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Market Analysis: Sep 08, 2006: John Roach, Senior Market Analyst

posted on September 8, 2006

Last week's dramatic rally in wheat cooled off this week while corn trended slightly higher. For the week, nearby wheat futures declined a little more than a penny, while the September corn contract gained almost two cents. Private estimates calling for increased yields pressured soybean prices. For the week, nearby soybeans declined one-and-a-half cents, while the September meal contract was up 20 cents per ton. In the fiber market, the December cotton contract had another losing week, posting a loss of $1.25. In livestock, the October live cattle contract was up $1.05. Nearby feeders gained $2.02. And the August lean hog was unchanged. In the financials, Comex gold lost nearly $17 per ounce. Nearby crude oil prices gained $2.94. The Euro lost 169 basis points against the dollar. And the CRB Index nearly 3 points to close at 323.75. Here now to lend us his insight on these and other trends is our senior market market analyst, John Roach. John, welcome back.
Market Analysis: Sep 08, 2006: John Roach, Senior Market Analyst Pearson: Here now to lend us his insight on these and other trends, our senior market analyst, John Roach. John, welcome back.

Roach: Thanks, Mark.

Pearson: Alright, let's talk a little bit about where things are headed. First of all, last week we did have a wheat market and I know you were thinking that this wheat rally should be sold.

Roach: Still feel that way. Chicago wheat is still giving us a sell signal, we've been getting it now for six days. That is normally about the length of one of these sell signals. So, we're very much wanting to sell a portion of the wheat that you have from harvest left over and a portion of the new crop wheat that you're going to be planting this next year.

Pearson: Okay, so the outlook for wheat in your mind is probably fairly dark?

Roach: Well, I don't want to say dark really. I think the outlook for wheat actually is positive. I mean, we have tightening supplies because of problems in Europe where there are harvest delays because of water, water delays. We've had problems in Argentina and Australia although maybe they have finally gotten some relief from their dry conditions. So, I don't want to call it dark but I do think that we are printing a peak on the market caused by those weather concerns and it makes very good sense to be selling peaks and averaging this sale with the next peak that comes along.

Pearson: Okay, so in your mind we're definitely at a peak. Now, you say Chicago wheat. Does that hold for Kansas City as well?

Roach: Kansas City, Minneapolis wheat also came up and gave us a sell signal this week but they only lasted for one day I believe in Minneapolis and two days in Kansas City. So, it was a very short up rally. And the interesting thing is those are the two crops that we were most worried about this year because of the dry conditions in the southwest and the dry conditions and the heat in the north. And so the wheat that is in greatest supply, if you will, the soft wheat is the one that is currently rallying and it's rallying on the heels of the European problems. One of the things here that we also need to understand about wheat is that we're getting improved moisture situations in all these areas and the increase in wheat acreage for this upcoming year is expected to be substantial.

Pearson: Alright, we'll get a take on that here fairly soon. Let's talk about the corn market which, of course, 2006 people are kind of yawning about corn and soybeans, everybody is looking for the fireworks of '07 and perhaps '08. But let's talk about what is coming up and that is this 2006 harvest, some places underway and obviously in the Corn Belt it's going to be watched very closely. Have we seen the harvest -- are we going to see a harvest low early, John, do you think? Or do you think this corn market maybe we've seen it?

Roach: Well, some people are thinking we have seen the harvest low, that maybe the biggest movement occurred of old crop inventory and we'll find places to put the new crop. I'm not convinced yet. We've just begun harvest and in those areas that we're harvesting the poor crop, not the better crops, those yields are a little disappointing to some and so that is giving people some cause to be maybe a little more positive. But I think the real situation is that nearby prices are the cheapest prices in the marketplace. If you were to buy corn today it is substantially cheaper than if you're waiting to buy it on the current market structure later on in this year, early part of next year. So, anybody who is a corn user has been really bunching up their purchasing year because there is an economic reason for it. On the other side farmers don't know for sure what they have in the field and as a consequence they are afraid to be making sales because they don't know whether they have enough storage or maybe they don't and there is no LDP so if you go out and sell at today's price that's it. And it's quite frankly not enough money. If you remember last year we had big LDP's and then an opportunity for some advance in the market and that all worked on big yields. But where we have uncertain yields, no LDP, I think farmers are just in a wait and see mode and they're not really going to have much to do as far as selling is concerned until they see what the monitor on the combine says. And then once they see that number then we'll figure out what we have to put away and we may see people start to step up their sales. So, I think we still have another low to make in the market, it might be lower than the last one that we made or maybe it won't be. It will just depend on what the numbers really are as we get into the harvest.

Pearson: Alright, you've been talking about storage and obviously '07 and '08 do seem to be where we're going to see certainly the ethanol demand is going to really start to build.

Roach: Well, the ethanol demand this past year just every time we get another number from the government it's a bigger consumption number throughout all of 2006. And as we look forward into 2007 we think that the demand is going to just continue to increase as these plants come on stream. The numbers get very tight as we go beyond 2007. Depending on what the numbers are on Tuesday from the USDA we may be okay for the '06, '07 year. It will certainly tighten supplies but we may still have adequate numbers of bushels left in the bin. The key is going to be how many bushels, how many acres will we plant, increased acres of corn, for the 2007 crop and what kind of yields will we have. We think that the corn market has an extremely positive outlook to it. We're advising our customers to find as much storage as you can, hold onto all this corn. We think it will pay the cost of commercial storage.

Pearson: Alright, let's talk about soybeans. You know, a little bit different scenario there and certainly the crop estimates that came out this last week, the Informa number, the FC Stone number, all the ones we sited earlier, talking about bigger soybean yields.

Roach: Yeah, the amazing thing about soybeans is that supply just keeps getting bigger and bigger and bigger even though demand has been quite robust and surprisingly good here in the last several months. The size of this crop in the field and the amount of inventory we already have in the bin is going to give us the largest supply starting out this crop year we've ever seen and promises to give us a very big surplus as we end the crop year one year from now. So, the market is going to continue to move in a direction where corn is more profitable than soybeans, to continue to encourage producers to plant more corn, to plant fewer soybeans. That means the bean market really has very little upside opportunity unless the corn market will rise enough so that that profitability continues to favor corn planting.

Pearson: Okay, let's talk about soybeans -- you mentioned next year, 2007-2008, again, soy biodiesel is another big driver of this market. You mentioned the export business. What do you hear in Brazil, in South America in general, John? Are they going to be back in the soybean business in a big way in 2006-2007?

Roach: It's not expected to be a big year for them. I think the current estimates are they'll be down 8% in Brazil. We have some people saying that they'll be down further, some people saying we won't be down quite that far. The government finally did come through with renewing their financing package so there is a little better opportunity for them to plant but when you look at the price levels that are available to the Brazilian farmer and how that compares to their cost they're not going to make any money on beans this year. So, their desire to plant soybeans is going to be hampered by this market structure.

Pearson: Let's talk about the cotton market, under some pressure this week and really has been under some pressure here for a while. I know this is so dominated by exports and China and so forth. What is your take on cotton as we go forward?

Roach: Well, the surprising thing that has happened with the cotton market is that the demand has just not materialized that people anticipated. Last year was a robust demand year and people extrapolated that on out into this upcoming year but it just hasn't materialized yet and most of the people, the analysts think that we're going to have to pull the export forecast down, they're talking 100 to maybe 200 million bales down on this next report that comes out on Tuesday. Now, there is some talk that maybe we'll pull the yields down as well. There is talk about maybe taking a bale and a half off per acre. But the -- where we are right now, until we see that demand start to come back the cotton market is going to continue to slide down until we can stimulate the demand.

Pearson: Let's talk about livestock, John. It's been a surprisingly good year for cattle and for hogs. But let's talk about this fed cattle market first. We're holding some pretty decent prices, up again this week on the board. It seems to be pretty good demand out there. We've got some very dry areas and we hear stories of cows being sold but prices pretty strong.

Roach: Prices are amazingly strong. And what is interesting is we actually set two new records this week. One, we killed the largest number of hogs that we ever have in one day, 416,000 head federally inspected slaughter. And we also had the heaviest average carcass weight on steer. So, there's plenty of meat that is being produced and yet the demand seems to be clearing that meat out at higher price levels than I think most anybody expected to see back a few months ago. The cattle market has a positive look as we move out into the fourth quarter and on into the first quarter of next year. The only thing that bothers me a little bit here is that we just brought back in the Korean demand, we brought the Japanese demand and so we've had some psychological impact on the market. The futures moved up sharply this week. I think we may well be at some price level in here that we might not be able to sustain. I think it's a good time to be looking at putting on some hedges and getting some puts in to cover profitability in the cattle business. But right at the moment I can't find much at fault with this cattle business. We made new contract highs several days this week. So, the cattle business is on very solid footing here.

Pearson: Alright, and certainly underpinned are these strong feeder cattle prices.

Roach: Feeder cattle prices are amazingly strong. Again, if you're in the cow/calf business this is a time to be looking at puts to get some protection underneath these markets.

Pearson: Alright, some good points. John, let's talk about hogs. You mentioned it, largest single day kill in history this week. The hog market has hung in pretty good.

Roach: And it is record open interest for increasing open interest I think 14 days in a row. I mean, it's just been a very powerful kind of a market. But be careful here. the period of time that prices normally go on higher is right ahead of us. Normally this next 30 day period of time prices move up. But then the government forecast in August their third quarter prices for hogs compared to the fourth quarter, the fourth quarter they are expecting the prices to drop. Their average expectation is a five dollar per hundred weight drop from the third quarter into the fourth quarter. So, I think pork producers need to be a little bit careful here. We're also going to maybe lose some business, some export business, some pork business to the beef industry as the beef industry picks up some of that demand, that Asian demand again. So, this is a time to look for a peak in the market, to be securing some hedges and expecting to see some slippage into this next fourth quarter. But meanwhile this month is a strong month. The hog and pigs report is about three weeks away as well.

Pearson: Alright, keep an eye on that. John Roach, thank you so much, senior market analyst. If you'd like more information from John on just 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 for free. It's at our Website. Be sure to join us again next week when we'll examine controversial efforts to regulate confined animal feeding operations. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news wheat