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Market Analysis: Jul 07, 2006

posted on July 7, 2006

Weather remains the dominant factor in the grain markets. While the seven-day outlook is calling for cooler temperatures and precipitation in many parts of the heartland, hotter and drier are predicted for the following week and that's moving prices higher.

For the week, nearby wheat futures gained more 10 cents, while the July corn contract was up a nickel.

Soybean prices continued their rally this week, breaking the 6-dollar mark. For the week, July soybeans gained more than 7 cents, but the July meal contract declined by $1.70 per ton.

In the fiber market, cotton prices continued to decline with the December contract losing $2.28.

In livestock, the August live cattle contract lost 35 cents. Nearby feeders were up 70 cents. But the July lean hog contract had another losing week giving up $1.30.

In the financials, Comex gold gained $18.80 per ounce, nearby crude oil prices set record highs before closing at 74.09, the Euro gained 27 basis points against the dollar, and the CRB Index advanced 6 points to close at 353.50.

Here now to lend us his insight on these and other trends is one of our regular market analysts Doug Hjort. Doug, welcome back.

Market Analysis: Jul 07, 2006 Borg: Here now to lend his insight on these and other trends is one of our regular market analysts, Doug Hjort. Doug, welcome back.

Hjort: Good to be here.

Borg: Well, let's start out with wheat. That is one of your favorites, isn't it?

Hjort: Well, it sure is and having raised it and I like to eat a lot of bread too.

Borg: What are the price, what's driving the prices right now? What's driving that market?

Hjort: Well, the wheat market we have to kind of break it apart by class of wheat in order to try to make some sense of it. The Chicago market is generally governed by the soft red wheat market and there is a plentiful supply of that wheat in the United States. But you go to the hard wheats, hard red winter wheat, of course, that harvest was greatly reduced because of drought in the central and southern plains. And now weather has been very stressful in the last two or three weeks in the northern plains. So, the hard red spring wheat crop continues to shrink or at least thought to be shrinking.

Borg: Is there anything that is going to change that at all? That is, in weather -- is that crop far enough along that weather isn't going to influence it any more?

Hjort: Well, part of it would be. South Dakota crop is pretty well done you might say right now. So, the damage, whatever it is, is already done. North Dakota and Montana still have time, though, to do some recovery should they get better growing conditions. That is going to be a continued problem though because just the forecast up there does not promise much weather relief for that northern plains area.

Borg: But in corn weather is driving that. I mean, it strikes me that in the heartland right now corn is in that very critical stage of tassling and silking.

Hjort: It is and that is a great worry to the weather watchers and market participants. The soil moisture in a good share of the Corn Belt is adequate right now. But there is a growing shortage of moisture in parts of the western and southwestern plains there, or Corn Belt area and out into the plains. So, if the weather turns off real stressful during this pollination period yield could be cut very quickly.

Borg: Why did we see strength this past week do you think in the corn market?

Hjort: Well, a lot of it had to do with two things. Number one, weather forecasts. Now, they change every day, a little rain and then not rain, then a little rain and not rain. But the other thing was a crop report that came out a week ago Friday and showing that less corn was planted in the United States than had been expected, still up from last year but down from, excuse me, it's down from last year but up a little more than what they said in March. Still though, give trend line yields along with that acreage that was reported and our ending stock of corn will drop off maybe 600-700 million bushels in the coming year. That would tighten up stocks down to that 1.2 billion figure or something and you'll get that close to a billion bushel that is where market participants get pretty excited about price.

Borg: What about soybeans? They are not quite in that weather critical stage yet.

Hjort: Well, that's right, they're not but they get pulled around by the grain markets somewhat and there's also still quite an outside market that impacts soybeans. Soybean prices if you look at a chart for maybe two and a half months have been going pretty much sideways in a rather wide price range but pretty much sideways. This week we got up towards the high side of that, ran up against resistance again and it held. It stopped the rally. So, I would look for prices to drop off a little more on soybeans now waiting for the weather later on in July and into August when weather is very critical to soybeans.

Borg: I wanted to ask you, you reported earlier about the Brazilian sale this week to try to offset the currency problems there. Of what significance is that to U.S. producers?

Hjort: Well, it's significant in this regard. The story was about trying to help Brazilian farmers with their economic problems. But it also shows that there is a surplus, a big surplus of soybeans in the world. So, the Brazilian government was trying to kill two birds with one stone there. They got rid of some of that product but they still have, worldwide we have record high soybean stocks right now. And given the acreage that was reported a week ago and normal yields we would add to that record high stock worldwide and in the United States in the next year. So, soybean prices are going to have a lot of trouble trying to rally a whole bunch unless we really severely cut yield back this year.

Borg: Of what significance will be the government reports out this week on grain?

Hjort: Well, on the wheat market, spring wheat primarily as we mentioned before, it'll be the first of the year crop survey for spring wheat, that is hard red spring and the winter white spring wheat in the Pacific Northwest and the Durham crop. On soybeans and corn there is no production report until the August report, August timeframe. But they will go in and adjust supply/demand balances on corn and beans and I wouldn't be surprised to see them raise export projections on both corn and soybeans on this report.

Borg: Just a quick comment, do you think that is going to influence the market at all, those reports?

Hjort: Probably not. The marketplace anticipates what is going to happen in these reports. They throw out all of these numbers and then it's a question how close does USDA come to those numbers.

Borg: Live cattle, I know we're in the summer grilling season but cattle, the beef market really has shown strong sustain support.

Hjort: Well, it has, it really has. The market is kind of nervous right now partly due to the export problems that we've been having, Japan, for example, South Korea and so on. The futures market has run up, especially the distant contracts. The December futures over $90, for example. Well, that has opened a barrier on the charts from a technical standpoint. Also, there is a lot of anticipation there that our export market is going to be growing by December or by the fall and I think it will. But that is the anticipation in this market and why it's so nervous.

Borg: I'm really anxious to get your comment on the feeder market, the strength there. How do you rationalize putting feeders in at the prices where they are right now?

Hjort: Well, it's very, very difficult to try to buy the feeders to make money. I've often said it's kind of like playing Russian Roulette with all chambers loaded. And yes, you can cheapen up the feeder in a way, backgrounding, whatever and make it kind of work for you. But if you're looking at that $90 fat cattle market for December that improves your odds greatly of making some money down the road. Looking at today's cash price, of course, it does not work at all.

Borg: And what relation, now, is the corn market, the price of corn, you know, that is going to have to be fed to those feeders or some kind of grain. So, what relation corn -- there is no weakness in that market to be able to say well, I can come out on these feeders because grain is cheap?

Hjort: The basis on corn is generally quite wide, historically very wide. So, in other words, the cash price in the country is historically low compared to where the futures price is at the present time. Now, when you get down into the Texas panhandle, of course, to where there is a lot of cattle fed the price of corn is sharply higher, sharply higher, up $2.70, $2.80 and so on and that makes it very difficult, just adds to the problem of trying to make money feeding these cattle.

Borg: Comment on the hog market for a moment if you will.

Hjort: Well, the hog market has run up to a point here two or three weeks ago and now we're just kind of sitting here waiting for the next thing to develop. That next thing has to be demand. We have to expect better than normal demand through July and August if we're going to keep these hog prices at this level. I would point out one thing about the hogs and pigs report out a week ago. It showed very little interest in expanding. Well, no reason to do that. The market is controlled by just a few entities, they're making good money, they like to make money and that's the way they're going to keep it. I don't look for expansion in this hog industry even though prices are high enough to give good profits.

Borg: Now, we're quoting cash hogs. Of what relation is that cash hog price to the contracts that are being negotiated?

Hjort: Well, that is a big problem, it's a real problem. The cash market out here is quoted every day whether you can get that or not, whether you have enough hogs of the right kind to fill that contract, that is another whole big problem that would take a whole long time to explain.

Borg: Thank you, Doug. We don't have that time because that wraps up this edition of Market to Market. But if you would like more information from Doug 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 a new twist on rural development that is bringing Dutch dairy farmers to the Midwest. Until then, I'm Dean Borg. Thanks for watching. Have a great week.

Tags: agriculture commodity prices markets news