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Market Analysis: Jul 15, 2005

posted on July 15, 2005

Disappointing rainfalls from Hurricane Dennis helped nearby corn futures post contract highs, while wheat prices rallied, as well. For the week, nearby wheat futures gained more than 11 cents. The September corn contract advanced 23 cents.

Dry weather and increased potential of soy rust combined for yet another volatile week in the soybean pits. For the week, August beans jumped 43 cents. The nearby meal contract was up by $15.70 per ton.

Cotton prices fell sharply this week, with the October futures contract declining by $4.26.

In livestock, the August cattle contract lost 83 cents. Nearby feeders declined $5.82. And the July lean hog contract gained 57 cents.

In the financials, Comex gold dropped $2.50 an ounce. The Euro gained 76 basis points against the dollar. And the CRB Index declined three points to close at 309-even.

Here now to lend us his insight on these and other market trends is our Senior Market Analyst, Joan Roach. John, welcome back.

Market Analysis: Jul 15, 2005 Roach: Thank you very much, Rick.

Swalwell: And as always with agriculture weather, weather, weather. That is always a big impact but especially so with the remnants of Hurricane Dennis. And let's start with the grains. How did the aftermath of that storm impact the bean market? Let's start with the beans.

Roach: The bean market, the traders and the farmers were looking for pretty good rains to come out of Hurricane Dennis and although the system sat there for several days we really just didn't see the heavy rains that were hoped for particularly in Illinois on into the eastern part of Iowa. As a consequence the bean market started to gather strength as we moved through the week and had a pretty strong week. One of the things that seems to be missing though is much enthusiasm about rust. The rust just is not spreading at the speed that people feared earlier in the year. We're going to have another test of it now with this, after Hurricane Dennis to see whether or not we actually move the spores north or not. We may well take that rust fear clear out of the market here if we don't see some more incidents of rust further north over the period of this next week or two weeks But the main feature is that the bean crop is still standing there ready for rain and able to grow with rain. But until we get some the bean market is going to be very strong.

Swalwell: As you mentioned here in the upper Midwest too hot, too dry and a critical time for the corn crop. How is that impacting the current market, in your opinion?

Roach: The corn market, actually the corn crop, actually is at a greater risk right now I think than the bean crop because we're in that critical pollination stage and we have a lot of the area too dry and we have forecasts for hot weather coming. And that is just the wrong combination. If you don't get the corn pollinated you're not going to get a crop regardless of what happens after the pollination period from a weather standpoint. So, the corn market really caught fire this week. It actually I thought had more strength to it than the bean market because of trader's fear during this pollination period.

Swalwell: Now, earlier in the show we mentioned the impact of the big government supply and demand report on the wheat market. What is your take on the activity there?

Roach: The supply/demand report for wheat showed increased bushels, as you said, in the spring wheat country, a little less in winter wheat but also a little less demand than what people anticipated. So, most of that increased number of bushels in spring wheat went right to the bottom line which really gives the wheat supply/demand cable a negative feel to it or a negative look to it. But most people are really not paying much attention to wheat in the trading activity we're seeing a lot more attention being paid to the corn and the bean markets. We did see this week, however, the funds finally come in and start to cover their short wheat positions that they have had for a very long period of time. Probably the heaviest week of buying in the wheat pit on the part of funds for quite a few months. The corn market also saw funds change their attitude. Funds have been very willing to maintain small, long positions or in fact short positions through most of this year in the corn market. But this week we saw the funds finally start to really build a rapid, or I should say, they're building long positions rapidly, about 50,000 contracts just in the last four trading days. In the beans, interestingly enough, we're not seeing much fund activity. It's been very light there. While the corn market is making new recent highs the bean market has seemingly stalled out here a little bit and unable, really, to search much further up.

Swalwell: So, with these current conditions the rally you mentioned with corn specifically would you be selling corn and beans right now?

Roach: As of the close today we're back into having a sell signal on the systems that we follow and those sell systems will normally last from four to six days and usually, in the case of corn for the last two years, from those sell signals we have seen substantial decline. So, I would definitely be a seller of corn over the next four or five days, again, trying to get a good average, anticipating the market to come under pressure once the sell signal is over. Remember that this market is fairly efficient and quick at diagnosing the weather situation and changing price levels. This week we were up twenty some cents a bushel on corn, we could very easily add another twenty cents to corn next week and reach some price levels that might be very hard to get up and get through. The $2.80 area on December corn is going to be really kind of a tough market place. Remember that we're coming into this season with a very large supply of corn in the bin and that large supply is going to buffer some of this weather issue that we're having currently. Now, the case on beans is different. The case on beans is the world numbers are actually growing quite markedly this year. Even if we have some further reductions in our yields, not drastic but smaller reductions in our yields, we're going to have very big supplies as we look at this bean situation a year from now. So, the key here is that not only are you selling corn here in the sell signal, I believe you need to be selling November '06 soybeans. That is a year from now. We crossed up over the $6.50 level several times in the last few trading days. That $6.50 is our first level to make sales. We look at something we call our historically significant prices which you can look up on Google, look up historically significant prices and see just exactly where those threshold levels are and see how well they've worked over the last 25 years. They've worked extremely well. So, $6.50 is our beginning spot, $7.25 is the second level on soybeans. So, we think that needs to be paid close attention to.

Swalwell: Let's talk a little bit more if you could about pricing strategy. And in light of what you just said and what we've heard on the show this week would you be locking in this year's crop right now or waiting?

Roach: Well, pieces of it. My approach to marketing is that you divide your crop into a lot of pieces and each time we get a sell signal you need to be selling a piece. We never know whether this sell signal will be the highest one for the year or whether the next one will be or just exactly because it's always going to be some external force such as weather that is really causing the price move. So, in answer to your question yes, I would be selling another increment of corn on this particular sell signal and I'd be very prepared to do the same with beans this next week. And I would already be selling November of '06 and I'd be close to selling November of '07 soybeans.

Swalwell: Alright, good information. Let's segway to cotton. And a big drop there, impact of the storm?

Roach: Yeah, the rain that we didn't get in the dry areas of the Midwest was very heavy in a lot of the cotton region. In addition to that the report that came out on Tuesday gave the carry over, production numbers increased because of acreage and also increased the carry over because of reduced demand, increase the stocks of cotton in China, cut the import potential to China because of those increased stocks. So, the cotton market really got several things this week that took it down sharply as we said earlier.

Swalwell: And with the livestock markets probably more influence from the government than the weather. Talk a little bit if you could about the big ruling we mentioned earlier in the show and where you think the feeder cattle market is headed.

Roach: Well, we've finally, maybe finally -- we don't know for sure with the court system exactly -- but it appears that the courts that ruled here yesterday, the appeals court struck down the injunction that the Montana judge had put in place and it seemed as if they would be willing to do that again. But there is still some more testimony and so forth to be heard in Montana. so, this is still kind of a moving target. But it's important to us that we get past this issue because what happens on our border with Canada influences how the Japanese handle our beef. So, we need to have a consistent policy and that policy of science rules is the policy that the appellate court came on that side. And so the hope is that we will have another aspect of the beef market which is that we get back into that Asian market that we're able to satisfy those political issues that are there so that the down side that we saw in the feeder cattle and the fat cattle market following this ruling we may be able to hope for some better news coming later as far as the issue into the Asian countries. But that being set aside, the cattle market is struggling in here. We had a fairly sharp decline. Now, we seem to have bottomed the market, the demand seems to be pretty good but nobody is really thinking we're going to get very excited with this market again, that we're probably going to have kind of a steady go, maybe we saw a bottom area here this week, feeder cattle prices were off ten dollars from the cash sources that I talked to this week but that is ten dollars off of a very high price. It's still a very high price for feeder cattle particularly when you have the corn market showing strength as well. So, I'm afraid that cattle market, the feeder cattle market is going to struggle a little bit. I think the fat cattle market is a steady to maybe a little better go.

Swalwell: Alright, let's switch gears and go to hogs where things are a little bit of a reverse trend of what we just talked about on the cattle side.

Roach: Well, we certainly had a better week this week. The hog market, the dress pork market was strong. We didn't have as good a pork movement, we had tremendous beef movement this week, but we did have better prices on the pork. The attitude we have is that we are at the low point or very near the low point of weekly kills. The weekly kills will start to increase seasonally as we move along and we think as those weekly kills start to increase we may struggle a little bit with the market. Our longer term outlook on the hog market is not very bright. We think the expansion has started to occur and we think that we'll see more numbers as we move on out in the future and that we're going to see prices under pressure. And so we're a pretty willing hedger on strength in that marketplace. One of the things that has been very interesting there is the size of the export business and the value of the export business. The value of our pork exports up a third from what it was just a year ago. So, that is one of the things that has really helped us and we worry a little bit about that if we get back into the beef export business into those Asian countries. We may lose some of that pork demand.

Swalwell: And real briefly here as we wrap up, what about the other side of that equation, feed needs?

Roach: If you're in the livestock feeding business you've got to be really careful in here because we're at that crossroads. Presumably you've got some feed coverage on. If you don't have some feed coverage on I'd be a hand to mouth buyer.

Swalwell: Alright, thank you John Roach, always good advice from you. Nice to have you here again this week. And that wraps up this edition of Market to Market.But if you'd like more information from John on where these markets are headed, then be sure to check out the streaming audio at the Market Plus page on our Market To Market Web site.

And be sure to join us again next week when we'll examine ongoing efforts to fight Asian Soy Rust. Mark Pearson will return next week as well.

Until then, thanks for watching. I'm Rick Swallwell. Have a great week.

Tags: agriculture commodity prices corn markets news wheat