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Market Analysis: May 19, 2006

posted on May 19, 2006

Forecasts calling for hot, dry conditions combined with USDA's estimates of smaller crops were friendly to the wheat market this week, but pressured corn prices. For the week, nearby wheat futures were up more than 14 cents while the July corn contract lost more than 5 cents. Burdensome supplies and prospects for increased production in Brazil next year sent soybean prices sharply lower. For the week, July soybeans lost more than 26 cents per bushel, while the July meal contract declined by $4.40 per ton. In the fiber market, nearby cotton prices trended lower this week, with the December contract losing $2.58. In livestock, the June live cattle contract gave up 18 cents. Nearby feeders were up 65 cents. And the June lean hog contract gained more than a buck. In the financials, Comex gold lost a whopping $54.30 per ounce. Nearby crude oil prices were down $3.51 per barrel. The Euro lost 138 basis points against the dollar. And the CRB Index fell more than 15 points to close at 349-even. Here now to lend us his insight on these and other trends is our senior market analyst John Roach. John, welcome back.
Market Analysis: May 19, 2006 Roach: Thanks, Mark.

Pearson: Let's talk about what's going on. Obviously, the wheat market we've been talking about this winter, we have had some problems down in the Panhandle and south central Kansas and big chunk of Oklahoma with extremely dry conditions. The hard red wheat crop, of course, we are looking at the Chicago price which has also been a beneficiary here but is not in quite as much demand. What's your take on wheat prices? What should producers be doing?

Roach: The wheat market has had a big runup starting last Friday into the middle part of this week and then sagged back here at the end. The wheat producers need to be selling wheat. We are into the -- today we had the eighth day of a sell signal on the system we follow and we know that you are supposed to be making those kinds, making sales in those kinds of environments. We never know for sure whether the trade has the crop size figured out exactly right or not but the wheat crop conditions were improved a little bit on Monday's report. Now we're talking about having some more damage occur particularly in Nebraska where it is supposed to be quite hot. So, the trade is really uncertain but the market feels like it's become fully priced and we've also had a substantial decline in gold and crude oil, which is also putting some pressure over into the grain markets.

Pearson: Alright, so producers at this stage of the game, of course, who have wheat to sell for the coming year, you'd recommend taking advantage of this opportunity and make some sales?

Roach: I certainly would. It's difficult to do because you don't know exactly the size crop you have in the field. But to the agree you can, sell into the wheat market. This is not a crop that you're going to want to store, this is a wheat crop that you're going to want to sell right off the combine if you can, particularly the soft red winter wheat where we had massive fund buying this week. Two different days we had funds buy over 20,000 contracts. So, we boost from funds being short that market, Chicago wheat, to being a record or near record long position there. So that market has had huge speculative buying coming on board and we are reaching price areas that are very hard to sustain. World demand really tapers off at these price levels.

Pearson: Okay, so a heads up to producers out there and particularly like you say the soft red that is followed out of Chicago and you're saying all three classes, this is a selling opportunity?

Roach: We have selling signals on all three classes of wheat tonight.

Pearson: Alright, let's talk about the corn market. We're in one primary class, number two yellow and the corn market has behaved extremely well up until this week, John, then we saw things kind of back off. Certainly the crop has been going in, in a pretty timely fashion. Overall, with the exception of some rainy spots in parts of the Corn Belt maybe we are lagging just a little bit but things look pretty good heading into the 2006 growing season.

Roach: The crop estimate we received last week from the USDA may well be the smallest one we get for the season. The acreage is likely larger than what they indicated. The harvested acreage is likely to be a larger percentage of the planted acreage and what they indicated. And we think that the yields are headed toward being very good yields because the crop has gone in early and we've got plenty of moisture. If we were just to go back and remember how we felt in January and February when we thought that it was going to be a very difficult year because we didn't have subsoil moisture recharged in the dry areas. Now we have subsoil moisture recharged in most areas and in many areas they are even a little bit surplus and we have the crop planted as well. That's unusual. It's typically difficult to recharge subsoil and get the crop planted in a timely fashion. But this year we have both. Stands look to be very good. And now we have warm weather and that's just about an ideal situation to get the corn crop off to a good start. And what we know is that the crop will look better each day and each week for the next two or three weeks anyway, almost regardless of what the weather does.

Pearson: You have been talking about engaging in some kind of strategy where you are taking advantage of these deferred contracts, which have been huge. I mean, not overall historically high prices but extremely good prices. December of '07 and '08 corn, you've been saying get a piece of that business?

Roach: Several years ago we looked back through the history of the December corn futures and December corn seems to stop at very strategic price levels historically. 270, 295, 320 are stopping points for that market. A week ago today, December 2008 corn hit a high of 330 a bushel. So, that is really the first three increments. We have been well above $3 on December '07 corn. What people, of course, worry about is they worry that well, I may sell something and then prices will be higher. But really what a producer needs to do is to look at what will my profitability be if I'm making sales at those kind of price levels even if my fertilizer costs and my costs are all higher, what will my profitability be and make profitability kind of sales on increments of those new crop productions.

Pearson: Again, you are not saying price 100%, you're saying start making some sales?

Roach: Absolutely. Just make incremental sales that you can feel comfortable with and think in terms of what that does to the profit and loss on the farm rather than where the market might be.

Pearson: Still seems like there is a lot of old crop corn out there still, John, and we are planting this new crop. What is your advice for people that haven't done anything for '05 yet in terms of making sales and, of course, for '06 December contract, would you want some of that?

Roach: I think the December '06 corn needs definitely needs to be part of a sales program. I think '05 corn as well needs to be sold here. We have had a sell signal now, I think we are on the fourth day of a sell signal on corn. And those normally last four to six days. So, these are excellent times to be making sales, particularly when the market is driven up by speculative kind of buying more than substantial user buying. We don't have any tight supplies this fall and we may not have tight supplies at all for the fall of 2007. There's just lots of speculative buying that's coming into the market. And one of the things that producers need to think in terms of is when we have a big runup in these indexes, they only last about so long before you reach a peak and then all these big indexes go back down. I'm talking about the CRB index that was actually down this week after moving higher and making new highs here in just recent days. That index has been moving up since 2002. So we are already four years into a big bull market. And people are already extending it out saying, well, we are going to have big bull markets out in '07 and '08 and we may, we may. But I have been in this business long enough to know that high prices come and high prices go. And so you have to be willing to make sales on strength, particularly during this time of year. May sales on sell signals are many years, most years, the best ones we get, unless we get some kind of a weather problem later on in the growing season.

Pearson: Exactly right and who knows. Real quick, John, soybean market, clobbered this week?

Roach: Soybean market got clobbered this week. We really had no reason for the soybean market to be higher other than we thought maybe Brazil was not going to plant the number of acres and now we feel a little differently. The big deal there is currency. What is the situation as far as the real is concerned to the dollar. If the real continues to stay strong that hurts their bean market and they may not plant the acreage. But the real looks like it may well have peaked this week. There has been a lot of demonstrations going on and so forth and suddenly maybe Brazil isn't the best place to have your money any longer and we may well see some of that money leaving and if that's the case that takes the strength out of the currency and that could put them right back into planting big acres this fall.

Pearson: Alright, real quick, John, are you making soybean sales?

Roach: On any strength we're making soybean sales, we certainly are, Mark.

Pearson: Alright, real quick, cotton market, again, big selloff this week. This seemed to be a critical, almost a turning point kind of a week, John.

Roach: The cotton market really made new contract lows on July cotton this week after having a relatively positive or slightly positive report last Friday. Dry conditions in Texas, dry conditions on over into Georgia. The Chinese increasing their demand this next year by 10%. Worldwide demand up 6%. Things look very positive from the standpoint of the overall growth picture, but yet we make new contract lows in cotton. It's a little bit puzzling. But we are in the beginning of a growing season. At this juncture I don't know that there is anything to do with the market down like this. But it's clear that we don't necessarily have the kind of strength across all the markets one would think.

Pearson: Alright, let's head over to the livestock markets and talk about fed cattle. In our open there we talked about prices being down and plenty of poultry being out there. John, I know that has been a factor. Cattle producers are out there, you know, looking at a calf crop coming off this year, it looks to be pretty good shape. Numbers have been increasing. What about weights? Are we current? What is ahead for this cattle market?

Roach: Well, the market, the cattle on feed report, we have 9% more cattle on feed now than we did a year ago. Our red meat production since the beginning of the year is up 3.7% compared to a year ago. Over 5% more beef produced than a year ago. We may well have some bright news here because the talk is this afternoon that the Japanese are getting very close to accepting all of our terms and willing to take our beef again, maybe here yet this next month. So, that sounds a little bit more positive. I think we have a positive kind of demand situation right now this Memorial Day weekend. It looks like good demand out ahead. We'll see what the clearance really is on that. But in general, the cattle market is going to have trouble going up much. I think that we are going to have continued problems until we get clear all the way out to the fourth quarter. And feeder cattle prices are really difficult. You can't make them work with this kind of a cattle environment and you have the potential for corn prices to go higher as well. So, there's lots of worry here that I have for the beef producer. I think it's a time of real caution. Look for rallies in the market that need to be sold. Hopefully we can get some business going to Japan and I would sell the strength that comes from that rally.

Pearson: Alright, let's talk about the hog market, John, which again some big numbers but some encouraging export news and some encouraging prices this week.

Roach: The export news on pork is excellent. 21% more pork exports this year than a year ago in the first quarter. The packers are out competing right now to buy hogs. A good advance purchase is here for Memorial Day weekend. So, the news is relatively positive and probably will stay a bit more on the positive note until we reach our normal seasonal peak here out into the June, July time frame. So, we look for a little bit higher prices. But on that seasonal peak, we think sales on out into the fall make very good sense.

Pearson: Alright, John, are you concerned about getting any feed needs covered right now?

Roach: Right at the moment, no, but if you take the corn market back down a little ways I certainly am. I think cash corn probably has the greatest value out there of anything. If a person has a way to buy and hold cash corn that makes very good sense. There's huge carrying charges in the market. You can afford to build storage.

Pearson: Excellent, 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 Web site. And, of course, be sure to join us again next week when we'll examine the economic impact of alternative fuel production in rural America. Until then, thanks for watching, I'm Mark Pearson, have a great week.

Tags: agriculture commodity prices corn crops markets news USDA wheat