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Market Analysis: Aug 19, 2005

posted on August 19, 2005

The grain markets remain pressured thanks to sluggish demand and abundant old crop supplies just ahead of harvest. For the week, nearby wheat futures gained four cents. But the September corn contract lost more than seven cents.

The focus in the soybean pits has shifted to late improvements in yield and that's a bearish sign. For the week, the September contract lost more than 43 cents. The nearby meal contract was down $15.40 per ton.

The cotton market was decidedly sluggish, with the October futures contract slipping 26 cents.

In livestock, the August cattle contract was up $1.40. Nearby feeders gained $1.33. And the October lean hog contract jumped $3.63.

In the financials, Comex gold dropped $8.70 an ounce. The Euro fell 274 basis points against the dollar. And the CRB Index plunged nearly 11 points to close at 312-even.

Here now to lend us his insight on these and other market trends is our senior market analyst, John Roach. Welcome back.

Market Analysis: Aug 19, 2005 Pearson: And to lend us his insight on these and other trends our senior market analyst John Roach. John, welcome back.

Roach: Thanks, Mark.

Pearson: Well, let's talk about what is happening up there. Let's talk about the soybean first. There seems to be a great deal of interest about that one and what is ahead for soybean numbers. But also what is this crop going to look like? There is a lot of things happening in the country right now weather wise which might help fill some pods. What is your take on soybeans?

Roach: Well, we have certainly improved weather since the earlier part of the month. And traders are really trying to figure out exactly what has happened. Have those plants in the dry area been able to fill and to recover some of the losses that occurred during the first part of August or not? And that is a real active debate right now. We'll have to wait and see on the September crop estimate. We came across Illinois and through the eastern part of Iowa over the last two days and the crops are so uneven, it's just so difficult. You see a good field next to a poor field in the dry areas and a lot of up and down variability within the same field. So, people are having a hard time getting their arms around what the size of the crop really is. But what the market is telling you is that our drought market is over. This market is unwinding in a similar fashion to most all drought markets. And the thing that I think people need to really understand is the big market this summer was not caused by our drought, it was caused by the Brazilian drought. We actually put the peak in the market in March. The Brazilian drought gave us our highs, we came back and tried to attack those price levels and when we were having our weather problems in July but we weren't able to get above those or even to those same price levels that we made in March. So, the key is that our crop is becoming less important to the marketplace and what is going to happen in South America will start to increase in importance as we move into their planting season.

Pearson: Alright, and so we need to be watching what is happening in the southern hemisphere closely when it comes to making marketing decisions here, going forward. Now there is kind of a question mark as to what that Brazilian crop could be this coming year in terms of planted acres. So, we have that hanging over our heads. But at the same time we're talking to a lot of producers right now who maybe haven't done anything. Based on what we're seeing there is still a lot of beans out there in the countryside.

Roach: There certainly are, there is 300 million bushels estimated for the carry over this fall before we start the combine in the field. And that is a big number relative to historical levels. So, we have to find a home for all those old crop beans and the job of the market is to find who will hold them into the new crop. And that normally means prices come down. By the same token the people who are buyers of soybeans, the Chinese of course are a very big buyer overseas, this week was the first purchase of new crop beans that they made, 55,000 tons. Last year they had something in excess of, well, almost 2.5 million tons on the books right now. So, our buyers have been real reluctant and with the market prices higher than they were a year ago the attitude of the buyer with supplies in the bin, the size that they are this year, the attitude of the buyer is why rush, why not just wait, have patience.

Pearson: Alright, so what would you tell a producer out there?

Roach: If we can get some recovery in the market you need to be a seller of the old crop beans that you're still holding onto in the bin. Once we get through the harvest period and we get everything put away we should have some recovery as we move in toward the first of the year. But remember if you're planning on holding soybeans into the January, February, March time frame of '06 you're going to be holding beans into the bulk of the Brazilian -- their harvest of course will start later than that -- but we'll be going in through their growing season. If their growing season is a favorable growing season the market will start to discount their crop remembering that they'll raise close to 100 million tons in Brazil and Argentina. We only raise 75 million tons in this country. So, holding beans from a tight supply situation into an ample supply situation doesn't make any sense. The ending stocks forecast for the fall one year from now is for a larger world ending stocks than we have today. So, the bull market in beans is over and has been over really for a while and this week it lost forty some cents as we're finally starting the road into harvest.

Pearson: Okay, obviously any rallies you'd want to move some beans.

Roach: On the old crop and then I'd like to move beans, I'd like to target a period after harvest where we get some recovery, perhaps into the first of the year, maybe if they have a little weather nervousness in Brazil we'll get a bounce on that and then I'd like to make sure I'm sold well into the new crop during that time frame.

Pearson: Alright, let's talk about the corn market. Fundamentally it didn't have nearly as much going for it as we went into the summer problems and the drought across eastern Iowa and northern Illinois. Corn has plunged here in the last four weeks. What is ahead now for the corn market?

Roach: Well, we're doing the same thing with corn that we're doing with the soybean market and that is we're trying to figure out who is going to hold on to a very large inventory still left in the bin prior to harvest. There is something in the neighborhood of 2.1 billion bushels and that is one of the largest carryovers in the last fifteen years. So, we have to find a home for that. We also have to find a home for the corn in the western part of the belt which is going to be well above a normal crop. There is estimates that there will be ten percent more corn to put away this fall in the western half of the Corn Belt than there was last fall. So, the struggle here will be finding a home. The cash market saw that first, the basis levels started to cave away. We have basis levels in some areas or they were, at least, as bad as they've been in a long, long time. They have narrowed in recent days because the buyers tried to buy and they couldn't buy anything so they had to bid up to get the job done. But there is only a certain quantity wanted because nobody was really anxious to take on that inventory yet. We're going to have to get that inventory put away before the corn market is going to have much life to it.

Pearson: Okay, so again, old crop corn, still a lot of it in the country. What do you tell those producers?

Roach: Well, if you've got storage space for it the best thing I can do with corn, old crop or new crop, is to use a storage hedge which means to hedge the July futures and wait for the basis to narrow and take advantage of the carrying charge in the futures and the narrowing of the basis. I think there is forty cents a bushel there. If you don't have storage I don't have a real good method for you to take advantage of the market. I wouldn't rush to sell at these kind of price levels and these kind of basis levels. But I'm just afraid that as we move into harvest it's not going to get any better.

Pearson: Any kind of a rally on old crop you definitely make sales.

Roach: Definitely be making sales and once again, if you've got adequate storage or you want to turn a machine shed into temporary storage there is going to be a very good return to storage this next year as we move into the spring. Next spring we're going to have a strong corn market because we're going to be worried about what our acreage is going to be, we're going to be worried about what our yields will be. We may not recharge the subsoil moisture in the eastern part of the belt so we're going to have a strong marketplace this spring. And we've also got China way down on what their inventory is. They're going to have less to export. We're talking about fewer exports coming out of Argentina which is a major competitor, that they're going to shift away from corn because of the cost of production there. So, we think there is a good story to the corn market but we have to get this inventory put away first.

Pearson: Alright, let's talk about the wheat market. Majority of the harvest is complete and wheat prices are doing their, you know, their harvest thing, a little bit of a bounce. What is ahead for wheat?

Roach: Well, wheat seems to be the favorite thing to be short for the commodity funds. This week they built their short position to a record short level until today finally they came in and were aggressive purchasers today. We think they may be anxious, they may be long corn and short wheat and so as they are unwinding that, that pushes pressure on corn and gives us some buoyancy in wheat. The wheat fundamentals are not positive, we're increasing inventories year to year. We think that the wheat market can have some seasonal upward move but if we're dragging down, if corn is going down and beans are going down the wheat market will have a hard time rallying very much once we get the intercommodity spreads unwound.

Pearson: Real quick, John, the cotton market again we're not seeing a whole lot on the board right now, fairly flat. What is your advice to a producer?

Roach: Well, the last, the USDA report a week ago today showed that the crop is bigger both in yield and less abandonment, raised the crop, a 20 million bale crop, raised it to 21.7, that is a big increase. They cut the old crop carry over numbers, they increased the new production export estimates but they still increased the carry over. So, we've got a surplus situation there. The best thing in the cotton market is that we normally have a seasonal upward move starting sometime here in the next two to three weeks. We normally start a seasonal upward move that will go into the middle part of January or maybe into early February. And we're hoping we can get some recovery there and allow producers to be able to make some sales in that time.

Pearson: Alright, let's talk about livestock market. Fed cattle market, last time you were on you mentioned you were getting concern about fed cattle prices. We've been relatively flat. We've been, you know, trying to hold around eighty dollars, sometimes we're getting it done and sometimes we're not. What is ahead now for this fed cattle market?

Roach: Well, normally we'll move up as we move from this time frame on into the latter part of the year and we think we can see some seasonal upward movement, nothing drastic though. We think it's going to be more of a flat market than anything. The report today showed the placements were down. But we're also not marketing as aggressively as we should. The feed lots have cattle but they're holding because they're not profitable, they're putting on extra tonnage and that normally gets us in some trouble. We look forward to the time when we can resume our trade in the Asian markets and that should bring some demand our way. But it's really I'd call a flat kind of market to a bit higher, the futures already have a premium built in which seems about right to me. So, I'm just advising people to be very cautious with the replacement cattle because I don't think we're going to have the kind of opportunities to make money on replacements that are too high priced.

Pearson: Real quick, John, are we seeing some expansion? Are we starting to retain some heifers?

Roach: We certainly are, we saw that on the inventory report and we're seeing it in the slaughter mix as well.

Pearson: Alright, let's talk about the hog market. As we look at hog prices, of course, a surprising week on futures this week with the bolt upward in hog prices. The cash market has been hanging on pretty good. This hog market despite some expansion seems to be hanging together.

Roach: It's hanging together very well and I think it's primarily because of weather. I mean, we've had more ninety plus degree days and just the wrong kind of weather to produce pork and I think that is showing. I think that is the reason we're not getting the two million head per week that we should be getting and I think it's just going to take some time and some cooling temperatures and we sure aren't having them today.

Pearson: Alright, your outlook, fed cattle price and for the hog market?

Roach: Fed cattle prices I look for firming markets as we move into the latter part of the year but I think the futures have that already priced in and the hog market we're coming from the peak season price wise sliding to the low season in the fourth quarter. So, I think price levels go down from here. Look for hedging opportunities on strength.

Pearson: About fifteen seconds, John, based on your bearishness on corn and soybeans tonight are you in any kind of a hurry to cover any feed needs?

Roach: No, I'm in no hurry whatsoever so cover feed needs. But localized basis levels are more important than futures right now.

Pearson: Absolutely, absolutely some good points as usual. 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 the uncertainty over price support programs for fluid milk impacts dairy production. Until then thanks for watching, I'm Mark Pearson. Have a great week.

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