Roach: Thank you.
Pearson: John, I was down in Amarillo, Texas this last week and it is scorching dry down there. They haven't had a good rain since last March. Other parts of the plains as we reported earlier in the show are also struggling. This winter wheat crop looks pretty thin right now, not that that's unusual for that crop but we're looking at some especially dry weather right now.
Roach: Yeah, we certainly are. Probably the biggest impact is actually occurring in the cotton market. You know, 35% of the cotton crop is raised down there in that area and it's extremely dry and causing the market to move higher. It's also certainly helping the wheat market strengthen as people look at the abandonment on wheat acreage and worry that the dry conditions could give us a heavier than normal abandonment.
Pearson: Talk about that, that is something that we face in the winter wheat crop from time to time. And, again, we're early in that growing season. But there is some concern that those may not be harvested acres.
Roach: Well, that is the biggest concern happening in the wheat market right now. If we look at last year our abandonment was about 19%. In 2002 it was closer to 35%. So, with this less, smaller acreage number that we saw in this week's report, about 1.5 million acres less than what people anticipated the abandonment becomes extremely important and, of course, the yields do as well. But the abandonment is going to be the real key.
Pearson: Alright, what is your outlook for price? What should producers be doing at this stage of the game?
Roach: Well, the wheat market has been a strong market really for a period of time, most notably in the Kansas City wheat, drug backwards by the soft red wheat represented by the Chicago wheat futures contracts. We think that the Kansas City wheat will continue to be a strong kind of a market as it pulls forward here. There is arguments that we could have carry-overs get very, very tight if we don't see some relief as we move into the critical spring period here for that hard red winter wheat. We could even see a tightening in the soft red winter situation and see that market become a bit stronger but it'll be the Kansas City wheat that likely leads everything.00:18:29:18 00:18:51:08 [00:00:21:20] PLUSPearson: Okay, so keep an eye on that one. Let's talk about the corn market, John. Of course, immediately after the first of the year we had this nice up swing in corn and soybeans. And really towards the end of December and going into the first week of January and then, of course, the USDA report yesterday there is plenty of corn out there. What kind of corn producer who maybe hasn't made sales yet look forward to?
Roach: Well, the corn market typically gives us its best price in March, April, May, June time frame. What happened this past year, this past fall was users did not get enough corn purchase from the farmers. Everybody thought they would, we thought we were going to be out of space, that there would be forced sales but as it turned out the users just didn't get that much bought. Once the market slid down to the lower levels farmers dug in their heels. The users had to start to bid up in order to get any corn to move to take care of their needs. They first did that with the basis and then pretty soon the futures started to rally and then we got a bunch of friends coming in, in the commodity funds and the indexes buying for technical reasons and for the concept that corn maybe is just one step removed from energy and if we're going to look around to see what could gain value over time it sure could be the corn market. And so we've seen a lot of speculative demand come in and that was all fine until we finally reached the price levels that U.S. farmers were willing to sell and that stopped this market.
Roach: And I think the one thing that producers need to look at as far as their near term marketing, look at where the highs were here a week or so ago when we made that peak. That is probably where we'll see more corn be available to the market place and that will probably be a tough resistance area. There is no question that we have enough corn. We've got lots and lots of corn. But farmers don't have to sell it and they're in a pretty good financial position right now so we have to get up to their price and that means getting back to that same level that we were at before. But there is enough corn available we probably can't go lots further unless we get into some weather issues.
Pearson: Okay, and of course barring weather which we never know what is going to happen with the crop would you look at entertaining pricing maybe some 2007?
Roach: I've actually been advocating that for some time. When we move this market up into the $2.60 range for December 2007 and December 2008 both in the $2.60 range, a little bit above that actually on the close today, those are price levels to start making some incremental sales. Historically we use the number of $2.70. Any time you can get a December corn futures are $2.70 it's worth the first increment of sale. We're backing that number down a little bit because these surpluses are large enough we think we have to come at the market just a little bit quicker. We don't want to become real negative to this market, however, because the longer term picture continues to be very bright. We continue to grow the world demand for corn in that four to five percent per year compounded and so the longer term is very bright. The energy production, the ethanol production that we're seeing is extremely bright. Articles in the Wall Street Journal this week, I think Tuesday, Ford and GM both are putting some significant investment into flex fuel vehicles. They are very excited according to the Wall Street Journal article about the potential growth there. I'd love to see the farmers get together with the United Auto Workers and work out some sort of a program to really assist the movement of money into flex vehicles. We need to be producing more flex vehicles, flex fuel vehicles in this country, we need to move a greater percentage of our total fuel consumption for vehicles into renewable resources.
Pearson: Well, that looks like what is going to happen. Let's talk a little about soybeans. Of course, that is pitting into the biofuels business as well with soy biodiesel. But it didn't help this last week here with the soybean market, we've seen some more pressure come in.
Roach: The bean market is finally realizing that there is a crop coming at us in South America that unless the weather turns bad that crop is going to be very large. That is on top of a U.S. crop that is in the bin that is also very large, forecast for the largest carry over in this country in a long, long time and stocks to usage ratio that is a very burdensome situation. So, if they have good growing conditions in South America we're going to have a huge inventory of beans that we have to deal with here over the period of the next four or five months. And then, of course, we have our crop coming on in the new year and if we have decent growing conditions then we'll have another big surplus building again next fall.
Roach: So, the bean market started to get its arms around that. And all the speculative buying that had been there carrying the prices higher seemed to back away a little bit and the farmer movement was pretty good as we got the market up toward those peaks. So, those peaks are going to be hard peaks to get through unless we have some kind of an increase in weather worries out of South America.
Pearson: Alright, on all of these commodities you mentioned these commodity funds. They're into the market on the first of the year, we kind of knew they were coming. The impact as you would measure, John, looking at this new exposure that investors now want to have to commodities?
Roach: It's a positive impact. The exact size of it we don't know. But think about it in these terms, that people every month when they make contributions to their retirement program some of that money is starting to find its way into holding inventories of agriculture in the futures market, inventories of grain in the futures market particularly corn and even coming, growing interest is in the wheat market as well.
Pearson: Alright, follow up on soybeans real quick. As you look ahead now for producers who are maybe making pricing decisions for this 2006 crop what would you tell them?
Roach: Cross your fingers, hope we get a little weather worry in South America, decent rally back up and be there to be a seller. You do not want to hold inventory into the South American harvest unless they have a weather problem there.
Pearson: Alright, let's talk quick about this cotton market, John. We talked about the dry weather down in the plain states and through the Cotton Belt and we certainly have seen a rally in cotton.
Roach: Well, the dry weather is a real key and a lot is going to hinge on what kind of a spring we have there. It has pushed the December cotton up into the 59 cent area. This 60 cent area is also a price area that we like to be making those first incremental sales. We do have a sell signal continuing on cotton as we speak and so it is a time to be a seller of cotton and then cross your fingers and hope the rains come.
Pearson: That's right. There is, over on the livestock side, let's talk about that. There has been some unease now in this fed cattle market and the hog market we had a huge sell off. Let's talk about fed cattle first. This month, this week we saw some big carcass weights on hogs, a little concerned about what is happening in the cattle market.
Roach: I think the first problem we have in the pork industry is the poultry industry. The poultry prices are very reasonably priced and consumers are willing to buy that lesser product particularly because their cost structure, the bills at home are running higher because of all the increased energy costs. So, we're finally starting to see that impact over on the demand side. It's something that I've been worried about and continue to worry as we look out forward because we have increased supplies coming at us. So, the production numbers are big and the consumer is getting tightened down from the standpoint of how much available money they have.
Pearson: Alright, cattle producers right now, hedge opportunities? You're paying a lot of money for these feeder cattle.
Roach: I think you have to look at that. I think, you know, we hope for resumption in demand when we saw the Japanese business come back at us and as you can see on the chart we had a blip up in the prices. But we really haven't gone anywhere. The tonnage is still big and on this report we saw this week the production numbers for beef for the second quarter up nine percent from a year ago. So, we have increasing numbers out forward. The good weather in feed lots have allowed the cattle to do lots better than what they would normally do. So, that dry condition which is hard on the crop has been very good on the livestock gain. So, we think that this, the cattle business is going to be in a little bit of tough shape here both from the demand and the supply standpoint.
Pearson: Big sell off in futures for hogs this week. We heard a lot of different things, increased carcass weights certainly one, exports I suppose are a factor as well but a lot of things just ganged up on pork this week.
Roach: Well, again, I think that the competition from the research that I've seen there is more competition or cross competition between poultry and pork than there is between pork and beef. So, when we start to lose some demand in the pork industry look over to the poultry industry to see what is going on and if you do you'll find that poultry prices are very, very competitive.
Pearson: Going forward now, for those in the hog business you look out and you have a week like this it can give you pause to think. Would you be looking at hedging hogs as you look into those summer months?
Roach: As the market strengthens I'd like to hedge into, at least early spring into the April time frame. I'm not quite ready to sell into the summer time frame. Traditionally that is a better time frame for the market place and so unless I'm back right up to near the highs I'm not very much interested in making summer sales. But I am interested in getting protection out through April.
Pearson: Potential volatility in all the markets that we talk about. Would you be covering some feed needs?
Roach: I think in the cash market on sell-offs I'd be covering feed needs out into perhaps the fourth of July. I think that we're going to have a strong spring as we worry about what kind of weather we're going to have and what kind of yields we're going to have. And I think that means that as you get weakness here during the month of February particularly that is when you want to pick up your inventory.
Pearson: Excellent, John Roach, thank you so much. That will wrap up this edition of Market to Market. But be sure to join us again next week when we'll examine how U.S. agricultural trade stacks up in the global market place. Until then, thanks for watching, I'm Mark Pearson, have a great week.