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Market Plus: Aug 22, 2003

posted on August 22, 2003


Market Plus: Aug 22, 2003

Pearson: Welcome to our Market Plus segment on our Market to Market Web page. I'm Mark Pearson, really glad that you've joined us. Don't forget, tell your friends about the Market Plus segment. We'd like as many folks to join us here as we possibly can get. Joining us tonight, our two Doug's, Doug Jackson and Doug Hjort, a lot of comments tonight, a longer market segment. Doug, you talked about the private crop forecasts that are out there, the government's crop forecast, what's ahead in corn and soybeans, what do you want to tell people at our market plus site?

Jackson: Well, Mark, you know the corn situation this year, I think, is really encapsulates the bigger picture in that demand is catching up with whatever level of supply we can provide with the limited or capped acreage in the United States, acreage of the five major commodities in the United States is virtually at maximum levels, only a couple million less than the 1997 maximum plantings that we had. Urbanization has wiped out some extra acres since then. We simply can't expand acres. And so here we have a ten billion bushel demand base in corn, Mark, so we find out, and again, the arithmetic of this supply/demand situation is catching up. All of a sudden this market is starting to subtly understand that we now need record yields every year to keep stocks from declining. A ten billion bushel demand base required nearly 140 bushel yield just to keep stocks stable. So, this whole situation is starting to be more broadly understood. We kind of escaped the situation on the wheat this year with a huge jump in acreage and yield combined. Of course, South America helps to buffer the bean situation but the United States largely is the only game in town on corn. Ethanol use goes up two hundred million bushels a year now and will for the next ten years and this just exacerbates the situation. The final shoe that could fall is if we would ever start to suspect that China is going to drop out of the corn export program legitimately. The government is currently forecasting that it will go down five million tons on exports this coming year from thirteen and a half to eight and a half million tons. We remember in 1995 one of the things that exploded prices was China abruptly went from a ten million ton exporter, the second largest exporter in the world that year, to nothing the following year. If we'd ever start to suspect that they're going to drop out of the corn export program again in the next year or two with their stocks down to the lowest level since the 70's we could have an explosion of demand that would make it almost impossible to build stocks or even produce what we use and that can set the stage for a cycle like the '95/'96/'97 cycle where we saw prices had to explode to price rationing levels. We can threaten the input costs, the livestock sector and we can bankrupt the ethanol business too in that kind of environment. We have a policy in Washington that perpetually pushes this demand higher with the subsidized ethanol program and with no more acres we have a situation for a disaster in terms of higher prices, disaster from a buyer's point of view, if we don't have cooperative weather and we saw again this year that we can't seem to have a good crop finishing cycle in August, we haven't had good crop ratings increase since '97, a very interesting long-term bullish situation, not this year but longer term.

Pearson: Alright, some good points Doug. Something definitely to think about. Now, Doug Hjort, livestock, this was such a dramatic week in cattle. We've been waiting for this, as you put it on the show, the other shoe to drop on this Canadian situation. Now, maybe this shoe may not drop or if it does drop it may be more of a fuzzy slipper. What's ahead now for fed cattle? How could it impact the hogs?

Hjort: Well, on the cattle, I've talked before when I was on the show last time about using puts. I'm not a real fan of puts but this is a time when they really are fit for a market. You don't want to really get into hedging live cattle when you can see a market going close to expiration, going limit up three days in a row. But expending a little bit of dollar, dollar and a half or so gets you pretty good coverage for even out into the winter production cycle and I would do that. Other than that, you know, just keep marketing at a pretty much normal weight level. We're seeing our cattle carcass weights, beef carcass weights going up probably at the slowest pace during the summer than we've seen in a long time. They always go up during summer, last year they went up very fast, this year they're not. It means we're very current in the feed yards. So, the cash price outlook looks very solid except for the Canadian thing if they should just open the doors there blanketly. I don't see them doing that, but if they do, that put protection would be something there that would certainly capture something like an $80 October, boy that is high priced stuff.

Pearson: That's one for the books.

Hjort: Yeah.

Pearson: Real quick, Doug, we didn't talk much about hogs on the show and because of the way the hogs are marketed, there's some kind of marketing agreement but this hog market has been the one that's been hurt by this situation in Canada.

Hjort: Well, it has been, it really has. Cash prices and futures diverging from each other, not unusual anymore since they've withdrawn to the lean hog contract. You know, that market can go up when the cash prices are going down and it doesn't seem to make much difference. The thing on hedging on hogs, October contract, 55 is about the top side of the band and just above 50 on the bottom side. If we would break out on the bottom side of that thing there could be as much as seven or eight dollars down. So, you know, it's not a real hedging situation but I think the risk of it going up over 55 is pretty slim and we were down about a little over a dollar from that on Friday's close. So, you might consider a little bit of hedging, a little bit of protection.

Pearson: Excellent. Doug Hjort, thank you so much. Doug Jackson, thank you. That's Market Plus for this week.


Tags: agriculture commodity prices corn markets news soybeans