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Market Plus: Sep 09, 2005

posted on September 9, 2005


Market Plus: Sep 09, 2005

Pearson: Welcome to the Market Plus page here at our Market to Market Web site. Glad you've joined us. A little something extra from our analysts here on Market to Market. I'm Mark Pearson. With me this week one of our regular analysts, Darin Newsom. And Darin, action has all been on the cash side and it hasn't been good action. It's just been, it's had people -- I was over in Lincoln, Nebraska talking to a group over there, a bunch of bankers and man they were worried about what their clients were telling them. A lot of them are holding corn. We've been holding all this 2004 corn waiting for strong basis levels. It never did really recover from last fall.

Newsom: No they didn't. We had maybe one glimmer of an opportunity because you're right, we've seen carry in this market since last harvest indicating basis levels are going to get better. If you just wait long enough the seasonal tendencies are going to kick in. Well, we saw just an ever so slight tightening or strengthening of the basis mid-June, late July as the drought talk really hit its peak. That was the opportunity to finalize these sales because after that, once we turned the calendar to August, once we brought some cooler, wetter weather into parts of Illinois we saw basis work right back down to the levels that we'd been for most of the marketing year. This left producers in a bad situation coming up into harvest. Now really their only alternative was to move this stuff here late in August, early September, start moving some of this corn that they've had hedged or they've rolled or they've got on farm, whatever the case may be into terminal right in front of harvest to make room for the next harvest which is just around the corner. All of a sudden Hurricane Katrina, that plan is thrown out the window as basis levels collapse, barge traffic gets backed up on the river, they don't know when they're going to get to move now. So, now they're having to find some interior markets. The effect on that, lower bids there as well, lower basis bids there as well. It's been a real interesting last week to ten days in the cash basis market, not really reflected in the futures.

Pearson: I've had a lot of producers tell me they did not realize how vulnerable they were to a hurricane. Sitting in Wahoo, Nebraska or Scranton, Iowa or Hopeston, Illinois you don't think you're that vulnerable to a hurricane.

Newsom: No, but when we sit back and look through history what has been the major artery, what has been -- I hate to be over dramatic -- but the life blood of American agriculture basically export markets in the United States has been the Mississippi River. And New Orleans is a vital city to United States agriculture. And so, you know, the threat has always been there and as we've found that threat has just grown over the years, you know, with some of the problems that have developed along the levy system and so on. So, I mean, we've been kind of walking this razors edge for quite some time and agriculture now realizes how much it needs the Mississippi River and how much it needs to keep this thing open and running. And so I think we're going to see some improvements here.

Pearson: I talked to some farmers along the Mississippi River over in Illinois and eastern Iowa who said, you know, now we can kind of spotlight our probably and maybe get the Army Corp of Engineers moving on our whole lock and dam system which they also feel is very vulnerable. Winter snow fall and other issues and of course size is another thing for the lock and dams. Okay, so we've got this situation, we're starting to work our way through it. And if you're on the grain side you're on the side holding grain. There is good carry in the market, there is potential for good LDP out there so those are the positives you hit in the show which I think were great. And the third thing and the way we left the show which I want you to talk about just a little bit more right now if you're feeding cattle, if you're raising hogs you need to be looking at some basis contracts and buy up as much of this cheap corn as you can shouldn't you?

Newsom: You really need to. We've got corn in the lower ranges of its historic price levels. I mean, with December corn down around $2.15 you'd start looking at your carries. Before these carries continue to widen, I mean, we're already out to pre-widen the margin next May and July. But they still offer pretty good opportunities. Basis levels are, you know, just horrifically low from a producers standpoint but a wonderful opportunity for end users. So, yes, I mean if they're looking at high cost of cattle, high break evens, you know, high break evens on hogs this is an opportunity to start getting some feed locked down. Yes, seasonally basis tends to weaken going into October but how much further is it going to weaken here? How much further is it going to weaken if we actually start to see some improvement along the Mississippi River system? Are we going to see that initial knee jerk reaction? If the crop comes in smaller, if the drought was actually as bad as what had been talked about all summer this is an opportunity to start getting some of this locked down before some of these ifs and ands start taking shape.

Pearson: Got fifteen seconds, real quick, your take on oil prices. What do you think might happen in the fourth quarter? Report on the show, a bid drop in crude oil this week.

Newsom: We've seen a big drop in crude oil but it's a very tentative drop. We saw how nervous the market was as Hurricane Ophelia or Tropical Storm Ophelia, I don't remember, even approached the other side of Florida, markets got very tentative, very nervous. So, we could see some pressure on this market. We could see it start to back off a little bit until even the next threat is even hinted. And then that could cause things to spike again.

Pearson: Alright, so don't expect improvement on energy prices any time real soon.

Newsom: Maybe a little but not a lot.

Pearson: Alright, Darin Newsom, appreciate your insights. One of our regular market analysts joining us this week on our Market Plus page. For all of us here at Market to Market, I'm Mark Pearson.

 


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