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Market Analysis: Sep 09, 2005

posted on September 9, 2005

There's just enough volatility in the grain markets to make traders nervous ahead of next week's USDA crop report. For the week, nearby wheat futures gained eight cents. And the September corn contract fell a half-penny.

Soybean prices were pressured by trade expectations that USDA will increase its crop projection on Monday. For the week, the September contract lost eight cents. The nearby meal contract was down $2.70 per ton.

Cotton prices again moved higher as the market assessed crop losses in the South. For the week, the October futures contract gained $1.58.

In livestock, the October cattle contract was up $3.62. Nearby feeders gained $3.77. And the October lean hog contract jumped $3.10.

In the financials, Comex gold advanced $4.60 an ounce. Nearby crude oil prices fell $3.52 a barrel. The Euro lost 143 basis points against the dollar. And the CRB Index fell more than six points to close at 325-even.

Here now to lend us his insight on these and other market trends is one of our regular market analysts, Darin Newsom. Welcome back.

Market Analysis: Sep 09, 2005

Newsom: Thank you, Mark.

Pearson: Let's talk about this corn market. Nancy's excellent report on what is going on in the river really undergurts what has happened since Katrina hit the Gulf. Talk about what a corn producer who maybe has some old crop still to sell and maybe hasn't sold much new crop what they should be considering.

Newsom: Yeah, I tell you what, it's really been something since this occurred. You know, I was up in central Illinois at a farm show, trade show actually when all this started to happen. And that was the question. there was producers who would come up and they were asking that very question, you know, what do we do? Right now if they're still holding cash it's a very difficult situation because it caught them, from a producer's standpoint, just at the wrong time. As the piece showed they were just moving some of last year's old crop into these terminal facilities when the basis levels just started to collapse. You know, so they're cleaning out the bins and they're trying to make room for the new crop that is moving in. So, you know, right now as the other piece showed, as the other part of that segment showed how this basis, how this weakening basis has had a ripple effect, you know. It started along the river and as this corn has had to find home at the interior markets we're starting to see those basis levels weaken as well. Now, there was some good news here late in the week as the river traffic started to pick up. We started to see some strength come back into the basis market. So, if producers are looking at this and they've still got the corn and they've rolled these hedges out since last harvest, you know, they're still looking at a much weaker basis than what we normally see. But there is still probably some opportunities, most notably on the interior markets if they have to move something right away. If they've got the crop under loan it's also been a very interesting situation here recently is the movement of the post county prices by the FSA offices. We've really seen a collapse in that where a lot of them now if you look at the post county prices compared to, a lot of cases, the local cash price it's bringing in the opportunity to go ahead and if you've got the loan with the cash price higher than the PCP go ahead and sell the cash and then pay back your loan at the lower rate, come out that way and you can still come in ahead of loan off setting some of the recent basis losses that we've seen. So, from the old crop perspective there are still some things to do if they were able to ride out the problems of last week.

Pearson: Alright, now, Nancy also pointed out that many of the export elevators are open and we're about 80% capacity down there. We have heard ships moving out so we're getting some positive news from down in New Orleans in terms of this crop again starting to move and move out into those export markets which are so critical. If we see that continue aren't we going to start to shore up this basis pretty quick?

Newsom: We should but what we have to realize this is a long-term, and we're all fully aware that this is a very long-term problem. They're getting these elevators up and running, you know, the barge traffic is moving both ways. But, you know, to say the river system is going to, you know, they're still trying to put together crews for tugboat crews and things to guide these ships up and down the river. There is a huge back log of ships. So, you know, this is going to be a problem that we're going to have to deal with. But yes, you know, if you look at the markets and you look at the river freight bids going further, 60, 90, 120 days out you're starting to see some optimism, you know, at least of some type of market basis improvement out that far. Yes, we're going to already be through harvest at that point and we'll know what we have, we'll know if this crop is actually going to be as big as what some think after all is said and done with the summer weather. So, at that point we'll see where we're at. But we should be able to start to see some improvement as we move forward.

Pearson: And, again, the interest isn't really on the futures side at this stage, it's on the cash market. I think you get around to talking about that post county price. Now, if this drags out and if these basis levels stay weak we could be looking at some substantial LDP opportunities.

Newsom: We certainly could and as you look at it one of the important things that producers have tofind out is they've got the opportunity for storage hedge because there is carry in the futures market but the futures aren't moving much. So, what they have to weigh out then is that going to bring in more income than say a LDP marketing opportunity where if you sell cash and take these substantial LDP's that may be available coming out that much ahead of loan and then not even having to worry really about the basis game because we're just coming up on the time of year, we've suffered from a weak basis since last harvest. Basis normally doesn't bottom out seasonally until early October. So, we've still got, you know, a good four to six weeks of fighting through some of this basis problems without the back log at the river.

Pearson: Let's talk about soybeans. The market there, the cash market there, it hasn't nearly the dramatic hit that we've had and futures really have been relatively flat, a little bit of pressure this week. But what is your take on soybeans?

Newsom: Soybeans I think the biggest thing to hit the soybeans today, and it's interesting that the collapse that we saw in the last fifteen minutes in front of a report, you don't normally see this and the September report isn't one of the major reports that come out through the course of the year. But be that as we may we still saw the November contract drop through six dollars relatively easily, triggered some other orders, some further sell orders that actually took it through a more, maybe a more important support level of around $5.94, closing near $5.90. This doesn't, you know, bode well going into next week. The soybean market for quite some time has been saying, if you look again at the spread between the contracts, if these commercial traders have become more comfortable with the crop situation, the yield prospects keep going up, in fact most estimate for Monday's report do have an increase in yield, an increase in overall production. So, both the commercial and the non-commercial traders are growing much more comfortable about this market and you're seeing that start to be reflected in the way the market itself is moving as it continues to grind lower, these support levels don't hold and overall going home this afternoon it just really doesn't look that bullish heading into next week.

Pearson: Alright as a producer what would you tell them to do?

Newsom: As a producer if they've already got some sold, if they're hedged into November, if they've got some forward contracts, we've had some ample opportunities to get that done this spring. We're not in LDP situation right now so keep a close eye on Nov./Jan. and the Jan./March spreads. Those have been widening out. This is what tips us off about the commercial traders getting more comfortable. As those spreads widen out and if you have the opportunity to put them into some type of storage and hold for a while go ahead and do so. And then let's see how the crop plays out. Let's see how the beginning of the South American crop comes along and then maybe we could again see some seasonal basis strength further down the road.

Pearson: Alright, you're right, we'll be watching South America here pretty quick.

Newsom: It's going to turn to that very soon.

Pearson: Let's talk about the wheat market which you're a Kansas boy, talk about wheat prices. And again, the world situation has not been that positive for wheat. We have plenty of wheat around the world. Now that has kind of changed after 2005.

Newsom: It has and the interesting thing is maybe we see all these reports where ending stocks, you know, world ending stocks are, world ending stocks are not where they're suppose to be but they're comfortable. But quality wheat, I think that is really what is boils down to and right now the hot item in the wheat market is the U.S. hard red winter wheat. We've really seen a lot of export demand in the hard red winter wheat. So, what this has done to Kansas City December contract is strengthened basically against the Chicago contracts, against the Minneapolis contracts, even against the deferred Kansas City contracts indicating, again, very high commercial interest in our high quality hard red winter wheat, we've seen some reports this week supposedly Iraq was on the books for another 600,000 metric tons of hard red, good sale for the week and export numbers again this morning, they were delayed a day so the weekly export sales number, again, very solid numbers dominated by hard red winter wheat. If we can keep this up and if we can keep this type of export demand hopefully we can start to break out of this long sideways pattern that wheat has been stuck in and if it does come it's probably going to be on the hard red side.

Pearson: You know, that is ground zero for this event, it was in the South where our cotton is planted. Cotton markets responded positively to that. What would you tell a producer right now?

Newsom: Right now, you know, it's the same sort of scenario that we've seen in wheat. Cotton has been grinding lower but all of a sudden it found some support down around forty-six. Now, it hasn't really, it's crawled back above fifty on the front month contracts. There is a, you know, so if a producer was short, maybe they've rolled that into some puts or they've turned it into some type of put strategy at this point allowing the market to start to work toward the upper side of, the upper levels of its sideways trading range, if we can start getting through these $54, $55 ranges and $5 levels maybe we can start to push higher. It looks like it's got that potential here probably in the next two to three months.

Pearson: Alright, let's go over to the livestock markets, a very positive week in the livestock market. Fed cattle on the board up over three dollars, feeder cattle were up as well. We've seen nice movement in those cattle futures.

Newsom: When we came into this shortened week, you know, it's shortened because of the holiday.

Pearson: Post Labor Day.

Newsom: Post Labor Day, you know, that in itself to be talking about a higher market post Labor Day is interesting. But we were looking for a dollar lower cash mark and we actually came in with two dollar higher, $83 was traded in the southern plains. So, we actually had a two dollar higher cash market. So, we've seen the futures really rally in here. They've tied themselves to the cash market. Now, what is going to be interesting to see is if we can continue this next week. It's an interesting situation talking with some other analysts where you've got both the packers and the owners of the fat cattle, we're losing money at this point. I mean, break evens in the 3rd and 4th quarter are posted out around $90. Well, we're at $83 cash with futures around the $84 to $87 market, somewhere in there. So, you've got an interesting situation where both sides are reportedly losing money. How much further can they push this market? Seasonally we do start to rally the cattle here through the last part or into the fourth quarter. If we can continue this type of movement we might be able to work back to this $85 to $87 range in the futures. Look like it's hard to say it's a good hedging area especially if you're hedging in a loss but that might be a pretty decent opportunity here coming into, as we head into the fourth quarter.

Pearson: At least limit some of those losses.

Newsom: That's right, that's right.

Pearson: And, of course, they're going to have a cash corn opportunity maybe to maybe reduce those break evens a little bit too.

Newsom: If they're looking at the cash corn now they're seeing prices that are near the lower end of the historic price range plus they've got these incredibly weak basis levels. You know, it's time to be locking some of that down.

Pearson: Absolutely, real quick about 15 seconds. The hog market going forward as you look at it again, a good week for hogs.

Newsom: Very good week for hogs again, a stronger cash market than what they anticipated. Seasonally we haven't quite shaken off the bearishness that we normally see this time of year. We need to do a little bit more work. Next week is going to be very important again to see if we can continue this upward trend that we set this week.

Pearson: Again, same advice there, record low basis levels down the road, livestock producers need to take advantage of it.

Newsom: Absolutely.

Pearson: So there is your word for the week. Darin Newsom. Thank you so much, we appreciate it. That will wrap up this edition of Market to Market. But, of course, be sure to join us again next week when we'll examine how an innovative program in Nebraska is bringing farmers into the no till fold. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news USDA