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Market Analysis: Sep 15, 2006: Doug Hjort, Independent Analyst

posted on September 15, 2006

USDA revised its grain production estimates upward this week running the bulls out of the markets. For the week, nearby wheat futures declined a little more than 10 cents, while the December corn contract lost more than a nickel. Predictions of record soybean yields and supplies pressured soybean prices. For the week, nearby soybeans declined more than 4 cents, but the October meal contract was up .90 per ton. In the fiber market, the December cotton contract moved back into positive territory, posting a gain of 48 cents. In livestock, the October live cattle contract was up $2.18. Nearby feeders lost $1.02. And the August lean hog declined 55 cents. In the financials, Comex gold lost more than $32 per ounce. Nearby crude oil prices declined nearly $3.00. The Euro lost 20 basis points against the dollar. And the CRB Index declined by nearly 17 points to close at 307 even. 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: Sep 15, 2006: Doug Hjort, Independent Analyst Pearson: Here to lend us his insight on these and other market trends, Doug Hjort. Doug, welcome back.

Hjort: Thank you, Mark.

Pearson: Well, we've been watching for harvest to start and it has, in many cases, for soybeans around the Midwest. The wheat harvest, of course, is in the bin. What is your outlook now on this wheat market? We always talk about Chicago soft red wheat, which has, of course, seen some activity here lately in addition, of course, to Kansas City. What is happening right now in the different proteins? What are you seeing and what's ahead?

Hjort: Well, as you say, the Chicago market has come alive let's say and that is because there's been a little more export activity for the soft wheats, the soft red and soft whites. And we've still got a big supply of that class of wheat. And that is where we'll see the most increase in U.S. exports this year. The hard wheats, especially the hard red winter wheat crop, was very, very small so our exportable supplies there are limited this year. We'll still have quite a bit but limited. The report did not cover U.S. production on wheat, the report that was out this week. But they looked at the world supply numbers and in several countries they inched production down a little bit and in southern hemisphere countries there is still quite a bit of concern about their newly developing crops down there and how they might come out. I think the wheat market, world wheat market will continue to tighten. We're already, on the last report out this week, the USDA predicted that ending stocks in the world market would be the smallest in about 25 years and as a percent of utilization the smallest in 40 years. Now, you have to take that with a grain of salt, so to speak, because the overall supply, the bushels of grain out there are somewhat adequate in most areas. But this ties in with the world course grain numbers coming down too. Rice numbers dropped off two years ago and have not improved since. So, our total grain picture is really tightening up and if there's, we'll get along, we'll get through the year without prices going extremely high unless there is more production loss somewhere. Demand is strong for wheat, of course, you know, but everybody wants wheat around the world. But wheat prices have dropped off significantly, we're down within a dime or so of technical support areas. I think that will hold so I would not be selling any cash wheat now. And then I look for a rally going on into the fall months. That rally is what really will determine whether the wheat prices can continue to move higher through the winter or just come up about part way and then turn back down.

Pearson: And really you're talking all three classes?

Hjort: That's right, all three.

Pearson: Let's talk about the corn market. You mentioned the USDA report that came out on the 12th which wasn't a huge surprise and kind of came in right where most of the analysts were thinking it was going to, 11 million bushel corn crop, a lot of corn, three plus billion bushel soybean crop. Let's talk about corn and let's talk about what's ahead for 2006, Doug. I mean, we're heading into the start of harvest in many areas.

Hjort: Right. The production number was up, as you say, but the demand was up as well. So, yes we've got a huge crop, probably the second largest crop coming on in history in the United States. But demand keeps getting pushed up. Even the old crop export estimates, the USDA had to raise those 50 million on their last estimate just to account for what has been sold and is being shipped. And the new year they increased exports 100 million. Well, we've heard the story about ethanol and how much that growth has been going on and feed use, a lot of people are saying that the feed use figure is too low yet on corn. Well, where are we at? Let's go to the ending stocks because we're looking at just over 2 billion bushel ending stock at the end of the 2005-2006 year which just ended at the end of August. In the new year we're looking at 1.22 billion bushel. So, even though we've got this huge corn crop coming on we're going to cut the ending stock under current projections by almost 800 million bushel. And that cut would continue on into the next year too most likely but that's too far out to talk about now. Corn prices are bouncing around here, sold off the day of the report and they've come back to finish the week. I don't think they're going to go much of any place except just chop around during the harvest period. So, I think a plan of attack here would be to cash LDP's, I don't expect very large LDP's this year, or use the loan program, whichever fits you best. But then plan the next sales on into the fall or maybe early winter. I think we'll see a fairly rapid rise in price after the crop is put away because of the very, very strong demand we have going on for the corn right now.

Pearson: So, store it and make sales a little bit later on?

Hjort: That's right.

Pearson: Let's talk about soybeans, Doug. Is it a similar situation there? I mean, we've got a big bean crop, seem to have plenty of beans about everywhere to 2006.

Hjort: Well, we certainly do and record stocks are projected out there. However, I do have to point out they are not as large as they were projected to be at one time. So, everything is kind of relative. The story in the soybean market last year was not a bullish supply/demand balance, it was very bearish and yet prices rallied nicely because of the influence of outside markets, gold, metals, energy and so on going sharply higher. Now those markets are on the down so now we're starting to see some of the impact filtering down into the soybean market, more of the traders are paying more attention to the bearish fundamentals on soybeans now and less to the outside markets. So, yeah, I think soybean prices will drift lower too going into harvest, have a rally after harvest but it's going to depend more on the speculative crowd to bring that price up very much after harvest. So, store it at harvest time but be ready to monitor price action very carefully and you might be selling soybeans at a cheaper price than you'd like to this coming year.

Pearson: Alright. Let's talk quickly about cotton. We're back on the positive side again. It's so export dependent and production looks pretty good in this country too.

Hjort: Well, it does and the report was just termed a little bit friendly this week, got a little pop in price but still we're within shooting distance of major support levels here, long-term support levels. Cotton is still going to have to struggle to try to get any major price rally.

Pearson: Alright, let's talk livestock. And Doug, I've talked to some cattlemen this week who were looking at -- we saw the feeder market back off a little bit -- but the fed cattle market really kind of battling what to do with calves to sell because this thing has been so good for these feeder cattle and these feeders, they must be optimistic about what this fed cattle can do. We're under some pressure on the board this week. Is this kind of a negative sign?

Hjort: The futures prices, actually hogs too, but live cattle and feeder cattle in the last few weeks have just been chopping around up at this, the high end of the chart. Some topping action maybe, down this week, maybe some correction or something really has to be watched carefully for next week because we could see quite a washout in these futures prices. In the cash market, cash prices for fat cattle were down a couple of bucks this week too. Feeder cattle price, calf prices hanging in there pretty good shape. I think if you've got calves you better start looking to get them sold. These are very high prices for calves again, third or fourth year in a row, third year I guess and they're just very, very strong prices. So, I would be looking to sell the calves this fall.

Pearson: Alright, so the cow/calf guys need to be awake here too. This has been a phenomenal string really for the calf market.

Hjort: Oh, it has been, very strong.

Pearson: As we look forward, of course, it's about where all the meats are. And, of course, that includes what is happening in the pork front. And pork producers we were looking for some expansion, didn't see it much this summer but boy in the last couple of weeks those kill numbers have been huge.

Hjort: Just absolutely out of this world this week, highest number since last December some time. Yeah, and it just hammered the market. The pork cut out values were down, futures were down, cash price was down. Well, actually cash price dropped off middle of the week then kind of stabilized. I'm very nervous about this hog market. If the cattle market stays good, in other words, in this general $90 area for fat cattle I think the hog market will stay strong, steady. But I'm recommending to keep the sales made just as soon as you can on those. I have not recommended any hedges yet. I think this coming week though is going to be very important as we look at futures price action on the distant months whether hedging should be done or not. A very strong possibility that there should be something put on out there but I'm not quite ready to do that just yet.

Pearson: Alright, we've got about 30 seconds, Doug, just a quick question. With the bullishness that we're seeing out there in '07 and '08 would you cover some feed needs if you were feeding cattle or feeding hogs?

Hjort: I definitely would but I would do it in the cash market because in corn the futures market every month out has a full carry in it. So, you're not going to be pricing in very much. It would be cheaper to borrow the money and pay the interest than to go to the futures.

Pearson: Some good points as usual. 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 remember you can download audio podcasts of our market analysis and the Market Plus segments free at our Website. Be sure to join us again next week when we'll examine prospects for the next farm bill. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news USDA