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Market Analysis: Aug 18, 2006: Virgil Robinson, Pioneer Hi-Bred International

posted on August 18, 2006

Widespread thunderstorms over the past two weeks brought much-needed moisture to much of the grain belt and dampened prices. For the week, nearby wheat futures fell by nearly 10 cents. The September corn also declined, losing a nickel. Significant rainfall in key growing regions coupled with bearish fundamentals depressed soybean prices. For the week, nearby soybean prices declined more than 8 cents, though the September meal contract was up 20 cents per ton. In the fiber market, the December cotton contract had another losing week, declining $1.22. In livestock, the August live cattle contract was up $2.35. Nearby feeders gained 20 cents. And the August lean hog was up $1.72. In the financials, Comex gold lost nearly $32 per ounce. Nearby crude oil prices declined $3.62. The Euro lost 65 basis points against the dollar. And the CRB Index lost more than 18 points to close at 332.25. Here now to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson. Virgil, welcome back.
Market Analysis: Aug 18, 2006: Virgil Robinson, Pioneer Hi-Bred International Pearson: Here to lend us his insights our senior market analyst Virgil Robinson. Virgil, welcome back.

Robinson: Thank you, Mark, nice to see you.

Pearson: Good to see you. It's been a while. Let's talk about this wheat market, Virgil. From what we're hearing, of course, we had the problems with the hard red winter wheat down in the panhandle and through parts of Kansas and Oklahoma. The dry weather certainly has been a factor. Spring wheat has been coming on now. We're seeing the board, the Chicago wheat, the soft red wheat that we track on the program been under a little bit of pressure lately.

Robinson: It has, Mark, and again the subclasses have different supply and demand scenarios to them. But I think it's important for us to talk briefly about the world fundamentals. Wheat production is projected to decline year over year about 3%, Mark, and ending stocks decline about 12% year over year. So, within that context, Mark, I'd like to mention that the U.S. wheat stocks to use ratio, all wheat in this instance, projected at about 20% which is the smallest it's been in the last ten years. And I think that underscores the concern about supply, hard varieties as well as the soft red. And internationally or globally the wheat stocks to use ratio, which I use to kind of gauge supply, projected at about 17.5%, the smallest it's been in 30 years. I think wheat futures, and I'll address wheat futures, Mark, the Kansas City contract, the Minneapolis contract, December in each instance as they recover and I think they will over the course of the next couple of months back towards $4.90 I am inclined for those who have done nothing to sell inventory, sell cash wheat based on that kind of a futures price. Now, whether it is a short hedge because the basis is poor or whether it's a cash contract because the basis is acceptable is something they have to calculate. Soft red winter wheat, again, a different subclass, supplies are larger, the market has struggled at or near $4. I think the December contract will make one effort between now and the end of the calendar year back towards that mark at which point I would sell inventory either in the form of a short hedge, if there is carry capture that, if the basis is acceptable I would go ahead and price the cash inventory.

Pearson: Alright, but we could be in that zone for that to happen over the course of the next quarter?

Robinson: Mark, I've of the opinion the wheat futures markets have been sold off based on lack of new business or slowing export business and domestic milling pricing to some extent as well. And it has created the wave of liquidation, and we'll talk about funds here briefly, of a significant nature. And now I think the market is ripe for some type of recovery. It will be driven I think by a recovery in export sales the next three months or so as well as some speculative enthusiasm. So, I think we're in position for a recovery at which point cash sales will be appropriate in my mind.

Pearson: Alright, let's move over to the corn market, Virgil. We talked on the show tonight about biofuels and certainly the ethanol expansion that is underway has certainly the deferred contracts looking pretty enticing at this point. But we still have to get through 2006 and right now there's still plenty of corn out there. USDA's number close to 11 billion bushels would tend to make us fairly comfortable in terms of supplies over the course of the next year would it not?

Robinson: Yeah, I think you're correct in all of your statements there, Mark, and I would agree with you. A large crop, you know, 11 billion bushel crop is likely to grow a little larger between now and final. And as a result of that with the combination of last year's carry over of a couple of billion the near term supply argument in corn is difficult to make a bullish case of. Now, you also referred to the projections of disappearance and demand led by ethanol and there are other developing stories there too also underpinned values, Mark. It does appear that the Chinese now have whittled course grain and corn inventories down in the confines of their country to a point where it is likely they will be importing corn and/or course grains in the near future. I think that will also help to underpin values. Cattle numbers, as mentioned earlier, Mark, are higher. I would not be surprised to see that trend and pattern continue which is bullish, of course, for corn and feed grains as well as feeder cattle. I think hog numbers are slowly recovering and the swine herd is growing and the importation of corn into Asian countries in addition to China is also growing. So, we have two or three different stories developing here underpinning values and bringing to our attention the need to expand acres, and that was the argument of a couple of weeks ago certainly, that will evolve over the course of the next several months. And it is, in my opinion as well, over the next sixteen to twenty-four months a bullish story..

Pearson: Alright, but again, we may not see that unfold until we get into 2007.

Robinson: Exactly right, plenty of supply in the near term, this transition will be kind of choppy and sloppy, Mark, there will probably be some storage issues this fall because of the large corn crop and ever growing soybean crop. So, we are in kind of a transition and I'm not suggesting next week we have to be higher, that is not likely the case but as you look forward several months down the road there are reasons to be optimistic and bullish.

Pearson: Alright, can we be bullish on soybeans yet?

Robinson: Well, there too I think there are a couple of stories taking shape. One, the immediate future doesn't look to be too bright, Mark. USDA suggested in their most recent production report a yield, a sub-40 bushel yield, that is probably too small, Mark. Near term we have plenty of soybeans. The two stories that will develop over the course of the next several months are the Brazilian production economics which will likely reduce sewn hectares down there, their transportation issues, their pathogen issues, Mark, their opportunity to acquire credit and the value of the Real remained inhibiting factors. So, should they encounter problems with the smaller sewn hectares and we here in the United States borrow some acres or steal some acres to grow more corn the story becomes infinitely more compelling. The biodiesel part is the second part of that story which will evolve over the next couple of years.

Pearson: Let's talk a little bit about the cotton market. It's been under a lot of pressure lately and seems like China is a big part of that market.

Robinson: They're kind of a big part of everything these days, Mark. Cotton production is projected year over year to be about unchanged but the news here is that consumption, Mark, is slated to grow about 10% year over year. I think U.S. cotton futures, I'll address futures as our barometer here, as they approach the $60 mark and I am talking about now March, May and beyond I think they offer attractive heding opportunities, Mark, only because the prevailing nearby cash basis is very poor. So, those who have the opportunity to store and carry and capture carry I think have an opportunity to improve cotton prices up towards $60 a bale.

Pearson: Okay. Let's shift gears, let's talk about livestock. Cattle market has behaved extremely well here the last week or so, cash cattle and the futures. What is ahead now? We're heading into Labor Day, it's always kind of a time when the market seems to get a little bit spooky in fed cattle.

Robinson: Yeah, you mentioned in the earlier report, the cattle on feed report so we know the data there, no major surprises. I think the things of importance to me, Mark, beef production will grow about 3% this year, year over year. Good news is exports will also grow about 3-5%. Per capita consumption here in the U.S. is also projected to grow. Ending stocks will not year over year. So, I think cash cattle, the balance of the third, all of the fourth quarter will average something near $85. The first and second quarter of 2007, Mark, 85, perhaps a little something less. So, those futures contracts Oct., Dec. and Feb. respectively in the 92-94 cent area offer at least in my mind good hedging opportunities. I think those are attainable in the next couple of weeks.

Pearson: Okay, let's talk quickly about feeder cattle. You mentioned the demand for ethanol and, of course, a lot of DDG's out there that need to be fed. And this feeder market has just been extremely strong.

Robinson: Yeah, Mark, it has been and it's been unlike I've ever witnessed in my career. And as mentioned earlier I think the demand for feeders, given the supply of corn we're looking at this fall and the supply of other feed ingredients including DDG's, will continue to underpin feeder values. Live cattle prices, as I mentioned earlier, I think can maintain this mid-$80 mark with occassionally perhaps perking a little above that. That will sustain good feeder cattle demand and I don't sense any significant decline in feeder cattle for the foreseeable future, Mark. It's just a very strong, well-supported, fundamentally good market.

Pearson: And, like you say, unique in our careers at this stage of the game to watch this calf market the way it is. A lot of smiling cow/calf people out there.

Robinson: I've not seen anything like it in my career, Mark.

Pearson: Let's talk about the hog market. You talked earlier about the swine herd has been growing and, of course, when you think of that happening you start thinking about prices being under pressure. We've been able to use a lot of that pork overseas, a lot of export market has gone on.

Robinson: Exactly and for the year, again, pork production is projected to grow I think two or three percent. But, again, exports are also projected to grow for I think the 9th or 10th year consecutively 3-5%, Mark, and per capita, U.S. per capita consumption projected to grow one pound year over year. We're not growing ending stocks or we're not growing burdensome inventories. It is being consumed and the trend is firmly entrenched. I think cash hog values, the balance of this year, will remain in the lower to mid-40's and the first quarter, second quarter of 2007 probably the mid to lower 40's, Mark. So, a pretty solid market for the foreseeable future at least in my opinion.

Pearson: Alright, Virgil, let's flip things over then. For the livestock person out there who is concerned about ethanol perhaps driving up local prices for corn, soy biodiesel maybe doing the same thing for soybeans, do you want to cover any feed needs at this ponit for those people?

Robinson: You know, it's going to be a really difficult situation this fall in some areas, Mark, where there is adequate storage for the corn and what appears now to be a larger soybean crop than we assumed just a few days ago. Where there is adequate storage for this year's bounty, this year's harvest I think the farmer will capitalize and capture the carries that are currently being offered in both cash corn and cash soybeans and it's going to be difficult to source grain in quantity through the fall of this year ironically. Now, in those areas where storage is an issue and it will, in fact, be short I think there will be some grain for sale and in those areas, Mark, if I were feeding livestock, for example, cattle, hogs or poultry I would be inclined this fall to lay those supplies in as best I could and for as long as I could under those circumstances. So, yes, to answer your question this fall I would be laying in feed supplies.

Pearson: Very good. Virgil Robinson, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Virgil on just where these markets might be headed visit the Market Plus page at our Market to Market Web site and don't forget, you can download audio podcasts of our market analysis and Market Plus segments free at our Web site. Be sure to join us again next week when we'll examine how consumer interests in whole grains has more producers growing white wheat. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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