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Market Analysis: Aug 02, 2002

posted on August 2, 2002


Weather forecasts then weather reports drove grain prices down then up. For the week September wheat contract gained 2 cents. Sept corn was nearly ten cents higher, while the new crop December contract closed almost 11 cents higher. August soybeans finished 11 cents higher, November beans 26 cents higher. August meal closed $4.50 a ton to the plus side. Cotton closed 95 cents lower.

In livestock, fed cattle futures finished down 20-cents. Feeder cattle closed 40-cents lower. The lean hog contract lost $1.05 on the week.

In the financials, COMEX gold posted a $4 per ounce gain. The EURO closed 19 basis points higher against the dollar. And the CRB index finished the week a full point higher at 210.25.

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

Market Analysis: Aug 02, 2002

Robinson: Thank you, Sid. It's nice to be here.

Sprecher: Well, it would appear that this is almost as pure a weather market as we can find. Do you see anything else out there? We've talked a little bit about demand in the past. Is that holding? Is that going to exacerbate a volatile weather market?

Robinson: Sid, there's, to start with, corn here. There's plenty of corn on hand to satisfy demand. And in that context, on the 12th of August, the USDA will make some adjustments in production, forecasts. And clearly the U.S. is certainly a candidate. Of more interest to me -- or of equal interest to me will be what the USDA projects in china and Argentina, two countries that are pretty stiff competition for u.s. corn exports. Private sources are suggesting the Chinese crop could be near 125 million metric tons, which would be a pretty significant increase from last year. A recent adjustment in Argentina's crop from last year adds another million and a half tons of corn in exportable position there. So there's plenty of old crop grain on hand to satisfy near-term demand. The question, of course, continues to be how large or what size is the developing new crop. And a private forecaster today, the first that I have seen sub nine million hit the street. And of course, futures reacted by closing higher today. So USDA will be out on the 12th. Sid, it will be interesting to see their numbers and from that what kind of price prospects we can generate or forecast.

Sprecher: Now, you're seeing prices for December corn, the new crop corn, continue to run ahead of the existing supplies. Now, that isn't the case in the case of soybeans. We're seeing old crop soybeans generating a premium out there. Is there a shortage there? How is that going to carry into the harvest?

Robinson: Sid, I don't think there's a shortage. There are certainly fewer beans inventorywise today than what we would have thought a year ago today. Usage for this particular crop year has been record large. It's likely we'll carry somewhere in the vicinity of 170- or 180 million beans from last year's crop into the breach of whatever we produce this year. It's just that those beans yet on hand are in very strong holders' ownership and they've been reluctant to release those into the marketplace. Now, the month of August is traditionally the pivotal month for bean production, where we might add a bushel to trend. We might reduce a bushel or two from trend. So clearly, the next thirty days, the market is going to be awful sensitive to u.s. weather and developments.

Sprecher: How would you price these beans and corn now?

Robinson: Sid, I think old crop beans should be pushed to the market and marketed because of the inversion that exists old to new. More often than not, an inversion of that nature will dissipate and fully evaporate between now and the availability of new beans. So I think old crop beans that are yet in inventory on farm sites. For example, this is an opportunity to move through those. And I would do so sometime next week, particularly if this dome of hot, dry air develops, as many forecasters fear.

Sprecher: Now, that could even harm the corn crop much more. Beans tend to recover or can recover with timely rains. Corn, after it reaches a certain stage of maturation, tends to deteriorate. So how would you market corn in light of that?

Robinson: Again, in all fairness, the last time I visited with mark, I was of the opinion establishing minimum price positions was the proper thing to do. And I in fact did that. So as you and I visit tonight, the corn crop that I'm directly responsible for or marketing has minimum price established, and we bought puts in this instance. For someone that has done nothing to this point in time, I would entertain the idea of what we've just discussed. And as we visit tonight, I think the prospects of the new crop corn futures contract pushing above $2.75 is strong. So for a near-term target, not knowing, of course, how the weather will shape up the next three or four weeks, I would use that as my entry level to establish that minimum price idea.

Sprecher: Now, these pits, both corn and beans have tended to drag along some other grains, notably wheat and oats. What would be your market strategy on either of those commodities?

Robinson: Well, wheat, for the third consecutive year, globally we're going to consume more than we produce, Sid. And wheat inventories here in the United States have tightened. Wheat inventories across the globe have tightened to the point that, while there's no critical shortage of wheat globally, we clearly are tightening that equation and places an emphasis on wheat in the up and coming year, Sid. So I think September wheat futures -- and I'm talking specifically about Chicago tonight -- are in position to test $3.50, a mark we've not seen for quite some time. At that point I would be inclined to move wheat inventories and price wheat inventories, Sid, assuming the basis is normal or better than normal, with the idea that on some kind of a pullback -- and ideally that pullback may occur as the harvest of other coarse grains, corn in particular, commences here in the fall of the year. at which point I would look to then make a selective entry probably with some type of option strategy back into the wheat futures market. So a two-pronged attack. I think the opportunity of seeing September wheat at 350 is a good opportunity to go ahead and price cash. Sometime during the fall of this year, I would selectively repurchase wheat inventories, with the idea of seeing some type of price progression into the winter and spring of 2003.

Sprecher: Turning quickly to the livestock side, it would appear there remain doubts about the fourth-quarter hog kill, that that may depress hog prices considerably. And that will, of course, be a factor on all red meat prices. How do you see it?

Robinson: Sid, in each of the last four or five weeks, the sow and gilt slaughter count has been in fact rising, which would suggest, then, that the herd rebuilding process has perhaps plateaued. Now, that isn't enough of a sample, i don't think, to suggest a trend is in place. But the market I think has taken that to heart, that statistical data, and assumes now that we're not going to expand to the extent that we thought maybe six or eight weeks ago. I still think, however, Sd, if the recent pig and hog crop report is accurate -- and to this point slaughter numbers suggest that report was fairly accurate -- we're going to see a number of weeks in the fourth quarter of 2002 where weekly slaughters will exceed a couple million head. That's plenty of pork. We've plenty of frozen inventory on hand, with the likelihood of keeping fresh supplies very ample. I still am fearful that in the fourth quarter, early part of 2003, we could see some sub-$30 live-hog prices here in the Midwest.

Sprecher: What sort of prices then would you start seeing that same quarter for beef?

Robinson: Well, we did a little hedging the last time we talked, Sid, and that has proven to be okay to this point. I think October hogs in the $43 to $45 area, I would in fact go ahead and place some type of defensive strategy based on that price range. December hogs 41.5 to 43, I would do the same.

Sprecher: And cattle?

Rrobinson: Cattle futures, I think, and cash cattle, Sid, probably remain fairly stable the balance of this summer. Plenty of live product, plenty of frozen product. But again, assuming weather now doesn't force additional cows to slaughter and calves to the feedlot, I think we can see some upper 60, maybe some $70 live cattle late this year, early in 2003.

Sprecher: All right. Thanks, Virgil. That wraps up this edition of "Market To Market." To hear more of Virgil's thoughts on the markets, you can turn to our web site. Until next week, for Mark Pearson, I'm Sid Sprecher. Thanks for watching. Have a good week.

Captions by: Midwest Captioning Des Moines, Iowa


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