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Market Analysis: Aug 22, 2003

posted on August 22, 2003


Varying fundamentals drove the markets this week.

The nearby wheat contract fell more than 15 cents as traders focused on demand. Corn had a slightly better week with nearby prices up 6 1/2 cents.

Soybeans proved they're in a weather market by pushing up 34 cents on the nearby. Soybean meal increased more than 15 dollars per ton.

Cotton was down fractionally.

In livestock, August cattle were up more than five-and-a-half dollars. August feeders jumped another $3.72. And the lean hog contract improved by $1.70.

In financials, Comex gold was virtually unchanged from a week ago. The Euro dropped nearly 360 basis points against the dollar. And the CRB Index gained an impressive 4 1/2points this week to close at 242.50.

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

Market Analysis: Aug 22, 2003 GENTLEMEN, WELCOME BACK.

Hjort: THANK YOU.

Jackson: HI,, MARK.

Pearson: ALL RIGHT. WELL, DOUG, LET'S GET STARTED ON A COUPLE OF FRONTS HERE. FIRST OF ALL, A VERY VOLATILE WEEK IN BEANS. THE WHEAT MARKET BACKED OFF ON THE NEARBYS AND -- BUT IT'S BEEN A HECK OF A RUN. LET'S TALK ABOUT THE WHEAT MARKET FIRST. <

Jackson: WELL, MARK, WE'VE SEEN, OF COURSE, THE CULMINATION OF A DISASTER IN EASTERN EUROPE, A SHARP COLLAPSE IN THE FORMER SOVIET UNION PRODUCTION. THEN WE COMPOUNDED THE PROBLEM, OF COURSE, WITH A MAJOR DROUGHT IN THE EUROPEAN WESTERN COMMUNITY. TODAY ON FRIDAY'S TRADE, WE SAW CANADA ESTIMATE THEIR CROP AT 21 MILLION TONS. THAT'S STILL 4 OR 5 MILLION TONS ABOVE LAST YEAR, BUT IT WAS SLIGHTLY BELOW THE TRADE EXPECTATION. BUT THE MARKET HAS FACTORED A LOT OF THIS IN. THE FUNDS HAVE RECORD LONG POSITION OF OVER 40,000 CONTRACTS IN CHICAGO, AND SOME OF THE MOST OPTIMISTIC EXPORT IDEAS THAT DROVE THE MARKET TO A NEW LEG UP EARLY THIS WEEK MAY HAVE PUT A MAJOR TOP INTO THE WHEAT MARKET. AT LEAST I THINK IT'S GOING TO BE DIFFICULT FOR US TO RE-CREATE THE EMOTIONAL OPTIMISM AND ENTHUSIASM THAT WE HAD EARLIER THIS WEEK, AND NOW WE'RE STARTING TO SEE THIS MARKET BACK OFF SOME, RECONSIDER THIS EXPORT POTENTIAL, AND STARTING TO SEE SOME FUND LIQUIDATION. WHETHER OR NOT WE CAN PUT HUMPTY DUMPTY BACK TOGETHER AGAIN TO CREATE A MORE BULLISH SCENARIO THAN THIS OR NOT I THINK IS GOING TO TAKE SOME TIME. I THINK WE'VE HAD A LITTLE BIT OVERZEALOUS ESTIMATES OF EXPORT POTENTIAL OUT OF THE UNITED STATES. ALL OF THIS WAS TEMPERED THIS WEEK BY SOME RAINS IN AUSTRALIA THAT NOW HAVE THEM FORECASTING POSSIBLY A RECORD CROP THERE, OVER 24 MILLION TONS, A MILLION, MILLION AND A HALF TONS MORE THAN THE LAST GOVERNMENT ESTIMATE FROM THE USDA. SO WE MAY START TO SEE THESE MARKETS BACK OFF SOME, AND I'M NOT SURE THAT WE CAN SUSTAIN THESE KINDS OF PRICES INTO THE WINTER MONTHS IF THE U.S. CARRYOUT IS, LET'S SAY, ABOVE 500 MILLION. IT'S NOT GOING TO BE AS BIG AS WE THOUGHT AT ONE TIME WITH THE BIG U.S. CROP, BUT I THINK WE'VE COME TO AN END OF THE ROPE HERE ON UPSIDE POTENTIAL FOR THE INTERMEDIATE TERM AT LEAST.

Pearson: ALL RIGHT. DOUG, THE LAST TIME YOU WERE ON, YOU WERE TALKING 380 FOR A TARGET ON WHEAT, AND TODAY WE WERE THERE. WE'RE BACKING OFF SOME NOW. DO YOU GO ALONG WITH DOUG? ARE WE GOING TO SOFTEN UP FROM HERE?

Hjort: ONE THING IS SURE HERE; THE TECHNICAL PICTURE LOOKS PRETTY BLEAK RIGHT NOW. YEAH, WE CAN PROBABLY GO BACK ABOVE IT. AND I WOULD THINK THAT UNDER WORLD FUNDAMENTALS, IF THE WORLD DEMAND COMES TO OUR DOORSTEPS HERE, THEN I THINK WE MIGHT TAKE THAT OUT. BUT THAT'S A CLASSIC SIGNAL THAT THAT'S THE TOP IN A MARKET, AND IT WILL BE FOR A TIME, I BELIEVE, AND IT -- A GOOD PLACE TO POINT TO TRY TO MAKE SOME SALES AS PRICES TRY TO RECOVER HERE NOW IN THE NEXT FEW WEEKS.

Pearson: ALL RIGHT. LET'S TALK CORN AND SOYBEANS. WEATHER A BIG FACTOR THERE. A LOT OF CROP ESTIMATES FLOATING AROUND THERE. THE GOVERNMENT'S NUMBER WAS OUT, SMALLER THAN WHAT THE TRADE HAD EXPECTED. DOUG, WHAT DOES THIS CHANGE? HOW DOES THIS MAKE THE SCENARIO FOR THE CORN MARKET LOOK AS WE GO FORWARD?

Jackson: WELL, MARK, ONCE AGAIN, WE HAVE AN AUGUST THAT'S CREATING SOME OPTIMUM FINISHING CONDITIONS HERE, AND IT CREATES, OF COURSE, A GREAT WILD CARD NOW. WE THOUGHT A FEW WEEKS AGO THAT THIS WAS A SLAM DUNK TO HAVE HUGE CROPS, HUGE STOCKS INCREASES. AND NOW, OF COURSE, THE COMPLEXION HAS CHANGED SIGNIFICANTLY. BUT INTERESTINGLY, MARK, YOU KNOW, WE HAD A PRIVATE CROP TOUR PUT A PRODUCTION NUMBER OUT FRIDAY THAT WAS STILL AT THE 10-BILLION-BUSHEL LEVEL, SOMETHING JUST SHORT OF A RECORD CROP. THEY STILL ESTIMATED YIELDS AT WHAT WOULD BE A STATISTICAL RECORD LEVEL AND NOT MUCH DIFFERENT THAN THE GOVERNMENT'S 139.9 NUMBER IN AUGUST. THIS PRIVATE CROP TOUR HAS A STRONG HISTORY OF UNDERESTIMATING THE FINAL CROP BY AS MUCH AS 350 MILLION BUSHELS IN THE LAST TWO YEARS, AND I THINK THE MARKET IS GOING TO TAKE NOTE OF THAT. MARK, I THINK WE'VE PUT A MAJOR TOP IN THE CORN MARKET OF 240 THIS WEEK. I THINK IT'S GOING TO BE HARD FOR US TO AGAIN RECREATE THE KIND OF ENTHUSIASM OR ANXIETY TO TAKE THAT OUT. I DON'T THINK THE INDUSTRY BELIEVES THE CROP IS SUBSTANTIALLY BELOW 10 BILLION, SUBSTANTIALLY BELOW WHAT THE GOVERNMENT PUT OUT IN AUGUST, AND THAT'S GOING TO MEAN THAT TOP IS GOING TO HOLD FOR A WHILE. IT'S STILL A MOVING TARGET WITH THE WEATHER, BUT I THINK WE'VE SEEN AN INTERMEDIATE TOP HERE, MAYBE A MAJOR TOP, AGAIN, PREDICATED ON THE IDEA THE CROP IS NOT MUCH BELOW 139 YIELD. NOW, FEEDING MAY BE HIGHER. THE MILO CROP HAS BEEN HURT BADLY. THERE'S A QUESTION, MARK, ABOUT CHINESE EXPORT POTENTIAL. WE'RE NOT GOING TO BUILD STOCKS THIS YEAR LIKE WE THOUGHT WE WOULD AT ONE TIME, OR PROBABLY WON'T UNLESS WE GET COMPLETELY SURPRISED BY THE CROP. BUT NEITHER DO PEOPLE BELIEVE THAT THE DRY WEATHER IN AUGUST HAS DAMAGED THE CROP SIGNIFICANTLY. THE DRY WEATHER WAS TOO LITTLE TOO LATE TO REALLY AFFECT THE CORN. IT'S HAVING LOCAL SIGNIFICANT IMPACT BUT ON A NATIONAL SCALE. WE'RE PROBABLY STILL GOING TO HAVE A SITUATION WHERE THE STOCKS BUILD SLIGHTLY OR MAYBE STAY STABLE. BUT LONGER TERM, MARK, THE PROBLEM IS WITH THE UNITED STATES NOT HAVING MORE ACREAGE TO BRING INTO PRODUCTION. AND AS THE ETHANOL DEMAND GROWS 200 MILLION BUSHELS A YEAR, AS THIS TOTAL DEMAND BASIS AT RECORD LEVELS OF 10 BILLION BUSHELS, WE CAN'T PRODUCE A CROP NOW WITHOUT RECORD YIELDS TO BUILD STOCKS HERE. AND SO ONCE AGAIN WE REALLY HAVE SORT OF A SIDEWAYS PRICE PATTERN LONGER TERM, AND ANY KIND OF A WEATHER PROBLEM OVER TIME, OF COURSE, AND PRICES CAN STILL EXPLODE. BUT FOR THIS CROP CYCLE THIS YEAR, I THINK WE'VE PUT OUR LOW IN, OF COURSE, OF 209.5. OUR TOP IS NOW IN AT 240, AND I THINK WE RETRACE NOW BACK INTO FALL, ASSUMING THIS CROP DOESN'T DETERIORATE A GREAT DEAL FROM THESE KINDS OF NUMBERS.

Pearson: ALL RIGHT. STRATEGY-WISE FOR THE PRODUCER WHO HASN'T DONE MUCH OF ANYTHING YET, WHAT WOULD YOU TELL HIM?

Jackson: WELL, LONGER TERM I'M BULLISH CORN, BULLISH PROBABLY EVERYTHING WITH THIS IDEA THAT WE HAVE A LIMITED ACREAGE SITUATION IN THE UNITED STATES AND EVER-INCREASING DEMAND. BUT IF YOU'VE GOT TO MAKE SALES BETWEEN NOW AND, LET'S SAY, NOVEMBER, DECEMBER, FOR STORAGE REASONS, CASH FLOW REASONS, OR WHATEVER, AGAIN, I THINK THAT HIGH IS GOING TO HOLD THAT WE PUT IN THE DEC. CORN THIS WEEK.

Pearson: ALL RIGHT. DOUG, AS YOU LOOK AT THIS THING FROM A STRATEGY STANDPOINT, WHAT DO YOU TELL THE PRODUCER?

Hjort: I THINK DOUG IS QUITE ON TRACK HERE FOR THE SHORTER TERM GOING INTO THE HARVEST PERIOD. I WOULD LOOK AT THE LONG-TERM PICTURE, AND VERY FRIENDLY THERE. I DON'T KNOW THAT YOU WANT TO BE TIED UP IN CARRYING A WHOLE LOT OF INVENTORY, ESPECIALLY ON COMMERCIAL STORAGE, YOU KNOW, PAST THE HARVEST PERIOD. YOU'VE GOT A GOOD BOOST IN PRICE HERE. AND IN A LOT OF AREAS, BASIS LEVEL IS STILL QUITE GOOD, EVEN FOR HARVEST DELIVERY. HADN'T REALLY FALLEN OUT OF BED. SO YOU MIGHT TAKE ADVANTAGE OF THAT IF YOU DON'T HAVE STORAGE FOR EVERYTHING.

Pearson: ALL RIGHT. SOME GOOD THOUGHTS. LET'S TALK ABOUT SOYBEANS, DOUG. AND AS YOU LOOK AHEAD TO THE SOYBEAN MARKET, AGAIN, AS DOUG MENTIONED, WE'RE NOT GETTING THE FINISH TO THIS CROP THAT WE'D HOPED FOR. IS THE DEMAND STRONG ENOUGH AND IS OUR USAGE GREAT ENOUGH THAT WE CAN SEE THIS BEAN MARKET STILL GO HIGHER?

Hjort: I THINK I WAS SAYING LAST TIME I WAS ON, YOU GET TWO VASTLY DIFFERENT PICTURES WHEN YOU LOOK AT SOYBEANS. HERE IN THE UNITED STATES, EVEN IF WE DO HAVE A NEAR RECORD PRODUCTION, NOT RECORD YIELD, WE COULD STILL USE MOST OF THAT HERE IN OUR COUNTRY, OBVIOUSLY DEPENDING ON WHAT EXPORTS WILL DO. BUT YOU LOOK AT THE WORLD PICTURE, IN BRAZIL, ARGENTINA ARE LOOKING AT INCREASED ACREAGES AGAIN. YOU'VE GOT THESE RECORD LARGE PROJECTED ENDING STOCK FOR A YEAR FROM THIS FALL. IT'S JUST NOT VERY BULLISH ON THE SOYBEANS LONG TERM. I THINK AT THE PRESENT TIME, SURE, I DON'T KNOW WHERE THIS PRODUCTION IS COMING HERE. AND IF WE DON'T GET RAIN FOR THE NEXT MONTH, OBVIOUSLY OUR PRODUCTION IS GOING TO DROP OFF A LOT AND PRICES WILL STAY VERY STRONG. BUT THESE ARE SOME PRETTY GOOD OPPORTUNITIES HERE TO PRICE SOME OF THE NEW CROP AGAIN, IF YOU DON'T WANT TO STORE IT.

Pearson: ALL RIGHT. DOUG, AS YOU LOOK AT THE SOYBEAN SITUATION, AS DOUG MENTIONED, IT IS DIFFERENT THAN CORN BUT WE HAD EXTREME TIGHTNESS ON DEMAND AND SUPPLY IN THE UNITED STATES IN THE 2002/2003 CROP YEAR. WE'RE GOING TO BEGIN A RECORD CROP IN BEANS.

Jackson: WELL, WE ARE COMING OFF OF A CARRYOUT THAT COULD BE 145, 155. THAT'S THE TIGHTEST CARRYOUT-TO-USE RATIO THAT WE'VE HAD IN DECADES, AND YET WE FOUND OUT THIS YEAR WE CAN TOLERATE THAT WITH MODERATE INVERSES IN THE U.S. FUTURES AND, OF COURSE, PRICES DIDN'T GO ABOVE 6 OR 650. AND OF COURSE, THAT'S THE PRICE MODERATING IMPACT, MARK, THAT WE'RE NOW, OF COURSE, CLEARLY IN A BIOHEMISPHERIC SUPPLY SITUATION. THE SOUTH AMERICAN PRODUCTION IS NOW ECLIPSING U.S. PRODUCTION AND, OF COURSE, WE'LL BE LEFT IN THE DUST IN THE NEXT FIVE TO TEN YEARS AS THAT ACREAGE AND PRODUCTION EXPANDS. SOUTH AMERICA EXPANDED ACREAGE AT 7 MILLION ACRES LAST YEAR. BRAZIL COULD EXPAND ACRES AT THAT -- AT THE PACE THEY DID THIS PAST YEAR FOR THE NEXT SEVENTY-FIVE YEARS. BUT AGAIN, WITH THIS PROBLEM OF NO MORE ACREAGE IN THE UNITED STATES, THEN, WITHOUT BIG YIELDS HERE, WE END UP WITH A TIGHT SITUATION IN THE UNITED STATES, WE CAN'T BUILD STOCKS HERE, BUT THERE'S PLENTY OF BEANS IN THE WORLD. WE'VE STILL GOT A SITUATION HERE WHERE A PRIVATE CROP ESTIMATE LATE THIS WEEK ESTIMATED YIELDS BELOW 38 BUSHELS AN ACRE. SOME PRIVATES ARE STILL ABOVE 39. BASICALLY IN OUR WORK, THE DIFFERENCE BETWEEN A 38 AND A 39 YIELD IS BASICALLY THE DIFFERENCE BETWEEN $5 FUTURES AND $6 FUTURES. IT'S JUST THAT TIGHT. BUT THE IDEA OF BUILDING STOCKS IS OUT THE WINDOW AGAIN NOW. AND IF THESE CROP RATINGS DROP BY 10 POINTS IN THE NEXT THREE WEEKS -- AND REMEMBER, THEY WERE DOWN 6 POINTS JUST LAST WEEK. AND THIS IS WHAT THE TRADE IS GOING TO LOOK AT EVERY MONDAY NIGHT ARE THESE CROP RATINGS NOW, SINCE THE WEATHER LOOKS PRETTY MUCH HOT AND DRY. IF WE START TO GET RATINGS DOWN TO LAST YEAR'S LEVELS, THAT WAS A SUB-38 YIELD LAST YEAR, AND THAT CAN PUSH THESE FUTURES BACK TOWARDS OR ABOVE $6. LONGER TERM, THOUGH, WE MAY NOT BE ABLE TO GET MUCH ABOVE 6 TO 6.25 ALMOST REGARDLESS OF THE U.S. SITUATION, DUE TO THAT TEMPERING INFLUENCE IN SOUTH AMERICA. BUT THIS BEAN CROP, OF ALL THE THREE GRAINS, IS THE MOST INTERESTING SITUATION HERE AS WE MOVE INTO THE NEXT FEW WEEKS AND IT STILL LOOKS WARM AND DRY, JUST TO SEE HOW MUCH DAMAGE WE'VE REALLY DONE.

Pearson: DOUG, YOU TALK TO A LOT OF COUNTRY ELEVATORS. QUICKLY, WHAT ARE YOU SEEING AS FAR AS BASIS IS CONCERNED AT THIS POINT?

Jackson: BASIS LEVELS ARE FIRM. THEY'RE GOING TO STAY FIRM. THEY'RE NOT GOING TO BUILD THESE STOCKS. CORN BASIS, THOUGH, MARK, WILL RETREAT BACK AS MUCH AS 10 OR 20 CENTS A BUSHEL, WHERE IT WAS THIS PAST YEAR IN SOME MARKETS, BECAUSE WE'RE GOING TO HAVE A MUCH MORE NORMAL DISTRIBUTION OF INVENTORY IN THE UNITED STATES. WE WON'T BE TRYING TO SATISFY THE DEMAND IN THE WEST AND THE EAST WITH DROUGHTS LAST YEAR. THAT COULD BE A SIGNIFICANT FACTOR FOR LOCAL PRICES AND BASIS VALUES, PARTICULARLY IN IOWA AND MINNESOTA.

Pearson: ALL RIGHT. SOME GOOD POINTS AS USUALLY. DOUG HJORT, LET'S TALK LIVESTOCK HERE. THE FED-CATTLE MARKET EXPLODED HIGHER TUESDAY. THIS WHOLESALE BEEF MARKET JUST JUMPED UP. PACKERS BID UP. WHAT'S GOING ON?

Hjort: WELL, THE SITUATION IS THAT WHEN THE CANADIAN BEEF PROBLEM STARTED BACK IN MAY, WE HAD THE INITIAL EMOTIONAL RALLY IN THE MARKET. AND IT TOOK US OVER $80 IN THE CASH CATTLE. WELL, WE PROBABLY WOULD HAVE GONE THERE ANYWAY. THAT MARKET WAS READY TO DO IT. THEN WE SETTLED BECAUSE IT APPEARED THAT, HEY, WE'VE GOT ENOUGH CATTLE, WE'VE GOT ENOUGH BEEF HERE, AND SO ON. WE FINALLY PULLED OUR COLD STORAGE STOCKS OF BEEF DOWN ENOUGH, WE PULLED OUR CATTLE FORWARD ENOUGH SO THAT WE WERE VERY, VERY CURRENT. WE DIDN'T HAVE THE EXTRA CATTLE YOU COULD PULL IN OR THE EXTRA BEEF THAT YOU COULD PULL IN LIKE YOU COULD OUT OF THE CANADIAN SUPPLY. AND WHEN WE RAN OUT OF THAT, THEN PRICES JUST STARTED TO SKYROCKET HIGHER. AND THIS WEEK, OF COURSE, LIKE YOU SAY, $2 TO $3 HIGHER ON A TUESDAY, FOR GOODNESS SAKES, YOU KNOW. USUALLY YOU DON'T DO MUCH BUSINESS TILL THURSDAY. FUTURES, OF COURSE, THE AUGUST FUTURES DRIVING LIMIT UP THREE DAYS THIS WEEK. THAT'S JUST TO TRY TO STAY UP WITH THE CASH. NOW AUGUST EXPIRES NEXT WEEK, AND THE BACK MONTHS WEREN'T RALLYING NEAR THAT MUCH BUT THERE'S STILL -- OCTOBER IS OVER $81 ON THE CLOSE FRIDAY. VERY HIGH LEVELS. NOW, THE CANADIAN BEEF COMING IN, YEAH, WE'RE GOING TO BRING SOME IN, BUT IT'S STILL NOT CLEAR AS TO WHETHER THAT'S GOING TO AMOUNT TO VERY MUCH TONNAGE OR NOT. AND THAT'S THE REAL KEY THERE. IF WE DON'T GET MUCH TONNAGE ON THAT AND JUST SOME SELECTED CUTS, THESE CATTLE PRICES WILL STAY VERY STRONG RIGHT ON THROUGH THE FALL PERIOD. OBVIOUSLY, IF THAT OTHER SHOE DROPS AND THE BORDER IS OPEN TO A LOT OF BEEF, LOOK OUT BECAUSE WE'LL DROP THIS THING $5, $6, $7, $8 A HUNDREDWEIGHT. THERE'S THAT MUCH OVERPRICING IN THE MARKET NOW IF THE CANADIAN BEEF COMES INTO THE PLAY.

Pearson: OPPORTUNITY FOR AMERICAN PRODUCERS AT THE EXPENSE OF CANADA. WE'VE BEEN GETTING A LOT OF CANADIAN HOGS DOWN HERE IN THE U.S., WHICH HASN'T HELPED US ANY. THIRTY SECONDS OR SO, DOUG, QUICK COMMENT ON THIS HOG MARKET.

Hjort: THE HOG MARKET HAS BEEN RATHER DISMAL. I HAVEN'T LIKED IT. CASH PRICES OFF ALMOST $10 A HUNDREDWEIGHT FROM THEIR PEAK BACK ABOUT TWO MONTHS AGO. I THOUGHT WE'D HAVE SOME SORT OF REBOUND IN THE PAST WEEK OR SO OR TWO WEEKS AND HAVEN'T HAD IT. PORK CUTOUT VALUES ARE DOWN HARD AGAIN THIS WEEK. NOW, FUTURES BOUNCING BACK AND FORTH WITHIN ABOUT A $5 TRADING RANGE.

Pearson: THERE'S WHERE WE'RE GOING TO LEAVE IT. DOUG HJORT, THANK YOU SO MUCH. DOUG JACKSON, THANK YOU. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." IF YOU'D LIKE TO HEAR ADDITIONAL COMMENTARY FROM OUR TWO DOUGS, BE SURE TO CHECK OUT THE "MARKET PLUS" PAGE ON THE "MARKET TO MARKET" WEB SITE. UNTIL NEXT WEEK, THEN, THANKS FOR JOINING US. I'M MARK PEARSON. HAVE A GREAT WEEK.

CAPTIONS BY: MIDWEST CAPTIONING DES MOINES, IOWA


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