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Market Analysis: Jul 05, 2002

posted on July 5, 2002


The grain markets finished a volatile week on the upside due to widespread weather concerns as dry, hot weather continues across the grain belt. For the week, wheat prices shot twelve cents higher. Corn prices gained three to four cents. Soybean futures gained seven to 35-cents this week. Soybean meal gained $8.40 per ton. Cotton futures were 45-cents lower.

In livestock, fed cattle futures gained $1.27. Feeder cattle gained $1.45. The lean hog contract gained $4.45.

In the financials, COMEX gold closed $2.60 lower per ounce. The euro closed 202-basis points lower against the dollar. The CRB index finished the week nearly two points higher to close at 209.75.

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

Pearson: ALL RIGHT, DOUG. LET'S TALK ABOUT THIS GRAIN MARKET. WE'RE IN THE THROES OF, IT LOOKS LIKE, OF ALMOST A CLASSIC WEATHER MARKET.

Jackson: WELL, WE ARE. I SUPPOSE, MARK, WE COULD SAY THAT ABOUT THIS TIME OF YEAR EVERY YEAR, BUT BASICALLY EVERYBODY IS STARTING TO WAKE UP. THE ARITHMETIC OF EVER-INCREASING DEMAND IS FINALLY CATCHING UP WITH US. WE'VE HAD FIVE YEARS OF BEAR MARKETS, FRUSTRATINGLY CONSISTENT YIELDS OVER A PERIOD OF TIME, A TREMENDOUS DEMONSTRATION OF INCREDIBLE PRODUCTIVITY OVER THE YEARS, PARTICULARLY LAST YEAR WHEN THE CROP RATINGS WERE NOT A GOOD INDICATOR OF THINGS. BUT WE'RE FINALLY AT THE POINT NOW WHERE, REALLY, IN ALL THE THREE GRAINS IN THE UNITED STATES, MARK, WE FACE A PROBLEM OF REALLY NOT HAVING ENOUGH ACRES. WE NEED TO TAKE THESE MARKETS HIGHER TO BUY IN MORE ACRES OR STIMULATE PRODUCTION AROUND THE WORLD. THE MARKETS, OF COURSE, ARE MUCH MORE SENSITIVE... THE RECOGNITION THAT WE'RE MARGINALIZING U.S. AGRICULTURE. WE'RE ONLY A SMALL PORTION OF THE WORLD'S WHEAT PRODUCTION, ONLY A MODERATE PORTION OF OILSEED AND COARSE GRAIN PRODUCTION, BUT THE U.S. IS STILL RELEVANT, OF COURSE, TO PRICE DISCOVERY HERE AND WE'RE ON THE VERGE OF A POTENTIAL MAJOR WEATHER PROBLEM. SO A VERY INTERESTING SITUATION. IT'S ALL WEATHER RELATED PRIMARILY, NOT ONLY IN THE U.S. BUT, TO A LESSER DEGREE, AROUND THE WORLD. WE'RE JUST GOING TO LIVE AND DIE IN THE WEATHER FORECAST NOW. WE HAVE VERY LITTLE ROOM TO TOLERATE ANY KIND OF A WEATHER PROBLEM IN THE BEAN MARKET, AND WE DON'T HAVE A GREAT DEAL OF ROOM TO TOLERATE ANY KIND OF A PROBLEM IN THE COARSE GRAINS OR THE WHEAT. BUT WE SEE THE BEAN SITUATION AS BEING THE MOST EXPLOSIVE OVER A PERIOD OF TIME. WE WANT TO REMEMBER THAT IN OUR LAST MAJOR DROUGHT SITUATIONS OVER THE YEARS, WE'VE SEEN SITUATIONS WHERE WE PUT $1 A BUSHEL ON CORN AND $3 A BUSHEL ON BEANS IN A MATTER OF WEEKS. SO THAT COULD BE THE KIND OF EXPLOSIVENESS WE HAVE AHEAD OF US. WE'LL JUST HAVE TO EVALUATE THE WEATHER AS WE GO ALONG.

Pearson: FROM A STRATEGY STANDPOINT, LET'S TALK ABOUT THE SPECIFICS NOW. THE WHEAT MARKET, WE TALKED EARLIER IN THE PROGRAM, WE'VE HAD A 14-PERCENT IMPROVEMENT IN WHEAT PRICES. ARE WE SELLING OLD CROP WHEAT IN HERE? ARE WE GETTING MORE AGGRESSIVE ON OUR NEW CROP SALES?

Jackson: WELL, WE DON'T WANT TO SELL ANYTHING FAR OUT, MARK. WE STILL THINK WE HAVE A PROBLEM THERE NEEDING TO BUY IN ACRES IN THE '03, '04 CROP CYCLE. EVEN THOUGH NOBODY IS TALKING ABOUT THAT, THAT'S REALLY THE FUNDAMENTAL UNDERPINNING HERE THAT IS OBSCURED BY THE WEATHER MARKET HERE ON THE NEARBY. THE MARKET IS WORRIED ABOUT CANADIAN PRODUCTION PROBLEMS, U.S. SPRING WHEAT PRODUCTION PROBLEMS, THE POSSIBILITY A SMALLER WINTER WHEAT NUMBER IN THE REPORT NEXT WEEK, SOME CHINESE PROBLEMS, AUSTRALIAN DRYNESS. SO THE WORLD WHEAT SITUATION CONTINUES TO CONTRACT AS IT HAS NOW FOR SEVERAL YEARS IN A ROW, AND SO DOES THE U.S. SITUATION. WE'RE FINALLY NOW AT THE POINT WHERE WE CAN SEE A TIGHTER SITUATION THIS YEAR AND AN INTOLERABLY TIGHT SITUATION NEXT YEAR. SO THE WHEAT MARKET HAS GOT TO BUY IN ACRES AWAY FROM WHAT COULD BE A GALLOPING HIGHER CORN AND BEAN MARKET, SO IT MAKES IT THAT MUCH MORE DIFFICULT. THERE'S HUGE INVENTORIES IN INDIA. THERE'S HUGE INVENTORIES IN RUSSIA, EASTERN EUROPE. WESTERN EUROPE IS GOING TO HAVE A RECORD CROP. IT'S NOT THAT THE WORLD IS RUNNING OUT OF WHEAT. THOSE PEOPLE WILL LOOK FOR AN OPPORTUNITY TO DUMP THOSE INVENTORIES. THAT WILL TEMPER THE WHEAT MARKET, BUT THE WHEAT MARKET CAN'T IGNORE THE ROW CROP STRENGTH AND WILL LARGELY MOVE IN PARALLEL TO THE CORN AND BEAN MARKETS OVER TIME. AND IF YOU THINK THERE'S A WEATHER PROBLEM THERE, YOU DON'T SELL ANY WHEAT NOW.

Pearson: ALL RIGHT. SAME STORY FOR CORN AND BEANS?

Jackson: WEATHER RELATED, AGAIN. THE BEAN MARKET WE THINK IS THE LEADER. THE FUNDS MIGHT PILE INTO THE CORN MARKET IN THE SHORT RUN AND GIVE THAT EXTRA BUOYANCY. BUT WE STILL SEE THE BEAN MARKET AS THE MOST INTERESTING. THE BOTTOM LINE ON THE CORN IS WE'LL GO ABOVE 250 ON THE DECEMBER FUTURES IF OR WHEN THE MARKET STARTS TO THINK THE NATIONAL YIELD IS AT OR BELOW $130 BUSHELS AN ACRE. THAT'S DOWN 8 BUSHELS FROM A YEAR AGO. ARE WE AT THAT POINT YET, I DON'T KNOW? BUT THE TRADE WILL LOOK FOR LOWER CROP RATINGS MONDAY NIGHT. ON MONDAY NIGHT, WITH JUST A SMALL DETERIORATION OF THE CROP, WE'LL BE FACING THE WORST RATED CORN AND BEAN CROPS SINCE THE FLOOD YEAR OF 1993. HOW RELEVANT THAT IS IN THE RATINGS, WE'LL HAVE TO SEE. BUT THE MARKET IS GOING TO BE SCARED HERE. IF WE DON'T GET GOOD RAINS OVER THE WEEKEND, WE'LL BE HIGHER, OF COURSE, PERHAPS SHARPLY HIGHER NEXT WEEK.

Pearson: ALL RIGHT. A VOLATILE SITUATION IN THE GRAINS. VIRGIL, YOUR TAKE ON THIS GRAIN MARKET? ARE WE GOING HIGHER HERE AND WILL THIS GIVE US AN OPPORTUNITY MAYBE TO SELL SOME '03 AND SOME '04?

Robinson: MARK, I'VE KIND OF ALREADY EMPLOYED THE MINIMUM PRICE STRATEGY WE TALKED ABOUT A MONTH AGO, SO I'VE ALREADY ASSUMED MY POSITION, SO TO SPEAK. AS DOUG ALLUDED TO, I THINK THE MARKETS ARE IN POSITION FOR SOME ADDITIONAL PRICE ADVANCES, AND WILL BE PROBABLY BEGIN EARLY NEXT WEEK WITH CROP CONDITION RATINGS PROBABLY BEING POOR, MARK. SO VERY DIFFICULT FOR ME TO ADD ANYTHING ASIDE FROM WHAT DOUG HAS ADDRESSED HERE. I THINK THE MARKETS HAVE AN OPPORTUNITY HERE TO MOVE HIGHER IN VALUE.

Pearson: ALL RIGHT. LET'S TALK ABOUT SOME MARKETS THAT HAVE BEEN MOVING LOWER. A MONTH AGO YOU WERE ON AND YOU EXPRESSED CONCERN ABOUT THE CATTLE MARKET, MAYBE WE'D SEEN THE BOTTOM. IT LOOKS LIKE -- HAS THAT OCCURRED NOW?

Robinson: MARK, I THINK DISAPPEARANCE AND DEMAND HAS IMPROVED. I'M NOT YET CONVINCED, HOWEVER, THAT WE'VE SEEN THE END OF THE BEAR MARKET IN CATTLE AND IN HOGS. THERE'S STILL A VERY ADEQUATE SUPPLY OF BEEF, PORK, AND POULTRY. I THINK WE'RE SLOWLY REDUCING THE FROZEN INVENTORIES THAT ACCUMULATED SHORTLY AFTER THE RUSSIAN POULTRY EMBARGO, AND THAT'S GOOD PROGRESS, MARK AND WILL BE HELPFUL. BUT THERE ARE A LOT OF HEAVY CATTLE ON FEED, AND THROUGH THE BALANCE OF THIS SUMMER, I DON'T SENSE ANY SHORTAGE OF FED CATTLE SUPPLY. COME FALL, THEN THERE'S THE PROSPECT, I THINK, OF SOME TIGHTER NUMBERS, PROVIDED GRAZING CONDITIONS AND FORAGE RECOVERY TAKES PLACE, PARTICULARLY IN THE WEST, WEST CENTRAL PART OF THE UNITED STATES. I DID SEE, IN EACH OF THE LAST COUPLE OF WEEKS, A PRETTY SIGNIFICANT INCREASE IN BEEF COW SLAUGHTER, MARK, WHICH WOULD SUGGEST THERE'S A SERIOUS CULLING TAKING PLACE IN THAT WESTERN PART OF THE UNITED STATES. NOW, IF THAT CONTINUES, THAT'S GOING TO CONTINUE TO CREATE A LOT OF BEEF SUPPLY, AT LEAST IN THE IMMEDIATE FUTURE. BULLISH LONGER TERM BUT NO RELIEF IN THE NEAR TERM. SO WITH THAT IN MIND, MARK, I THINK AUGUST CATTLE FUTURES ABOVE 66.5 CENTS REPRESENTS A GOOD HEDGING OPPORTUNITY. OCTOBER ABOVE 68, DECEMBER ABOVE 69, I WOULD EMPLOY, AT A MINIMUM, MINIMUM PRICE STRUCTURES.

Pearson: ALL RIGHT. LET'S TALK ABOUT THE HOGS. NOW, YOU'RE NOT AS FAVORABLY IMPRESSED WITH HOGS. THEY HAD A HECK OF A WEEK ON THE BOARD. FRIDAY CASH MARKET WAS PRETTY STRONG. THE HOGS AND PIGS REPORT WAS A LITTLE FRIENDLIER, I THINK, THAN WHAT THE TRADE WAS ANTICIPATING, BUT TAKE US ON FORWARD.

Robinson: WELL, I THINK YOU MENTIONED THE HOGS AND PIGS REPORT A LITTLE MORE FRIENDLY THAN HAD BEEN ANTICIPATED IN FORECAST, COMBINED WITH SOME PRETTY HOT WEATHER CONDITIONS, MARK, PROBABLY RESTRICTED RECEIPTS TO SOME EXTENT. BUT GIVEN THAT REPORT AND THE ACCURACY OF THAT REPORT, PORK PRODUCTION SHOULD INCREASE IN THIS JULY THROUGH SEPT. AND THEN OCT. THROUGH DEC. PERIOD ABOUT 3 TO 4 PERCENT YEAR OVER YEAR. NOW, IF THAT'S CORRECT, I'M HARD PRESSED TO BELIEVE THERE'S A BULL MARKET IN THE IMMEDIATE FUTURE IN THE HOG MARKET. SO MY OPINION, INCREASE IN PORK PRODUCTION APPROACHING, ADEQUATE, PROBABLY EXCESSIVE BEEF SUPPLIES, AND CERTAINLY ADEQUATE POULTRY SUPPLIES. I WOULD LIKE TO HEDGE AUGUST HOGS, MARK, AT $53 OR HIGHER, THE OCTOBER CONTRACT NEAR 43, AND THE DECEMBER CONTRACT NEAR $41. I STILL AM FEARFUL OF THAT FOURTH QUARTER, AND WE COULD, IN FACT, SEE SEVERAL DAYS -- OR SEVERAL WEEKS THROUGH THAT PERIOD WHERE WEEKLY SLAUGHTERS EXCEED A COUPLE MILLION HEAD. IF THAT'S THE CASE, WE COULD EASILY SEE $25 TO $30 HOGS IN THE FOURTH QUARTER OF THIS YEAR.

Pearson: ALL RIGHT, VERY GOOD. VIRGIL, WE APPRECIATE YOUR ANALYSIS. DOUG, YOU TOO. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." NOW, YOU CAN HEAR MORE OF DOUG AND VIRGIL'S COMMENTS ON OUR WEB SITE: IPTV.ORG/MARKETTOMARKET. NOW, BE SURE TO JOIN US AGAIN NEXT WEEK WHEN WE EXAMINE THE SUCCESS OF A VENTURE LAUNCHED BY A GROUP OF CATTLEMEN TO CAPTURE AN OVERLOOKED NITCH MARKET. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK. CAPTIONS BY: MIDWEST CAPTIONING DES MOINES, IOWA.

Market Analysis: Jul 05, 2002 Thanks Virgil, Doug. That wraps up this edition of Market to Market. You can hear more of Doug and Virgil's comments on our website, I-P-T-V dot O-R-G slash MARKET TO MARKET. Join us again next week when we examine the success of a venture launched by a group of cattlemen to capture an overlooked niche market. Until then, thanks for watching. Have a good week.


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