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Market Analysis: Aug 30, 2002

posted on August 30, 2002

The grain markets finished the week mixed with wheat prices continuing their increase, while corn prices softened slightly. For the week, wheat prices gained more than 14-cents. Corn prices were down three to five cents. Soybean futures gained four to seven cents. Soybean meal gained nearly six dollars per ton. Cotton futures gained $1.07.

In livestock, fed cattle futures posted a two cent loss. Feeder cattle were fifty cents higher. The lean hog contract closed the week $3.68 lower.

In the financials, COMEX gold gained $6.10 per ounce. The euro gained 91-basis points against the dollar. The CRB Index finished the week two points higher to close at 222.

Here now to lend us his insight is one of our regular market analysts, Virgil Robinson. Welcome back.

Market Analysis: Aug 30, 2002

Robinson: Hi, Mark.

Pearson: The big question is how big is the corn and soybean crop, if you check in the corn and soybean belt. And, Virgil, that's kind of the question I'm going to put to you. This wheat situation just continues -- production wise, it continues to decline.

Robinson: International Grain Council just this week, Mark, again lowered world coarse grain and wheat production for the third or fourth consecutive time. So as viewed by them, supplies continue to decline. It kind of sets us up nicely for the anxiously awaited USDA September report, Mark. And I think in each of the last two or three weeks, we've seen modest week-over-week increases in the USDA crop condition index. So the trade, I believe, is of the opinion, production numbers come September 12 will be a little larger in both corn and in soybeans, which leaves the question will they proportionately increase demand? And I would answer that in the general manner as yes.

Pearson: All right. So we have a little bit better crop, maybe, than what they thought in august. But demand is going to roll right along, so we're still going to stay tight. What's a wheat producer -- let's start off there. What's a wheat producer to do right now?

Robinson: Mark, I think long-term wise wheat futures -- Chicago wheat futures are now in position to test that magical $4 Mark. How quickly remains unknown. I would guess sometime post the September 12 report. So for those who followed perhaps my advice the last time we visited, I did in fact suggest selling some cash wheat, Mark, and did that. I would now be of the opinion we are in position to move towards $4. So for those who wish to repurchase, I think that's the target. For those who are content with that sale and have more, I believe we'll press near $4 and provide that opportunity within the next few weeks.

Pearson: And again we're talking futures here.

Robinson: Yes, correct.

Pearson: And so your own basis may vary. Let's talk about corn now. You thought we might see corn up around $3. We hit $2.90. What's on tap now, Virgil?

Robinson: Again, I think, Mark, over the course of the next several months, the Market is, in my opinion, in position -- I'm talking about futures -- in position to move higher. I have a target of about $3.20. Now, having said that, it doesn't mean we have to trade to $3.20 next week. We have a harvest in front of us, as you mentioned, an anxiously awaited USDA report where production is likely to grow a little bit. So we may, for a period of time here, flatten in value, at least as measured by futures, with the idea at some time mid or post harvest beginning to increase in value with the target of around $3.20.

Pearson: All right. So that's what we're going to be looking for. And we don't talk basis very much but, obviously, when we get into $3.20 corn and we've got a lot of corn coming off the combine, that basis tends to widen out.

Robinson: True. Although this year I think, Mark, given the circumstances in the western corn belt, poor production on average in many areas, also in parts of the east, southeast, demand pulls from both those regions are likely to converge right here in the middle part of the country, southern Minnesota, most of Iowa, perhaps even Wisconsin. I think basis levels as a function of dual demand pulls from both east and west as well as southeast, will keep the basis tighter or narrower than traditionally is the case. So I don't anticipate a significant break in the basis this fall, Mark. There's adequate storage in many regions on farm as well as off farm. I think we'll absorb that production easily without stress and basis levels should remain fairly narrow all year long.

Pearson: Some positives there. Soybeans same story?

Robinson: much the same story I think there, Mark. The Market I think is in position to push higher, provided we sustain the kind of demand we became accustomed to all of last year. Now, that remains to be seen because we're talking about a higher price threshold than we were a year ago, Mark. The USDA made an effort at rationing demand in their last supply and demand report as a function of higher price and smaller supply. It remains to be seen, in my opinion, whether demand will surpass each of the last few years, which has been basically on record pace. So having said that, a futures target between now and may of 2003, I can envision one of the spot futures contracts trading at or fractionally above $6.50.

Pearson: Let's take a look at livestock. You talk about demand; there's an awful lot of hogs out there. We talked about poultry earlier in the show. We've got larger cattle. We're sending big steers to town right now. What does a pork producer do at this stage of the game?

Robinson: Cumulative meat supplies year over year are up about 3.6 percent, Mark, and much of that increase has been in the beef sector, as well as pork. For the first week ever during the month of august, we had a record kill -- estimated kill this week of two million fifteen or twenty thousand head. Mark, I know there's been a lot of conversation about the prospect of having pulled hogs ahead. Unfortunately, the week-over-week weight change in southern Minnesota and Iowa -- we actually gained a pound this week versus last. That does not suggest we pulled any marketings ahead. I think we have significant slaughter and tonnage ahead of us in both hogs and cattle for the next several weeks. Having said that, Mark, I think the February -- excuse me, the December lean-hog and February lean-hog futures contracts are in position to recover towards $38 and $44 respectively within the next two to three weeks. Given that opportunity, I would product -- protect last half of this year's production, first half of 2003's production, using those lean-hog futures levels as my sales barometer. Cattle, again lots of beef, not likely to change, at least in the near future. December cattle futures around $72. February around $73. I would use both those numbers to employ defensive strategies. Short hedges, forward contracting if the basis is acceptable. I think there's just plenty of meat, and that's going to be the pattern here for the next several weeks.

Pearson: Are we going to start seeing some of those weights come down with this corn Market?

Robinson: Haven't thus far in live cattle. I saw this week, Mark, they averaged 1,262 pounds live, 758 or -59 pounds dressed, both significantly above last year and showing no signs of plateauing. Hog weights have maybe stabilized. I think 259 pounds, down a pound from the week before. But to suggest they are significantly smaller or trending lower would be misleading. I do not sense that at present.

Pearson: Quick look at cotton, Virgil. An upweek this week for cotton.

Robinson: Cotton futures, Mark, an interesting study. The October contract has really struggled near $48. That happens to be a point on long-term continuation studies, at least in my opinion, that is a crossroads between prices at this level and lower, prices at that level or higher. A monthly close above $48, in my opinion, will trigger some additional price gains up towards $60.

Pearson: Very good. Virgil Robinson, thank you so much. To hear more of Virgil 's thoughts, turn to our website. Until then, join us again next week for "Market to Market" when we talk about a lot happening as this harvest begins to get underway in many parts. We'll also define political campaigns in rural America. Until then, I'm Mark Pearson. Thanks for watching. Have a great week.

Tags: agriculture commodity prices corn markets news wheat