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Market Analysis: Jul 22, 2005

posted on July 22, 2005

The grain markets remain volatile as traders try to determine if there's been enough rain to mitigate the drought. For the week, nearby wheat futures declined 18 cents. The September corn contract dropped by more than 24 cents.

Soybean prices retreated sharply this week, just as it appeared they may break through the highs of mid-June. For the week, August beans fell almost 51 cents. The nearby meal contract lost $14.10 per ton.

Cotton prices regained some of the losses from the past month, with October futures gaining 66 cents.

In livestock, the August cattle contract was up 73 cents. Nearby feeders advanced $1.50. And the August lean hog contract gained $2.47.

In the financials, Comex gold moved up $3.70 an ounce. The Euro gained 16 basis points against the dollar. But the CRB Index fell eight points to close at 301-even.

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

Market Analysis: Jul 22, 2005 Pearson: Well, Doug, let's talk about the soybean market where the most dramatic price movement has been and this week there is certainly no exception to the down side. Could the high be in on the soybean market?

Jackson: Mark, we got some unexpected rains across the Belt this week. We saw rains in Wisconsin, Michigan, parts of Indiana, some scattered relief in Illinois, a lot of rain in Iowa and that was a bit of a surprise to the market from what we had imagined early in the week. The market understands, of course, that the bean situation will be determined in the key month of August where rains will either make or break this crop. As we go home over the weekend we've got forecasts for several heavy rain events next week which in the mind of some suggests a major pattern change which is not unprecedented. Everybody knows beans can dramatically improve if we get the rains in August and how much we can improve is yet to be seen. Mark, in the past we've seen yields drop as much as six bushels an acre or increase nearly four bushels an acre from what the government estimates in August. Now, that kind of a change from a 32 estimate in August, if we'd see that this year, would be the difference between $5.50 futures and ten or twelve dollar futures. So, the key determinants are still ahead of us here. But if we are on the verge of a pattern change then the highs, perhaps, are indeed in on this bean market. And yet we're in such a delicate balance, Mark, that just a one bushel per acre change in yield is worth 50-75 cents a bushel ultimately. So, we're just going to be on needles and pins. Right now we're trying to basically discount a 38 bushel per acre yield compared to the 34 and 42 yields that we've had in the last two years and that is a good place to be for the time being until we see how this weather plays out.

Pearson: Alright, from a sales standpoint what would you tell a producer to do?

Jackson: Well, you've really just got to come to it in your own mind with the idea is this thing going to return to normal weather or not. We're on a hair trigger situation and most producers are probably going to dare it to rain and hang on and just see what happens.

Pearson: Alright, let's talk about the corn market. And obviously if you're watching the show, we have a lot of faithful viewers over in the state of Illinois where they've had the severe drought in many parts, Peoria and that whole region, and you look at this corn market and the action in there is saying gosh, we're down this week and this is a substantial corn growing area that is having some real crop growing problems. Overall with the carryout that we have is it significant?

Jackson: Well, that's right. We've got over a 2 billion bushel carry in that is going to help buffer inventories this year. As this week went on, as the rains fell in key parts of the belt with some declaring that the drought was coming to an end in parts of Wisconsin, Michigan and Indiana leading really just eastern Iowa, southeastern Iowa and key parts of Illinois dry. The industry is starting to coalesce around the idea be it right or wrong that the national yield could be between 132 and 138. A lot of people zeroing in on maybe 134, 135. Well now, Mark, that is going to cut our ending inventory in half. That will leave us with a carry out of 1.2, 1.3 billion next year. But the problem is that is not enough to be bullish particularly at the recent highs that we had at $2.75. We saw fund buying early in the week, they got long, the market collapsed, now they're in trouble. We'll probably see more fund liquidation unless we start to move out of the range on yield prospects that I just mentioned. I think the highs are in and we'll really now just go into the tedium of fine tuning these details. And ultimately we'll look back and this will be the year that we cut our inventories in half, that inventories were drawn down, those buffer in the stocks disappeared but the whole story potentially very bullish story long term will be transferred to 2006 and 2007 with lower inventories there than 11 billion bushel demand base. You'll need huge crops and good weather next year. But that is really where the story is probably going to be transferred to and this year we'll end up maybe in a $2.25, $2.50 range on futures and perhaps the weather scare is to some degree behind us now as we're starting to stabilize some of these areas. And that will be particularly true if, again, next week we see the rains and cooler temperatures that are forecast after the 100 degree heat this weekend.

Pearson: Alright, let's talk about the wheat market and the action there. And, of course, it's softened up as well. I mean, the whole market is in a sell off mood at this point. You mentioned the funds. What is your take now on wheat and the wheat market as we go forward?

Jackson: Well, we had the wheat crop more or less made. We have record or near record spring wheat yields. We had certainly more than adequate winter wheat crop. U.S. stocks of wheat now are almost guaranteed to increase. The last USDA estimate had stocks building the largest level in several years and there is 700 million. I think the market clearly understands that world prospects are generally favorable, Australia turned out to be much better. Canada, although the European crop is down some, Black Sea Eastern European wheat is discounted sharply and so we have really a not very exciting situation in the world or U.S. wheat situation. Wheat is going to follow corn price action. Long-term wheat will lose to corn and try to price itself as a feed grain. So, a lot less excitement there. The funds have been persistently short in the wheat market rather than long corn and beans with dramatically different underlying fundamentals. I think all they can say about wheat is it's going to follow the corn market and if indeed the corn market has had its highs, the speculative highs are in then we can look for wheat to drift lower, some private analysts think we have as much as 30 or 40 cents down from here and I wouldn't argue with that if we can calm down the row crop price action.

Pearson: Alright, let's go over and talk livestock, Walt Hackney, fed cattle market some fairly decent action on the board this week. What is your take right now on where this fed cattle market is?

Hackney: We've had five weeks of steadily decreasing cash market in the fat cattle industry. It's all driven by psychology. It's been driven by the fear of the Canadian imports that were released and were allowed to come in this week. The first load come across, no one was really living in fear of that. But then yesterday there was over 6000 head came across. So, the reality of the Canadian problem may be with us as we go into next week. We don't need too many more live cattle imports simply because of our percentage of the Canadian slaughter cattle are currently coming down in boxes anyway. So, the addition of the live cattle may tend to accentuate a problem we have currently here in the U.S. We've got cattle marketing heavier today than we've had for some time. We've got a 770 some pound carcass average right now which is heavy, heavier than it was a year ago, heavier than it was a week ago. So, you add to that the influx of imported cattle it is steadily going to accentuate the psychology, the adverse psychology of the market. So, the chances are instead of 78 dollar cattle that we had this week we have a potential of 76 or 77 dollar cash cattle next week. That is creating huge losses in the cattle feeding industry for U.S. cattle feeders. Can that be rectified? Not in the nearby. That is going to be an issue that we are going to live with until we eat our way through the current U.S. supply of finished cattle.

Pearson: Alright, so take us out to the late fall, the last quarter of the year Walt what would be your price scenario for fed cattle?

Hackney: I would suggest that the price scenario should be in that 83 to 85 dollar level. I don't think we'll see a dramatic increase in the next 60 days. But as we get into the fourth quarter I think the opportunity due to a potential of a fed supply that might not be quite as aggressive may give us a tendency to get some help in the cash market.

Pearson: Alright, let's talk about this calf market which has, of course, been phenomenal, has hung in there pretty well. This corn market is breaking down. Are we going to see this calf market just stay strong?

Hackney: Well, to say stay strong and to say it'll take a break and still be strong probably is the correct way to put that, Mark. We've had ideas of $1.25, $1.26 on 600 pound Montana calves for October delivery. Those calves today are more in the teens now. It's still an excellent market for those cattle. Nothing particularly to blame except the reduction in cash flow that the cattle feeder himself is suffering right now with $78 fat cattle. Yearling cattle are probably from $1.15 weighing eight, eight and a quarter. Those are probably more like $1.07, $1.08 or in that vicinity today. It's still an excellent market and the feeder cattle producer is still making excellent money even at those reduction levels. The fat cattle buyer, the feeder cattle buyer I'm sorry, is the one that is still at risk because his break even capabilities are not going to be enhanced if Doug's point about any increase in grain supply or increase in grain prices takes place.

Pearson: Real quick, Walt, you predicted there is a lot of pork out there, more on the way. What is your outlook now for this hog market?

Hackney: Well, you can't look at it in any way other than the expansion factor has probably been under estimated. It's probably been understated. And the fact is we're marketing heavier hogs, those hogs are in fact capable of producing a million nine a week and we're only killing a million seven five to eight, eight and a quarter. So, there is a build up in that regard.

Pearson: Okay, hog market beware. We're into one of those cycles. Walt, Doug, 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 travel to the fields of Illinois to get a closer look at the drought of 2005. Until then thanks for watching, I'm Mark Pearson. Have a great week.

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