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Market Analysis: Jul 18, 2003

posted on July 18, 2003


Crop prices were pressured this week as the trade anticipates bigger crops and bigger surpluses.

The wheat futures contract gained 14 cents for the week, but nearby corn was down more than seven cents. Dec corn was off more than four cents.

In the bean pit, the nearby futures contract was off almost 34 cents from a week ago. August meal was down nearly seven dollars a ton. Cotton futures were down 60 cents a hundredweight.

In livestock, live cattle futures were up $2.22 for the week. August feeders were $2.62 higher. But the lean hog contract dropped more than $3.00.

In the financials, Comex gold was up $2.20 an ounce, the Euro was virtually unchanged from a week ago, and the CRB Index was, in fact, unchanged and closed as it did last Friday at 234-even.

Here now to shed some light on these and the week's other major trends is our senior market analyst, John Roach. Welcome back.

Market Analysis: Jul 18, 2003

Roach: THANKS, MARK.

Pearson: WELL, LET'S TALK ABOUT THE WEEK THAT WAS. LET'S START FIRST ON A BRIGHT SPOT AS FAR AS PRICES ARE CONCERNED, AND THAT'S THE WHEAT MARKET. WHAT'S AHEAD?

Roach: WELL, THE WHEAT MARKET HAS PUT IN A SURPRISING WEEK. AS WE'VE BEEN HEARING, EXTREMELY LARGE YIELDS, RECORD SETTING YIELDS IN SOME OF THE AREAS COMING IN, THE DEMAND HAS ALSO COME AT THE MARKET. IT INITIALLY STARTED HERE A WEEK OR SO AGO WITH COMMODITY FUND BUYING. WE'VE CONTINUED TO SEE COMMODITY FUND BUYING. WE'VE ALSO SEEN EXPORTER AND USER TYPE BUYING AS THE TREND HAS TURNED HIGHER, AND THAT'S WHAT'S DRIVEN THE MARKET UP. THIS WEEK WE HAD HEAVY COMMODITY FUND BUYING WAS PROBABLY THE FEATURE.

Pearson: OKAY. HEAVY COMMODITY FUND BUYING. SHOULD WE HAVE HEAVY FARMER SELLING TO MATCH SOME OF THAT?

Roach: WELL, WE STARTED TO GET SELL SIGNALS. ON WEDNESDAY WE HAD A SELL SIGNAL IN THE CHICAGO WEEK THAT QUICKLY DISAPPEARED ON THURSDAY. BUT TODAY ALL THE WHEAT CLASSES ARE GIVING US SELL SIGNALS ON THE TECHNICAL THINGS THAT WE PAY ATTENTION TO. WE THINK IT'S TIME TO BE SELLING WHEAT. WE THINK THERE'S A RELATIVELY SMALL WINDOW OF OPPORTUNITY HERE, WHERE THE UNITED STATES IS REALLY THE ONLY SUPPLIER IN THE WORLD WITH ANY KIND OF INVENTORY AVAILABLE. AS WE MOVE INTO THE FEW MONTHS OUT AHEAD, LET'S SAY WE GET INTO SEPTEMBER AND BEYOND, WE SUDDENLY WILL BECOME JUST ONE OF THE PEOPLE OUT THERE WITH WHEAT AVAILABLE. THE COMPETITORS WILL COME IN AND LIKELY UNDERCUT OUR PRICES. SO, YES, I THINK YOU NEED TO BE SELLING WHEAT IF YOU'RE A PRODUCER. I THINK THAT THERE MAY BE ANOTHER OPPORTUNITY AFTER THIS ONE PASSES, BUT IF YOU'RE WANTING TO GET WHEAT SOLD HERE -- I WOULD WANT TO HAVE IT ALL GONE OR A GOOD CHUNK OF IT GONE BETWEEN NOW AND THE MIDDLE PART OF NEXT WEEK. I THINK THIS IS A RELATIVELY SHORT-TERM PHENOMENA. AND AS SOON AS WE GET ENOUGH FARMER MOVEMENT, THAT WILL OVERWHELM, I THINK, WHAT IT IS THAT THE USERS AND SPECULATIVE PEOPLE WANT TO BUY.

Pearson: ALL RIGHT. SO A SELL SIGNAL DEFINITELY ON WHEAT. LET'S TALK ABOUT THE UPCOMING CROPS, CORN AND SOYBEANS. AND, OF COURSE, EVERYWHERE YOU LOOK IN THE CORN BELT AND THE BEAN BELT, THIS CROP LOOKS PRETTY DARN GOOD, JOHN. NOW, WHAT'S GOING TO STOP THIS FREE FALL IN THE COMMODITIES.

Roach: WELL, WE JUST HAVE TO FINALLY HIT BOTTOM. NOW, PEOPLE ARE TALKING $5 BEANS AND $2 CORN, AND SOME PEOPLE ARE TALKING LOWER THAN THAT. BUT AS YOU SAW WITH THE NEW CROP CORN AND THE NEW CROP BEANS BOTH, THEY SLOWED THEIR DECLINE THIS WEEK. NEW CROP CORN WAS DOWN ABOUT 4 CENTS, BEANS A BIT MORE THAN THAT. THE MAIN THING THAT HAPPENED WAS THE OLD CROP INVENTORIES, WHICH HAD BEEN PRICED HIGH RELATIVE TO THE NEW CROP, ARE CATCHING UP -- OR DROPPING DOWN TO, I SHOULD SAY, THE NEW CROP PRICE LEVELS. AS WE TAKE AWAY THE NEED FOR PEOPLE TO TRY TO GET SOME INVENTORY, THE USERS ARE LOOKING FORWARD AND SAYING, "I'LL JUST WAIT A LITTLE BIT. THERE'S PLENTY OF NEW CROPS SO I'LL GO SLOW HERE ON MY PURCHASES." SO IT'S MAINLY BEEN A FUNCTION OF THE OLD CROP LOSING RELATIVE TO THE NEW CROP THIS WEEK RATHER THAN THE NEW CROP MAKING DRAMATIC DOWNSIDE PROGRESS.

Pearson: ANYTHING TO DO AT THIS STAGE, OR ARE WE JUST LOOKING AT AN LDP GAME FROM HERE ON OUT?

Roach: WELL, I THINK, REALLY THE -- IF YOU HAVE ANY OLD CROP LEFT, IT'S TIME TO GET RID OF IT. JUST CALL YOUR ELEVATOR AND SEE WHAT YOUR OLD CROP BID IS AND YOUR NEW CROP BID IS, AND UNDERSTAND THE OLD CROP WILL BE WORTH WHAT THE NEW CROP IS WORTH PRETTY SOON. SO IT'S TIME TO GET RID OF OLD CROP. THERE MAY BE SOME BOUNCES AT ANY PARTICULAR TIME. WE CERTAINLY STILL HAVE TIGHT SUPPLIES OF SOYBEANS AND RELATIVELY TIGHT SUPPLIES OF CORN. I THINK THAT WILL KEEP BASIS VALUES RELATIVELY FIRM AS WE MOVE ALL THE WAY INTO HARVEST. BUT AS FAR AS NEW CROP IS CONCERNED, I THINK THAT THE MAIN THING WE CAN DO IS CHANGE OUR ATTITUDES. PRODUCERS PRAY IN THE SPRING TO HAVE A GOOD CROP, AND THIS YEAR WE HAVE A GOOD CROP OVER A VERY WIDESPREAD AREA, AND LIKELY TO BE A RECORD CROP IF WE LOOK AT THE NATION, LIKELY TO BE A RECORD YIELD SITUATION, AND ONLY A FEW AREAS REALLY BEING HURT VERY MUCH. SO WE HAVE WHAT WE'RE HOPING FOR. AND I THINK THAT THAT DOES A COUPLE OF DIFFERENT THINGS. FIRST OF ALL, OVER ON THE CORN SIDE, WE'RE GOING TO PUT RELATIVELY CHEAP CORN INTO THE INDUSTRIAL COMPONENT OF THIS MARKETPLACE, AND THAT'S AN AREA WHERE WE REALLY NEED TO SEE SOME CONTINUED GROWTH. WE NEED TO HAVE MORE PLANTS PRODUCING ALCOHOL AND THE BEST WAY TO DO THAT IS TO HAVE CHEAP CORN AND TAKE THE SUBSIDIES FROM THE GOVERNMENT -- AS A FARMER, TAKE THE SUBSIDIES FROM THE GOVERNMENT. AND IT'S IN ESSENCE SUBSIDIZING, IF YOU WILL, THE CONSTRUCTION OF FACTORIES AND THE PRODUCTION OF ALCOHOL, WHICH IN TURN WILL GIVE US BETTER DEMAND AS WE GO DOWN THE ROAD. I THINK THAT WE HAVE THE POTENTIAL HERE TO MAKE EXPORTS BE A MUCH LESS IMPORTANT COMPONENT OF OUR PRICING STRUCTURE ON CORN, AND EVERYTHING IS SET UP JUST ABOUT RIGHT. HAD WE HAD A SHORT CROP AND HIGH PRICES THIS YEAR, WE'D HAVE DERAILED THAT, PERHAPS.

Pearson: ALL RIGHT. THAT'S A GOOD POINT, AN INTERESTING PERSPECTIVE. LET'S TALK WHAT'S HAPPENING ON THE LIVESTOCK FRONT. AGAIN, THE BEEF MARKET -- THERE'S STILL A LOT OF CONCERN ABOUT WHAT'S GOING TO HAPPEN WITH CANADA, WHAT'S HAPPENING WITH REOPENING THE BORDER, WHEN THAT'S GOING TO HAPPEN, AND WHAT THE IMPACT WILL BE WHEN THAT DOES OCCUR. WHAT'S YOUR TAKE, JOHN, IN THIS BEEF MARKET AS WE GO FORWARD?

Roach: WELL, THAT'S REALLY THE KEY. THE CANADIAN BORDER SITUATION OR THE IMPORT OF CANADIAN BEEF IS THE REAL KEY TO THIS MARKETPLACE RIGHT NOW. IT LOOKED EARLIER IN THE WEEK THAT, WELL, MAYBE WE WERE GOING TO SEE THAT BORDER OPEN, AND THEN IT TALKED LIKE THAT IT WOULDN'T FOR SOME TIME. AND THEN AS A CONSEQUENCE, THE MARKET TOOK OFF AND MOVED UP THE LIMIT AND INTO NEW CONTRACT HIGH AREAS AND SO -- SO THAT'S REALLY THE KEY. IT NOT ONLY IS FOR THE CATTLE INDUSTRY, IT ALSO SPILLS OVER INTO THE PORK INDUSTRY AS WELL, BECAUSE MEAT IS COMPETITION AND IF WE -- IF IT'S NOT ALLOWED IN THIS COUNTRY, THEN THAT REDUCES THE COMPETITION.

Pearson: WHAT'S AHEAD NOW? PRICE-WISE, OBVIOUSLY THAT'S GOING TO HANG OVER THE MARKET. HAS THE MARKET BEHAVED PRETTY MUCH AS YOU THOUGHT? WE HAVE BECOME VERY CURRENT.

Roach: YEAH, WE'RE EXTREMELY CURRENT. WE SAW THE CATTLE-ON-FEED REPORT TODAY SHOWED THAT WE HAVE -- WE MARKETED 8 PERCENT MORE CATTLE THAN A YEAR AGO, MORE THAN WHAT PEOPLE ANTICIPATED IN THIS LAST MONTHLY PERIOD -- REPORTING PERIOD. SO WE ARE IN AN EXTREMELY CURRENT POSITION. MARKETS WILL PROBABLY BE STRONGER HERE NEXT WEEK, CASH MARKET AS WELL AS THE FUTURES. BUT THE WILD CARD IS WHAT HAPPENS HERE WITH THE CANADIAN SITUATION, AND THAT'S GOING TO TRUMP EVERYTHING ELSE. WHAT WE'VE BEEN SUGGESTING TO PRODUCERS IS IT'S A TIME TO BE OWNING INSURANCE ON THE CATTLE THAT YOU HAVE IN THE FEEDLOT. WE LIKELY HAVE NOT SEEN THE LOW OF THE CASH CATTLE MARKET FOR THIS SUMMER.

Pearson: ALL RIGHT. WHAT ABOUT ON THE HOGS? WE HAD A NICE RALLY IN THROUGH JUNE. WE'VE REALLY BEEN BACKING OFF SOME, PARTICULARLY ON THE CASH SIDE AND THE FUTURES THIS WEEK.

Roach: YEAH, BUT THE FUTURES ARE STILL UP NEAR THE UPPER SIDE, AND I'M AFRAID THAT THEY'RE STILL OVERPRICED RELATIVE TO WHERE THE MARKET WILL BE. SO I'M A HEDGER OF THE HOGS OR A BUYER OF PUTS IN THE HOGS AS WELL, ANTICIPATING PRESSURE AS WE SEE INCREASED MEAT SUPPLIES BECOME AVAILABLE LATER.

Pearson: LET'S TALK ABOUT ANOTHER STRONG MARKET, AND THAT'S BEEN COTTON. OUR FRIENDS DOWN SOUTH HAVE RUN INTO SOME PROBLEMS WEATHER-WISE. THERE HAVE BEEN SOME CHALLENGES. DEMAND HAS BEEN GOOD. WHAT'S AHEAD FOR THIS COTTON MARKET?

Roach: WELL, WE'VE GOT A MARKET THAT'S TRADING HERE AT THE UPPER SIDE OF ITS RANGE. AND AS WE MOVE THE COTTON MARKET BACK UP IN THE 72-CENT AREA, WE THINK THERE'S A TOUGH RESISTANCE. IF YOU LOOK AT THE CHARTS, 72, 72.50 IS A TOUGH, TOUGH AREA. SO I WOULD BE A SELLER OF COTTON ON STRENGTH HERE AND FEARFUL THAT WE'LL HAVE THE MARKET COME UNDER PRESSURE AS WE MOVE FURTHER INTO THE HARVEST PERIOD.

Pearson: LET'S TALK ABOUT -- WE'VE TALKED ABOUT THE GRAINS AND YOU TALKED ABOUT THE OTHER PERSPECTIVE, WHICH IS BIG CROP AND LOWER PRICES ARE GOING TO HELP ENABLE THE ETHANOL INDUSTRY. BUT, JOHN, AS YOU LOOK AHEAD TO NEXT YEAR WITH WHAT WE JUST TALKED ABOUT IN TERMS OF COTTON AND COTTON PRICES BEING STRONG, COULD WE START TO SEE SOME EQUILIBRIUM COMING OUT? MAYBE FEWER SOYBEAN ACRES IN THE SOUTH, FOR INSTANCE?

Roach: WELL, PERHAPS. BUT I THINK THAT THE DEMAND SIDE OF THE SOYBEAN MARKET IS BEING IGNORED HERE A LITTLE BIT BY THE MARKET TODAY, WHICH IS WHAT IT SHOULD BE DOING DURING THIS GROWING SEASON. THE EXPORT SALES THIS WEEK, WE HAD 1.1 MILLION TONS OF BEANS SOLD MOSTLY OF NEW CROP. AFTER THE BRAZILIANS FINISHED HARVESTING A CROP THAT'S 30 PERCENT BIGGER THAN WHAT IT WAS TWO YEARS AGO. SO WE JUST HAVE AN EXTREMELY BIG APPETITE -- WE'RE SEEING AN EXTREMELY BIG APPETITE FROM CHINA, AND I THINK THAT THE DEMAND WILL BE THE KEY TO THE SOYBEAN MARKET AS WE MOVE LATER. I THINK WHAT WE'LL HAVE TO DO THIS YEAR IS WE'LL TAKE BIG LDPs AT HARVEST, HOLD FOR A LITTLE BIT OF AN UPWARD THRUST, POST-HARVEST THRUST, AND THEN MERCHANDISE. AND THE GOOD NEWS IS WE'RE GOING TO BE MERCHANDISING BIG BUSHELS OF BOTH CORN AND SOYBEANS. I THINK IT'S GOING TO BE A VERY GOOD YEAR IN FARM COUNTRY, AND I HEAR A LOT OF PRODUCERS TALKING DOWN IN THE MOUTH BECAUSE PRICES ARE CHEAP. MY GOSH, I THINK OUR PRAYERS ARE ANSWERED. THE CROP IS EXCELLENT.

Pearson: ALL RIGHT. WE HAVE A GOOD CROP, SO WE'RE GOING TO BE WORKING THE LDPs AND THEN MAYBE HOLDING ON, MAYBE MERCHANDISING THE CASH GRAIN AS WE GO THROUGHOUT THE MARKETING YEAR.

Roach: YEAH, I THINK WE'LL HAVE EXCELLENT OPPORTUNITIES TO HAVE VERY GOOD GROSS RETURNS PER ACRE THIS YEAR.

Pearson: EXCELLENT. JOHN ROACH, THANK YOU SO MUCH FOR JOINING US. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." NOW, IF YOU'D LIKE TO HEAR ADDITIONAL ANALYSIS FROM JOHN, BE SURE TO VISIT THE "MARKET PLUS" PAGE ON THE "MARKET TO MARKET" WEB SITE. AND BE SURE TO JOIN US AGAIN NEXT WEEK, WHEN WE'LL SEE HOW CHANGING TIMES HAVE LED ONE COMPANY TO SWITCH FROM THE FEED BUSINESS TO THE FOOD BUSINESS. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK. CAPTIONS BY: MIDWEST CAPTIONING DES MOINES, IOWA

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