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Market Analysis: Oct 07, 2005

posted on October 7, 2005


Wheat varieties traded in Kansas City and Minneapolis remain the darlings of the grain markets. For the week, nearby wheat futures in Chicago lost more than eight cents. The December corn contract fell by three cents.

Soybean prices slumped again thanks to the bigger crop estimates. For the week, November beans lost nine cents. The nearby meal contract was off $1.90 a ton.

Cotton prices continued their steady climb. The October futures contract went off the board Friday with a gain of 70 cents for the week.

It was another great week for livestock prices. The October live cattle contract was up $1.13. Nearby feeders jumped $2.90. And the October lean hog contract improved by $1.35.

In the financials, Comex gold climbed another $5.70 an ounce. Nearby crude oil prices slipped $4.40 a barrel. The Euro gained 101 basis points against the dollar. And the CRB Index fell three points to close at 331.50.

Here now to lend us their insight on these and other market trends are two of senior market analysts, Walt Hackney and Doug Jackson. Welcome back.

Market Analysis: Oct 07, 2005 Pearson: Alright, well Doug let's talk about this wheat market. We follow Chicago wheat here on the show, the soft red varieties and we've seen some, of course, a nice rally there and then we're backing off the last couple of weeks. But the spring wheat varieties seem to really be jumping.

Jackson: Mark, the September 30 production number cut the U.S. spring wheat crop sharply. We had record good crop ratings earlier in the year, we expected a record yield, a record crop and it turned out to be damaged at the last minute and not nearly as big as expected. So, the USDA will be incorporating some relatively significant changes in their subclass projections next week and the Wednesday supply/demand repots. We have a smaller crop of spring wheat, extra demand from Nigeria and Iraq due to structural, logistics and political problems that have them buying Australian and U.S. wheat even though there are a lot of cheaper wheats in the world. So, the hard red situation continues to tighten and the total wheat supply in the United States is not a great deal different now as it turns out to a year ago.

Jackson: So, the wheat market is dealing with a lot of structural changes and fundamental changes of attitude here. We have dryness in the Ukraine; we have some questions about the quality and size of the Canadian crop. We have some dry weather in the U.S. and yet major exporters' supplies in the world are still very adequate. Black seed prices are way below U.S. values. The funds were short a record amount of Chicago wheat and long a record coming out of Kansas City. The technicals moved enough that the funds covered that entire 40,000 contract short position at Chicago. Now they're even, we've had the rally, now the question is whether U.S. prices are still so high versus the world that we'll see the funds come in and re-sell the Chicago variety which has very, very poor demand and some of the lowest new crop sales in years. So, we have a totally different situation in the subclasses, a generally adequate supply from the longer term view. Prices at these levels are probably unsustainable but you may see a lot more choppy price action as we've been seeing here in recent weeks.

Pearson: Okay, for those subclasses, for the hard red spring wheats, you recommend making sales?

Jackson: We actually think Kansas City could gain to 50 or 60 over Chicago so that would be another twenty or thirty cents from here. Minneapolis may continue to gain on Chicago. Everything is probably going to gain on soft wheat. But we might see some further strength in Kansas City as I just said. But the soft wheat varieties probably are still overpriced and need to be sold right here.

Pearson: Alright, let's talk about the corn market, which, of course, we're in the full brunt of harvest is occurring right now and typically we're seeing prices soften up some. Basis prices have been very -- terrible. Let's call a spade a spade for the most part throughout the Corn Belt. What is your advice to a corn grower right now?

Jackson: Well, Mark, we're still in the process of discovering how big this corn crop is. Our estimate, and other well-followed private analysts throughout this week, everybody is adding 200, 300, 400 or more to the current projection from September. We already faced a record storage problem with the September production numbers particularly in the Western Corn Belt. Now we're adding two or three or four hundred million on top of that. Nebraska, Minnesota and Iowa will clearly face a storage deficit problem this year that is beyond anything ever imagined, even much worse than a year ago.

Jackson: We have a transportation problem, we have sky-high car freight, we have sky-high barge freight, we have a situation that just can not move the grain. And as you said, we're going to see record low basis values. The game here is really much as it was last year. People will take their LDP payments, forty or fifty cents a bushel at harvest, generate a lot of cash flow, they won't want to make any cash grain sales but the trick here is to make those sales for Jan., Feb., March, April, May, capture those carrying charges, this huge carrying charge in the cash market. You can net well above long by doing so. The producer that has the space to hold the grain can capture those carrying charges, earn that. But selling it in this very depressed, almost non-existent cash market in the nearby is going to be a very ugly thing to do but we may get to the end of this storage problem into this harvest and find out people will still have to make forced sales at unattractive prices. Unfortunately the supply/demand situation this year may actually be more bearish than a year ago. We didn't have a two billion carryout estimate last year until February. Today we're already imagining a 2.2 billion carryout or more. July corn futures went down, too, and below two dollars last year. Even after beans had rallied, stay at $2.32 roughly, they spent very little time above $2.35 last year. We would see July corn today until we get clear out into next summer as up five, down twenty-five items. So, very little upside, make those sales and lock that carrying charge in today. There is not much opportunity in the corn unless we get into a drought a year from now.

Pearson: Well, let's talk about soybeans where the picture has grown more and more bearish as this harvest, the soybean harvest continues, as well.

Jackson: Well, we again are seeing production estimates, 100, 200 million larger than the previous guesses. That would give us a 300 carryout, maybe a 400 carryout, certainly a situation that is significantly different than we thought. Yields have simply been astounding, 50, 60, 70 bushel beans in places where we thought we had a drought. The new management, the new varieties have astounded the trade, we still have to discover the final crop size. But even at that, Mark, the general supply/demand situation and the more important Western Hemisphere broader view, even with the larger private numbers we're dealing with now, will actually be slightly tighter than a year ago from what we thought at the time when futures were somewhat lower. So, the fact is here that even if South American production rebounds some, the supply/demand situation may not really be that bearish at these prices with cash prices near loan. And the market is dealing with the phenomena that we may now be discovering that South America with their tremendously high freight costs into and out of Mato Grosso in the northern areas with the high currency move that we've seen, their local currency, are now at a permanent disadvantage in terms of cost of production.

Jackson : The world needs six million more bean acres per year in South America to keep supply/demand in balance. Right now we're projecting acreage will actually contract as their domestic economics implode on this soybean production situation. So, we may actually be below the cost of production in South America, some may be sustainable long-term. So, there may be less down side to the beans right now but if we have a huge crop in the U.S. we may be really at a $5.80, $6.00 range for quite some time.

Pearson: Alright, as usual some great insights, Doug Jackson. Thank you so much. Walt Hackney, let's talk about livestock. This fed cattle market last time you were on you were thinking we'd see a nice rally, we had a post-Labor Day rally and this market has hung in there pretty good.

Hackney: Mark, it has maintained a good pace. It has not been a profitable pace for the cattle feeder at no fault of anyone except those feeders that are currently finished in the lots, were bought too high for an $85 cash market to make them make money. As we speak this week, the feedlots were rolling the dice, refusing to sell cattle much under ninety cents a pound. It sounds like big figures, Mark, but forty dress sounds like big figures. The point being, eighty-eight, maybe eighty-seven is kind of a bare minimum for a profitable sale as we speak on these fat cattle. We've got an elevation here that has made the air very thin for cattle feeding. The bailout could be, as Doug is indicating, cheap corn, possibly cheap corn. Possibly the cheaper ration cost is going to assist these cattle that are currently being fed to come out and hold their money together. In my lifetime, in my career, it's been rare that I've seen cheap corn make profitable cattle. Historically, it's cheap corn, cheap cattle, and we potentially can see that because as the market resists then we see heavier cattle due to the cheaper rations. So, I don't know, all in all in this thing, Mark, the point being cattle need to continue to be sold. They shouldn't fight the market at levels that are at or near break evens or profitable to a certain extent. Then the magic $90 cash market, nothing was sold this week enough until we went on the air today, Mark. And I don't know if we got the $90 or we did not today. If we didn't, if sales weren't made at $88 or better and if the feedlots sat tight on that show list this week, that will simply compound the issue going into next week. Packers, granted, are short bought. They're very current in their inventory but they're not going to continue to bleed as they have on their bottom line, so going into next week it will just stiffen their resistance to the feedlot asking price.

Pearson: Walter, we've got a lot of cow/calf producers that watch this show and they're tracking this feeder market and this calf market has still been strong. I know they've got some profitability issues on the finish side of the business but this feeder market is down.

Hackney: Well, true, and the asset base position of the rancher is probably as good today as it's ever been. He's probably more liquid today than he's been in five or ten years. I don't know but in that vicinity. That is why a lot of them kept some heifers back. They felt they could afford to maintain that calf for two years before she give them a coupon. The point here being, yes, we've got historic high prices, subsequently we've got historic high break even figures and if the meat complex, pork, poultry and beef continue with this extraordinary production that we're experiencing, beef might get to a level where the consumer is going to back away and those break evens are going to drop, I mean the break evens are going to create a problem.

Pearson: We've got about fifteen seconds Walter, a quick word about hogs.

Hackney: Well, hogs at two million a week is probably an overload on the pork complex. We've got extraordinary exports; that is the only thing that has kept pork alive the way it is for over two years. Now we're killing two million head a week consistently. We've got two million a week coming at us and so I would suggest that pork is pretty well toppy.

Pearson: Alright, word of warning there from Walt Hackney. Doug, thank you. Thank you, Walt. That will wrap up this edition of Market to Market. But be sure to join us again next week when we'll examine the price action that follows the big USDA crop report. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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