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Market Analysis: Aug 04, 2006: Grains Analyst Doug Jackson and Meat Analyst Walt Hackney

posted on August 4, 2006

How the crop forecasts affected trading this week is something we'll discuss with our market analysts, but first let's look at the numbers.

For the week, nearby wheat futures gained 7 1/2 cents. The September corn contract was up 7 3/4.

August soybeans gained a whopping one cent and the August meal contract declined 60 cents.

In the fiber market, the December contract jumped 74 cents.

In livestock, the August live cattle contract was up 1.32. Nearby feeders gained 97 cents. And the August lean hog contract lost $2.75.

In the financials, Comex gold lost $47.80 per ounce, nearby crude oil prices went up $1.52, the Euro gained 122 basis points against the dollar, and the CRB Index gained 5 points to close at 350.50.

Here now to lend us their insights on these and other trends are two of our regular market analysts Walt Hackney and Doug Jackson. Gentlemen, welcome back.

Market Analysis: Aug 04, 2006: Grains Analyst Doug Jackson and Meat Analyst Walt Hackney Pearson: Good to see you, Walt, Doug. Well, Doug, let's talk first, if we could, about the wheat market. And, of course, I was just up in wheat country. I was up around north of Marshall, Minnesota. And spring wheat yields were good, and the protein was a little bit disappointing. But that market has been on fire lately hasn't it?

Jackson: Mark, we are seeing some better-than-expected harvest results that keeps the train guessing here, regarding the final size of this spring wheat crop. But with the hot, dry weather, the crop ratings that have collapsed, we had a private estimate on Friday that cut another 44 million off of the government's July projection. we have a situation, mark, where the total U.S. Wheat carryout this year will probably be the smallest since 1996. But then that masks a more fundamental and more dramatic situation where we're going to have the tightest hard red winter wheat, the Kansas City wheat, and the hardest hard red spring, the Minneapolis wheat, subclass carryouts in recorded history. We're going to have to cut exports in those two subclasses by the largest amount year to year ever to just end up with a minimally acceptable smallest ever ending inventory of those two types of wheat, and that's already, of course, largely known. That's why premiums are where they are at intermarket spreads are where they're at. But we're going to see a very choppy wheat market all winter long. Longer term we may work a little bit lower despite everything we've just said. The market is talking about four million more acres next year if the weather cooperates. That means a lot lower prices a year from today. But how we're going to make that transition from where we are today to there and ration this demand and deal with these record tight subclass situations all year long, I could see us in a very volatile 50-cent range on wheat all winter long.

Pearson: All right. Would you say we're at the low end of that range right now or the high end?

Jackson: Well, really I think we're kind of in the middle. We may see things 25 cents higher and 25 cents lower and perhaps influenced too by these row crops.

Pearson: Okay. All right. Let's talk about what's been happening in the corn market, where there's quite a spread of interest for all the interest in biofuels and all the new money that's come into the commodities market and all the excitement that's out there. As you look ahead from this corn market and as we do look ahead, looking out to December next year, we see $3 corn. Would you be taking advantage of any of that or not?

Jackson: Well, Mark, this week we saw our FC Stone estimate midweek and the other private estimate late in the week. They were virtually identical, about 151 bushels per acre, about 3 bushels better than last year's drought reduced crop. Mark, you know, we may get a surprise next Friday on the august 11 report, but basically this would be the year of transitioning from large supplies to a billion bushels less inventory at the end of next year. And then, Mark, as we plunge head long down this road to biofuels, we start to really feel the impact of the '07-'08 and beyond balance tables, where demand for these biofuels is outrunning our natural ability to increase production with increasing yields. And this means we need to pull in acreage, substantial amounts of additional acreage. We need three to five million more corn acres next year to just have a prayer of keeping the U.S. Corn supply/demand situation in balance, and even that will require nearly ideal whether. And then you see, Mark, this is not like the 1996 situation where we took corn to $5 very briefly and knew that we could rebuild inventories the following year by opening up the set-aside and doing things like that. Today with this ever increasing biofuels demand, you'll need an additional 3 or 4 million acres in 2008 and an additional 3 to 4 million every year thereafter. And with the wheat market trying to buy acres in there and the oil seed market trying to buy in acreage there, Mark, we simply do not have enough acres at this price to satisfy this head long plunge of demand that we see for these biofuels. Mark, in the next few years, you're going to see the most catastrophic confluence of fundamental changes in agriculture since the invention of the plow as we move down this road to both biofuels of ethanol and biodiesel. You're going to see a worldwide surge of demand that's going to all come together cataclysmically in 2008. And without a substantially higher priced pull in unprecedented acres in the world, you will start to see the beginnings of a manmade food shortage by 2008. We think you need 25 million more corn acres and 55 million more acres of oil seeds by 2010 to have any possibility of keeping supply/demand in balance. You'll be tearing up the face of the planet in five years, Mark, to deal with high priced grain and record grain profitability to try to pull these acres in. You're going to need to take prices high enough that you pull in acres in the Ukraine, in Russia on feed grains, and expand acres dramatically in northern Brazil. And right now with Brazilian farmers virtually bankrupt, it means higher prices for oil seeds too. All these grains are going to mean much, much higher prices. No, Mark, I think new Dec. corn at $3 is a 10 cent down $2 item long term.

Pearson: Long term -- $2 up long term?

Jackson: That's right.

Pearson: Wow. All right. From Doug Jackson. That's something. All right. So you're saying this biofuels thing. What about the Fischer-Trope when we start using cellulosic products and all that? Is that where the next wave of that is going to happen?

Jackson: Oh, yes, long term that's great, but that's five to ten years from now, Mark. You'll run out of food at these prices in the next two years. I'm not sure which is more delicate, the ethanol situation of corn or the vegetable oil situation. Actually, probably the veg oil thing is more in inelastic. And while we've got plenty of supplies today in both corn and veg oils and will still have adequate supplies next year, as you see simultaneously increases in demand worldwide, China, South America and North America, Europe, on the biodiesel thing, you're going to run out of veg oils. And when you do, you won't be able to recover.

Pearson: all right. So hold onto your hat for the soybean market, then. You don't want to make any sales there.

Jackson: We're going to have big supplies this coming year with 41.5 yield, Mark. But then by '08 everything blows up in these grains.

Pearson: Wow. Well, let's move over to the livestock sector. Walt Hackney, there's gonna be a lot of distiller dry grains out there it sounds like. Are we going to see the cattle business come back?

Hackney: There seems to be an extraordinary supply of distiller grains now, Mark. In that the distillers are having problems getting rid of the byproduct. A lot of the cattle feeders, particularly through the Midwest, are highly anticipating very low price distiller grain byproduct coming to the feed lot. That's a good thing. It's a bad thing. The point being that the producer feels he'll have more available corn in respect to sell than feed for his cattle because he's getting his economic benefit out of the distiller grains. It's a hard one to read. Some of the bigger companies that are involved in feed manufacturing are trying to create rations that will include higher and higher percentages of distiller grain versus whole shelled corn or dry crack corn in the rations. So in that, they are holding the price of feeder cattle higher or maybe abnormally high in anticipation of cheaper feed costs.

Pearson: All right. Well, let's talk first about this fed cattle market, Walter. As we go through the summer, we've been -- someone said it to me today that we've; been in kind of a contraseasonal bloob on fed cattle. Here we're looking at the feeder cattle chart too. But coming back to fed cattle, as we head towards the month of August and we head towards labor day, which is always a key time in the beef business, are we going to start to see some pressure on fed cattle prices at this point through the forth quarter or are our numbers -- are we current enough where we could see the market fairly strong?

Hackney: It depends on whether you go by the last two cattle-on-feed reports that indicated huge replacements that actually were somewhat misleading because they failed to recognize the input of light grass or light wheat pasture cattle coming out of the droughted out areas. Those cattle were counted as replacements, which would have been indicative of a large amount of fat cattle coming toward the third and fourth quarter. As it stands, it's become recognized now that we are very current in the feed lots, that wall of cattle that indicated in the February cattle-on-feed report isn't there. We've got cattle, due to the heat stress, and the fact of the sheer numbers themselves, we've got a very current feed lot position right now. This week as we speak, the fat cattle market has been up $2 and $3 a hundredweight here at the end of the week. Because the packer overplayed his hand, he believed in some of the abundance of that fat cattle that were coming in the reports, and they're not there. So all of a sudden, he ended up with a less or at a 600,000 head kill this week and we really need to keep that kill up around 650,000. So to answer maybe your question, I would suggest that this cattle market is going to stay at or near this market or even up again 85 and -6 as we progress toward the third quarter.

Pearson: All right. So at this stage of the game, we had some herd expansion. Have we seen the herd expand at maybe a little bit slower pace than we thought because of the dry conditions, particularly in the big parts of the panhandle of Texas and through Oklahoma?

Hackney: Very valid point. Prior to sixty days ago, we would have been indicative of a percent increase in our herd. Today I question that because of the culling rate that is going on right now in the cow herds on pairs that are being forced off of grass conditions that are just simply no grass there. The drought has gotten them.

Pearson: And our friends out in the panhandle of Nebraska are having troubles out there. So, yeah, maybe that will ameliorate some of that expansion. Let's go over and talk about hogs for a minute, Walter. In beef last week we got the good news we're reopening with Japan. That's going to be a slow go probably. But how's that going to affect the pork industry, because they've been living high on the hog literally with those exports overseas?

Hackney: Well, that's again a good point, and unfortunately we're heading toward an abundance of hogs to be marketed as we go toward the end of the third quarter, maybe middle way through the third quarter. We could easily get to a two million head a week kill within the next three weeks. The point there being the hogs are lighter, the heat stress has kept the weight down, along with good, good inventory control by the producers. And so a hundred -- or a million, eight and a half, a million nine with lighter weight hogs is helping sustain a good cash market. But if we run that up to two million head with demand down, foreign demand on export due to some increase in the beef, well, then, of course, cash is going to suffer as we go to the fourth quarter.

Pearson: Okay, so the fourth quarter -- should we be doing something right now, producers?

Hackney: Well, there's good opportunity in regard to certain style of hedging. It would probably behoove the producer to take a hard look at either some option positions or something along those lines.

Pearson: All right, getting some kind of coverage in there at that point of the game.

Hackney: That's correct.

Pearson: All right. So anyway, some interesting comments from Doug Jackson. Walter, as usual, appreciate what you have to say.

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