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Market Analysis: Jul 08, 2005

posted on July 8, 2005

You know things are dry when farmers in Illinois are hoping for rain from Hurricane Dennis, currently spinning through the Caribbean. For the week, nearby wheat futures gained more than four cents. The July corn contract advanced nearly 10 cents.

Prices in the bean pits took a roller coaster ride, climbing well past $7.00 before falling back at week's end. For the week, July beans gained two cents. The nearby meal contract was up by $1.80 per ton.

Cotton prices saw a slight retreat from last week, with the July futures contract falling by 60 cents.

In livestock, the August cattle contract was unchanged. Nearby feeders advanced $1.67. And the July lean hog contract gained $1.80.

In the financials, Comex gold dropped $5.00 an ounce. The Euro gained just three basis points against the dollar. And the CRB Index climbed nearly two points to close at 312-even.

Here now to lend us their insight on these and other market trends are two of our regular market analysts, Erin Golly and Darin Newsom. Welcome back.

Market Analysis: Jul 08, 2005 Pearson: Let's talk first about this soybean market. It has been a roller coaster ride up over seven dollars then back down again. There are some analysts who are saying you haven't seen the highs yet, there are some people saying this is all over done. We've got plenty of beans around. What is your take and what should farmers be doing?

Newsom: Well, right now going into this weekend the market could go either way. I mean, it's all going to depend on where Hurricane Dennis comes ashore, what its path means as far as moisture, how far north it's going to pull the moisture. If this high pressure ridge that has been located over much of the eastern Corn Belt continues to hold and the moisture is not able to break through it and this thing slides off to the south and east we're going to see the market come right back because we saw a lot of choppiness. As you said, we saw a lot of choppiness in the soybean market this week. By week's end really not much has been accomplished. We're still maintaining the up trend. An interesting note though in this afternoon's CFTC report. The funds, the non-commercial traders have been long for quite some time. They did a considerable amount of liquidating as of last Tuesday. So, this could be a little bit of an early warning sign, maybe a possible warning flag that this market, this rally may be getting a little bit tired up in these areas, these historically high levels. So, you know, if I'm a producer sitting there and I haven't been using this rally, you know, it's going to be a long weekend waiting to see what occurs. If I've got something on, if I've got some sales on maybe I've covered those with calls actually looking pretty good going into this weekend with all the uncertainty it may bring.

Pearson: How aggressive are you on making new crop sales?00:20:51;15

Newsom: Early on, you know, if we go back over a year, a year last spring when the prices were also, you know, when we neared I believe in upper seven's there was an opportunity to get some stuff done. So, you can be fairly aggressive if you've gone back that far and you've covered that with calls when we went down to our late winter lows. Other than that in areas of ____ production really isn't being called into question. You can be fairly aggressive but other than that you might want to be a little cautious, 33%, 50%, something like that.

Pearson: Alright, let's talk about the corn market. Trading _____ volatility, big concern and big problems for a lot of viewers over in central Illinois, eastern Corn Belt where they are suffering a drought that in my mind reminds me a lot of 1988. I talked to my dad in Champaign last week and that was what he said, he said it reminds me of '88. I've heard a lot of other analysts who have said that. We had some pretty significant price action back then. What is your take on what is ahead based on what you're hearing from crop conditions?

Newsom: Well, you know, hearing from crop conditions right now in Illinois you're hearing you're losing one to two, one to three bushels per acre per day as long as these conditions continue. What does this mean long-term? You know, everyone is talking about possibly up to a half a million bushels taken off overall production. What that leaves us with still roughly 1.8, 1.9 billion bushels in 2005-2006 ending stocks. So, it's not that we're going to actually be short of corn and the market is showing us. I mean, we've got a long-term sideways trend, we've been banging our head against the $2.35 on the front month futures, you know, since last August. Today was very interesting with the July futures going off next Thursday. We saw the September drop down below the $2.35 mark, you know, kind of setting itself up, again, depending on developments this week. And as for the December corn same situation up against $2.55. We dropped back down into the $2.40's at the end of this week with nine to ten cents down today. You know, it hasn't shown -- if we look at the large basis that we've seen, the very weak basis that we've seen in the cash market -- this market has not shown that it's willing to buy into a lot of damage at this point.

Pearson: Alright, would you make some sales when we get back to that $2.55 in December corn?

Newsom: If we get in that $2.50, $2.55 range, yeah, you know, you need to have something on the books. Yes, could we see a considerable higher market? If Dennis doesn't pan out and if the next round of hot, dry conditions move in we could certainly go higher but it's a big if at this point. We don't know where the hurricane is headed and at this point, you know, if you don't have anything on, as I said, in soybeans it's going to make for a long weekend trying to guess where it could go.

Pearson: Absolutely, there are some nervous people out there.

Newsom: Yes, there is.

Pearson: Now, let's move over to the wheat market. We talked about the fact wheat quality and overall production looks better this year. There is plenty of wheat worldwide but that is changing as I understand.

Newsom: The wheat market has been very interesting. Demand has been nothing spectacular. It's been consistent but it hasn't been spectacular. The market itself has been flat. It's, you know, slowly been the difference between the highs and the lows has been narrowing considerably. The interesting part of the wheat market has been the spring wheat cash market for quite some time. We've had extraordinary premiums to the futures due to the fact that we had such a short quality crop last year particularly in the protein, the spring wheat, you know, the northern plains crop wasn't that good, the Canadian crop wasn't that good. So, we've had that going for us. Now, looking forward the spring wheat crop, the early crop ratings that we're seeing on that are exceptional, they're well above average. Once that really starts to come into play and we near harvest we could start to see some of these premium basis bids in the cash market start to deteriorate quickly. So, the wheat market, again, I understand the situation that wheat farmers are in, most of them need to sell right at harvest. This probably isn't a bad area, we've caught the market on a little bit of an up here, non-commercial traders continue to hold short positions and the trend really isn't showing us much at all. So, if you can make some sales in here and basically just get out of the wheat market should work fine for you. I know there is carry in it, carry in some of the market situations. But from a cash situation selling wheat in here probably wouldn't be that bad.

Pearson: Not a bad idea at all. I want to talk quickly about the cotton market, of course, they've talked about a lot at the G8 and subsidies and so forth. China demand has been good. Prices have recovered in a fairly decent fashion. What is ahead now for cotton?

Newsom: Cotton is another one of those markets where it has had its problems here, you know, six to eight months ago and is having a nice little rally along with the rest of the commodities. Looking at it, it may not be able just to take off and run on its own particularly if we start to see some weakness in some of these outside markets. With that in mind these levels that we've been looking at and that we've been running at here the last few weeks may not be a bad selling opportunity, again, in the cotton.

Pearson: Alrighty, let's go over and talk about livestock. Erin, fed cattle market has been decent really for two and a half years now, a lot of people wondering, you know, when is the bloom going to come off the rose? Have we started to see that now in the last couple of weeks in what has been happening with this cattle futures market?

Golly: Well, the cattle market finally found some stability this past week in light of the terrorist attack in London and the positive BSE case. Cash market traded better this week and I think it's going to continue to trade better over the next few weeks. However, producers haven't been, they've been reluctant to sell at these prices. And so they're not current with their marketings right now. In the last USDA monthly livestock report average live weights were about 20 pounds heavier than last year. So, we've got some heavy supplies in front of us, large supplies, and high fuel prices. I think these factors are going to weigh on the cattle prices into late July and early August. I think we have a chance at dipping down into the 70's and that is probably where we'll put our bottom in for the market and for the summer. But I do have some good news on the cattle market. The supply situation does look positive into the fall. The key things we're going to have to keep an eye on is if demand holds up and if fuel prices hold up. I think if demand is poor into the fall we'll see prices in the low 80's. If we have demand fairly good into the fall I think we'll have prices in the upper 80's to 90's. But if we have exceptional demand and fuel prices would come down at all I think we have a chance of seeing dollar cattle again.

Pearson: Okay, so some good news there. And more bad news late Friday because the Texas herd where the BSE alleged positive came from out of Texas they are now testing more cattle, USDA announced Friday. Will that have much of an impact next week or have we seen most of the impact from that BSE?

Golly: I think we've seen pretty much most of the impact already. I think people are ready to shake that off.

Pearson: Alright, if you're a cattleman out there and you're buying these high priced feeder cattle, we haven't really had a break there Erin.

Golly: No, we haven't and the outlook for the feeder cattle market continues to look real positive. The cash index was trading around $115, $116 this past week and it doesn't look like it's going to get any cheaper any time soon. The key things to watch with the feeder cattle is if corn prices can rally substantially higher than the current levels and if the Canadian border does reopen. But I remain real friendly to the feeder cattle market. We've got extremely tight supplies and very good demand right now.

Pearson: With this calf market as strong as it is are we seeing any retention? Are we starting to build that herd maybe more dramatically than what the USDA...

Golly: There is a lot of talk that we are retaining back right now and I think we are building up a herd.

Pearson: If you were to look ahead in the beef cattle market, the entire market, would you be willing to buy cows at these prices?

Golly: Well, it's actually -- we just talked about that earlier -- it's actually cheaper to buy fat cattle futures than to buy actual feeder cattle right now.

Pearson: Yeah, it's strange, a strange situation that we're living through right now. But you're favorable long-term if everything falls into place?

Golly: Right, if demand holds up.

Pearson: Alright, let's talk about the hog market, something that is near and dear to your heart. The hog market has been under some pressure. We've seen it fairly dramatically here in the last two months. And, of course, that is reflective of something you mentioned a long time ago, that was we were seeing expansion out here in the countryside. How much expansion are we seeing?

Golly:Well, the big story in the pork market right now is the abundance of meat. Poultry supplies are really weighing on the markets right now. The export market is still good but it's the retail chain stores that are driving the market right now and it's certainly a different year for demand, for me, in 2005 than it was in 2004. And the last hog and pig report showed some expansion but not as much as most people had anticipated. Starting in mid-September going forward we have forecasted that weekly slaughter rates are going to start at two million head right then. And then once we get into November and December weekly slaughter rates jump up to 2.2 million a head per week. So, I think we're going to see a lot of numbers this fall and winter and that is why I think it's important that producers actively look at purchasing put options under this market to protect themselves.

Pearson: Okay, so you'd recommend some kind of an option strategy...

Golly: Right, right.

Pearson: ... with the finished hogs?

Golly: We're not interested in selling futures because if demand would happen to step in it could really rally this market up in the fall and the winter.

Pearson: Okay, so again, expansion is occurring. This is our usual cyclical move in the pork business, take some action.

Golly: That's right, I think it's important that you at least get some protection underneath you.

Pearson: Excellent. Thank you Erin. Thank you Darin. That will wrap up this edition of Market to Market. If you'd like more information from our experts 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 get the government's latest snapshot of the U.S. farm export picture. Until then thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news