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Market Analysis: Jul 28, 2006: Senior analyst John Roach

posted on July 28, 2006


Hot and dry weather continues to be the number one influence on the grain markets. For the week, nearby wheat futures lost nearly 19 cents, but the September corn contract remained even at 2.36 and 1/4.

Not much change in the August soybean contract from a week ago -- down just a half-cent. The August meal contract declined by $2.70 per ton.

In the fiber market, the December cotton contract inched up 8 cents.

In livestock, the August live cattle contract was down 92 cents. Nearby feeders gained $1.47. And the August lean hog contract gained $1.28.

In the financials, Comex gold lost $14.60 per ounce, nearby crude oil prices lost more than $1.20, the Euro gained 55 basis points against the dollar, and the CRB Index went up 4 points to close at 345.50. Here now to lend us his insight on these and other trends is one of our regular market analysts John Roach. John, welcome back.

Market Analysis: Jul 28, 2006: Senior analyst John Roach Pearson: Here now to lend us his insight and these and other trends one of our regular market analysts, John Roach. John is our senior market analyst I should add. Mr. Roach, good to see you again sir.

Roach: Thanks, Mark.

Pearson: Let's talk a little bit about this wheat market. And, of course, it's been a weather season in the hard red wheat market. We had some of the driest conditions in history and yet really amazing we produced the crop that we did in the hard red wheat belt. Now, the spring wheat crop is a concern.

Roach: Yeah, weather has kind of given us the one, two punch on wheat and the Chicago wheat has kind of gone along for the ride. We really haven't had that bullish of a fundamental balance table in the Chicago wheat but it went along for the ride at least for part of the ride anyway. The wheat market we think has printed its high for the year or nearly so. We certainly have to see what this spring wheat crop is really going to yield but the market has already anticipated a substantially reduced crop. The percentage of the crop rated good to excellent seemed to have bottomed here this week. We didn't deteriorate the crop any further. There is some worry about this heat that is around right now but the market is usually pretty good at anticipating that. And typically what happens in a weather driven market is that the adage is that a short crop has a long tail. In other words, you put prices in near harvest, the price peaks in near harvest and then decline as you move through the balance of the year.

Pearson: We talk about these different classes of wheat, the hard red out of Kansas City, the spring wheat out of Minneapolis and we track the soft red out of Chicago. And a lot of our viewers are in that soft wheat country, they've wrapped up harvest this year and production was pretty good.

Roach: It was and the anticipation is we're going to see a substantial increase in acreage because the profitability that is being offered for the next year's crop is very attractive. So, the wheat market is now going to have to find its buyers. We're going to have to stimulate the buyers to come back in and to accumulate inventory at a time when sellers are more willing to turn loose the inventory now that they have completed their harvest or in the case of spring wheat will soon be completing their harvest.

Pearson: That's right, that soft red wheat we'll know a lot more once we've passed the Heshan fly date, that's when you plant that soft wheat. Let's talk about the corn market, John, there's so much interest in that with ethanol and biofuels and oil prices and everything else what is ahead for corn. Obviously we had some heat stress early in the summer. We always have that unknown. We've had that rally, we've been under some pressure ever since. What is ahead for corn prices?

Roach: Well, we still are in somewhat of a weather concern period, particularly for the western third of the belt, northwestern third of the belt, the high temperatures that are forecast. But the trade anticipates today that there will be cooling weather by the middle part of next week along with some increasing precipitation. The attitude is that the corn crop is somewhere at 150 bushels per acre national yield, people expect the government report in August, on August 11th to be a little bit smaller than that number but typically the government reports about 6 bushels below, at least the last five years the August report has been 6 bushels an acre below the final report. So, people aren't even worried if the August report is going to be a little bit smaller. What is really happening here is we have a very large carry over of corn in the bin now prior to harvest and if we have this size of crop coming on we're going to have very large supplies this fall, the basis levels are weak, the spreads are very wide as we try to figure out how to get through this harvest period. And then the second thing to come is how are we going to stimulate farmers to increase their corn plantings this upcoming year in order to supply a substantially increased demand for this next year. So, we really have two markets, a market between now and the time we get everything put away and that market looks to be one that will probably have some further pressure unless weather cuts the yields further and then we have a market post-harvest which looks extremely promising.

Pearson: Alright, so as we look ahead to 2007 we see some opportunities out there. John, and I've asked you about this several times and all of our analysts, as you look at some of those deferred contracts historically they look fairly attractive for '07 in particular, '08. Do you have any interest in making sales out there?

Roach: We've already actually made sales in those distant contracts and we even have the 2009 contracts starting to trade here I think just this week which is trading up in the $2.30's, or $3.30's. So, we have very high prices out forward and we've made some sales there. But where the market is now we're way off our highs, we're not anywhere close to a sell signal here on corn. We're headed toward the harvest lows. I think it's time to just forget about selling anything. Now is the time to figure out where you're going to store this crop and not only that but think forward to next year because we're going to have to raise more acres of corn this upcoming year. Where are you going to store next year's crop? And then we need more acres the following year or more yield. Where are you going to store that crop? You can't get yourself as a farmer into the situation where you have no place to go with your crop because if you do you end up getting stuck having to sell in the valleys of the market rather than the peaks.

Pearson: Alright, and this is, again, as the ethanol plants emerge as a major consumer of corn products they are saying they don't want to hold the product.

Roach: They don't really want to at all, that's really not their business. Their business will be we'll buy the corn and run it through the processing plant and the one thing about the ethanol plants is they're not going to slow down that production unless the price of corn gets really out of line compared to the price of gasoline.

Pearson: Alright, John, let's talk about soybeans. And, of course, that is a biofuel as well. Talked to a neighbor of mine who has been using the B10, going to get a whole tank of it now. We're not seeing that much reflected in soybean prices at this stage of the game.

Roach: Well, we actually are seeing the oil share in the bean, that is the oil compared to the meal values. We are seeing the oil share actually stimulated quite a little bit. We're seeing commodity funds that are owning very large quantities of soybean oil, they're also accumulating palm oil. Palm oil this week reached two year highs in Malaysia. So, we are seeing a big play, if you will, on that oil market. So, over time we're going to see that have a big impact. However, in this country we have record supplies of soybeans in the bin before we start harvest so we don't really have any tight supply situation at all yet. However, as we pull bean acres away and plant corn on that ground instead we'll get ourself into a tight supply situation in beans, maybe not next year, but probably the year after.

Pearson: Alright, so what is your take on soybean prices? What do you want to do sales wise?

Roach: Well, the soybean market has been in a real broad trading range now actually for a year. And we're down toward the bottom side of that trading range which you would expect as we head into harvest. And yet the month of August we know is the critical growing period for the soybean crop. So, we're now entering the important weather phase knowing we have plenty of beans in the bin. So, the market would seem to me to be able to go either direction, either go even lower into harvest if weather is benign or have some substantial recovery if there is any weather problem at all.

Pearson: Alright, let's talk about the cotton market and cotton has been one, again, it is weather sensitive but also China sensitive.

Roach: It's very much China sensitive. The cotton market has actually had a nice little rally here and we're on actually the sixth day of a sell signal and those sell signals normally last from 4-6 days so if you're needing to make some sales in cotton here over the short run it's time to be making some sales. Longer term, however, we think the outlook on cotton is more positive. On the July supply/demand report we saw world supplies as far as the production is concerned relatively cost just about the same as what it was last year. But the consumption is going to be going up so the ending stocks are tightening. So, we think the cotton market has some opportunity to move higher over time but, again, we've got harvest ahead of us so this may be our last rally before we move into the harvest period.

Pearson: Livestock market, fed cattle market which, of course, people have been watching closely because it's such a great consumer indicator. It's been fairly flat really the last few weeks but hanging in there in the 80's. What is ahead now for fed cattle?

Roach: Well, the cattle market hopefully will get a little bit of a further boost from the opening up of business with Japan. But this week the market was pretty bored with it, I guess, would be the right way to think about it. Prices didn't move very much. The futures market moved as much as about $2 higher but then just didn't really go anywhere. Cash market really didn't go anywhere either. The dress beef market is down over 9% since the end of June. So, beef prices have really had a tough time at the retail level but that is kind of normal. This is the time of year when you normally will put lows in. And if you look at the temperatures we've seen last week in the crop report that the government put out there were 350 different new daily highs reported and that was last week. This week we had more new daily highs and look at the temperatures we saw clear out on the West Coast. We had to hurt beef demand in those areas with triple digit temperatures. So, I think that we're at about the worst of this cattle business from a price standpoint. I think we'll have higher price levels as we move into the fall of the year. But the third quarter we have 7% more beef expected to be produced than what we did last year. So, these are all big numbers of supply and that is what the market has to do, it has to work through this supply during this third quarter and then we'll have better price levels into the fourth quarter and the first quarter of next year.

Pearson: Optimism remains fairly good and, of course, cheaper corn prices lately have also helped fuel that feeder cattle market.

Roach: It certainly has. The feeder cattle market has actually remained relatively strong. The profitability in the fat cattle market came back a little bit quicker than what people anticipated.

Pearson: Let's talk about hogs and what you see happening there. I mean, obviously good news on Japan, again, taking U.S. beef. Could that impact some of those pork exports we've seen?

Roach: I'm afraid it might. Pork exports have been well up this year compared to prior years. I think the last number I saw was 18% higher. And at the same time this heat has slowed down the pork production out there in the country although the numbers continue to be bigger than what we anticipated. So, there's something that is not adding up here in the hog market. But I know on a calendar that prices tend to peak at this time of year, they tend to peak on hot weather and as I look forward I think prices will slide. So, I'm a hedger of hogs. We made some new contract highs on back months today. It's time to be a seller.

Pearson: Alright, John Roach, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from John on just where these markets are headed visit the Market Plus page at our Market to Market Website. And be sure to join us again next week when we'll tell you how to access a new service on Market to Market, podcasting. Until then, thanks for watching, I'm Mark Pearson. Have a great week.


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