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Market Analysis: Jul 26, 2002

posted on July 26, 2002


The grain markets finished the week on the upside on continued concern about the state of this year's crop. For the week, wheat prices gained more than four cents. Corn prices gained six to eight cents.

Soybean futures closed more than 24-cents lower. Soybean meal finished the week $7.90 lower per ton. Cotton futures closed the week $1.42 lower.

In livestock, fed cattle futures were down 80-cents. Feeder cattle closed 93-cents lower. The lean hog contract gained 15-cents.

In the financials, COMEX gold posted a $20 per ounce loss. The EURO closed 260 basis points lower against the dollar. And the CRB index finished the week more than five points lower to close at 209.25.

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

Market Analysis: Jul 26, 2002

Hjort: Thank you, mark.

Pearson: All right. Let's get the question that's on everybody's mind. Is this bull market going to continue? Have we topped out? You know, what's the weather report saying? What's ahead? We know we don't have much of a wheat crop this year, at least as far as the soft red winter wheat crop is concerned, the spring wheat. What's ahead for wheat, Doug?

Hjort: Well, I think we'll see some higher prices for wheat. It was interesting this week and a little bit of last week; we started to see corn and wheat prices move pretty much together and ignoring what's been going on in the soybeans, partly because the soybeans have been so terribly volatile that why try -- why even try to stay up with them. And in the wheat market, really the fundamental is kind of quiet right now. The spring wheat crop is not in very good shape, but it varies a great deal. They do have some good crop, some bad. They got a little bit of relief from the weather this week. So I wouldn't think that crop deteriorated much this week, if at all. It didn't deteriorate very much last week either. Still, a very low rating and, therefore, puts the overall u.s. crop at, what, twenty-seven, thirty-year lows? The demand side of the question is still just a little bit suspect, although in the last two weeks, we've had pretty good export sales. I would expect those export sales to improve and be much better than they were last year, primarily because of weather problems in Canada, Australia, even India on their rice crop. Now, their wheat crop was a good one, but their rice crop is somewhat in suspect now because of the late monsoon and the wheat monsoon. And that would mean that they'd have less wheat for export, you see. Have to consume it domestically. So i think the wheat market has still got some more legs on it. How much more? I think it will follow corn. I think corn will go up a little bit too, but we do have harvest coming and that's going to keep some pressure on the corn market.

Pearson: This tightness, this drawdown, are we going to slow down demand? Let's look at the corn crop first. Are we going to slow that demand down? If we look at a 9.2- or 9.3-billion-bushel corn crop and 10-billion-bushel demand, there's going to be some rationing.

Hjort: Well, that's right. Some of those numbers start to come out this week. Some analysts were brave enough to print them.

Pearson: Yep.

Hjort: We've all been talking about them and thinking about them for some time. The interesting thing is, you look at our corn supply/demand balance, to really make it really, really tight, you have to reduce production almost a billion bushel this year. But look at the total world grain picture. You only have to bring the corn equivalent of that down 264 million bushels to become as tight a supply/demand -- or excuse me, to lower ending stocks as low as they were at the end of the '95-'96 season. Now, I'm sure we've already done that since those numbers were as of July, USDA report. I'm sure a combination of a little less spring wheat here, a little less corn, maybe a lot less corn. Other world production really hasn't gone up enough anyplace to offset that. As a matter of fact, it's come down some. We're setting ourselves up here in the corn and the wheat markets to have a real gangbuster's price scenario develop on us, primarily driven because supply is still relatively high but demand is at a level now that it is exceeding supply, even if world yields are quite high. And we are having some major problems in major producing areas, such as the United States, this year. So we still have harvest to get on through. So that's the big question, you know, on new crop: should I sell ahead of harvest or not. I think keep this in mind: it's very likely that we will not see an lDP on corn this year. So if you're selling new crop, you better come back and look at some sort of protection in case this market takes off and goes sharply higher after you've made that sale.

Pearson: All right. With those thoughts in mind, what are you telling your producers? How do we market into this thing?

Hjort: Right now I'm not selling anything into the new year. Now, on old crop, sure, we just use whatever comes here in the next few weeks to start working on cleaning out any old-crop inventories. But on the new crop, I want to be very careful, partly because of what I said before. Without an lDP out there and even if you really start to get bullish, maybe even eliminate this -- the other payment, the target price payment -- now, that's probably a bit of a stretch to expect that right now, because that's set up around 260 or something like that. That's the average for the whole marketing year. But you have to keep those things in mind when you're setting up a marketing plan for the new year. I'm not ready to start selling cash into that new year yet.

Pearson: All right. What about on the beans? You mentioned they have disengaged from the other two. They have been extremely volatile. What's your recommendation there?

Hjort: It's interesting. Today, on Friday that is, we saw the August futures down 17, 18, 19 points, whereas, the September was down 8 or 9. The November is what I meant to say. Here's the situation. We've got delivery against the august contract coming up next week. Commodity funds heavily long on the august contract. They started bailing out. Remember we did the same thing on corn futures first week of January -- of July. We sold that market off about 20 to 25 cents during that delivery period. And then the prices came back, went above that level. And on the close Friday, we were about the same as the peak we saw. I think the same thing will develop on the soybeans. Weather obviously will have a big key. But remember, even with trendline yields and the acreage we're working with now, we will use a few more bushels of soybeans next year than we will raise, drawing ending stocks down year to year. It's not what USDA numbers say right now. There's a small increase there year to year. But I think when we get through all the adjustments, we'll see a smaller stock a year from now than we will this fall and we will be below 200 million bushel at the end of this year as well.

Pearson: Okay. And project that out pricewise, Doug.

Hjort: Pricewise not as bullish as I would be on the corn right now or the wheat, but i do see some price improvement. The problem is the next month. Weather is going to be very, very key. Look for a lot more of this sharp up-and-down volatile price action.

Pearson: Let's talk about livestock. Fed cattle market; we're in kind of the doldrums here. What's ahead? What's your take on fed cattle?

Hjort: Plenty of them out there. Heavyweights -- heavy carcass weights. Beef demand is running pretty good, but the supply is just a little too large. I believe it will take several weeks, perhaps to get this market to move on higher. I still think we can do $70 cattle this fall, but we've got to work on getting these weights down. We've got to get rid of those real heavy cattle. We've been placing heavy cattle into the feed yard, those over 800 pounds, more and more of them. That's one of the reasons our carcass weights remain so high. Once we get past that and start putting some lighter cattle on this fall, then we can start to project to see the fat cattle price improve. But the next three, four weeks, it's going to be a very sluggish period. I don't know what else to do but to just continue selling the cattle and try to get those weights down as much as we can.

Pearson: Let's talk about the hogs. Also again, there seems to be less concern about the fourth quarter. Is that the feeling you're getting, Doug? Is that your analysis?

Hjort: That's right. And I think the producers paid attention to some of those dire price predictions for the fourth quarter. The reason I think that is they brought their -- the weights down dramatically. We're running about the same weight now in the Iowa/Minnesota market on butchers that we were a year ago, whereas, a little as two months ago, we were running 4 and 5 pounds over. So I think that those low price predictions caused producers to take a look at it and say, "boy, I better get this down." Therefore, I think fall quarter -- or winter quarter will be much better on price.

Pearson: Some good news, Doug. Thanks much. And that will wrap up this edition of "market to market." Now, you can hear more of Doug's comments at our web site, so be sure to check that out. In the meantime, I'm Mark Pearson. Thanks for being with us. We'll talk to you next time on "Market To Market."

Captions by: Midwest Captioning Des Moines, Iowa

That wraps up this edition of market to market. You can hear more of Doug's thoughts on our website. Join us again next week as we examine how legislation to restrict class action lawsuits could affect Rural America. Until then, I'm Mark Pearson. Thanks for watching. Have a good week.


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