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Market Analysis: Aug 25, 2006: Erin Golly and Darin Newsom

posted on August 25, 2006

Aggressive fund buying this week combined with tightening supplies pushed grain prices higher. For the week, nearby wheat futures gained 14 cents, while the September corn contract gained more than a nickel. Despite surveys noting a decline in pod counts, burdensome supplies continue to pressure soybean prices. For the week, nearby soybean prices declined 4 cents, though the September meal contract was up 20 cents per ton. In the fiber market, the December cotton contract pulled out of its downward spiral, posting a gain of more than a dollar. In livestock, the August live cattle contract was up $1.48. Nearby feeders gained $1.20. And the August lean hog was up $1.30. In the financials, Comex gold lost nearly $10 per ounce. Nearby crude oil prices gained $1.37. The Euro lost 70 basis points against the dollar. And the CRB Index gained nearly 4 points to close at 336-even. Here now to lend us their insight on these and other trends are two of our regular market analysts, Erin Golly and Darin Newsom. Folks, welcome back.
Market Analysis: Aug 25, 2006: Erin Golly and Darin Newsom Pearson: Here now to lend us their insight on these and other trends two of our regular market analysts, Erin Golly and Darin Newsom. Folks, welcome back.

Golly: Thank you, Mark.

Newsom: Thanks, Mark.

Pearson: Good to see you. Alright, well Darin let's start with you and let's start with the grain markets. And we just had a great story about white wheat. We tend to follow the red wheat and, of course, the hard red wheat and the soft red wheat, soft red wheat out of Chicago. And we like to follow that spring wheat market from time to time. Most of the action has been in the other markets in Kansas City and Minneapolis hasn't it?

Newsom: It really has. The Kansas City markets have been very active here over the last few weeks. We moved through some key support levels and the biggest thing like we were just talking about with the aggressive fund buying, we saw that earlier in the marketing year. That is beginning to dry up a little bit and the price has basically reached too high of levels to sustain at this point so we've seen these traders actually getting out of the hard red winter Kansas City wheat market. Now, what this has done is it's been pushing the prices down now and we've stabilized over the last couple of, I'd say over the last week or so. But it still isn't drawing the huge amount of either demand, export demand or speculation demand into the market right now. They are kind of staying on the sidelines waiting to see if this market doesn't have another leg down in it.

Pearson: Okay, so these funds, how have they really done this year?

Newsom: I'm going to say overall they've probably done fairly well. You know, it's interesting that over time we've seen some markets all of a sudden catch them off, I hate to say catch them off guard, but all of a sudden make a quick turn. We've seen that in the unleaded gas to a certain degree, the corn market, we'll get into that later. The Kansas City wheat and the wheat market as a whole has not really been able to sustain its rally here over the last month, six weeks and now it's in the process of searching out new demand.

Pearson: Okay, in terms of sales on Chicago, Kansas City, Minneapolis, what is your take?

Newsom: If we look at the Kansas City hard red winter market the basis has been holding fairly well. We've been holding in this mid-30, 35, 36 cents under the front month contract. Now, the problem with the market is as we come down closer to $4.41 in the front month, right now it's September contract, if we break through that level we could hit considerably lower, another 25-50 cents lower in a hurry. So, with basis holding fairly well and still holding above some key support we might want to look at getting some sales. If we haven't made them all up at this point start making some cash sales for the old crop wheat and just getting rid of it because the market does have a little bit of risk built into it at these levels.

Pearson: Alright, let's talk about the corn market. There is a big crop tour going on, the John Deere and Pro Farmer crop tour is going on in the eastern Corn Belt, western Corn Belt, they're releasing their numbers. What do you see as we go forward now on corn and what this corn futures market is going into? We're heading into harvest here, it's around the corner. Are we going to see a lot of cash pressure too?

Newsom: We could in the long run. Right now we have a stalemate going on in the corn market. We've got long-term bullish non-commercial traders. They are still holding in that long position of somewhere in the 120,000, 130,000 contracts. They are still quite bullish. Now, a lot of these contracts are out in the 2007, 2008. So, again, we're looking long-term. Now, off setting that we're heading into a very bearish time of the year. You know, we get into September we hit lower through harvest during the mid-October, somewhere in there. And so we've got that going against us. And if we look at the underlying fundamentals of this market, if we look at the way the contracts relate to each other price wise in the spreads and we see that it's not really being driven right now by a tight supply/demand situation looking a little bit longer term. Now, short-term we have seen some good demand, we have seen as the piece before mentioned, we've seen some very good week to week export, weekly export business. This has really helped firm the basis. We've gone from a complete collapse early in September, you know, post-Katrina to where basis right now, even with 2 record harvests under our belt the last two years we've moved to a point where average basis is about what it normally is at this time of year heading into the next marketing season. So, the cash market is actually looking pretty good, futures market is holding its own. It's not, you know, it has found a comfort zone. This market may decide to consolidate in this area for a while and if it does the cash, the basis could continue to strengthen.

Pearson: Alright, so in terms of making sales obviously for 2006, like you say, the tables all are turned when we get to '07 and '08.

Newsom: Right.

Pearson: But for '06 what should farmers be doing?

Newsom: Well, they should probably have some sales on the books already because we had a rally up into the upper $2.70, $2.80 range, almost approaching $2.90. We've pulled back with the December futures now in the low $2.40's, upper $2.30's with support down at the new contract low that we set at $2.33 1/2. It looks like the market wants to sit here. If we do break seasonally the down side objective or the down side possibilities are $2.20, $2.25 possibly so another 10-15 cents lower than the contract low. More than likely we're not going to be able to put much more pressure on it than that. I think the underlying investment community are going to continue to provide support for this market.

Pearson: What about soybeans?

Newsom: Complete opposite, and this Friday what we saw was a break through some long held support. We've been holding above $5.45 1/2 in the front month futures basically going back to last harvest. We would try to push through and then all of a sudden we would find a little rally or we'd find some demand somewhere and we would be able to rally this market, not much but just enough to get it back off these low levels. This Friday that wasn't the case, we tested it, we broke through it and it generated its own type, it generated renewed non-commercial investment selling interests. So, we've got a market here with the underlying fundamentals remaining bearish, again, going back to the spreads, they remain wide, a lot of carry in the nearby spreads. We've got non-commercial traders who are holding a net short and if there is one grain where they are not actively buying right now it is soybeans. They're not concerned about, you know, any type of supply/demand situation and they just don't view it as a good investment. So, this market unfortunately looks like it has got some more room to work down. If we look out to the new crop November contract hanging around the $5.50 level or so, $5.50, $5.60 it looks like it may well be on its way to targeting $5 by the time we set the harvest lows in mid-October.

Pearson: Okay, so as we look at that cash soybean market what we're going to see typical harvest lows, very seasonal pattern?

Newsom: Yeah, we anticipate that. And with the basis in beans, unlike corn where we have seen it strengthen basically over the course of the marketing year just as the soybean market, the futures market itself has gone sideways, basis market hasn't moved that much. There's been a little improvement through the course of the marketing year but not a lot, again indicating not an overly strong demand situation at this point.

Pearson: Okay, let's talk about cotton where we finally did see some demand come into that market after several weeks of lower prices.

Newsom: Yeah, the cotton market is interesting. It's sitting between, you know, support and resistance, again kind of consolidating between 50 and 56. This week we began to press towards the upper side of that. Now, there are some things on the periphery, you know, we've got some weather issues coming up, we've got some things that people are going to start taking a look at. Now, non-commercial traders continue to hold in that short position, they're not overly bullish but, again, it won't take much weather wise, something major happens to make that change.

Pearson: Alright, let's move over to livestock side, Erin Golly. Erin, fed cattle market a good week this week on the board. I'm hearing trouble out west with cow/calf people and I'm hearing about sales out in particularly parts of the west. Walk us through this fed cattle market. What do you see ahead? What do you see ahead in terms of supply?

Golly: This volatility is making it so hard to keep a risk management strategy in place. People are having a very hard time doing it. But I think that the supplies are going to fall into the fall, actually they're going to go down into the fall due to the slightly lower placements that we saw in the second quarter and demand is going to pick up once we get into the cooler weather also. The cow slaughter has actually gone up a bunch aggressively and I don't know if that means exactly if the expansion is over or not but if that is it's a good thing for it long-term anyway. A few of the Japanese large companies are coming in saying they're going to start buying American beef in 2007 so that is positive. We might have to just wait another year to see the full implementation of the re-opening up the export markets to Japan. But we've got some great hedging opportunities for producers out here in the Oct., Dec. and Feb. futures right around the 91 to 92 area. It looks very good right now.

Pearson: Alright, so you'd use those to maybe lock in some prices?

Golly: Oh yes, definitely.

Pearson: Alright, now the fed cattle market, you know, typically as we go into Labor Day, post Labor Day is not very good but you think we'll be kind of contra seasonal this year?

Golly: I do think so and I feel good about the demand in the feeder cattle market. We're still continuing to see good demand, corn prices have come down a little bit. The cattle region in the Midwest got some good moisture that was much needed and that is positive for the feeder cattle market, they're going to keep those younger cattle back, put them on grass and then this fall put them on a wheat pasture. So, it's positive for the feeder cattle market to get moisture into the Midwest. I feel good about it, there is good support at the index around the $110 to $112 area, feel very good about that.

Pearson: Decent prices.

Golly: That's right and you've got to keep your feed input costs under wraps so keep control of those corn costs.

Pearson: Alright, do you want to get to control some of those, maybe cover some of those feed needs?

Golly: Yes, as we get into the harvest yes we do.

Pearson: Alright, let's talk about the hog market, one I know you're extremely close to. It's turned out to be a pretty decent year in the hog market. What is ahead now?

Golly: Well, this last rally caught a lot of people by surprise and we at _____ livestock saw an influx of light hogs being thrown at the market and what basically happened is the high heat in late July and early August really kept a weight on, or a top on the weight gains in these hogs. So, it really kept a lot of the hogs from gaining weight, producers had to move those hogs out of the buildings because there was another round of hogs coming right back in them. So, saw a big influx but right now we're moving into, or getting done with the Labor Day retail futures, wrapping it up with the grocery stores and the cash market is going to move lower into the Labor Day holiday. We've got to keep a close watch on the October futures. They're trading at an eight to ten dollar discount to the cash right now. And if the October futures track lower with the projected drop in the cash market and product market we could, and if that discount stays really wide, we could sure see the cash stabilize and those October futures rally to eliminate that larger discount. So, you've got to be careful with the October hedges.

Pearson: Alright, you mentioned this rally, it was a surprise and it's interesting. So, disease issues, heat issues, all those things played into this hog market. We're also still moving a lot of hogs overseas aren't we?

Golly: Yes, we are. We are having really great exports and that is another thing that we could see some demand come back into this market through the fall because the Japanese market isn't fully resumed with the beef trade yet so that is what a lot of our market is over there. So, hopefully we'll continue to see some demand from that.

Pearson: Alright, hedge price about where?

Golly: I think we should start buying at the money puts right now, keep the top side open in case demand does come in like the fall of 2004. But I would start putting in your hedges now through April.

Pearson: Sounds really good. So, producers out there look alive, opportunities are out there, keep under control. Erin, Darin, thank you so much. That is going to wrap up this edition of Market to Market. Now, if you'd like more information from our analysts on where these markets may be headed visit the Market Plus page at our Market to Market Website. Now, remember, you can download audio podcasts of our market analysis and Market Plus segments free at our Website. So, be sure to join us again next week when we'll learn how construction of a biodiesel plant is fueling one rural town's economy. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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