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Market Analysis: Jul 30, 2004

posted on July 30, 2004


Grain and soybean prices have fallen so dramatically during July that it's fair to say record yields have been fully priced into the market.

For the week, nearby wheat futures fell by more than 16 cents. September corn retreated by more than six cents.

Slow export demand and anticipation of a big crop continue to pressure bean prices. For the week, August beans fell by 70 cents and for the month are down by more than $2.00. The nearby meal contract declined by $20 per ton.

The cotton market remains stagnant and for the week fell another $2.62.

In livestock, the August live cattle contract fell $1.18. Nearby feeders slipped a nickel. But the August lean hog contract advanced $2.18.

In the financials, Comex gold gained 50 cents an ounce. The Euro dropped 84 basis points against the dollar. And the CRB Index fell two-and-a-half points to close at 267-even.

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

Market Analysis: Jul 30, 2004

Hackney: HI, RICK.

Jackson: HI, RICK.

Swalwell: DOUG, LET'S START WITH YOU. THE BALL IS IN YOUR COURT. WE TALKED ABOUT THAT BIG DROP IN BEAN PRICES THERE. CHATTING BEFORE WE WENT ON THE AIR, YOU WERE USING THE WORD COLLAPSE. IS IT REALLY THAT BAD?

Jackson: WELL IT HASN'T BEEN SPECTACULAR. CASH PRICES OF BEANS IN THE WESTERN CORN BELT HAVE DROPPED PROBABLY OVER $4 A BUSHEL, AND THIS HAS BEEN A RARE COMBINATION OF A COLLAPSE IN THE BASIS AS WELL AS A COLLAPSE IN THE FUTURES. FUTURES DOWN OVER $2.50, BUT THE BASIS HAS ALSO DROPPED, OF COURSE, FROM SPECTACULARLY HIGH LEVELS. SOME PLACES IN IOWA, THE BASIS HAS DROPPED OVER $1.50 A BUSHEL JUST IN A MATTER OF WEEKS. AND IN FACT, WE'VE SEEN BASIS BREAKS OF 50 CENTS TO 75 CENTS IN A MATTER OF DAYS. A SPECTACULAR SITUATION. WE STILL HAVE A SET OF ARITHMETIC IN THE BEAN MARKET THAT SUGGESTS THAT THE CARRYOUT THIS YEAR COULD BE WELL BELOW A HUNDRED MILLION BUSHELS, SOMETHING LIKE 85 MILLION BUSHELS, THE TIGHTEST CARRYOUT TO USE RATIO IN MODERN TIMES. AND YET, OF COURSE, IT CLEARLY IS SEEN NOW THAT WE'RE GOING TO REDEFINE OUR DEFINITION OF WHAT MINIMALLY ACCEPTABLE CARRYOUTS ARE. APPARENTLY WE HAD STOCKPILING OF MEAL. THE MARKET HAS BEEN ABLE TO MOVE BEANS FROM THE FARMER TO THE PROCESSOR AT AN ADEQUATE AMOUNT, THAT THE MARKET HAS SIMPLY COLLAPSED. AND I GUESS AN ANTICIPATED PROBLEM, THAT BEING OF LITERALLY RUNNING OUT AT THE END OF THE YEAR, THAT'S BEEN ANTICIPATED FOR SO MANY MONTHS THIS YEAR, HAS CREATED MARKET FORCES THAT ALLOWED US TO COMPENSATE FOR THAT SHORTAGE. AND NOW OF COURSE, WITH HARVEST STARTING IN SOUTHERN STATES MAYBE NEXT WEEK, THE ANTICIPATION OF ANOTHER LARGE HARVEST A FEW WEEKS AWAY HERE IN THE MIDWEST. AND PRICES, OF COURSE, ARE MAKING THAT TRANSITION FROM $10 BEANS TO WHAT COULD BE ACTUALLY PRICES NOW THAT LOOK LIKE THEY'LL GO BELOW LOAN AND PUT US INTO AN LDP AND LOAN ECONOMICS ENVIRONMENT IF THE WEATHER STAYS GOOD, AS IT IS FORECAST NOW THROUGH THE MONTH OF AUGUST. SO A SPECTACULAR COLLAPSE, NO QUESTION ABOUT IT.

Swalwell: AND CORN PRICES OFF AS WELL. SOME OF THOSE SAME FACTORS IMPACTING THE CORN MARKET.

Jackson: WELL, THAT'S RIGHT. WE STARTED OFF THE YEAR WITH RECOGNITION THAT WE'D HAVE A RECORD DEMAND BASE IN CORN. WE STARTED OFF WITH THE RECOGNITION THAT WE'VE HAD DIFFICULTY GETTING ANY SIGNIFICANT EXPANSION OF ACREAGE, AND THAT STILL WAS LARGELY TRUE. ETHANOL DEMAND CONTINUES TO INCREASE 150- TO 200 MILLION BUSHELS PER YEAR. SO WE KNEW THAT THERE WAS ONLY ONE CAVEAT TO A BULLISH SITUATION, ONLY ONE SCENARIO THAT WOULDN'T PUT US IN A PRECARIOUS SUPPLY/DEMAND SITUATION, AND THAT, OF COURSE, WAS TO HAVE A RECORD CROP, A RECORD YIELD, AND IN FACT NEVER HAVE A WEATHER THREAT. ALTHOUGH THOSE SITUATIONS ARE NOT UNPRECEDENTED BUT, IN FACT, THEY'RE RARE, BUT THAT IS EXACTLY APPARENTLY WHAT WE'VE HAD THIS YEAR. A SITUATION THAT STARTED OUT WET EARLY AND THEN TURNED OUT TO BE A VERY GOOD SUMMER. THE FUNDS HAVE DUMPED 60,000 CONTRACTS OF CORN IN THE MONTH OF JULY AFTER THEY WERE LONG, ANTICIPATING THIS WEATHER PROBLEM. AND THIS WOULD BE ONE OF THOSE YEARS, PERHAPS LIKE 1994, TEN YEARS LATER NOW WHERE, IN FACT, WE'VE HARDLY EVER HAD A LEGITIMATE WEATHER THREAT TO WORRY ABOUT THROUGHOUT THE SUMMER MONTHS. THE WESTERN DROUGHT, THE HOT WHETHER THAT'S BEEN SO CLEAR CUT IN THE LAST FEW YEARS, POSSIBLY ASSOCIATED WITH GLOBAL WARMING. THE WESTERN DROUGHT IS STILL THERE BUT IT RETREATED AWAY FROM THE CORN BELT. WE'VE PROBABLY GOT RECORD CROP POTENTIAL IN NEBRASKA, MISSOURI, KANSAS, A LOT OF THE PERIPHERAL AREAS HERE IN THE CORN BELT. ALL AREAS LOOK GENERALLY GOOD. SOME BETTER THAN OTHERS. BUT THE MARKET IS RACING TO PRICE IN A RECORD YIELD SCENARIO, WHICH IS PROBABLY A LEGITIMATE THING TO DO. NOW WE'LL SPEND THE NEXT FOUR OR FIVE MONTHS UNTIL THE JANUARY CROP REPORT, JUST FINE-TUNING THE SITUATION. SOME PEOPLE ARE RACING TO 150-BUSHEL YIELD SCENARIO. WE THINK THAT'S PROBABLY OVERDONE. LAST YEAR YIELD WAS 142. WE EXPECT THE GOVERNMENT, THE AUGUST CROP REPORT COMING UP IN A COUPLE WEEKS, PERHAPS ESTIMATE A YIELD OF 145, 3 BUSHELS BETTER THAN THE PREVIOUS RECORD. WE THINK PERHAPS THE POTENTIAL WOULD BE SOMETHING LIKE 147. BUT EVEN WITH THAT TYPE OF A SITUATION, STOCKS BUILD SLIGHTLY BUT NOT DRAMATICALLY. WE THINK WE'RE WITHIN PENNIES OF THE LOW FOR THE YEAR, BUT AT THE SAME TIME, WE DON'T THINK THERE'S MORE THAN 10 CENTS UP IN THE MARCH CORN MAYBE THROUGH FEBRUARY. SO WE MAY ALREADY BE AT NEAR ROCK-BOTTOM PRICES, HOVERING ABOVE LOAN LEVELS, BUT IN A SIDEWAYS TREND NOW THAT COULD LAST FOR MONTHS.

Swalwell: OKAY. FROM BEANS TO CORN TO WHEAT. LET'S WIND UP YOUR ANALYSIS WITH THAT FACTOR.

Jackson: WELL, THE WHEAT ALSO, OF COURSE, CHARACTERIZED BY A REPLENISHING OF STOCKS, PARTICULARLY IN EASTERN AND WESTERN EUROPE. THEY'RE NOW BACK IN THE EXPORT BUSINESS. STOCKS SHARPLY HIGHER THERE. PRODUCTION SHARPLY HIGHER THERE. AND THE WHEAT, I'M AFRAID, IS PRICING ITSELF AS A MARGINAL FEED GRAIN, SO IT'S TAGGING ALONG WITH CORN. PRICES HAVE PROBABLY DROPPED A LITTLE BELOW WHAT A LOT OF PEOPLE EXPECTED. BUT AS LONG AS WE'RE BACK INTO THIS INTERNATIONAL EXPORT COMPETITION ARENA WHERE EVERYBODY IS TRYING TO UNDERCUT EACH OTHER IN THE EXPORT SCENE AND WE HAVE THE FEED GRAIN SITUATION UNDER PRESSURE, THE WHEAT JUST TAGS ALONG WITH THE CORN. AGAIN, MAYBE NOT A LOT OF DOWN SIDE BUT A SIDEWAYS SITUATION THAT, IF WE WOULD, OF COURSE, HAVE ANOTHER GOOD CROP NEXT YEAR, WHICH THERE ARE MANY QUESTIONS ABOUT THAT, BUT IF EASTERN EUROPE AND WESTERN EUROPE CAN REPLENISH THEIR STOCKS NEXT YEAR, OF COURSE, WE'D FACE A LONG-TERM, MULTIYEAR, NEGATIVE PRICE SITUATION THERE. THAT'S A LOT OF IFS BUT I'M AFRAID WHEAT IS JUST GOING TO TAG ALONG WITH CORN POSSIBLY FOR MONTHS YET TO COME.

Swalwell: ALL RIGHT. THANKS, DOUG. WALT, WE'LL TURN TO YOU. AND YOU ALMOST NEAT A SEAT BELT HERE TO KEEP FROM FALLING OFF THE ROLLER COASTER HERE IN THE LIVESTOCK MARKETS. WHAT'S HAPPENING, IN YOUR MIND?

Hackney: WELL, REGARDLESS OF THE $3 ADVANTAGE WE GOT THIS WEEK IN OUR FAT CATTLE TRADE, WE STALLED OUT. A LOT OF OPTIMISM COME INTO THE MARKET WEDNESDAY OF THIS WEEK, INDICATING A POTENTIAL OF $87 FAT CATTLE; $85 SEEMED TO CARRY THE MARKET. THE SOUTHWEST RETAINED THEIR BULLISH APPROACH TO IT, BUT FINALLY THREW THE TOWEL IN THURSDAY AND FRIDAY AT AROUND THE $85 LEVEL. CATTLE AREN'T GETTING HEAVIER COMING OUT OF THE FEED LOT, BUT WE MUST RECOGNIZE THAT OUR INVENTORY CAN NO LONGER BE CALLED AS EXTREMELY CURRENT AS WE POTENTIAL -- POTENTIALLY SAW IT AT LEAST BACK SIX WEEKS AGO. THE BSE FEAR FACTOR THAT COME INTO OUR MARKET MOST RECENTLY PROBABLY CAN BE CREDITED WITH CREATING SOME OF THE EXTRA INVENTORY THAT WE HAVE RIGHT NOW. THE PACKERS PROBABLY ARE GOING TO CUT THEIR KILLS BACK GOING INTO NEXT WEEK. WE'VE GOT SOME FLOATING HOLIDAYS THAT THE PACKERS ARE WANTING TO MAKE UP SOME TIME WITH. SO IT'S PROBABLY AN OPPORTUNE TIME FOR THEM TO CUT THEIR KILL BACK BECAUSE THERE'S SOME BULLISHNESS LEFT IN THE IDEA THAT OUR CASH COULD COME OFF 85. IT COULD GO TO 87. BUT IF WE ONLY COME IN WITH A SHORT KILL NEXT WEEK WITH NO REAL INCENTIVE FOR THE PACKER TO BUY -- AND THAT PROBABLY WILL BE THE CASE -- DRESSED BEEF CAN'T SEEM TO COME OFF HIGH CENTER. WE HOLD IT EVEN. WE START GETTING OPTIMISTIC THINKING WE'VE BOTTOMED THE MARKET. AND THEN AS IN FRIDAY, TODAY, WE LOSE ONE AND A HALF TO TWO AND A HALF A HUNDREDWEIGHT IN THE DRESSED BEEF TRADE, THE CUTOUT. SO THERE ARE NO REAL INCENTIVES FOR THE PACKER TO STRETCH INTO THIS TRADE GOING INTO PARTICULARLY NEXT WEEK.

Swalwell: I KNOW YOU WANTED TO TALK ABOUT FEEDER CATTLE ACTIVITY AS WELL. LET'S TALK ABOUT THAT.

Hackney: WELL, RICK, IT'S BEEN SUCH AN INTERESTING PLAY ON THESE FEEDER CATTLE, AS DOUG HAS SO ACCURATELY PROJECTED HERE FOR THE LAST FEW TIMES THAT HE AND I HAVE BEEN ON HERE --

Swalwell: HE SAYS THE SAME THING ABOUT YOU. [ LAUGHTER ]

Hackney: CORN MAKES A RUN TO THE UPSIDE, INDICATING FEEDERS SHOULD BACK OFF HIGHER PRICED RATIONS, ET CETERA. FEEDERS CONTINUE TO GO HIGHER. CORN BACKS OFF AND TAKES A COLLAPSE, SUCH AS HAS BEEN MENTIONED THIS EVENING. FEEDERS CONTINUE TO CHARGE. HISTORICALLY WHEN CORN BACKS OFF AS DRAMATICALLY AS PROJECTED, THERE'S ALSO A REASON TO BACK OFF ON FEEDERS BECAUSE THERE WILL BE -- SHOULD BE MORE PEOPLE STEPPING INTO THAT ARENA TO BUY AND FEED CATTLE OR USE THE CORN. NOTHING SEEMS TO STOP THE FEEDER MARKET. IT SIMPLY IS ON A ROLL. IT HAS BEEN ON A ROLL FOR NEARLY A YEAR NOW. AND THE SHORTAGE IN THE COW/CALF CROP THIS YEAR, 1 TO 2 PERCENT. THE SIMPLE FACT RANCHERS ARE NOT KEEPING THEIR HEIFERS AS REPLACEMENTS, AS YOU WOULD EXPECT THEM TO, JUST SIMPLY INDICATES THAT WE'VE GOT A RUN IN THIS FEEDER MARKET PROBABLY AT LEAST FOR ANOTHER YEAR AT A BARE MINIMUM.

Swalwell: OKAY. AND LET'S HAVE A QUICK RECAP, THEN, OF HOGS TO WIND THINGS UP.

Hackney: WELL, THE HOG IS SIMILAR IN A WAY TO THE FAT CATTLE MARKET. WE CANNOT SEEM TO GET THE HOG MARKET OFF HIGH CENTER. WE GET INTO THAT $55, $60 CASH LEVEL, AND THEN THE PRODUCTS GOES UP, THE USAGE SEEMS TO BACK OFF TO AN EXTENT. AND NOW ON TOP THIS WEEK, THE JAPANESE HAVE INDICATED THAT THEY'RE GOING TO HAVE TO INCREASE THE TARIFF IN REGARD TO PORK. SO IN THAT REGARD, THEN, IT WILL PROBABLY CLOSE UP ON SOME OF OUR EXPORT TO JAPAN.

Swalwell: ALL RIGHT. THANKS, WALT. THANKS, DOUG. THAT'S DOES IT FOR THIS EDITION OF "MARKET TO MARKET." BUT IF YOU'D LIKE MORE INFORMATION FROM OUR EXPERTS ON JUST WHERE THESE MARKETS MIGHT BE HEADED, BE SURE TO CHECK THE STREAMING AUDIO ON THE "MARKET PLUS" PAGE AT OUR "MARKET TO MARKET" WEB SITE. AND BE SURE TO JOIN US AGAIN NEXT WEEK WHEN WE'LL EXAMINE A REPORT THAT SUGGESTS THE SPOT MARKET FOR HOGS JUST MAY BE STABILIZING. UNTIL THEN, THANKS FOR WATCHING. FOR MARK PEARSON, I'M RICK SWALWELL. HAVE YOURSELF A GREAT WEEK.

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