Drought-reduced production pushed corn prices into record territory this week, prompting some discussion on the impact of renewable fuel mandates.
For the week, September wheat gained 96 cents, while the nearby corn contract broke through the $8-barrier with a gain of 84 cents.
The drought’s impact on soybean prospects was readily apparent as the August contract exceeded $17 per bushel with a impressive weekly move of $1.63, while the nearby meal contract advanced by nearly $70 per ton.
In the softs, cotton traded sideways this week as the December contract posted a gain of 28 cents.
In the dairy market, August Class III Milk futures lost 23 cents, but the deferred contract rose twice that amount.
In livestock, August cattle gained 75 cents. Nearby feeders were off nearly $3, and the August lean hog contract moved $3.30 higher.
In the financials, the Euro lost 83 basis points against the dollar. Crude oil declined more than $4 per barrel. Comex Gold fell nearly $10 per ounce, and the Goldman Sachs Commodity Index gained nearly 30 points to close at 650-even.
Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Sue Martin. Sue, welcome back.
Martin: Thank you, Mike.
Pearson: It's been a big week. Obviously weather is playing a big part. Over in Europe, are any of the things going on over there having an effect on the market here, in your opinion?
Martin: I think they are in the equity markets. Today Spain said that they felt that the recession for them was going to last on into next year, and so that sent the dollar running. Bonds higher. I think bonds are trading around 151, 152. They might get to 162 before they are going to find tough times or turn around where maybe we start to see a lift in interest rates. But the dollar being higher, one would think that that plays havoc with our grain prices going higher, but right now it's an emotional thing and we are looking at supply rather than demand. The equity markets, like the stock markets, they all fell around the world on Friday and, consequently, it has an effect more there, maybe even in the energies and possibly even into, like, gold and silver. But not so much on these agricultural markets there. They're kind of doing the weather pretty much.
Pearson: Let's get right into it. Where do you see wheat going?
Martin: I think the wheat market is -- you know, it was not that long ago that everybody kept saying, oh, we have a glut of wheat in the world, but that is changing and you go from gluts to tight supplies. And the problem with wheat is that we look at India, who does raise a fair amount of wheat and exports. In their monsoonal rains since April, first off, They were late in coming and not only late in coming, but they were less than what they really should be. So while we had some pretty decent rains out of them in the first week or two of July, overall, they've been really lackluster on about 80 percent of their crop areas, especially the ground areas and, of course, the soy areas and in fact it is affecting soy areas by maybe 5 percent of their planted area. In other words, their planted area will be less. It's estimated 5 percent than what they normally would have planted. That's a concern. Then you look at Australia, who El Niño tends to affect and given them drought. And of course, they're seeing a little bit of dryness yet in their wheat areas. And so that's a real big concern because Australia puts a lot of wheat into the world market and you have the U.S., of course, start off looking like we're going to have an awesome crop and we ended up with not as great of a crop but it's very good quality so, consequently, it's not feed wheat very much. It's more of the wheat that will go into the flour mills and that type of thing. So the wheat market looks to me like it's going higher. I think we'll see $10 wheat, I think maybe even higher. But I think that the wheat market is in good hands and breaks will be well supported as we go into October, at least and even late October. The one thing about wheat is that everybody thinks they can feed wheat at the expense of corn but that may not happen because wheat prices are running higher than corn.
Pearson: Let's move into corn. That's been a busy week there as well. How high is corn going to go?
Martin: I look at the corn market and, you know, we still have for now what damage is done is done, and we've got to where we are, which is right against -- Right under the $8 level for Dec. corn. We tested all-time highs today within a heartbeat, and the September contract for any lead contract now is making new all-time highs. Got up around 8.24. And I think that what we're looking at is a market that is going to still push higher. You know, we can have some breaks here, but this feels like a market that has got some more mileage yet to go. We haven't done enough demand destruction yet. We will when it's all said and done. We got to these price levels because of Illinois, Indiana, you know, Missouri. Those crops and a little bit of slippage on Iowa's and maybe a hair of slippage on Minnesota. They're the garden spot still. And Nebraska, of course, it rated just a little bit over Iowa. But we're going to see that change dramatically. Nebraska is going to show marked deterioration and so is Iowa again. And I think our deterioration in Iowa is going to be bigger than it was last week, and we fell about 11 percent on corn and something close to that on beans. I think you're going to be somewhere around 13, maybe 16 percent on those crops. So that said, if this weather persists through the month of August and we see further deterioration in Iowa's crop, we're now decimating a major chunk of good producing states that are trying to make up for the other big producing states on the east of the river, and that's a big concern. I think corn can go to 852. That's been a target for a long time, but a lot of analysts have gotten too sexy about that. And so therefore, I've noticed that we've done -- in many markets and be it whether it's on the upside or the downside, it seems like we're exceeding them a little bit. So the next target I have, beyond that, is 926. I would not underestimate that we put a nine in front of corn. If we don't this year, I would be thinking it's a pretty good bet for next year.
Pearson: You mentioned something briefly there. You mentioned demand destruction on corn, and I know we're seeing beans going up, up, up. Is demand destruction a concern there as soybean prices rise?
Martin: Absolutely. The one thing we have to remember is if we were to slow down ethanol production, which we're seeing the slowest or lowest, I should say, production in two years. So as we slow down production, of course, that means less DDGs and that means you've got to put some demand back towards the corn, but also, soymeal. And of course, China, huge livestock herd, huge hog industry, and trying to grow, looking at 640 million hogs or whatever, I mean it's way big. Of course, I don't know as if I believe that their crop is the wherewithal.
They would tell you it is, but I don't believe it. In the meantime, they're going to need protein and their crushers are not crushing beans very aggressively. So they may end up turning to soymeal to buy the meal to feed their livestock. If we have a real problem with this bean crop, which I think that we're going to, then I visualize that they're going to come in and start buying the hogs, which I'm kind of circling in a lot of different markets, but I can visualize them coming in and buying the whole carcasses and we look to feeding for them and send the meat over. But at the present time, this bean market is the one -- if you look east of the Mississippi, they have got crops in two-three weeks early. So July was their August. But west of the Mississippi, we're pretty much looking at August as August. If we continue on -- and it sort of looks like we could -- this weather is really taking a toll. The beans are short. The blooms are falling off. I'm hearing even in gardens where they've watered that blooms that aren't even on the bush beans, the edible beans. And out in Nebraska, talking to the Nebraska climatologist, Al Dutcher, he even told me about how they've had problems out there as well finding that there aren't blooms on beans even with irrigation. That's a big shock. So I think that we're looking at a crop that's going higher. I think that we know that the news media is a hold of it. I haven't seen it on the front cover of the Wall Street Journal yet, but they are aware of it. It may be one of these years where they stay aware of it and the market just keeps chugging and chugging, and each month gets a little higher until we wear ourselves out, because the U.S. is the only game in town for soybeans. When we look at the fact that China, the rumoring this week was that they were going to cancel corn sales back to us. They have 1.6 million metric tons to take yet. Well, the market didn't skip a beat. What market set the new highs? September.
Pearson: Sue, I've got to move on here. I've got to talk livestock. Real quick, what do you see in the cattle market going forward?
Martin: Well, I think the cattle market has got some tough times to go ahead. We'll get some bounces, but this heat has really worked over demand. Now, the rains coming up and cooling on the East Coast is going to be a godsend here for a little bit. But to be honest with you, the drop in the feeder market is going to continue, I think. I fear, you know, we've had calves on the downside but rallies are going to be met with selling, and we're going to continue to see a liquidation of cows coming off of pastures and moving into the packing houses and then the calves going to auction. Lightweight calves will have a home easily. The heavier weight ones, because they're going to demand corn feeding probably will be taking a drop in price.
Pearson: Sue, can we talk hogs for just a sec?
Martin: First off, the hogs, of course, appear to be holding up a little bit better today, but the problem here again, it's sort of follow in the footsteps of the cattle producer because hog producers are losing at least $25 a head. So we're going to see the hog producer who was at first attempting to maybe expand, they're going to probably going to some liquidation and see sows liquidated.
Pearson: Sue Martin, thank you so much. That wraps up this edition of Market to Market. But if you’d like more information from Sue on where these high flying markets may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program –as well as links to our Twitter Feed and Facebook account -- all FREE -- at the Market to Market Web site. And speaking of social media, I’m sort of “the new kid on the block” here at Market to Market, and I’m really excited about getting to know viewers better. So visit any of our sites and share your comments on Market to Market. Be sure to join us again next week when we’ll continue to examine the drought’s impact on commodity prices. Until then, thanks for watching. I'm Mike Pearson. Have a great week.