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Market Analysis: Oct 20, 2006: Doug Hjort, Independent Analyst

posted on October 20, 2006

Last week's impressive rally in coarse grains lost steam this week as wheat prices trended lower. For the week, nearby wheat futures lost more than 20 cents, and the December corn contract gave back nearly two cents. But soybean prices still have some traders shaking their heads. For the week, nearby soybeans gained 13 cents and closed above $6.00. The October meal contract was up 70 cents per ton. In the fiber market, the December cotton contract moved back into positive territory this week, with the December contract gaining 20 cents. In livestock, the October live cattle contract was down 78 cents. Nearby feeders lost 83 cents. And the December lean hog contract was down $1.70. In the financials, Comex gold gained $4.20 per ounce. Nearby crude oil prices fell another $1.75. The Euro lost 100 basis points against the dollar. And the CRB Index gained nearly 8 points to close at 309.50. 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: Oct 20, 2006: 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: Alright, well let's talk a little bit about -- let's talk about wheat first. And, of course, that is what sparked this incredible harvest rally that we've seen in corn and soybeans for that matter. Cooled off some this week but obviously the situation remains fairly tight worldwide as far as wheat supplies are concerned.

Hjort: Well, it sure does and that, of course, was the catalyst that really got prices moving. I think maybe prices rallied faster than they should have and yet this price level, five dollars or better is not surprising to me in the futures market given the very tight supply-demand balance in the world. But here we are, we came into this week and we know all of that loss or most of that loss in Australia, for example, we know that several countries around the world and primarily exporting nations of wheat have smaller crops this year. So, the United States, of course, we have a smaller crop too but we're in excellent position to pick up extra exports. Now, one of the things that happens in the export market, the U.S. comes in last when you're talking about wheat sales into the world. So, even though the U.S. exports most likely will exceed current estimates it probably isn't going to really generate weekly sales at a higher level for may be several weeks yet. In other words, these foreign buyers go to other countries. Part of the reason is political but part of it is price too. There is cheaper wheat in the world than there is in the United States right now although you take like France, for example, they have set record high prices within the past year or past month as well.

Pearson: Doug, we tend to lump wheat together but we've got three distinct classes. We've got the Chicago wheat which is what we quote on the show and what was on our chart a moment ago, the soft red wheat. We've got the hard red wheat. A lot of viewers down in Kansas and Oklahoma and the panhandle of Texas that grow that and into Nebraska. And then we've got the Durham, the spring wheat up in the north. Are all three classes experiencing the same kind of demand?

Hjort: They are but at different times. The hard wheats had their major rally during the summer months. The soft wheat, Chicago market, just in the last month or five weeks we've seen that market just skyrocket. So, those prices in Chicago now are within spitting distance, anyway, of the hard wheats. Durham wheat prices, they have been moving up steadily and this week actually Durham prices went up about 40 cents a bushel whereas the other wheats were topping and coming down. I think it's a very key element here from a technical standpoint. This week we put in a key reversal on the weekly charts and decisively so, hit a new high this week just momentarily and then crashed the market. And I don't think we've seen the highest prices that we will for wheat in the next year. But this is a seasonal time frame now for wheat prices to top out and it wouldn't surprise me if we may have put the top in for a while now.

Pearson: Alright, would you make sales here, Doug?

Hjort: Yes, I would. I'm recommending to my clients to sell some crop, not all of it. As a matter of fact I have just made my first sales for this year this week. And I think what I'm trying to do is get cash flow out there to sustain them for a few months but I think we will see higher prices later on when the actual physical crunch really starts to hit. One other thing about the hard red winter wheat, however, that price has been struggling a little bit -- I said earlier that that hit its peak in the summer -- but it did so now we're looking at fairly decent moisture out here in the Plains, finally so a better chance for a new crop and we're starting to trade that in the market as well.

Pearson: A little bit of pressure there. Let's talk about the corn market. Corn rose in sympathy with wheat because we're in the throws of the corn harvest, a lot of corn is moving to town. It's been quite a rally. What should a corn producer do right now who has got corn coming off the combine?

Hjort: I think it depends on how much of the crop they have sold. This is a pretty good price right now to be selling something off the combine, sell a little moisture along with it here so you don't have to dry everything down as much to store it long-term. The corn market price wise rallied similar to what the wheat market did and I think got a little bit ahead of itself. Now it's interesting, we did a reversal on the weekly charts on corn this week as well but not nearly as dramatically as on wheat. I think we'll struggle here on prices for a while but again I don't think we've reached the high on corn prices yet. I don't think the world is really understanding how much more demand there is going to be for corn because of the shortage of wheat in the world and rice continuing to be at historically low levels.

Pearson: Alright, let's talk about the soybean market as well, Doug, and obviously there supply situation is totally different, there's plenty of soybeans out there.

Hjort: Well, there is but the technicians have grabbed a hold of that market again this week and as was pointed out earlier soybean prices up this week where the grains were down. The fundamentals obviously are very bearish but if you remember last year we had up to that time we had record bearish numbers out there and yet the soybean price rallied over a dollar a bushel. Well, we were worried about inflation. You heard buying soybeans as a hedge against inflation and we had outside markets running higher and so on. This year we don't have that. Things have topped out and calmed down somewhat. So, I don't expect to see soybean prices running dramatically from here. Remember too that soybean prices started from a much -- the rally last year started from a much lower level than this year, than where they're at now. So, I wouldn't expect to see soybean prices continuing on up dramatically from here but I do think there is another 20 to 40 cents up in that market.

Pearson: Okay, so soybeans, again, with the rally we've had would you make sales now, make some sales?

Hjort: Not right now. I would put that off for a little while. Soybean harvest is far enough along and yeah, weather is going to string out the rest of it. That might even improve basis and help to bring the, to cause the futures to continue to move higher. I think though within a couple of months I would see another 20 to 40 cents in this market.

Pearson: Cotton market was under a little bit of pressure again this week. And, again, we're at that point where exports are so key to that market.

Hjort: Well, they are and the market is starting to look ahead to next year too and wondering if acreage could be cut a little bit. This whole discussion about where are we going to find more corn acres, well, corn doesn't really grow that well where most of the cotton is raised but there might be a little slippage of that acreage, maybe that will start to help this price and move it up a little bit over the winter months.

Pearson: Let's talk about livestock, Doug. And this fed cattle market there has been some concern expressed about where fed cattle prices could be headed going down the road. Obviously we heard all the economic reports, they were all good which would tend to spell decent demand. But also there is a concern that there is a lot of red meat out there too.

Hjort: Well, there is and on the cattle on feed report out this afternoon, Friday afternoon, record numbers in the lots yet. We've been dealing with that for several months now. So, there is, there's plenty of beef out there. There's plenty of pork and there is enough poultry. So, the retailers a week ago they just kind of laid out a smorgasbord at the retail counter, let the consumer come in and pick whichever meat they preferred and we might live with that for several more weeks. It's going to keep pressure on all meat prices. In the cattle market the placement numbers and the marketing numbers on this report were just about right on the average so there should not be any knee jerk reaction to this report. It's going to go back to beef demand, beef cut out values and so on. Beef cut out values have been holding fairly well so I would expect to see fat cattle prices stay generally in this area. Feeder cattle price is something else, that has really dropped down hard and it's going to be tough to try to get that market to rally back this fall.

Pearson: Obviously you talked about the higher corn market and sympathy with wheat and that is putting some pressure on feeders. What kind of a break do you think we're going to see or has the break occurred now in this feeder market?

Hjort: Well, a good share of it has but how can you rally it with corn prices staying up here where they're at. And remember you've got corn prices down in the Texas panhandle $3.75 a bushel now. And that really tightens up that ability to try to make any money or any reason to try to feed cattle and yet they've got the lots, they almost have to use them. So, the feeder cattle market is going to struggle. One thing that will help it a little bit here for the light ones, the calves, anything that will go out on winter wheat pasture. With the moisture they have received down there in the central and southern plains the winter wheat pasture should come on. They need more rain to keep that coming, there's no question about that. But at least they've got chances now of getting that wheat up to stand.

Pearson: Alright, so feeder cattle producers, cow/calf people need to plan accordingly. Doug, what about -- let's talk about the hog market. Mammoth kills out there this week and the hog market has hung in there really. I mean, we saw a little pressure on the board this week but it's been fairly flat.

Hjort: Well, yeah, and the pork demand is good, we know that. And the kill is going to stay strong for some time here. So, I'm not expecting to see hog prices run up dramatically. What I think should be done from a marketing standpoint, you see like this week we saw prices move up maybe a dollar and a half, two dollars in some markets. Any time you see that kind of a move top out the weights or sell them down, get the weights light again if you are in that position you can do that. But try to keep these weights as light as possible. This total meat inventory that we're going to be dealing with over the next several months is very large and it's going to be extremely difficult to try to get cattle or hog prices to rally very much during this time. So, from a marketing standpoint try to maximize your profits if they are there or minimize your losses in the case of some cattle maybe but just don't feed them to any heavier weight than you have to.

Pearson: Doug, we've got about fifteen seconds. Right now if you're a livestock producer with the board trying to buy corn acres at all do you start covering some feed needs in a big way?

Hjort: Very little. I expect to see prices step back a little in the next two weeks. I certainly would start to do some coverage then.

Pearson: Excellent, Doug Hjort, thank you so much. 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 don't forget, you can download audio podcasts of our Market Analysis and Market Plus segments free at our Website. Be sure to join us again next week when we'll examine an on-line trading system for value-added agriculture. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news wheat