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Market Analysis: Jul 21, 2006

posted on July 21, 2006

Widespread storms in much of the Corn Belt this week severely dampened prices, while weather concerns in Canada, Australia and Europe stimulated a rally for wheat traders. For the week, nearby wheat futures gained nearly 10 cents, but the September corn contract lost more than 23 cents. USDA's contention that the nation's soybeans are in relatively good shape, pressured prices. For the week, August soybeans were down more than 26 cents, and the August meal contract declined by $5.70 per ton. In the fiber market, arid conditions pushed cotton prices higher this week with the December contract gaining more than $5.00. In livestock, the August live cattle contract was up 27 cents. Nearby feeders gained $1.40. And the August lean hog contract lost $2.75. In the financials, Comex gold lost $47.80 per ounce, nearby crude oil prices lost more than $2.50, the Euro gained 31 basis points against the dollar, and the CRB Index declined 15 points to close at 341.50. Here now to lend us his insight on these and other trends is one of our regular market analysts Tomm Pfitzenmaier. Tomm, welcome back.
Market Analysis: Jul 21, 2006 Pearson: Here to give us his insight on these and other trends one of our regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back.

Pfitzenmaier: Thanks, Mark.

Pearson: Well, let's talk first about the wheat market which sort of an up week this week, concerns worldwide about wheat production in addition to problems we've had obviously in the United States.

Pfitzenmaier: We've got that decline, as you mentioned earlier, that declining good to excellent rating in the wheat that's continued to profit up. There had been concerns as you alluded to, too, about Australia. We're hearing as we went into the weekend that they're expected to get some pretty good rains over the weekend so that may dampen the enthusiasm in the wheat. Wheat went up, tested those old highs, kind of fell apart a little bit on Friday. If you get good rain in Australia, you know, the demand for U.S. wheat still isn't all that great. It's really a hard red winter wheat issue. That's the leader, that's the one that has really got the most bullishness to it. It's kind of pulling the Chicago wheat up along with it. I would expect you're going to start to see the wheat market sort of run out of gas here as you saw it do just a little at the end of the week.

Pearson: Alright, would you make sales here?

Pfitzenmaier: Yeah, I think you have to make sales up here against the highs. You've had a great run up, a big pop this week. I think it's setting up a selling opportunity here.

Pearson: Alright, let's talk about the corn market. What a week it was for corn futures with the kind of pressure that they've been under. Obviously there were some rains throughout key parts of the Corn Belt which, of course, helped and moderating of temperature during the end of the week also, of course, is a help. It looks like at this stage again there should be plenty of corn, Tomm.

Pfitzenmaier: Yeah, you had the crop condition ratings, didn't show very much decline. The average pollination date is the 15th of July and we're pretty well past that so there's a pretty strong seasonal to work lower after that time period and that's kind of, we followed that seasonal, went back, re-tested the lows on Friday and I guess we'll have to see, you know, how it shapes up over the next week or two. We're probably on the verge here over the next week or two of beans taking over the leadership and corn kind of going flat and being more of a follower.

Pearson: With the corn market the way it is we've had a lot of reports here including this week with these declines where other analysts have been saying with the demand out there for corn we could see this market really take a pop. And you have not been an advocate of selling those deferred contracts thinking that could happen. Is that still a possibility now as this corn crop continues to improve?

Pfitzenmaier: I'm not an advocate of selling December of '07 and December of '08 if that's what you're alluding to. I am an advocate of selling the July of '07 corn. There is a huge carry out and carry in that market, almost 30 cents which historically has been a very good carry. If you've got bins and you want to fill them up, which I think you should, and you get the chance to sell that July of '07 corn back up in that $2.90 to $3.10 area I think you need to go ahead and start marketing some of this '06 corn. That is a big carry, you need to capture it and get paid for having that bin on the farm.

Pearson: Alright.

Pfitzenmaier: You may even get paid for putting up a new bin on the farm. I mean, it's -- I think the corn market is changing structure where farmers are going to be compensated and asked to store the crop. The ethanol industry doesn't seem to want to store it themselves, they want you to store it and then they'll take it from you. And that is part of the reason we're seeing these big carries in the market and you need to take advantage of those.

Pearson: A fundamental shift really in the way cash grain is marketed.

Pfitzenmaier: Yes, it is.

Pearson: Alright, let's talk about soybeans. You alluded to soybeans taking over the leadership role going forward. Talk about that. Why do you think that's going to happen?

Pfitzenmaier: Well, yeah, everybody knows that August is the critical time for soybean production. Soybeans can sit and do nothing and stall and be short and all kinds of things through the month of July but you need to have rain and decent conditions in August to really go ahead and have a decent bean yield. I think we're going into that time period in fairly good shape. If we continue to get rains over the next two to three weeks you saw November beans break down under that $6 area, test that support that we put in about four weeks ago down at 91, got as low as 95 on Friday so we're starting to break down a little bit. Now, if we have heat come back in and it dries out in August we're going to shoot right back up and re-test that $6.39, $6.40 area. If we don't then I think you're going to -- the fundamentals in beans aren't real hot anyway and I think you're going to start to see them fall apart if we don't get that weather. But August is key, they're going to keep some premium in the beans until we see how that's going to go.

Pearson: Alright, last time you were on here talking about the fundamentals worldwide for soybeans and they are dismal at best. I mean, even at these prices this is a pretty attractive sale.

Pfitzenmaier: Yeah, especially I think if you can get the November bean put at the $5.80 or the $6 puts bought for 20, 22 cents, get a good floor underneath you, leave your upside open if you're worried about some catastrophic thing that's going to happen to beans and rally them. But I think you need to start getting some kind of protection under yourself for the bean market.

Pearson: Alright, let's talk about cotton, which again, weather is a big factor there right now. What is ahead for cotton? We're up in some price levels historically you said make some sales.

Pfitzenmaier: We kind of washed some cotton out, got down in that 48, 49 cent area and then the cotton market, cotton crops started deteriorating. Everybody was a little reluctant to buy cotton because they thought well, we're heading into hurricane season, the hurricanes are going to bring moisture into that southern cotton area and kind of bail them out. But that's not going to help that Texas and on west cotton crop and they're starting to realize that and you're starting to see cotton creep up here. Well, more than creep up, it's jumped up pretty good. I think, again, like you alluded, you get it back up in that 57 to 59 area, just shy of 60 and then you have to start being a seller there again too.

Pearson: Alright, let's talk livestock. Fed cattle market as we look forward to the end of the summer and we get past Labor Day when we typically see prices under some pressure the market has held in there fairly decently, $1.27, $1.28 in the beef. What is ahead for fed cattle?

Pfitzenmaier: Well, number one we had a cattle on feed report Friday afternoon, placement number they were looking for 99.1% placed, came out at 110 so that's a pretty strong reflection of all that dry weather out west, they're moving cattle and putting them on feed. The on feed number was up 2.6% higher than they were expecting. Marketings were up a little bit but just barely. So, we're going to be under pressure when we walk in and start trade on Monday morning. In answer to your question, yeah, those are good prices. I think any time you get cattle up banging on that $90 area, February cattle are at $91, to have expectations that we're going to go much beyond that I think you're going to be disappointed.

Pearson: Flip side is we seem to be eating the factory again in terms of some of those drought areas. Early cow herd culling of pairs and so forth, this feeder cattle market, Tomm, as you look at that, it looks pretty healthy.

Pfitzenmaier: Well, it's healthy. We had cheap corn, you know, you saw that 23 cent drop in corn this week and you saw a corresponding rally in the feeder market. But I think you're up into the levels in feeders where I don't know that there's a lot left in them. There is a strong seasonal for cattle to top out in the middle of the decade and to work lower. Now, that is not a straight line down and this dry weather may prolong that a little bit but ultimately you're going to see depressed cattle prices as you head into the end of the decade.

Pearson: We'll take a quick look at our feeder cattle chart here and I think it kind of underscores exactly what it is that you're saying. And there you go, up around the $115 level. Let's talk though the other red meat out there that is critical, they call it the other white meat and that's pork and pork producers out there obviously this Japanese beef ban, we've continued to move pork overseas well.

Pfitzenmaier: Pork demand overseas has been good. It started to get a little sloppy in the U.S. I think you've seen the cut out was down almost every day this week so the packer margins are getting tight. Now, they had a lot of slop in that and could absorb most of that. You're getting to the point where most of that is gone. So, I think if you continue to see that cutout decline that is going to reflect and lower cash hogs as you head into the end of the summer and into the fall time period. So, you know, if you can buy a put in October, December or February hogs for $2 to $2.50 I think you need to look at that on rallies.

Pearson: Absolutely, Tomm Pfitzenmaier, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Tomm 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 examine efforts to protect the public from Avian Flu. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news wheat