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Market Analysis: Aug 05, 2005

posted on August 5, 2005

The weather market has failed to sustain any bull run from investors this summer ... and plentiful supplies of old crop have kept end users quiet, as well. For the week, nearby wheat futures fell nearly eight cents. The September corn contract declined by 16 cents.

Soybean prices moved lower this week as the markets remain sluggish ahead of next week's big crop report. For the week, August beans dropped more than 13 cents. The nearby meal contract was down $1.50 per ton.

The cotton market also remains sluggish, with the October futures contract sliding $1.19 this week.

In livestock, the August cattle contract was down 63 cents. Nearby feeders advanced $1.18. And the August lean hog contract jumped $2.23.

In the financials, Comex gold climbed $7.30 an ounce. The Euro gained a healthy 224 basis points against the dollar. And the CRB Index jumped nearly four points to close at 318.50.

Here now to lend us his insight on these and other market trends is one of our senior market analysts, Doug Hjort. Welcome back.

Market Analysis: Aug 05, 2005 Pearson: Here now to lend us his insight on these and other market trends one of our senior market analysts, Doug Hjort. Doug, welcome back.

Hjort: Thank you, Mark.

Pearson: Well, it's been a long bull run in the soybean market. Are we starting to see it run out of steam now?

Hjort: Well, we certainly are and I think a lot of it is just uncertainty as pointed our earlier on the show, the weather uncertainties and crop supplies, old crop supplies of all grains and oil seeds plentiful for this year. This marketing year is winding down though. Officially on paper it ends the end of August for corn and beans. So, we have to start dialing in the new crop now. The production number that you eluded to there from Informa and some others, they're grouped kind of around the 2.8 billion bushel figure for soybeans. And you look at that in conjunction with demand something over 2.9 billion as projected by USDA on their July supply/demand report that will tighten down ending stocks pretty tight, something below 200 million bushels. That is not extremely tight and wouldn't call for prices to rise much above current levels or where they had been anyway. But certainly snug up that supply/demand relationship enough to prevent prices from going down until we really get the combines running and find out what is actually there. Also reports out of Brazil this year, or this week that they intend to cut their acreage and production again this year. I don't know that I really believe that but nevertheless it all falls into this whole picture for new crop soybean and oil seed supply/demand balances worldwide. Could be a pretty interesting situation even if our yields are pretty much a normal level in that 38.5, 39 bushel per acre yield.

Pearson: Alright, let's talk about the corn market. Fundamentals aren't quite as strong there. We've got a big carry out from last year, you talked about it on the show before, and the corn market certainly didn't do much this week. And we had that late July peak and we've been under pressure ever since.

Hjort: Well, we sure have and a good share of it, as you say, is because of the old crop supply. And that is weighted into the Western Corn Belt and into the plains so basis levels there are just horrendous. And they're not going to get much better there because of the old crop that has to move. A lot of these elevators out in the country are full of corn right now at a time when they're normally trying to get emptied out for the new crop. And that is the area where you have the best crops coming on in the field as well. So, that is going to be a significant problem there. Even the futures can find some nugget here to rally on and I don't think corn futures can rally very much on their own. I think soybeans would have to be the catalyst going higher in order to take corn up much from here before harvest. Now, the crop report comes out next Friday and it's going to be important not because of what the numbers say but because of where USDA is on what they found in the field. This report is mainly a plant count, an ear count and an average weight associated with those ears. So, USDA's number probably would overstate what is actually in the field. But at least we'll have some solid numbers from a survey in the field instead of just guessing from the windshield as to what is really out there. Corn market is going to struggle. We'd have to take yields down to about 130 bushel per acre in order to get bullish on the corn market. The number at 139 is probably towards the high side of what we'll see on the pre-report estimates. But still that is how much we have to take out of this crop just in order to get prices to move higher from where they are now.

Pearson: Would you pull the trigger on December corn at $2.50 or better? What is your target there?

Hjort: Well, probably so. I certainly want to have something sold and there again it just depends on what your crop is like out there. Some people, you know, don't want to sell very much at all, Illinois and so on. But in other places where their production numbers are just as good or look as good as last year, yeah, sell something around that level.

Pearson: Alright, let's talk about this wheat market. Harvest is good and has been good. The wheat market has been under some pressure along with corn and soybeans here lately. A totally different world set of fundamentals when it comes to wheat.

Hjort: Well, it certainly is. There is enough wheat, again, old crop wheat was plentiful as we started the new marketing year of June '01. The production numbers in the United States and in the world are going to be adequate. We're going to be okay on the wheat. Spring wheat harvest just getting going strong now up into North Dakota. They're finding more and more of the head scab up there and that cuts into yield as well as quality although the quality issue has not been raised yet. They aren't far enough along to really know how much damage there might be there. Export market on the wheat really jumped on the last report that came out on Thursday of this week. That was for the week ended the previous Thursday, good sized number and there is going to be more of that, in my opinion, because the quality of the U.S. crop, the winter wheat crop was very, very good. If the spring wheat quality is good our crop is going to be in favor worldwide. So, we'll be able to, even though prices are a bit problematic and we can't go up unless the world prices go up, I think the U.S. can compete quite well in wheat.

Pearson: Alright, sales targets as you look for a wheat producer?

Hjort: Well, price wise it just depends on where the corn and the beans are going over the next month or two. Later on then of course we can see prices coming up. Wheat prices have kind of held in there fairly decent actually when the corn and the beans were going down so much. But I would say twenty-five cent rallies from where we closed on Friday would be certainly be selling points. I'm not suggesting we'll get there any time soon but that would be the first target.

Pearson: Cotton market did back off some again this week. You were pretty friendly to getting some cotton sold up around $52, still look for that?

Hjort: Yes, yes I think we can do that. Weather wise, again, you know the crop is being hit by the hot weather, the dry weather, the wind, the rain, everything else. But yeah, I think we can get a little bit of a run here. That market is terribly, terribly nervous though primarily because of large world supplies.

Pearson: Let's talk about the livestock market, fed cattle prices. Beef trading was up a little bit in terms of the trade. But we've seen some pressure on cattle. There was concern about cattle coming down from Canada. That has turned out to be kind of a non-factor. What is ahead in the beef price?

Hjort: Well, just to state the issue I think prices dropped off too much two weeks ago, well, two, three weeks ago they were dropping like a rock, like you say, because of the fear of the Canadian cattle coming in. Yeah, they came in but then the amount of beef also, you know, went down some because the cattle are coming now and not the beef, just the beef. So, in the last two weeks now cattle prices have jumped back up almost five dollars a hundred weight. I think that is an equilibrium price right now, $82, $83 for fat cattle. I think that is okay for August. Maybe we can do something a little better later on but this Canadian thing is going to impact our prices. It's going to put a lid on them to a certain degree. So, I'm not looking for any big runs up. I don't look for $90 fat cattle again this fall.

Pearson: Talk about the feeder market, this is still a very small cow herd.

Hjort: It is, that is probably where we'll see more impact from Canada. We'll probably see more of those feeder cattle coming in swamping our market later this fall. I had recommended a long time ago to clients to price cattle for fall delivery, cash if they could and most of them did, a lot of those cattle out there in the Montana and Wyoming area are contracted, had been for some time even at higher prices than they are now. But even where they're at right now I would still get some contracting done on those feeder cattle. I think we could see $10, $15 come out of feeder cattle prices, calf prices this fall.

Pearson: Alright, with that kind of a number are we going to see an expansion of the herd do you think this year? Are the conditions ripe enough out in the West now to start holding back females?

Hjort: I think so. The rancher has been able to make some pretty good money and get well so to speak. And now it's going to depend on grass and hay. Where they've got the grass and the hay they're going to start expanding a little bit. I don't think it's going to be any big wild expansion. I think it will be a very slow growth, one percent per year maybe. But we did see on the last semi-annual inventory report the number of beef cow/heifers held back for breeding was up over four percent again. It was in January and again in July. So, that is the indication there that yeah, they're starting to hold back some of those calves. They're going to make mama cows out of them down the road two, two and a half years.

Pearson: Alright, let's talk about the hog market which, of course, can pick up and expand quickly. you were talking about that last time you were on the show. We thought we'd see the hog herd expand. It sure seem so to be the case and yet the hog market has been stronger.

Hjort: Well, it certainly has and it's been a puzzle to me. I've tried hedging that market a couple of times and have been chewed up by it. Even this week, you know, the prices started off very weak and came back up though later in the week and closed on the highs again. We're in a position here if we can move just fifty cents to seventy-five cents higher early next week we'll break some resistance levels and could keep on going. I don't think we're going to do that because I think cash hog prices were somewhat tied to the cattle price. Cattle prices went too low and I think the cash hog price did too. Now, we've bounced it back up here and I think steady money next week on cash hogs maybe then through the month of August is probably about as good as we can do. I'm kind of out of sync in this whole market, that's for sure. But I would be very cautious and make the sales as soon as they reach market weight.

Pearson: Excellent, Doug Hjort, thank you so much for your insights. We appreciate it. That will wrap up this edition of Market to Market. But be sure to join us again next week when we reviewed the numbers in the August crop report and try to get a bearing on future price trends. Until then thanks for watching. I'm Mark Pearson. Have a great week.

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