So, need to keep these marketings as current as possible, $87 on fat cattle now, I think that needs to be sold.

Pearson: Alright, let's talk hogs, Doug. As you look at this thing right now obviously margins are going to get squeezed into the hog pit as well. What do you see happening for producers?

Hjort: Well, hog production is kind of the same thing as the -- or the price outlook rather is kind of the same as for the cattle. It's just kind of on pins and needles. We saw the futures drop off early this week and it looked like they were just really going to wash out. Well, they found legs and came back, closed just fractionally below last Friday's close. Still kind of a negative chart action because of the down trend of the last several weeks. But the cash price was kind of holding in there. Pork product values on the other hand pretty sloppy in the last half of this week so a lot of uncertainty in this hog market. I don't expect any major rallies in the hog price. I think the question is going to be can we hold prices together? So, given that outlook I think you need to be selling these hogs and getting these weights down as light as possible.

Pearson: Alright, some good advice as usual. Doug Hjort, we appreciate it. That will wrap up this edition of Market to Market but if you'd like more information from Doug on where these markets 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. Now, be sure to join us again next week when we'll meet two of the protagonists in the ethanol debate who don't see eye to eye on the benefits of the alternative fuel. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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