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Market Analysis: Jun 20, 2003

posted on June 20, 2003


The grain markets finished the week mixed. Wheat was pressured by the looming harvest, while corn prices were influenced by production potential and export potential. For the week, wheat prices were six cents lower. Corn prices were a penny lower to two cents higher. Soybean futures were eight to fourteen cents higher. Soybean meal gained $2.40 higher per ton.

Cotton futures were 13-cents higher.

In livestock, fed cattle futures were $1.12 lower. Feeder cattle gained 80-cents. The lean hog contract closed 30-cents lower.

In the financials, COMEX gold closed 30-cents lower per ounce. The euro was down 319 basis points against the dollar. And the CRB index finished the week unchanged at 234.

Here now to lend us their insight are two of our regular market analysts, Virgil Robinson and Doug Jackson. Welcome back.

Market Analysis: Jun 20, 2003

THANK YOU, MARK.

Pearson: ALL RIGHT, DOUG, LET'S GET STARTED WITH THESE GRAINS. LET'S START WITH THE WHEAT. AGAIN THIS WEEK A LITTLE SOFTER. THE SOFT RED WHEAT CROP, THE HARVEST IS GETTING UNDERWAY IN MANY PARTS OF THE COUNTRY. WHAT'S AHEAD FOR WHEAT PRICES?

Jackson: MARK, THE MARKET GENERALLY EXPECTS A BIGGER U.S. WHEAT CROP. IN FACT, THERE ARE THOSE PRIVATE ESTIMATES THAT ARE LOOKING FOR 50-, 60-, EVEN 100 MILLION BIGGER WINTER WHEAT CROP. WE HAVE A BIGGER SPRING WHEAT CROP COMING. EIGHTY PERCENT GOOD TO EXCELLENT IN THE SPRING WHEAT CROP; IT'S THE THIRD BEST RATED CROP IN FIFTEEN YEARS. SO PEOPLE ARE IMAGINING THE POSSIBILITY OF A CROP THAT COULD BE EVEN, 100-, EVEN 125 MILLION BUSHELS LARGER THAN THE ALREADY LARGE JUNE PRODUCTION ESTIMATES. SO WE'RE IN A STOCK BUILDING MODE IN THE UNITED STATES, MARK. THIS KIND OF A BALANCED TABLE, 650 TOP CARRYOUT, INCREASED TO ABOUT 200 MILLION FROM LAST YEAR'S RELATIVELY SMALL CARRYOUT, HAS HISTORICALLY BEEN ASSOCIATED WITH FUTURES DOWN AROUND 275, SOME 30 TO 50 CENTS LOWER THAN WE ARE TODAY. HISTORY SHOWS US THAT THESE KINDS OF LARGE CROPS TEND TO MAKE THEIR LOWS IN NOVEMBER AND DECEMBER. IN OTHER WORDS, WE SPEND ALL WINTER -- OR ALL SUMMER AND FALL DISCOVERING JUST HOW BIG THE CROP IS. SO PROBABLY, WE ARE IN A BIGGER CROP SITUATION, A LARGER CARRYOUT SITUATION, AND A LONG-TERM NEGATIVE PRICE SITUATION, ASSUMING THAT WE HAVE GENERALLY NORMAL WEATHER IN ROW CROPS. THE THING THAT'S BEEN SUPPORTING VALUES HERE AND THAT HAS NOT ALLOWED PRICES TO DECLINE AS QUICKLY OR AS FAR AS WE MIGHT HAVE IMAGINED ALREADY IS THE FACT, OF COURSE, MARK, THAT EVERYBODY IS AWARE OF THE FACT THAT WORLD WHEAT PRODUCTION CONTINUES TO STILL BE BELOW USAGE. NOW, THE BULK OF THE STOCKS DRAWDOWN IN THE WORLD IS IN CHINA, WHICH HAS NOT AFFECTED WORLD TRADE ONE WAY OR THE OTHER. BUT PEOPLE UNDERSTAND NOW, FOR THREE OR FOUR YEARS IN A ROW, THAT WORLD PRODUCTION HAS BEEN BELOW USAGE. AND WHETHER OR NOT THIS TREND CAN CONTINUE FOR A LONG PERIOD OF TIME BOTHERS PEOPLE. WE HAVE A 30-MILLION-TON DROP IN PRODUCTION IN EASTERN EUROPE AND A 30-MILLION-TON INCREASE IN MAJOR EXPORTER PRODUCTION. WE'RE GOING TO HAVE A HUGE WORLD TRADE SHIFT, BUT IT'S NOT GOING TO MEAN MORE EXPORTS OUT OF THE U.S. U.S. STOCKS ARE GOING TO BUILD. PRICES ARE GOING LOWER OVER A PERIOD OF TIME IF WE JUST ASSUME REASONABLY GOOD CORN AND BEAN PRODUCTION THIS YEAR.

Pearson: LET'S TALK ABOUT CORN AND SOYBEAN PRODUCTION. THINGS LOOK PRETTY GOOD SO FAR.

Jackson: THEY ARE. WE'RE OFF TO A GOOD START. WE HAVE SEVERAL, OF COURSE, OF OUR CRITICAL WEEKS OF WEATHER AND CRITICAL WEEKENDS OF WEATHER COMING UP. AS WE GO HOME WITH THE WEEKEND THIS WEEKEND, THE MARKET IS CONFRONTED WITH EIGHT- TO FOURTEEN-DAY, THIRTY-DAY, AND NINETY-DAY WEATHER FORECASTS OUT THIS WEEK FROM THE NOAA AND NWS THAT'S PROJECTING BASICALLY A COOL AND WET SUMMER GROWING SITUATION. AND A LOT OF PEOPLE HAVE SUGGESTED THAT IF THE PATTERN HAS NOT CHANGED BY NOW IT'S NOT GOING TO CHANGE. WELL, WHETHER OR NOT THAT PANS OUT IS YET TO BE SEEN, BUT THAT'S WHAT THE MARKET WAS BELIEVING GOING HOME. IF WE GET THE GOOD RAINS FORECAST NEXT WEEK, WHICH ARE ALMOST UNIVERSALLY FORECAST BY MANY OF THE FORECASTERS, THEN WE'RE PROBABLY GOING TO SEE A SIDEWAYS TO LOWER KIND OF A MARKET. MARK, OF COURSE, IF WE HAVE GOOD WEATHER, WE'LL SPEND THE REST OF THE SUMMER DECIDING HOW BIG IS BIG, HOW LARGE CAN THIS CROP BE. AND AFTER THE RECORD YIELD PRODUCTION SITUATION IN IOWA LAST YEAR, OF COURSE, THE MARKET WILL FEAR MUCH BIGGER PRODUCTION THAN MANY IMAGINED. IF WE WOULD HAVE A 1994 DEVIATION ABOVE TREND, WE COULD HAVE A NATIONAL CORN YIELD OF 157. THAT WOULD NOT BE STATISTICALLY IMPOSSIBLE. THAT, OF COURSE, WOULD SET THE STAGE FOR A 2.2 TO 2 POINT -- BILLION CARRYOUT AND, OF COURSE, LEGITIMATELY BURY THE PRICE PROSPECTS FOR ONE OR TWO CROP CYCLES IN THE FUTURE. THAT'S NOT STATISTICALLY IMPOSSIBLE. WHETHER THE WEATHER REMAINS GOOD IS YET TO BE SEEN, BUT RIGHT NOW GOOD WEATHER PROJECTION SETS THE STAGE FOR LOWER PRICES.

Pearson: MAKE SALES NOW?

Jackson: IF WE MAKE THE ASSUMPTION HERE THAT YOU'RE GOING TO ACCEPT THE IDEA THAT WE CAN HAVE 137, 138 YIELD, WHICH WOULD BE ABOUT 8 BUSHELS BETTER THAN LAST YEAR, NEAR STATISTICAL TREND, YES, WE CAN DRIFT TOWARDS 220. IF YOU WANT TO MAKE THE ASSUMPTION THE YIELD IS BETTER THAN THAT, WE CAN GO EVEN LOWER THAN THAT.

Pearson: LET'S TALK SOYBEANS, THEN. WE'RE LOOKING FOR DECENT CROPS THERE NOW TOO.

Jackson: WELL, OF COURSE, THE WEATHER SITUATION IN THE BEANS, OF COURSE, IS ALSO APPLICABLE THERE TOO. IF WE HAVE REALLY GOOD WEATHER, REALLY GOOD YIELDS, THEN, OF COURSE, YES, WE CAN REBUILD STOCKS NEXT YEAR AND HAVE A 250, 350 KIND OF A CARRYOUT. AND THEN THE MARKETING LOAN SITUATION, MARK, HOW LOW COULD PRICES GO IN THAT SITUATION? BUT OFFSETTING THE SOY COMPLEX, WHICH IS NOT THE SAME CASE IN THE WHEAT OR THE CORN, IS ALMOST BOTTOMLESS CHINESE DEMAND. CHINA IS GOING TO IMPORT 7-, 8-, 9 MILLION MORE TONS OF BEANS THIS YEAR THAN LAST YEAR. THAT GOES A LONG WAYS TO ABSORBING THE 12-MILLION-TON LARGER CROP IN SOUTH AMERICA. CHINA KEEPS BUYING ALL THE TIME. U.S. BEANS ARE $25 A TON CHEAPER FOR NEW CROP THAN SOUTH AMERICAN BEANS. THIS WEEK WE SOLD OLD CROP BEANS TO CHINA BECAUSE SOUTH AMERICAN FARMERS ARE HOLDING TIGHT, PARTIALLY DUE TO THE CURRENCY PROBLEM THERE, WHERE THE CURRENCY HAS RALLIED AND THEY'RE GETTING LESS REALS PER BUSHEL IN BRAZIL. WE HAVE A SITUATION WHERE OLD CROP SUPPLY/DEMAND IN THE UNITED STATES IS THE TIGHTEST RATIO EVER, AND WE'RE GOING TO MAKE -- WE'RE GOING TO MAKE THIS TRANSITION FROM THIS OLD-CROP TIGHTNESS TO NEW-CROP SUPPLIES, AND IT'S GOING TO BE A CHOPPY, DIFFICULT-TO-PROJECT TRANSITION. BUT PROBABLY WE'VE TOPPED OUT. PROBABLY WE'RE GOING TO ROLL OVER HERE WITH THE PROSPECTS OF GOOD WEATHER, BUT WE COULD STILL HAVE SOME ERRATIC OLD CROP PRICE ACTION AS WE MAKE THAT TRANSITION FROM OLD CROP TO NEW CROP.

Pearson: ALL RIGHT. LET'S TALK WHAT'S HAPPENING ON THE LIVESTOCK FRONT. VIRGIL ROBINSON WITH US THIS WEEK. AND, VIRG, LAST TIME YOU WERE ON, WE WERE TALKING ABOUT THAT CANADIAN CATTLE SITUATION. WE STILL DON'T REALLY KNOW WHAT'S GOING TO HAPPEN WITH THE CANADIAN CATTLE, BUT WE HAVE BACKED OFF ON FUTURES SOME AND THE CASH HAS CERTAINLY DROPPED OFF.

Robinson: YEAH, BOTH HAVE RETREATED, MARK, BASED, I THINK, UPON THAT, AND THE FACT THAT U.S. PRODUCERS, IN FEAR OF LIFTING OF THE BAN, HAVE BEEN AGGRESSIVELY MARKETING CATTLE. MARK, I NOTICED THIS AFTERNOON LIVE AND DRESSED WEIGHTS 25 TO 30 POUNDS LIGHTER IN EACH CATEGORY RESPECTIVELY. SO CLEARLY, THE PRODUCER HAS RESPONDED AND MOVED INVENTORY VERY AGGRESSIVELY, AND I THINK THAT'S BEEN THE PROPER STRATEGY TO THIS POINT IN TIME. LIVE PRICES ANYWHERE FROM $73 TO $75. I PENCILED USING IOWA STATE BASIS HISTORY, MARK, HEDGING OPPORTUNITIES, AT LEAST FOR WESTERN CORN BELT PRODUCERS. GIVEN TONIGHT'S FUTURES CLOSES, THE BEST THAT I COULD PENCIL IS AUGUST THROUGH OCTOBER ABOUT $67 LIVE AND AROUND $71 TO $-2 BASIS DECEMBER. SO CLEARLY, ALL OF THOSE ARE DISCOUNTED TO PREVAILING CASH. I THINK THE CONVERSIONS WILL CONTINUE, CASH MOVING CLOSER TO FUTURES. BUT AT THIS POINT, I STILL AM OF THE OPINION THERE'S THE PROSPECT FOR SOME IMPROVEMENT IN FUTURES BASED ON AWFULLY GOOD DEMAND. IT'S LIKELY THE CONSUMER WILL HAVE A LITTLE MORE DISPOSABLE INCOME LATER THIS SUMMER, BASED ON TAX LEGISLATION. I THINK THEY'RE NOT AT ALL BACKING AWAY FROM HIGHER PRICED BEEF. I THINK THE MARKET FUNDAMENTALLY IS IN RELATIVELY GOOD CONDITION THERE, MARK.

Pearson: YOU MENTIONED A KEY THING: DEMAND HAS NOT FALLEN OFF.

Robinson: WELL, NOT TO MY -- NOT TO MY ABILITY TO TRACK IT, MARK. AND THE ABILITY TO TRACK DEMAND IS VERY DIFFICULT. BUT FEATURES REMAIN STRONG. I SAW THIS AFTERNOON A LITTLE DRAWDOWN MONTH OVER MONTH IN THE COLD STORAGE INVENTORY OF BEEF AND TOTAL RED MEATS. I THINK AGAIN THE MARKET FUNDAMENTALLY IS IN PRETTY SOLID CONDITION, AND $67 LIVE CATTLE AUGUST THROUGH OCTOBER RIGHT NOW IS NOT PARTICULARLY APPEALING TO ME IN TERMS OF HEDGING OPPORTUNITIES.

Pearson: THESE HIGH BEEF PRICES ON THE RETAIL SIDE HAVE GIVEN REALLY KIND OF AN OPENING TO THE PORK BUSINESS, WHICH HAS FINALLY HAD ITS DAY IN THE SUN.

Robinson: WELL, THE MONTH OF MAY WAS THE FIRST PROFITABLE MONTH IN THE PORK INDUSTRY, MARK, I THINK FOR THE LAST EIGHTEEN OR THEREABOUTS. BUT PRIOR TO THAT, THERE HAD BEEN A SERIES OF PRETTY SIGNIFICANT LOSSES. THIS AFTERNOON I AGAIN NOTED, IN THE COLD STORAGE REPORT, A PRETTY SIGNIFICANT DRAWDOWN IN TOTAL PORK INVENTORY, LED BY BELLIES, MARK. SO I THINK DEMAND REMAINS RELATIVELY STRONG. IT'S LIKELY IF THE JUNE 30 HOG AND PIG CROP REPORT INDICATES 2 PERCENT FEWER IN THE HERD, 4 PERCENT FEWER BREEDING INVENTORY, AND 2 PERCENT LESS MARKETING HERD INVENTORY THAT WE CAN SUSTAIN THIS LOW TO MID $40 CASH PRICE THROUGH THE BALANCE OF THIS CALENDAR YEAR INTO THE FIRST QUARTER OF 2004.

Pearson: VERY GOOD. SOME GOOD NEWS FOR PORK PRODUCERS AT LONG LAST. I WANT TO THANK VIRGIL AND DOUG. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." NOW, IF YOU'D LIKE TO HEAR MORE OF VIRGIL AND DOUG'S COMMENTARY, JUST CLICK ON THE "MARKET PLUS" ICON AT THE "MARKET TO MARKET" WEB SITE. SO UNTIL NEXT WEEK, I'M MARK PEARSON. THANKS FOR WATCHING. HAVE A GREAT WEEK.

CAPTIONS BY: MIDWEST CAPTIONING DES MOINES, IOWA

Tags: agriculture commodity prices markets news