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Market Analysis: Nov 24, 2006: John Roach,

posted on November 24, 2006

Futures prices in the grain pits remain unseasonably high, with contract highs reached this week in corn. At Wednesday's close, nearby wheat futures gained more than 12 cents. The December corn contract advanced more than seven cents. The big news in the soybean market this week was confirmation that Brazilian acres will be down dramatically this year. For the week, nearby beans were up more than 13 cents. The December meal contract gained $1.70 per ton. In the fiber market, the December cotton contract moved sideways and for the week gained 19 cents. In livestock, the December live cattle contract was up 18 cents. Nearby feeders gained 83 cents. And the December lean hog contract picked up 95 cents. In the financials, Comex gold advanced $6.50 per ounce. Nearby crude oil prices jumped $3.43 a barrel. The Euro gained 113 basis points against the dollar. And the CRB Index was up nearly three points to close at 308.50. Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. Welcome back.
Market Analysis: Nov 24, 2006: John Roach, Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, welcome back.

Roach: Thank you very much, Mark.

Pearson: What a fall it has been, contra seasonal indeed led by wheat. Let's talk about the wheat market. Obviously with the wheat market there is a crop maturing somewhere around the world almost every month but we had a tight supply, tight situation, I think was one of the factors in sparking this corn and also soybean rally. So, John, as you look at this wheat market right now and you hear about the numbers and what is being planted out there what is your take, what should we be doing?

Roach: The wheat market did start to move higher first, it was the first market to move higher because of weather problems down in the hard red country and then also up in the spring wheat country. But the wheat market has quit being that leader. The wheat market has been really more trying to follow the corn market than anything else here and particularly over the last few weeks until late on Wednesday or during Wednesday when we saw the wheat market finally run on its own because of some business with Egypt, about 60,000 tons of business was announced with Egypt, it surprised people on the pricing structure a little bit because it seemed like the price was actually cheaper than what the trade is at the Gulf. But the traders sort of ignored that and focused more on worries about the new crop as well as some demand coming back. The biggest problem we've had in wheat as of late is that we haven't been able to really get any demand going overseas. Wheat is the biggest exported grain that we have so the exports are a bigger determining factor in price structure than in the other markets and we've just been running very, very slow as far as exports are concerned.

Pearson: Okay, so at this stage of the game with the run up that we've had do you have a sell on wheat?

Roach: No, we don't have a sell on wheat. We're concerned, it's dry, the wheat condition report out on Monday showed that the crop deteriorated a couple of points in the good to excellent area but we still have a fairly well rated crop but we're worried. We need moisture, we need to put this crop into the winter with more moisture than what we have right now and that is what has traders bothered.

Pearson: Alright, let's talk about the corn market, like you say the leader in this whole thing as it should be with all the renewed demand for biofuels that we talked about earlier in the show and ethanol production continues to jump, these plants continue to come online in dramatic fashion. A lot of corn producers out there have put up a lot of storage throughout the Corn Belt and this crop put away, kind of hard to get people to sell at this stage.

Roach: The optimism in the corn market might be unprecedented. I started in the business in 1973 and at that point we saw an unprecedented situation occur where we saw new demand coming at the market and that particular instance it was the former Soviet Union. Now we have new demand coming at the market and it's for the biofuel industry. The numbers as we look forward and we talk about the 2007-2008 year are extremely tight. We must plant a substantial increase in acres, something in the neighborhood of seven or eight million acres more than we planted last year in corn. We've never seen that occur before unless -- the biggest we had in a non-program changing year is a little over 3 million acres, in '96 we had about a 6 million acre increase when we had those very big prices of '96. So, the need for more acres is very clear cut, the need also for a very big yield is clear cut. As people crunch the numbers the numbers just don't work and so what has happened is the market has started to run after, I shouldn't say started, it's been going for two months now, has run after the inventory of corn that is available. The big carrying charges that were in the market are now gone. We have basis levels that are very strong. So, the whole market is really turning on demand and at the moment we're still trying to figure out where the high of this market is. We made new contract highs this week but we still don't know where prices have to go in order to slow down this usage.

Pearson: John, as you look historically these are good prices for corn. Should a producer be making some cash sales to at least cover some cash flow or a little bit of a safety valve in case things change?

Roach: Doing good business as a farmer is always good advice and with these kind of prices and these kind of profits making periodic sales when the market gets distorted to the up side and we saw that this week those sales make sense. But don't make the sale thinking that this is the high and the market is going to collapse. That's not the case. The market is going to find the price range as necessary, we may be there, the market has been trading in this similar range here about a 30 cent range from about $3.85 on the top down to about $3.55 on the bottom side on March corn and this may be a high enough price area. But what the market has to do is it has to give the signal to corn users and this is livestock producers as well as ethanol plants that we can not grow at the pace that has been projected just over the last two or three or four months. We can't put all those plants into production and feed all that livestock unless we do something rather drastic over on the acreage side. And the, as your story reported earlier we're not getting enough interest for people falling out of the conservation reserve program, there's going to need to be some stimulation to get people to pull ground out of the conservation reserve or we're going to need to quickly bring on the cellulistic ethanol, something has to happen to make these numbers work.

Pearson: We had the news out of Brazil this week that the numbers, acres are down there for soybeans and of course we're trying to buy soybean acres here, buy acres away from soybeans for corn. How are we going to end up? This soybean market has had quite a rally too. And we've got a huge carry out in soybeans.

Roach: The soybean market is trying to keep pace with the corn. You can only get corn about so, up to a certain level without the beans have to follow along. And we talk about this acreage shifting back and forth and of course if we move eight million acres into corn we're going to probably take five, six million acres out of beans in order to do that job. But remember, it was just a few years ago that we were scared to death about all the ground that could come into production in South America. Now because they've had a couple of years of bad crops and because the price level has gone down they in Brazil have shrunk their acreage but they're not shrinking it in Argentina or in other areas, other countries in South America. The acreage is actually going up. The acreage can go up substantially there with the profit motive is in place. I believe that is what's going to happen. I believe at the price levels that we're seeing for the crops out forward for the next year or two years those are price levels that will buy acres. The potential for increasing acreage in South America is very substantial and so we shouldn't worry so much about the beans.

Pearson: Alright, should we sell beans?

Roach: I think on strength you do sell beans. I think that you have to recognize that we have a record inventory that will be in the bin before we harvest one bushel one year from now. It's going to be a new record and this past fall it was a record number before we put a bean in the bin. So, there's plenty of beans out there, there's no problem with it, it's just a market function here and on strength during weather concerns, during December and January, make sales on soybeans and clean that inventory out because the South American crop will be coming on stream in our spring.

Pearson: Alright, real quick, John, the cotton market. I know China is a big player here and exports are a big player in that one too.

Roach: You know, the cotton market is the only agricultural market we have out there that price levels across all the boards it seemed like this week except for cotton which is struggling. And there's a lot of resistance in the market. This $52.80 to 53 cent area is quite a ways above where we are right now is a tough, tough resistance. On last Friday's CFTC report the commodity funds have a record short position in cotton. So, sooner or later we're going to have a reversal but it's not right now.

Pearson: Alright, real quick, fed cattle market, what's your take? Obviously these higher feed costs I know are weighing on livestock producers.

Roach: They certainly are. However, if you take a look at the cost of feeder cattle and the cost of corn on what we call the board crush, in other words feeder cattle prices, corn prices on the board versus fat cattle prices we're at some very high price, very high crush levels if you will. There are excellent profit opportunities out there on feeder cattle that are purchased right.

Pearson: Alright, and of course we've had that big break in feeder cattle. What about the cow-calf guy? What word do you have for him?

Roach: Well, the cow-calf producer is reducing his herd, we're seeing cow slaughter up and we think that that's going to continue because the profitability is being squeezed there quickly.

Pearson: Let's talk about the hog market, John, and, of course, we've had beef moving now into some of those countries where we were banned before export wise. Should probably take a little bit of market share away from hogs. We've heard about some disease issues in some of these big operations. What is your take on the hog market as we go into the, as we finish up the fourth quarter of 2006 and go into 2007?

Roach: Well, we're slaughtering more hogs right now than we were expected to be slaughtering right now so we may be seeing some liquidation occur. But at the same time we have pretty big expansion that has gone into place particularly by some of the larger producers. So, the hog market is kind of caught. The larger producers are expanding and now their feed costs are going up. I think what is going to end up happening is we're going to squeeze some more small producers out of the business.

Pearson: John, what about on the feed coverage side? These guys haven't had a lot of opportunities to do that. We thought we would get that with a break during harvest. That hasn't happened. What would you tell a livestock producer that needs to get some feed needs covered? Would you do it on the board or would you buy cash?

Roach: I like buying the cash market rather than buying futures and whenever you see that market take a break and we back off 20 or 30 cents a bushel accumulate some inventory.

Pearson: Alright, soybean meal?

Roach: Soybean meal I think you can be a little more patient. I'd be a hand to mouth buyer on bean meal because I think we have plentiful supplies of beans there out in the country and I think our meal prices together with the competition from the DDG's that's coming out of the ethanol industry I don't see a reason to rush after meal purchases.

Pearson: You don't see anything right now that you really want to jump at in terms of a hog hedge?

Roach: No, I really don't. We made new life of contract highs on the back months of hogs, the same way with the back months of cattle. We have to have higher meat prices in order to make the profitability be there for producers to stay in business.

Pearson: Well put, thank you John Roach for your insights. As usual, we appreciate it. 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, absolutely free at our Website. Now, be sure to join us again next week when we'll learn how consumer interest in whole grains has more producers growing white wheat. Until then, thanks for watching, I'm Mark Pearson. Have a great week.

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