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Market Analysis: Sep 01, 2006: Sue Martin, Ag and Investment Services, Inc.

posted on September 1, 2006

Corn prices trended higher this week while the Chicago December wheat contract soared to its highest September 1st price in 10 years. For the week, nearby wheat futures gained 23 cents, while the September corn contract gained a nickel. Bearish fundamentals continued to pressure soybeans. For the week, nearby soybean prices declined 4 cents, and the September meal contract was down nearly $2.00 per ton. In the fiber market, cotton trended lower with the December contract posting a loss of $1.70. In livestock, the October live cattle contract was up $1.75. Nearby feeders gained 30 cents. And the August lean hog contract was up $1.53. In the financials, Comex gold gained $4.60 per ounce. Nearby crude oil prices fell $3.32. The Euro lost 7 basis points against the dollar. And the CRB Index lost nearly 10 points to close at 326.50. Here now to lend us her insight on these and other trends is one of our regular market analysts, Sue Martin. Sue, welcome back.
Market Analysis: Sep 01, 2006: Sue Martin, Ag and Investment Services, Inc. Pearson: Alright, well let's talk first about this wheat market. Talk about some volatility for starting off the brand new crop marketing year. Wheat was there.

Martin: Well, it certainly was and, of course, it pulled along the other grain markets as well but, you know, word that Australia's production has declined by ten million metric tons and then you've got frost fears in northern China's wheat producing areas and talk of cool temps in Argentina that has already been suffering from drought and it kind of set the tone for the market to get a little enthused.

Pearson: This is almost kind of a catch up rally, wasn't it? I mean, there's been these problems developing and decent demand too, we can't ignore that.

Martin: Oh absolutely, you know, we're getting demand much bigger than what we ever dreamed of at the beginning of the year out of India. You know, we're looking at probably eight, nine million metric tons of wheat demand to India and that has been a pleasant surprise. Of course, we've always had Egypt coming back and forth and so that is, you know, there is demand under this market along with shrinking supplies. And we know that coarse grains and wheat stocks are extremely tight with stocks to usage rations in the world, some of the tightest we've had in history.

Pearson: Alright, so what is a farmer to do here? Obviously the crop was tough in some areas of the hard red wheat areas and in the soft wheat areas we're hearing pretty decent reports. But is this a sales opportunity here?

Martin: Well, I think you do take advantage of some of this. You want to save some and trinkle it out through the year because wheat might have another good opportunity to sell in October and again in probably next March. But what I would probably suggest is for the producer, especially if you're in need of some cash and that type of thing, I would say take advantage of this rally you're getting and then turn around and replace anything you sell with, this is basis Chicago wheat, buy back the $4.60 calls in the March timeframe and sell the $4.20 puts.

Pearson: Okay, alright. Now, what about on the corn market? As we mentioned last week, I guess two weeks ago now the Pro Farm report that came out, it's calling for a little bit smaller corn crop than what USDA was estimating. And we've heard reports, scattered reports in the far Western Corn Belt of problems with corn production. What is your take on this? Now, how much of a crop reduction could we see in September? How significant is it going to be? 2006 doesn't seem to be the year that people are that interested in.

Martin: Well, I think the key here is, is that this past week the trade became more of a believer that the yields were not going to be what they were last year, that we might see yields down maybe 20-25% from a year ago nationwide or even in the state of Iowa, let's just talk about that. And so I think that that helped instill the market to bounce. You had fallen already into some very good support shelves around the $2.34 area and basis December futures. But underneath all of this, you know, we keep hearing a lot of talk about an anticipation towards the new contracts for next year and into '08 because of all the ethanol pulled demand. The one thing we have to remember is a lot of ethanol plants are booked for corn needs through March, May of next year, some all the way into December with maybe April not. That is telling you that we can't really count on ethanol to be the wherewithal for next year because we're carrying in a fair amount of old crop, '05, '06 corn not to mention the crop out of '06, '07. So, we're coming in with big supplies but it's a big carry out from '05, '06 into next year that is going to be kind of covering our tail a little bit because when we look at China, this has been phenomenal, you know, China has got drought that they're facing in the southern regions where they produce corn. In the meantime, in the first half of this year their crude oil imports increased by 16%. Industrial usage over there for corn is expected to increase to 20 million metric tons and next year in '07 that number increases again by another 15 million metric tons. You're looking at a country that was anticipated to turn net importer. We're going to be a big benefactor of that business. Now, you've got Europe facing drought and that is another reason for wheat handling the up side of the market so well. But they also are on an increase, you know, Russia and China both are increasing poultry production quite sizably and that takes protein and corn. So, there are some beneficial things for this old crop market. In the U.S. poultry prices have increased 16% in the last three months, soy meal has declined by 12% in the last, well since June. And so the poultry industry is doing well right now, it's very profitable, that means we're going to be seeing some increases here that is going to take more corn. You know, your livestock sector, both cattle and hogs is increasing. We've got some demand out there for the product but we need to see this old crop, the basis level step up to the plate to pull it out of the farmer's hands and get rid of some of this old crop hangover otherwise what I feel we're going to have in the corn market is that as one month expires, even though you're in an uptrend in this market next year into the spring while they try to buy the acres, I fear if we don't get these front months moving better and narrow some of that basis, or that carry spread between the fronts and the deferreds as one expires the next one is going to trinkle down and that will be a disappointment to the farmer.

Pearson: Absolutely, people are talking about '06 and like you say not much in the way of excitement. But with '07 with the ethanol demand, the biofuels excitement and so forth we're going to see big demand there.

Martin: Lots of demand and, of course, you know, once they get those acres bought, March, April probably a good time to sell some new crop corn next year because once they get your acres bought they don't have to worry about you any more until they see a weather scare and then they'll get antsy and we wouldn't want to bank on just a weather scare, you know, to market stuff.

Pearson: Right, let's talk about soybeans. And the soybean story seems to be a little different. There's a ton of beans around, late rains in key parts of the Bean Belt, maybe you're feeling some pause. What's ahead for soybeans?

Martin: Well, you know, I'm the perennial bull.

Pearson: Go ahead and say it.

Martin: No, I mean, I still believe that the $8 picture is there. I'm not going to let go of that because when I look at the technical side of things it keeps popping up. But I thought it was rather interesting, Mark, about two weeks ago the Goldman Sachs Index revised their estimate of fair market value for soybeans by 80 cents a bushel and came out with $7.61 as their fair market value estimate for soybeans. That is telling us something. That is an index fund that has a tendency to be on the buy side but it tells you what other index funds are going to be looking at too. They're waiting for the seasonal time of the year when you get your best buying opportunities which is harvest and they're probably going to be entering the long side of this market. In the meantime, you've got, again, in China acres to oil seeds declined appreciably this year. Soybean acres declined by 5.1%. You had rape seed oil acres decline by 6.9%. You know, you've got South America just Madagraso, the number one producing province in Brazil, talking possibly as much as 30% reduction in acreage and Brazil as a total we think will at least be 10% down.

Pearson: Okay, so with that in mind you're still friendly to soybeans, not in a big hurry to make sales at all here?

Martin: Oh, I would not be making any sales at this time. It would be the worst time of the year to do it. If you haven't done it by now do not do it and keep, if you have to generate cash, if you have to sell something for bin space sell beans but replace them back on the board and re-own them because you're looking at a better year next year. I look for a high next year to market some of those beans probably in the March, April timeframe.

Pearson: Alright, let's talk about livestock, Sue. Fed cattle market done a great week on the board. The market has really had a pretty decent summer going into Labor Day. What is your feeling for the last quarter of 2006 for fed cattle?

Martin: Well, I think the cattle market seems to be on a roll, again, much to a lot of people's surprise. This market has got tremendous demand, we've got good exports not only picking back up into Japan but we're shipping beef to Mexico which is a nice market, we've got cattle coming in from Canada down by 5%, you know, you've got an increasing number of consumer demand and we haven't even had to move the beef, even though our slaughter rate is up, we have not had to lower our wholesale beef prices which tells you the consumer is paying up and they're buying. Because of the lightweight placements going into these feedlots, you know, the demand and the fear of having good, choice cattle, you know, that choice select spread continues to widen and that seems to be a driving mechanism behind this price moving higher. So, we've seen some good prices this past week and we suspect this next week we'll see some better prices again. I think that the packer is going to continue to bid for cattle. October looks to be a good month.

Pearson: Okay, let's talk about the hog market. Obviously we've seen some expansion happening in hogs and, of course, like you mentioned we have beef going into Japan which is a good sign but that has been a huge market for the pork producer.

Martin: It certainly has. Pork has been, it's almost coming back into the same mode as cattle. Of course, beef is probably helping the cause because of beef gets very high then pork looks cheap so the consumer buys it too. And our exports, again, have been very, very good. Demand overseas for poultry and pork is growing very well in Russia and parts of Europe. In fact, the feed costs over there are escalating. And then you look in China and here again demand is just growing by leaps and bounds. I suspect this is a picture that we're going to probably see through a lot of '07 too while we have maybe numbers and we'll have some valleys in the meat markets. I sense that we're going to have some pretty good export demand worldwide over the course of this next year. So, I like the hog market. I still think the Dec. hogs are going to make it over 65 and, of course, the front month has been pretty adamant. We should see some demand picking back up again.

Pearson: Alright, thank you Sue Martin, so much. That will wrap up this edition of Market to Market. But if you'd like more information from our analyst 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, we're not going to go any cheaper. It's at our Website. Be sure to join us again next week when we'll examine efforts to replace fossil fuel with switchgrass at a coal fired power plant. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news wheat