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Market Analysis: Aug 16, 2002

posted on August 16, 2002


The grain markets shot higher this week following the release of the government's crop report on Monday. For the week, wheat prices gained more than three cents, but corn prices gained more than 20-cents. Soybean futures were fifteen to thirty-six cents higher. Soybean meal gained thirty cents per ton. Cotton futures gained a penny.

In livestock, fed cattle futures were 75-cents higher. The feeder cattle market closed a nickel lower. The lean hog contracts closed the week $2.88 lower.

In the financials, COMEX gold dropped 50-cents per ounce. The euro gained 130-basis points against the dollar. The CRB index finished the week with one of its sharpest gains in years—up more than seven and-a-half points to finish at 219.30.

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

Market Analysis: Aug 16, 2002 Pearson: John, we have a bull market in the grains market, something we haven't had in about seven years.

Roach: It's a nice feeling, isn't it, Mark, to see prices going higher?

Pearson: Yeah, it's certainly a change of pace. The big question now is will they continue to march higher. What's your outlook? Let's talk about wheat first.

Roach: Well, the wheat market has marched up into price areas that will make it difficult for us to compete around the world, and that's what stopped the market from moving higher. This week, as you said in your opening, we only moved wheat slightly higher this week because the competition worldwide is growing. There's shortages in some areas. There's small crops in some areas, but in other areas, there are large crops. And in those areas, particularly in some of the former soviet union countries, we're going to see some of that wheat move into the marketing channels where we would have otherwise sold our wheat. Rumors at the end of this week, we were going to see wheat come in from the European market into our ports. So that's what stopped the market from moving higher and that's what's concerning traders right now is that we've gotten our prices out ahead of the world prices.

Pearson: All right. So maybe we put a short-term cap on what could happen as far as the wheat market is concerned?

Roach: Unless we see increased damage occurring in some of the areas that are in the wheat production stage now, this is market is going to struggle, or until we move through the supplies from those other countries that are competing with us. We're at the -- wheat is a big export market. We don't use so much of it domestically, so we've got to sell it overseas, and we've reached the top here momentarily.

Pearson: All right. Let's talk about this corn market, obviously a huge week. Twenty cents up for the week. A lot of concern about the state of the u.s. Crop. If we look at what this is going to do to carryover going into next year, it's certainly going to tighten things up dramatically. Could we be looking at $3 and $3.25 as the board as some people are saying?

Roach: Before we talk about corn, for just a moment I'd like to really address all the grains here at one time for a moment. One of the things that's accomplished -- or has happened, that we've now recognized this week, is we're out of surpluses in this country on corn, wheat, and soybeans. And so corn is the one that looks like maybe is in the shortest situation with the least amount of competition around the world. Our number one competitor in exports is either Argentina, traditionally, or china. And the Argentines, we expect will reduce their corn acreage because of the cost of planting corn and instead plant soybeans. Same thing in Brazil. They have to bring in a lot of products to plant corn that they have to buy in the world market, and their currencies are cheap. So beans will be a much-preferred commodity for them to raise, to the degree that they're going to expand. We think that expansion will occur in soybeans and there will be some contraction of corn. So we're going to lose competition there. We think it's going to be very difficult to cut the usage on corn in this country, more so than we saw back in '95, the last time we saw usage being rationed, because we've moved so much of the livestock operation into larger units, more concentrated units that are more like factories, where it's so much capital investment that slowing down the unit or shutting down the unit is just not nearly as practical as what it was once upon a time. So we think you're going to have to hold prices high to cut the feed usage. We know that the production of alcohol is going to continue to increase as we're bringing more plants on stream. So we think we're in a situation where the world competition is going to be somewhat slowed down at the same time that our usage in this country is going to be somewhat difficult to slow down, so that means that the market has got to ration the demand or we have to find out the crop is not as big as we think -- or not as small as we think. This August report is notorious for giving us a head fake, if you will. We've seen a lot of revisions following august reports as we watched the crop mature. Most of them in drought kind of years, we've seen the yields be decreased as we go along. So that's really the state that the market is in right now, expecting to see further decreases if we follow the normal trend, expecting to have not as much demand -- as much competition in the world market, and a market that's going to be difficult to slow down the consumption in this country.

Pearson: All right, give us some price targets for, like, December corn.

Roach: Well, December corn, I think is a $3 market. Back in the old days we said December corn would always get to $2.70, in a year with crop problems, $2.95; and it took some serious problems to get to $3.20. So those are kind of your target areas. We've almost met the $2.95. I think we'll see $3- to $3.10. There's a gap in the market that gives us a target of $3.10 on December corn.

Pearson: All right, you talked about soybeans. Give us a target there for soybeans. Where would you like to sell soybeans?

Roach: Well, the soybean market -- you saw Doug's comments from last week earlier in the show, talking about the competition in South America. Well, let me say, in the government's report, they cut 170 million bushels out of usage in this country between exports and usage. I don't see that happening without beans going considerably higher than this. So I think the bean market is cheap. We're trading beans slightly above loan, and we've got all kinds of worries out ahead on how we're going to slow down the usage. So I think beans are cheap. I think we'll see a 6 in front of the bean market in the November's, and I wouldn't be surprised if we see $6.50 beans.

Pearson: John, real quick, a nonevent, all this in terms of the cotton market, as you look ahead, decent crop prospects down there. Cotton market has had a nice recovery from its lows. Anything in particular as you see ahead?

Roach: I think it's going to have to come up to compete for acreage. Again, we're going to have the demand out there to get acreage into all three of the major crops. Corn, wheat, and beans are all going to try to increase their acreage this upcoming year. That means the cotton will have to get stronger.

Pearson: Quickly, fed cattle.

Roach: Fed cattle market is going to firm into the fall of the year. The market has done a very nice job of moving through this low demand period with better demand than we figured.

Pearson: Red meat overall. Let's talk about hogs. Fourth quarter this year. Between our analysts, we've had a competition between we think it's not going to be that bad, we think the fourth quarter will be okay. What's your take?

Roach: Well, I think we're going to have a lot of hogs out there. We're going to be killing in excess of two million head per week, and I think we're going to have poor prices. Now, the market has already got that discounted in, though. Will we see worse prices that are on the mercantile exchange? I don't think there will be much worse than this. But we're going to produce a lot of pork, and that's going to continue to keep the demand in corn.

Pearson: All right. And as you look ahead, we get through the fourth quarter, you talk about these larger units, and we're talking about more concentrated feeding of livestock. From that side of it, from a feed standpoint, should we be locking in some lower prices as this stage of the game?

Roach: I think all the users of corn and soybeans and proteins and oils are all slow. They're all slow to react to this. They're going to need to step up their buying activity. I think you'll see demand underneath all these markets as users start to get coverage. Remember, we've gone for a lot of years with no inventory being the cheapest inventory. Suddenly it's changed and nobody can quite get their arms around that. It's only been one week since we saw the government report -- less than a week. It happened Monday of this week. So it's going to take some time for people to get their arms around them, but we're going to see the demand be underneath this in a very strong fashion, I believe.

Pearson: Will we see expansion in South America this year?

Roach: No question about it. They're going to take advantage -- they're at record high prices now on soybeans in South America or were just shortly before the real strengthened a little bit after we injected money into their country. But i think the expansion might be a little less than what some of the people have been talking about.

Pearson: All right. John Roach, thank you so much. That will wrap up this edition of "Market to Market." Now, you can hear more of john's thoughts on our website. No doubt, the days ahead will provide some interesting market commentary. Until next week, I'm Mark Pearson. Thanks for watching. Have a great week.


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