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Market Analysis: Apr 07, 2006

posted on April 7, 2006

Last week's acreage estimates were friendly to the corn and wheat markets and this week prices the rallies continued. For the week, nearby wheat futures were up more than 3 cents and the May corn contract gained another 7 cents. Meanwhile, bearish fundamentals pressured bean prices. For the week, May beans dropped more than 13 cents per bushel, while the May meal contract declined by $3.50 per ton. In the fiber market, May cotton prices, gained $1.32. In livestock, the April live cattle contract recovered $1.72 of last week's losses. Nearby feeders fell below 100 dollars for the first time in nearly two years before rallying to post a gain of 53 cents. And the April lean hog contract lost nearly $3.00. In the financials, Comex gold climbed $6.60 per ounce. Nearby crude oil prices were up 76 cents per barrel. The Euro fell 2 basis points against the dollar. And the CRB Index gained 6 points to close at 340-even. Here now to lend us his insight on these and other trends are two of our regular market analysts Doug Jackson and Walt Hackney. Gentlemen, welcome back.
Market Analysis: Apr 07, 2006

Jackson and Hackney: Thank you, Mark.

Pearson: Walt, Doug -- alright, let's talk, Doug, let's talk first about the wheat market. And, of course, that's been kind of the bullish market here of the three that we track for grains. And a lot of concern about the southwest and what that hard red winter wheat crop down in the panhandle of Texas and Oklahoma is going to look like. It looks a little bit better up in South Dakota and parts of Kansas after some rains this week. What is your take on this wheat market?

Jackson: Mark, we did have the big drop, of course, at nearly 50 cents after we had the big snow event a couple of weeks ago and now we have re-entered a period where, again, we're worried about simultaneously both southwestern hard red winter wheat production potential with a warm, dry, windy forecast for the next couple of weeks while at the same time we're worried about some flooding and delayed spring wheat planting in the north. The trade has a wide range of ideas regarding this winter wheat production number. Soft red wheat, of course, will be a large crop and very burdensome, the Chicago style wheat. But the Kansas City wheat continues to gain on Chicago and I think we're going to be in for just a period of some real volatility here.

Jackson: Of course, the export trade recognizes that U.S. futures, U.S. wheat prices are well above world values. We're going to have a larger crop in Western Europe which will not offset, however, a sharp drop in the Ukraine and Russian crop. But the overall world supply of exportable wheat should probably be something similar to last year. And if we can avoid a significant late season deterioration of this hard red winter wheat crop we'll probably see wheat values work irregularly lower into summer. But right now we're still at a critical phase on this winter wheat and weather situation, probably kind of a sideways kind of a trade at these values with day to day volatility watching the weather, Mark.

Pearson: Alright, now let's talk about the corn market. Again, the acreage shift that came out last Friday came as a, it seemed to be a surprise to the market, of course, for a lot of observers it was somewhat expected. It's caused quite a stir in Chicago but as you know we're really not going to know how much corn we're going to plant until we get into May and June. So, what is your take on corn prices right now -- are these sales levels?

Jackson: Well, we were surprised by nearly 3.5 to 4 million less acres of corn that people expected in that report. We've really had a full week of reaction to that. We saw the funds buy 40,000 contracts of corn late in the week. This week they're long about 190,000 contracts, a maximum previous long about 215,000. So, the speculation has been ramped up here now with a new crop corn balance table that, again, is extremely delicate. Normal increased productivity, normal expansion of yield would give us about 350 million more corn but demand is going up over 600 million for this next year led by a 550 million bushel projected increase in corn for ethanol.

Jackson: So, once again, we'll see the government project in May nearly an 800 million bushel decline year to year at inventories even with 150 yield, which would be the second highest yield we've ever had. So, we're going to have to have good weather, we're going to have to think we have good weather all the time and Mark, any type of a serious production threat from a perceived weather threat that would find us estimating the yield this coming August like where we estimated it a year ago below 140 and you'd have December futures shooting above $3 in a heartbeat. If you have normal weather, good crops, trend yields, of course, yes, we can go back down towards $2.10, $2.20 so we've officially entered the weather market now, Mark, and we're going to be adding or subtracting risk premium now on a weekly basis depending on planting progress and summer weather developments, a lot of volatility, very nervous. We're going to hold these prices well into summer because we're only discounting a little bit of a problem at these prices. Any kind of a threat will move significantly higher and these funds will pile in to record positions.

Pearson: Alright, so what are you telling producers?

Jackson: I'm not that interested in making sales at these levels. I'm assuming we're going to have more weather scares this summer, give you a better chance to make sales here. This is a very delicate situation with this supply/demand situation and we're not going to know if we're going to pull extra acres in until the June 28th report practically towards the 4th of July.

Pearson: Alright, now, let's go over to soybeans where the news has been anything but good. Obviously we lose corn acres and we add soybean acres. A big crop in South America from what we hear.

Jackson: Well, that's right, Mark. The big surprise in the acreage was we have more unwanted bean acres. We have a record crop in South America, we're moving into record supplies in the Western Hemisphere up about 10-15 million tons from a year ago. Of course, one reason we haven't completely collapsed below loan level yet in the United States, we're about 25 cents above loan now, is that people recognize that we're already apparently below the cost of production in South America. South America, as we've talked about many times before, has lost its economic edge on bean production, higher transportation costs, particularly the cost of Asian soy rust control has their prices below the cost of production. And we can't really bankrupt South American soybean production in the long run. We need them to continue to expand acres long run. But in the next one to one and a half years during this next crop cycle and slightly beyond we could tolerate less acres in South America which is the threat if we have a good crop in the U.S. We think the government will forecast a carry out at a record 700 million in the May supply/demand report. So, prices are probably going to work irregularly lower, Mark, and some substantially lower. Of course, again, producers are protected until June by the loan program in the U.S.

Jackson: Well, we may see prices work lower here. This is the one clear cut oversupplied situation. Unless we either have a drought -- I'm talking a major drought that significantly altered the picture -- or find out we have a lot less acres -- and, again, we won't know that practically until July.

Pearson: Okay, so the soybean market, some pressure there. Corn, some tightness. Walt

Hackney: , we've watched the cattle market that gave a great three year run. It's been under pressure since the first of the year. Poultry is out there, a lot of it, a lot of extra pork for that matter, a lot of red meat out there. Walter, what do you tell cattlemen these days?

Hackney: It's really hard to give a lot of encouragement to the cattle industry as we speak, Mark. We've taken a tremendous hit on feedlot cattle for the last month or six weeks. And we've come from making a little money on those cattle even through February and then all of a sudden we got into a red position at the cash price. Mainly, you know, we can't export, we're having to absorb that beef domestically which up to this year it wasn't so hard to do because exports in pork was holding that product level and the poultry wasn't any enormous threat until the flu issue came into being.

Hackney: We're drowning in poultry. We've got an enormous supply of pork. They are exporting as fast as they can but that isn't enough so beef has to enter that domestic market with those two issues as its main competitor. And they can't keep up. We've taken phenomenal hits on the dress beef side, the retail side whether it is showing it so much to the consumer or not might be debatable but the fact is from the wholesale side we've taken tremendous hits. We've got another issue coming at us in the cattle, Mark, we've got a season coming at us referred to as calf feds. Now, that would be those October, early November calves that came off of the ranches, been on feed now all winter, have done excellent with a good open winter and those cattle due to the maturity or lack of in those calves they don't take the ink, they won't grade well.

Hackney: So, all of a sudden we're developing an enormous spread between select and choice at a time when we've already got an enormous discount on the choice itself. So, these cattle that are being marketed as we speak are losing anywhere from probably 90-150 a head. Granted at the end of this week it did appear that we've got a preliminary floor set in this thing. None of us believe it's going to be for any long-term but it is a floor that may hold around this 80-82 cent cash level. That is going to be a red figure for the cattle feeder but at least maybe the drop has pretty well been stopped.

Pearson: What do you say to these cow/calf guys in this feeder market?

Hackney: Feeder market, interestingly, has taken some reduction in the cash market but nothing like fat cattle. So, the rancher sitting out here dropping calves today he is still thinking in terms of last year's calf prices. The cattle feeder sitting back here losing 100-150 a head, he's thinking somewhat differently, that's correct. I don't know where the market will be on the summer calves and fall calves. I do know that the merc anyone wanted to hedge won't allow any hedges at the current price of feeders. They've got to go down. Now, if that mercury spawns, if the funds get under it, if they push that merc up on the long side that would maybe help some hedging opportunities at the current feeder level and it wouldn't have to drop.

Pearson: Okay, let's talk about the hogs. You mentioned it, plentiful pork supplies. What do you see ahead now?

Hackney: Well, some analysts have predicted this volume of hogs we've got, 268 to 270 pound average market weight, lots of tonnage, 2 million or near 2 million head of hogs a week. That was a surprise to a lot of us including myself. Some analysts said we would have it and we do. We're going to hit 1,975,000 probably this week. Going into, as we approach mid-May and into the latter part of May I wouldn't be at all surprised that we hit 2 million head. The problem is, again, the competitive nature of protein meats on the poultry, pork and beef. And right now pork is trying to hold its own in that competitive arena but they're not doing a very good job and are not able to export enough pork to offset the supply.

Pearson: Alright, Walter, about fifteen seconds. Would you do anything as a pork producer from a head standpoint?

Hackney: I wouldn't right at the moment because we're going to, we've already sold this market down pretty dramatically and it may be oversold by some of the better analysts' opinion. So, I would suggest, I guess, to sit tight, take the cash market. It isn't a huge loss for the hog producer at this cash level.

Pearson: this point. Walter, thank you so much, Walt Hackney and Doug Jackson, thank you so much for your insights. That's going to wrap up this edition of Market to Market. But if you'd like more information from Walt and Doug on just where these markets are headed then be sure to visit the Market Plus page at our Market to Market Web site. And be sure to join us again next week when we'll examine the increasing role of women in farm ownership and marketing. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news wheat