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Market Analysis: Jul 23, 2004

posted on July 23, 2004


Grain prices drifted lower this week as the funds moved from long to short positions. For the week, nearby wheat futures fell by 4 ½ cents. September corn retreated by more than 15 cents.

Uncertainty over the size of the crop continues to pressure soybean prices. For the week, August beans fell by 38 cents. The nearby meal contract declined by $22.80 per ton.

The cotton market continues to trade sideways and for the week fell 85 cents.

In livestock, the August live cattle contract gained $3.83. Nearby feeders jumped $6.18. And the August lean hog contract advanced $2.42.

In the financials, Comex gold plunged $16.30 an ounce. The Euro dropped 352 basis points against the dollar. And the CRB Index fell two points to close at 269.50.

Here now to lend us his insight on these and other market trends is one of our regular market analysts, John Roach. Welcome back.

Market Analysis: Jul 23, 2004

Roach: THANK YOU, RICK.

Swalwell: IN A NUTSHELL, GRAINS ARE DOWN, LIVESTOCK IS UP. SO LET'S START WITH THE GOOD NEWS, THE LIVESTOCK. IN THOSE TWO BIG REPORTS THAT CAME OUT EARLY THIS WEEK, WHAT IMPACT DID THAT HAVE ON THE LIVESTOCK MARKETS?

Roach: THE CATTLE INVENTORY REPORT -- SEMIANNUAL REPORT CAME OUT TODAY, ALONG WITH THE CATTLE-ON-FEED REPORT. AND BOTH REPORTS WERE REALLY CONSTRUED AS RELATIVELY NEUTRAL. ON THE INVENTORY REPORT, THE ONLY THING REALLY OF NOTE IS THAT THE BEEF HEIFERS, OR HEIFERS RETAINED FOR THE BEEF HERD, WERE UP 4 PERCENT. SO WE'RE ACTUALLY SEEING A LITTLE BIT OF EXPANSION GOING ON IN THE HERD, WHICH IS SURPRISING TO SOME PEOPLE, IN LIEU OF HOW DRY THE PASTURE CONDITIONS HAVE BEEN IN THE WESTERN PART OF THE COUNTRY. THE TOTAL CATTLE INVENTORY DOWN JUST SLIGHTLY, WHICH WAS REALLY PRETTY MUCH WHAT PEOPLE EXPECTED TO SEE. ON THE CATTLE-ON-FEED REPORT, THE PLACEMENT NUMBERS WERE SMALLER THAN LAST YEAR, WHICH WAS A SURPRISE. PEOPLE THOUGHT THAT WE WOULD SEE PLACEMENT NUMBERS ABOVE LAST YEAR'S LEVELS. THEY WERE ACTUALLY A BIT SMALLER. MARKETING NUMBERS WERE ALSO ONE PERCENT SMALLER THAN PEOPLE ANTICIPATED BUT, ALL IN ALL, THESE ARE PRETTY POSITIVE REPORTS THAT WE'RE SEEING. AND THE ANTICIPATION IS THAT THE FAT-CATTLE MARKET WILL BE STRONGER HERE ON THE FIRST OF THE WEEK.

Swalwell: HOW ABOUT A RECOMMENDATION, THEN? SHOULD PRODUCERS PUT CATTLE ON FEED AT THIS TIME?

Roach: WELL, THE COST OF REPLACEMENT CATTLE IS EXTREMELY HIGH. WE'RE HEARING BREAK-EVENS OF CLOSE TO A DOLLAR PER HUNDREDWEIGHT, WHICH IS WAY OVER THE TOP OF WHERE THE FUTURES MARKET IS. SO THAT REQUIRES AN AWFUL LOT OF OPTIMISM FOR A PRODUCER TO PLACE CATTLE THAT HAVE THOSE KINDS OF BREAK-EVENS. IF YOU'RE ABLE TO FIND SOME BARGAIN PRICES AND SO FORTH, I THINK THE CATTLE MARKET IS GOING TO BE A SOLID MARKET AS WE MOVE THROUGH THE REST OF THIS YEAR. I'M OPTIMISTIC THAT THE SCIENCE WILL PREVAIL AND THAT WE'LL BE ABLE TO RESTART THE EXPORT MARKET TO JAPAN YET WITHIN THIS YEAR. THAT FIRMED THE MARKET HERE LATE THIS WEEK. IN ADDITION, THE CASH MARKET WAS VERY STRONG HERE LATE THIS WEEK. SO IT'S HARD TO RECOMMEND PUTTING CATTLE ON FEED WITH THAT HIGH OF A BREAK-EVEN, BUT BY THE SAME TOKEN, I AM POSITIVE AND OPTIMISTIC ABOUT THE MARKET AS WE GO THROUGH THE BALANCE OF THIS YEAR.

Swalwell: AND WITH THAT, LET'S MOVE OVER TO HOGS. WHAT'S HAPPENING THERE, IN YOUR MIND?

Roach: THE HOG MARKET IS AT ITS SEASONAL PEAK. THIS IS THE TIME OF THE YEAR WHEN THE MARKET CRESTS AND WE START TO MOVE DOWN. WE'VE SEEN SOME LOWER PRICE LEVELS THAT THE CONCERN ABOUT LOSING SOME OF THAT JAPANESE PORK MARKET, PARTICULARLY IF WE GAIN THE BEEF ENTRANCE BACK INTO JAPAN AND THE TIME OF THE YEAR, HAS ME BELIEVING THAT IF YOU'RE NEEDING TO PUT ON SOME HEDGES, IF YOU'RE LOOKING TO PROTECT SOME PROFIT LEVELS FOR THE BALANCE OF THIS YEAR, I THINK IT'S THE RIGHT THING TO DO. OUR NUMBERS ARE CERTAINLY NOT BURDENSOME. THE DEMAND CONTINUES TO BE GOOD, AND SO I'M NOT NEGATIVE ABOUT THE MARKET FALLING APART. BUT THESE ARE VERY GOOD PRICE LEVELS IN HERE, AND THERE'S SURE NOTHING WRONG WITH LOCKING IN SOME OF THOSE AS YOU LOOK OUT THROUGH THE BALANCE OF THIS YEAR.

Swalwell: HOW ABOUT INTERNATIONAL FORCES THAT ARE COMING INTO PLAY WITH THE LIVESTOCK MARKET?

Roach: WELL, WE'RE CONTINUING TO SEE THE EXPORT BUSINESS AS KIND OF THE FROSTING ON THE CAKE AS FAR AS THE LIVESTOCK MARKET IS CONCERNED. WE'RE WORRIED PARTICULARLY IN THE CASE OF PORK, WHERE WE'RE SEEING COMPETITION SPRING UP DOWN IN SOUTH AMERICA AND HOW THAT MIGHT TAKE AWAY SOME OF OUR BUSINESS AS WE LOOK AT THIS LONGER TERM. IN THE UNITED STATES, THE PORK BUSINESS SEEMS TO BE RELATIVELY CONSTANT WITHOUT MUCH CHANGE, EITHER INCREASE OR DECREASE ON THE HORIZON.

Swalwell: WELL, ACROSS THE BOARD, GRAIN PRICES ARE DOWN JUST IN ABOUT EVERY ARENA. WHAT'S GOING ON? WHY IS THAT?

Roach: TWO DIFFERENT THINGS HAVE HAPPENED, AND ONE IS THAT THE CROP HAS GONE FROM BEING ONE WE WORRIED A LOT ABOUT IN APRIL TO ONE THAT WE FEEL VERY GOOD ABOUT TODAY. THE INDUSTRY BELIEVES THAT THE JULY PRODUCTION ESTIMATE THAT THE GOVERNMENT GAVE US ON CORN IS LIKELY TO BE EXCEEDED. WE MAY WELL SEE A CROP PERHAPS AS BIG AS 11 BILLION BUSHELS, AND THAT'S WHAT THE MARKET IS CURRENTLY FOCUSED ON. THE SITUATION ON SOYBEANS. THE MARKET IS FOCUSED ON A CROP OF ABOUT THREE BILLION BUSHELS. AND OVER ON THE DEMAND SIDE OF THINGS, THE DEMAND HAS BEEN VERY LACKLUSTER IN PARTICULARLY THE SOYBEAN MARKET. EVER SINCE THE CHINESE PROCESSORS GOT IN ALL THEIR TROUBLE, WE JUST HAVE NOT SEEN THE BUSINESS DEVELOP. THE FIRST HALF OF THE YEAR, FROM JANUARY TO JUNE, THE CHINESE IMPORTED 11 PERCENT FEWER SOYBEANS THAN THE PRIOR YEAR. THIS IS AT A TIME WHEN EVERYBODY THOUGHT THE CHINESE HAD AN INSATIABLE APPETITE. THE SAME SITUATION IS OCCURRING ON CORN. OUR CORN EXPORT SHIPMENTS ARE NOT RUNNING AT THE PACE NECESSARY TO REACH THE GOVERNMENT'S FORECAST. SO YOU HAVE THE TWO WORRIES, ONE WHICH IS PRODUCTION. WE'VE LOST THAT WORRY. WE NOW THINK WE HAVE BIG CROPS. AND DEMAND, WE WERE WORRIED THAT WE COULDN'T SUPPLY EVERYBODY, AND NOW IT LOOKS LIKE THERE'S GOING TO BE ENOUGH TO GO AROUND. SO THOSE TWO FACTORS HAVE COME TOGETHER AND THEY'VE TAKEN PRICES, QUITE FRANKLY, LOWER THAN I THINK ANYBODY FIGURED JUST A MONTH AGO.

Swalwell: YOU TOUCHED ON CORN AND BEANS. LET'S TALK ABOUT WHEAT FOR A LITTLE BIT.

Roach: WELL, THE WHEAT MARKET HAS SUFFERED RIGHT ALONG WITH CORN, PARTICULARLY CHICAGO WHEAT WHICH IS GOING TO HAVE SOME PROBLEMS COMPETING IN THE WORLD BECAUSE THERE'S GOING TO BE -- MOST OF IT OR A LOT OF IT -- MORE OF IT IS BECOMING FEED QUALITY. THE QUALITY OF THAT CROP IS DETERIORATING. SOME OF THAT'S GOING TO BE DELIVERED IN CHICAGO. IT'S GOING TO BOUNCE AROUND. THAT'S GOING TO KEEP THE CHICAGO MARKET A WEAK RELATIVE TO KANSAS CITY AND MINNEAPOLIS, WE THINK. BUT WE THINK IN GENERAL THAT WHEAT PRICES WILL START A RECOVERY HERE, THAT NOW THAT WE'VE TAKEN A LOT OF THE PRESSURE OFF THE BEANS AND CORN THAT THE WHEAT MARKET CAN STAGE A RECOVERY. AND WE THINK THAT PRODUCERS SHOULD TRY TO FIGURE OUT A WAY TO HOLD ONTO THE WHEAT OR PERHAPS REOWN WHEAT THAT THEY'VE SOLD EARLIER. SAME WAY OVER IN THE CORN COMPLEX. THE CORN MARKET I THINK IS GETTING ITSELF INTO TOO CHEAP OF A PRICE LEVEL. A FRONT MONTH OF CORN AT $2.15 IS A VERY LOW PRICE IN THE SCHEME OF THINGS. NOW, CERTAINLY WE GO BELOW $2.15 FROM TIME TO TIME BUT ONLY IN TIMES OF BIG SURPLUS, AND WE DON'T HAVE A BIG SURPLUS HEADED OUR WAY. AND WE MAY, IN FACT, NOT HAVE AS BIG OF A CROP AS THE MARKET IS CURRENTLY TALKING ABOUT. THE FRONT MONTH OF CORN THIS WEEK GOT DOWN TO $2.19. THAT'S CLOSE ENOUGH FOR ME. I DON'T THINK THAT THE CORN PRICE AND, FOR THAT MATTER, THE BEAN PRICE CAN SLIDE MUCH IN HERE. SO WE'RE ENCOURAGING PRODUCERS TO HANG IN HERE, AND LET'S SEE MAYBE WHAT RECOVERY WE CAN GET. ON THE OTHER SIDE, WE WANT TO CAUTION PARTICULARLY SOYBEAN PRODUCERS THAT HOLDING INTO THE SPRING OF THE YEAR MAY NOT BE A GOOD TACTIC THIS YEAR, THAT WE'RE GOING TO HAVE A LOT OF COMPETITION COMING FROM SOUTH AMERICA, AND WE'RE WORRIED THAT THAT COULD GIVE US VERY POOR PRICES NEXT SPRING AS THEY'RE MOVING INTO THEIR HARVEST PERIOD.

Swalwell: A QUESTION FOR YOU, JOHN. SHOULD FARMERS COVER FEED NEEDS AT THIS TIME, WITH EVERYTHING YOU'VE JUST TOLD US?

Roach: I THINK SO. I THINK THAT PRODUCERS NEED TO ACCUMULATE FEED. I DON'T THINK I'D RUSH AND BUY EVERYTHING. BUT ACCUMULATE FEED ON WEAKNESS AND TAKE ADVANTAGE OF THESE LOWER PRICES AS THEY'RE BEING OFFERED TO US.

Swalwell: AND I GUESS TO WIND THINGS UP HERE A LITTLE BIT, LET'S SHIFT GEARS AND TALK ABOUT COTTON DOWN THERE AS WELL.

Roach: THE COTTON MARKET HAS LOST ALMOST 50 PERCENT OF ITS VALUE, NOT QUITE BUT WE'VE MOVED FROM THE 80-SOME-CENT AREA DOWN INTO THE 40-SOME-CENT AREA. AND THE ATTITUDE IS THAT WE'RE GOING TO GO EVEN LOWER, THAT WE MAY GO DOWN INTO THE 40- TO 42-CENT AREA. BUT WE'RE DOWN INTO THE LOW SIDE OF PRICES. IF YOU BRING UP A MONTHLY CHART, WE SELDOM SPEND MUCH TIME DOWN BELOW THESE PRICE LEVELS. ALTHOUGH I DON'T HAVE A LOT OF REASON TO BE ENCOURAGING, THESE ARE CHEAP PRICES AND I DON'T THINK THAT PRODUCERS SHOULD BE RUSHING TO SELL ANYTHING AT THESE KIND OF PRICE LEVELS.

Swalwell: WHAT IMPACT WILL TRADE NEGOTIATIONS HAVE, CURRENT AND FUTURE, ON THIS AREA OF COTTON TRADE?

Roach: WELL, I THINK REALLY WE NEED TO LOOK AT THEM ACROSS -- CERTAINLY WITH COTTON, BUT ACROSS THE REST OF THE INDUSTRIES. WE'RE GOING TO HAVE SOME PROBLEMS HERE WITH THE FARM PROGRAMS AS WE HAVE KNOWN THEM IN THE PAST, AND I THINK IT'S GOING TO TAKE SOME REAL CREATIVITY TO FIGURE OUT HOW TO PROTECT FARMERS AND NOT ALIENATE THE FOREIGN TRADING PARTNERS THAT WE HAVE. WE'RE LOSING IN THE WORLD COURTS WITH OUR SUBSIDY SYSTEMS AS THEY EXIST CURRENTLY, AND SO SOME SORT OF A PROGRAM WHERE WE CAN TURN THIS INTO AN ENERGY OR A CONSERVATION CERTAINLY SEEMS TO MAKE SOME SENSE TO ME. BUT THAT'S AN AREA THAT'S GOING TO TAKE WORK ON AS TIME GOES ALONG BECAUSE, SO FAR, WE'RE NOT ABLE TO PROTECT OUR FARMERS AND SATISFY THE WORLD COURTS.

Swalwell: WITH JUST A LITTLE BIT OF TIME HERE, JOHN, LET'S JUMP BACK TO CATTLE, WHERE WE STARTED THIS DISCUSSION. AND WHAT ADVICE DO YOU HAVE RIGHT NOW FOR PRODUCERS?

Roach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

Swalwell: NOW, A MOMENT AGO YOU TALKED ABOUT CONSUMER DEMAND. IS THAT GOING TO END UP SOFTENING PRICES WITH WHAT'S GOING ON WITH THE SIZE OF THE CATTLE HERD OUT THERE?

Roach: WELL, NOT IMMEDIATELY. WE'RE STRUGGLING TO MAINTAIN THE SAME NUMBER OF CATTLE, QUITE FRANKLY, OUT THERE. PLACEMENT NUMBERS BELOW A YEAR AGO AND SOME OF THE LOWEST IN THE LAST THIRTY YEARS ON THE REPORT TODAY. SO WE DON'T SEE AN IMMEDIATE SOFTENING YET, BUT WE'RE STARTING TO SEE THE SEEDS BEING SOWN LITERALLY WITH HEIFER REPLACEMENTS FOR THE BEEF HERD.

Swalwell: GOOD INFORMATION. THANKS, JOHN. THAT WRAPS UP THIS EDITION OF "MARKET TO MARKET." BUT IF YOU'D LIKE MORE INFORMATION FROM JOHN ON JUST WHERE THESE MARKETS MIGHT BE HEADED IN THE FUTURE, BE SURE TO CHECK THE STREAMING AUDIO ON THE "MARKET PLUS" PAGE AT OUR "MARKET TO MARKET" WEB SITE. BE SURE TO JOIN US AGAIN NEXT WEEK, WHEN WE'LL EXAMINE THE PERSEVERANCE REQUIRED TO BE A FIFTH-GENERATION RANCHER IN THE RUGGED OUTBACK OF RURAL WYOMING. UNTIL THEN, THANKS FOR WATCHING. FOR MARK PEARSON, I'M RICK SWALWELL. HAVE YOURSELF A GREAT WEEK.

CAPTIONS BY: MIDWEST CAPTIONING DES MOINES, IOWA


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