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Market Analysis: Jun 09, 2006

posted on June 9, 2006

Despite concerns about a shorter crop for 2006, grain and oilseed prices moved sharply lower this week, as the trade focused on burdensome global supplies. For the week, nearby wheat futures lost more than 31 cents, while the July corn contract was down 17. Soybean prices responded to record stocks estimates. For the week, July soybeans were down more than 23 cents, while the July meal contract declined by more than $8 per ton. In the fiber market, nearby cotton prices continued their rally, posting a 26 cent gain on the December contract. In livestock, the June live cattle contract declined 1.82 cents. Nearby feeders were down $1.62. And the June lean hog contract gained $3.55. In the financials, Comex gold lost $27.30 per ounce. Nearby crude oil prices were down 70 cents per barrel. The Euro lost 28 basis points against the dollar. And the CRB Index declined nearly 4 points to close at 340.50. Here now to lend us their insight on these and other trends are two of our regular market analysts Darin Newsom and Erin Golly. Welcome back.
Market Analysis: Jun 09, 2006 Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Erin Golly and Darin Newsom. Welcome back.

Golly: Thank you.

Newsom: Thank you, Mark.

Pearson: Let's talk about this grain market first, Darin. I was out in Amarillo, Texas in January, saw the crop down there on the panhandle and up through Oklahoma, down in Stillwater, it was a pretty bleak picture. This spring there was some hope that maybe we would see that crop come back but the yields are not too impressive so far.

Newsom: No, everything that we're hearing is pretty much in line with -- this is just really a horrible crop out there. We're hearing all kinds of reports coming in, yields mid-teens, low, you know, anywhere from ten to twenty bushels per acre. It's just, you're right, they didn't have any moisture, there was nothing really to really ever get this crop off and going. Crop condition ratings have been poor all the way along. And now that's what we're seeing. So, you know, as a crop, even this report today for what it was worth, I think it's still probably overestimating the hard red winter crop. I think when it actually gets in the bin and the harvest moves further north and we have a better idea of what's actually out there I think we're going to be pretty, I think the overall, I think the overall yield is going to be quite a bit lower than what we're still looking at right now.

Pearson: Alright, of course, we've had quite a crunch down on the numbers that we just showed. Of course, our Chicago soft red wheat. What is your take on that market? Obviously it's been clobbered here.

Newsom: Well, the soft red winter wheat market is really very interesting in the fact that it ran up, we saw the July futures run up to over $4.25. The problem with that is that the underlying fundamentals in this market remain very bearish. The soft red winter is the class of wheat where we do have, we don't have a supply problem and we have basically no demand at this point. So, you know, what was it that pushed this market this high and how did it get so out of balance because that has become a very hot button issue right now is the basis in the soft red winter wheat market. If we look at the DT and the national soft red winter index it's 60 cents under the, it's 60 cents under the July futures setting an incredible weak basis right now. You know, there's a lot of talk about what is causing this. Well, you know, the main thing was that the non-commercial traders ran the soft red winter market up so high in line with the rallies that we've seen in outside markets, metals, crude oil, corn, not soybeans, but the corn market. We've seen all these markets rally on speculative buying. Chicago what went with it, commercial traders weren't willing to pay both sides, high futures and strong basis or even average basis. So, where were they able to defend themselves? The basis is just horribly weak. We see this also in the incredibly widespread, this week we've been trading the July, September spread, futures spread at well over 100% full commercial carry, again, just indicating that the commercial traders in this market are not interested in buying the supply. And I think it's one of the telling, it's one of the most telling things that we can see in the markets right now is this soft red winter wheat market. The hard red winters were a little bit different. We've still got a fairly good basis despite the high futures price. It just goes back to what we were talking about earlier, though, the horrible crop that we've got. With the national average basis running 39 to 40 that's not that far under where we normally run this time of year and given the lofty futures, you know, approaching $5 it makes for a pretty stout cash price if there was anything to sell.

Pearson: That's right, let's talk about it from a producer's standpoint, let's talk about the hard red and then the soft red standpoint and then, of course, we also want to talk spring wheat, we have a lot of viewers up in the spring wheat growing regions which also are running more closer to the hard red winter wheat. What is our strategy right now?

Newsom: Well, you know, unfortunately in the hard red winter wheat, you know, we could say, you know, it's time to sell, it's time to sell or hold back and see what the market does. Quite honestly as we've talked there's not that much crop going to have anything to do with and those that do have some crop coming in with these high prices they're going to have to sell right now. More than likely they're going to need to pay some bills, a lot of wheat farmers this is their income for the year throughout much of the southern plains. And so what we're going to see is we're going to see these bushels unloaded on the market. You're not going to see a lot of them held back, see if they can take advantage of a higher market later down the road. It would be nice if they could do that but all things being equal, as I said, we've got futures up around $5 in the hard red winter market, basis at 30 to 40, looks for some pretty attractive cash sales. In the soft red winter it's kind of a, you know, you just basically have to say how bad can it get, basis at 60 under, futures are up still in the $3.50, $3.60 range I believe. The price isn't going to be that great for the soft red winter market but still, is it going to get any better. From the looks of it, you know, they're projecting, today's report showed that we're going to have more than we did last year, more crop than we had last year and that market was horrible. So, from the soft red winter standpoint if you get a bump in the market you might want to still look at unloading it even with the wide carry that we've got in the market, it may not be indicating stronger basis down the road.

Pearson: Alright, so take action and get a little bit defensive and get something done.

Newsom: I think so at these levels.

Pearson: Alright, let's talk about the corn market, which, of course, is another one that is pressured now sharply this week and, of course, we've seen quite a fall off from some of those premiums. You talked about it during your discussion about wheat which is kind of the air coming out of this whole commodity run that we've had and it goes to crude oil, it goes to gold, it goes, you know, we saw everything literally that you touched somehow was tied to biofuels or whatever, inflation, very inflationary. Now we've seen the air come off all that really with the exception really of crude oil which is still relatively strong.

Newsom: Yeah, you know, it's interesting in the corn market there's been so much talk about the strong demand and how tight we're going to see the supply/demand situation. Well, that may be true but it's not the case right now. Commercial traders are not overly excited about the supply/demand as in the wheat. We're seeing wide carries. Even if we go out to the new crop, '06-'07, we're still sitting at about 60% full commercial carry Dec. to March. So, what we've got is a situation that is more neutral to bearish, they're comfortable with this situation. So, again, what we've seen, what has pushed this market is the non-commercial investment traders, you know, those who have been in the gold, they've been in all these markets that you just mentioned. Now, what we've seen over the last few weeks is we've seen the market do a normal retracement, you know, we've seen the December corn come back to 33% retracement. Today it was testing, on Friday it was testing the 50% retracement, perfectly normal for this type of market where we've got strong non-commercial buying but yet don't have the underlying fundamentals to support the market. And next week is going to be very interesting, how we can hold in this $2.60 to $2.62 range early in the week. You know, if we can hold this level and start to find some support again these non-commercial traders continue to hold an incredibly large position. At one point it was up near 270,000 contracts. Yes, they've trimmed that back but they're still incredibly long. If for some reason they all decide to change their mind we're going to see this market come off quickly because there isn't the underlying support to fall back on of the fundamentals. So, it is going to be a little bit dicey here as we head into the middle part of June, with July being the key month in the corn market. We've still got some room to go and we could see a lot of fluctuation yet.

Pearson: There's a lot of old crop still in the country and basis values for corn, I know you've been tracking those.

Newsom: Yeah, the basis value for old crop corn has really held together pretty well despite the run up we've seen in futures. So, you know, for those who have not made sales, you know, they may want to look at this because we're in a contraseasonal rally right now. Normally we're heading lower this time of year. Basis has held firm, those who have been able to roll due to the wide carry, they might be able to start cashing in some of those hedges that they've had on since last harvest and if they haven't had it hedged then they've been able to take full advantage of this market. So, again, a good opportunity in here that's been provided by these non-commercial traders.

Pearson: Now, when you say non-commercial traders we're talking about these hedge funds, these institutional investors for the first time really showing up in the commodities, in the grain bins particularly.

Newsom: Yeah, over the last year and a half to two years we've really seen, we've really seen them draw interest. There was all this inflationary talk and so on and so forth, they wanted to hedge against that. So, we've got all of this international money, all of this speculative money coming into the market. It provides us with the opportunity and a lot of people don't like to even visit about them but they are the drivers of the market, they're the ones that set the trend because they're the ones that are interested in how high and low these markets go, it's what provides them their opportunity. So, as they push these market higher on the producer side, those of us who are actively in the cash grain market they can certainly take advantage of these and then, you know, knowing full well that at some point the money is going to come back out of the market and down we come again.

Pearson: Alright, real quick, '07-'08 corn sales. Now, we were up over $3, a lot of our analysts thought that was fairly attractive, at least make some sales.

Newsom: Well, I think so. I think you want to lock in a little bit but you don't want to get too far ahead of yourself because in '07-'08 that is where if we see this continued growth in demand, if demand has actually changed and it's changed to the point where we're going to reset long-term prices ranges, it's going to come probably in the '07-'08 time frame. And so keep a close eye on where that December futures market is and where the Dec. '07 and March '08 how that spread is reacting because that will give you a good idea of what the commercial traders feel towards that market.

Pearson: Alright, let's talk about the soybean market. Again, a plunge down this week. It was sharply lower. And, again, I mean, we're a long way from making the 2006 crops, not a whole lot you could say there. But, again, just some of this air coming out of this commodity market.

Newsom: The thing with soybeans is that they have not been able to attract the type of attention that the other grains have, the corn and the wheat market. Non-commercial traders just simply have not had the interest in building -- it's interesting because that is usually one of the first grain commodities that they turn to when we see the types of rallies that we've seen in the metals and what we've seen in the energies. They usually look at soybeans first. The problem was this time around is that soybeans never dropped back far enough into their historic price range to become an attractive investment tool. So, we've sat, basically since last harvest, we've sat in a narrow, sideways trading range. Now, that range is getting narrower and narrower and it's basically due to the underlying fundamentals, as we indicated earlier in the show, remain bearish. So, there is no reason from a supply/demand side for these traders to get interested. And until something does change, until something along that line does change the price probability of this market still isn't that attractive, it's just going to continue to sit tight and it's going to continue to stay in this sideways trend. The best chance that it has to rally is during June, that is its seasonal strength. If it can't do it this month we're probably not going to be able to get it done.

Pearson: Alright, what about the cash side on the soybeans?

Newsom: Cash side on the soybeans, basis has begun to weaken. The commercial traders have been able to, you know, all the way along they've been able to buy what they've been needing to meet supply, to meet demand. That is probably not going to change. And if this market does try to work a little bit higher we're going to continue to see that basis weaken. Again, going back to the discussion that we had in the wheat, they're not going to look to pay up on both the futures and the cash, on the basis. So, we could continue to see this basis weaken a little bit in this time of year.

Pearson: Strategy wise what is a soybean producer supposed to do?

Newsom: Well, if we can get this June rally we're going to certainly want to take advantage of it. If not be very aware of where the lower side of these sideways trading ranges are, where the support is and once this thing starts to break through that, if it coincides with the weak seasonal time frame starting in July you might want to start making some catch up sales.

Pearson: Let's talk about the cotton market. Cotton futures up this week, up a couple of weeks in a row finally. There is some concern about that crop too.

Newsom: Cotton to me is in the very same situation that we've seen in soybeans where non-commercial traders in that market have grown a little bit more interested, we've seen them come in and out of the market but it's also been in the long-term sideways market. If we look at the carry in the market, again, it's indicating that commercial traders are not that interested, price probability we're running at about the 50% level of the market. Again, there's just nothing to really light the fire. We're going to have to see some type of supply/demand situation develop or another round of heavy non-commercial buying in commodities and in some of these commodities that they have basically stayed away from, the soybeans, the cotton, to be able to push it back up. We want to see it approach the upper side of that range up around 58 and then see what can happen there.

Pearson: Alright, let's move over to livestock. Erin Golly is with us. And Erin, let's talk about this fed cattle market. We've got futures into the 70's. You were not too optimistic about fed cattle end of last year, the cycle was ending and here we sit today. What is your take now on fed cattle? Take us out 60 to 90 days.

Golly: Well, today we had a real down day in the futures and that was mostly due to the sell stops and some technical things that were going on. But I still remain friendly on the fed cattle market. You know, everyone keeps talking about the seasonal price decline but we just haven't seen any signs of it yet. And that leads me to believe that the low has already been set for the year. Beef demand has been very good over the past 30 days. We've got Father's Day coming up, 4th of July coming up and we should see some demand for that and then seasonally the demand falls off towards the end of the summer. But I think the one key thing we need to keep an eye on is the shipments, the shipment pace through July to see if producers are keeping current with their marketings because if we can keep these summer numbers manageable I think we're going to have pretty good prices this fall. I know the weather down in Texas is pretty hot right now, they're up in the hundreds so that should keep some cattle weights under control too.

Pearson: Alright, so that's critical, that fourth quarter which would be kind of a contraseasonal deal for us maybe see cattle prices strengthen in there. But what would be your price targets here?

Golly: I think we're going to be trading in the 90's in the fall. You know, it all depends on how the economy is, though, the economy dictates a lot in the cattle market and if we continue to see a strong economy I think cattle prices can hold up there.

Pearson: As you look ahead for the fed cattle market, like you say, going into the fourth quarter looking pretty good, you've got some expensive calves out there that people are trying to make work. And you heard Darin talk about this corn market, which, who knows what could happen ... all those things being equal can we make money feeding cattle?

Golly: Well, we had an aggressive pace of feeders placed in the feedlots and they were actually placed a lot more than we thought we'd ever see. And so that is what is supporting the feeder market right now. Corn prices, like you just said, are going to be higher and I think that is going to curb some demand some time this year. But, you know, we had the price, we had the highs set a little bit earlier this year and that is mostly due to the premiums that were in the deferred futures and some of those premiums were actually some of the largest in history. But fundamentally I do think we're getting near our top in the feeder cattle market and with the high corn prices I think that producers should remain cautious in this thing.

Pearson: Okay, now what if you're a cow/calf guy? Would you recommend maybe taking advantage of those feeder contracts that go out towards late summer or early fall?

Golly: I think if you're going to be buying feeder cattle you need to have some risk protection on your corn, you know, buying cash corn, making sure you've got everything locked up and just purchasing put options to protect the bottom side.

Pearson: Alright, let's talk about the hog market. I know you track this one really close. We've had a nice move in hogs this week. What is going on Erin?

Golly: Well, it's an exciting week in the hog market. And it's fun to be down at the World Pork Expo this year with all the high hog prices. We've had very tight numbers in market ready hogs and that is basically due to all the disease problems we saw last year, all the breeding problems from the heat last year and when I was on the show last time we talked about the circle virus and those problems are showing up now. And I think we're going to continue to see very tight supply of market ready hogs through the next 60 days, 30-60 days. So, that should be really price supportive under this market. Demand wise we've gotten great demand and export market, we're sending a lot of hams to Russia, just seems like it's really good. We've got record exports, I know that were just released this past week, they're even better than 2004 so I feel pretty good about the hog market. But the big question at the World Pork Expo is where are prices going to be this fall?

Pearson: Exactly.

Golly: And this problem with all the breeding problems and production has given producers an opportunity to take some hedging stances for their October through April and look at capturing some of that money because it is, a problem has created a very good solution to hedging up this fall because there are going to be more numbers this fall.

Pearson: Alright, what kind of price start are you looking at to do that?

Golly: Right now.

Pearson: Really?

Golly: Right now, yeah.

Pearson: So, you're going to get on them right now...

Golly: Well, you know, futures could rally, you know, another two to three dollars but the risk/reward scenario isn't there, you know, to try and price it out and miss out on it, it would be just too bad for them.

Pearson: Okay, so let's get aggressive out there from the hog business. We've got an opportunity that has been presented, like you say, from a couple of strange things and some good export business, this is the time to take action.

Golly: That's right and the export market should be better this fall is what I'm hearing too.

Pearson: Alright, so that's some good news.

Golly: Yeah, very good news.

Pearson: Thank you so much, Erin. Thank you, Darin. That will wrap up this edition of Market to Market.

Tags: agriculture commodity prices markets news