For the week, nearby wheat futures gained 12 cents. The July corn contract was up nearly 4 cents.
Soybeans continued to rally. For the week, July beans rose another 20 cents per bushel. The nearby meal contract gained 2.20 per ton.
The cotton market trended higher and for the week the July futures contract gained nearly $3.00.
In livestock, the effect of the latest case of Mad Cow disease is unknown as the markets were closed when USDA made its announcement. For the week, the June cattle contract actually gained nearly $1.00, while nearby feeders gained $.88. And the July lean hog contract fell $.30.
In the financials, Comex gold gained $2.20 an ounce. The Euro lost 251 basis points against the dollar. And the CRB Index fell more than 1.25 points to close at 312.24.
Here now to lend us his insight on these and other market trends is one of our regular market analysts, Alan Brugler. Welcome back.
Brugler: Good to be here.
Borg: I said weather a dominant factor, is that the reason behind the gain in the soybean market?
Brugler: That is certainly the principle, fundamental reason that is being touted. Of course, we've got some speculative participation, the commodity funds are buying, the index funds are buying but the concern is weather. A shift at two bushels per acre in soybean production for the U.S. would be 150 million bushels, that would put us right back in a sub-pipeline supply situation and justify the kinds of prices we're seeing or perhaps even a little bit higher.
Borg: Are you saying the reason for the funds buying is separate from the weather or are they buying because of the weather?
Brugler: The index funds are more buying commodities in general as an investment or as an inflation hedge That is the actual commodity story is secondary but they are accompanied by commercial users, elevators, exporters, crushers. Crushers we found yesterday the census crush report that the crushers only had 59 million bushels of inventory at the end of May. That is an unusually low quantity of beans in storage at their plants.
Borg: As an analyst yourself what do you think about the soybean market?
Brugler: I look at the charts, the charts are still pointing higher. They are over bought which means we are vulnerable if we get a surprise rain that covers the areas of major concern which would be Illinois and Indiana particularly. But as long as we continue on this upward path I think you stay out of the way and try and save some beans to sell later.
Borg: And a good rain would change maybe corn prices too?
Brugler: Yes, corn and beans are in the same boat, so to speak. Corn would be rather quickly effected because we're just coming up on the key pollination period here. We've got about two weeks until most of the corn is going to get to that stage. But, again, the market is very sensitive. Corn could potentially go up another ten to fifteen cents if we don't see the rain over the next couple of weeks.
Borg: And corn is reacting, I heard an Iowa State University meteorologist say on Friday that there is corn firing across the Midwest.
Brugler: We're getting a little bit of firing, we're getting quite a bit of heat stress because of the 95 degree temperatures we've seen across much of the Corn Belt. That is fairly common when you have those types of temperatures. But when you don't have the moisture to support the plant then you start to see the firing, you start to see some of the leaves burning.
Borg: What are you advising people on corn right now?
Brugler: Basically if you're a cash seller we're starting to make some scale up sales. We think that because this is based strictly on weather forecasts and not on exports or other variables that it could go away quickly. We want to make sure we reward the rally with some sales but at the same time we don't see any indication it's over yet.
Borg: Would you use the word volatility in those two commodities?
Brugler: Volatility is definitely the name for any crop that is in the middle of a drought market.
Borg: Yes, now does that apply also to wheat? Now that is in harvest time.
Brugler: Wheat is in harvest, we don't have the risk to production so you would expect it would be a little less volatile. It is somewhat substitutable for corn and feed rations, particularly in the southeastern poultry market. So, you're going to see some rise in wheat prices if corn is going up and in fact we're seeing that on Friday.
Borg: Because of the interchangeability there of that feed stuff?
Brugler: Yeah, that is not the dominant use of wheat, only about 200-250 million bushels a year, but it's a residual use. The export market also will substitute feed wheat for corn in some situations.
Borg: What about cotton?
Brugler: The cotton market had been under a lot of pressure, we had fairly large search stocks, deliveries against July futures started on Friday. But we got a nice little rally this week because of the dryness down in the delta area, some of the mid-south cotton is not doing real well, condition ratings are expected to drop in Monday's report. And we're seeing some interest in China again in buying some cotton from us. There is still the trade dispute over the chief textiles coming in but the Chinese are acting like they are going to have to buy some cotton and maybe some of it will come from us.
Borg: Will that strengthen the cotton market or is that already factored in?
Brugler: We've got a nice bottom around fifty cents on the December contract. The July got down around forty-six and then rebounded. That one is still a little dicey because of the delivery aspect. But it's acting a little better technically and I think we have to give it some room to try and go up here.
Borg: Does the dryness at all effect the cattle market? We're seeing weakness there. Now, it may effect feeder cattle. I will talk about that later but weather have any effect on cattle?
Brugler: It will if we sustain high temperatures. We tend to see some slower rates of gain and of course in extreme situations you can have some death loss from high temperatures.
Borg: Yeah, the BSE scare, we don't know how that is going to effect the market.
Brugler: That is clearly going to be the dominant factor on Monday. I think the initial reaction will be lower but at the same time this is a well advertised situation, the USDA has been very public about the fact they were sending this lab sample back to England. Prices have been under pressure. I don't anticipate a situation where we've got a multiple limit down days. I think the market has got it built in already.
Borg: Could we use the word volatility also in cattle or not?
Brugler: Seasonal volatility, annual volatility definitely has been greatly increased over the last two years since we had to start dealing with the BSE. The bigger concern in cattle is that we are in a period of time when we're adding extra pounds to each carcass and we're also adding some to the slaughter mix. So, the challenge will be to get rid of the excess product, retail prices are very high historically. That makes it hard to move enough tonnage.
Borg: Feeder cattle, those for replacement, they've weakened a little bit but they're still fairly strong. Is that right?
Brugler: That's correct, they've come down somewhat with the live cattle but we're at a period in the cattle cycle where some of the heifers are being diverted out to grass to become mama cows and that has kind of shrunken the supply a little bit. And, of course, the Canadian border is still closed and there have been some issues with the Mexican cattle as well. So, we've got a fairly tight supply at this point in the cycle and that is profiting up the feeder price.
Borg: What about the beef export market supporting prices?
Brugler: We don't really have that much in the way of beef exports. We do have to Mexico and a few other countries that have opened.
Borg: Japan is closed to us?
Brugler: Japan is still closed and I don't anticipate that the BSE announcement is going to speed them to an early opening of the border.
Borg: Has there been some substitution into that Japanese market? Is somebody else taking the U.S. market there?
Brugler: A lot of that U.S. market share has been met by Australia and New Zealand, some of the major packing firms have ownership of facilities in Australian and they have ramped up their production for the Japanese market. We have not seen any Canadian beef moving into Japan yet but there is a fear in the industry that that could happen too, particularly if the playing field is a little more level on the BSE front.
Borg: Let's move onto hogs and what do you see there?
Brugler: The hog market has been under a lot of pressure because, again, we've got some expansion in production, we've got the Canadian hogs coming in that had not been. We've also got the lean cut out or the value of the products is down about twenty dollars from where it was a year ago and the packers, of course, are trying to pass it onto the producers.
Borg: Do you see continued pressure in hogs?
Brugler: I kind of think that the BSE issue and the hog and pig report that we just had on Friday are going to give us an opportunity to bottom these things out.
Borg: Why is that?
Brugler: First of all, there is an old saying in the industry, sell the rumor, buy the fact. The hogs and pigs report showed some expansion ... 101% on the breeding herd, 100% in most of the other categories. So, we've got some growth in hog production but it was well advertised. It was already built into the price and, of course, if there is any consumer concern about eating beef that may flow to a little bit more pork consumption.
Borg: Would you -- is there any advise that you give now to livestock producers? I asked about that advice in grain. What about livestock producers and those who invest?
Brugler: Well, for the hog producers we've been very defensive. We've been fully hedged out through October and we've even got some put positions on for December because of this liquidation in the cash market and the pressure on the futures. We'll probably look to lift those if we can get a little bit of a rally here.
Borg: Alright, thanks Alan. That wraps up this edition of Market to Market. But if you'd like more information from Alan on where these markets are headed, more than we were able to discuss right here 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 learn how farmers are breaking new ground to feed those in need. And Mark Pearson will be back next week too. Until then, thanks for watching. I'm Dean Borg. Have a great week.