Weather, increased exports and a weaker dollar made for a volatile week in the grain markets. For the week, the December wheat and corn contracts fought a major battle over pennies only to finish flat. A combination of the dollar at a three-year low and increased exports to China helped push the November soybean contract 13 cents higher. December meal gained $6.40 per ton. Hurricane Irma’s imminent threat added $2.71 to the December cotton contract. Over in the dairy parlor, October Class III milk futures declined 32 cents. Livestock had gains this week as the October cattle contract put on $2.18 and nearby feeders jumped $4.88 higher. The October lean hog contract bumped up 70 cents. In the currency markets, the U.S. Dollar index plummeted 144 basis points. Crude oil gained 19 cents per barrel. COMEX Gold increased $20.80 per ounce. And the Goldman Sachs Commodity Index moved just over 1 point higher to finish the week at 387.25. 

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Don Roose. Don, welcome back.   

Roose: Thank you, Mike.

Pearson: In case you want to go over things again, you can download or listen to our Market Analysis and Market Plus podcasts anytime online at iptv.org/mtom.

Pearson: Don, let's start out by talking about the wheat market. We saw Chicago wheat gain fairly decently on Tuesday to start the week and then it was just hammered as the week went on to recover a little bit on Friday. Was this just money flow changing or what caused those movements?

Roose: Well, when you look at the wheat market, Mike. we're still in a supply bearish market. But it's a market that we think we're trying to sock in a seasonal low. From the beginning of September to the middle of September we usually bottom on wheat and I think that is what has happened. Remember, we did have a key reversal on August 29th and so often times that signals a technical major bottom or an intermediate bottom. But the rallies are hard fought and it's primarily because Russia's wheat crop up 200 million bushels on the last report, it looks like we could be up another 200 million on the next report. We have a lot of wheat in the world market. And remember, Russia accounts for about 10.5% of the world wheat production, FSU about 18% and the United States only 6.5%. So we can't run too far to the upside without the rest of the world following us.

Pearson: Are these prices encouraging fewer winter wheat acres going into the ground do you think?

Roose: Well, remember last year we were at the 100 year lows as far as the wheat acres and I think that's right. I think the acres again are probably going to be down. It's not a real profitable situation and the basis levels are so wide. So there's no doubt looking for alternatives. And hopefully we force some place around the world to produce less acres. And I think the lower dollar will help do that, maybe less acres around the world. But that's a question mark that we're working on right now.

Pearson: Alright. So hopefully we're putting in a low, we're struggling to do that but maybe we'll see it happen in the wheat market. The big talk as we look over at the corn market, harvest is approaching, we did see that same August 29th spike down in the corn market. Was that the low, Don Roose?

Roose: Well, remember a year ago it was August 31st, same timeframe, same date, the delivery timeframe we put in a key reversal, we put in a low and it's possible that that was the seasonal low. I think the real question mark on the corn market is the producer selling down at these levels is just really non-existent. They're not interested. But we have a struggle with the corn because this year is really about smaller supplies, smaller production but also smaller demand. Remember a year ago it was South America's crop that was much smaller than it was this year, that really was the supportive factor. And exports to date, export commitments for this next year are down 46% from a year ago. So I think when you look at it, Mike, the real question mark for the producer is probably $3.40 on Dec corn is too low, we settled about $3.58 area. But when you look on the other side from a carry on July $3.95 is probably too high. So I think that is the problem, it's the carries in the market.

Pearson: Okay. Well, we've got a question. This one is from Noah in Bouton, Iowa. And Noah is on Twitter @NoahTaylor76. We encourage all of you to send in questions to us @MarkettoMarket on Twitter or Facebook. And Noah wants to know, what do you see being a more opportune time to lock in basis on a spring HTA? Do you do it pre-harvest? Or do you wait until that post-harvest Thanksgiving to Christmas time period?

Roose: Well, most always in big crop years is no opportunity do some marketing in the fall. You have big supplies, you're going to try and distribute them over time. I think with the carries in the market that you have right now the opportunity is to take advantage of that, put your HTA's, hedge to arrives, out in July. It gives you the carry in the market about 26 cents from Dec to July and wait for more of a spring timeframe to lock in the basis levels. And usually it's that beginning of May is an opportune time as the producers go to the field and the supplies hitting the market are less. So that's the timeframe I would shoot for. This certainly isn't a good time with the basis levels at these levels.

Pearson: Now, you talked about how we're 46 under export orders from last year. But last year, as you mentioned, was an anomalous year with that very, very tight Brazilian crop. When you look at the other components of demand, ethanol seems like it has had a strong year, feed demand has been fairly strong. Is there some demand hope in your mind here as we go through the rest of 2017?

Roose: Well, and that's the real issue, our demand actually, like you say, our ethanol demand is strong but it's also stagnant, it's pretty well built out. The feed demand is probably the same. That can ramp up a little bit more. So we're fighting for the exports is the moving situation, probably going to be down 400 million from this last year. South America's crop bounces back 1.7 billion bushels from last year. That's a big amount. So that's the issue when you look at the demand side of the market. It really has to come from the supply side shrinking in some place around the world. But the good news is in the olden days we used to look at the U.S. market in the spring as a weather problem, now we also have South America which is coming up right now, they're just starting, they'll be planting early corn this month and so it's going to start.

Pearson: Okay. Let's take a look at the soybean market. We saw a pretty impressive rally coming off last week into this week. What has been moving that for the most part? Has it just been those strong export sales and orders into China?

Roose: Well, I think the big issue is the dry weather that we've had in August. This has not been an ideal finish for the soybean crop. It has been too dry. We've got the crop report coming up. That's going to start to give us some direction on what we think but it's probably really going to be the combines that are going to tell the tale. But if you look at the soybeans they're a little bit different than the corn and wheat. We talked about that we put in key reversals, bottoms, August 29th, August 30. But the soybeans really put in a bottom in the spring, or in the summer, in late June at $9.07 and we're sitting up around $9.62 now. So the bean market typically bottoms the first week of October. So regardless of what the report says we're not that far away from a seasonal bottom.

Pearson: Now, as you look ahead to the report do you anticipate USDA pulling those bean estimates down slightly?

Roose: I tell you, that's a good question, it's a jump ball, Mike. It's a tough question because the crop ratings improved from the August report from 57 to 61 where we're at now. The crop ratings would tell you that we should go up. But when you look at it realistically it has been a very dry pattern and it wouldn't surprise me if the yield comes down a bushel or so. I don't think the government is going to make major jumps but they did surprise the trade the last report when they took it up 1.4 bushel. But major surprise again would be if they took the yields up.

Pearson: Which they could, as you mentioned, given the crop conditions.

Roose: Jump ball.

Pearson: Now, let's take a look at the cotton market because really of all the markets cotton has been a standout over the past two weeks, which makes sense given the devastation from Hurricane Harvey and the impending Hurricane Irma. How aggressive do producers need to be if you're confident the cotton crop you've got in the field on this almost $5 rally or $4 rally over the past two weeks?

Roose: Yeah, we rallied from some lows to some new contract highs. And my experience, not just for the cotton market but a lot of these markets, when they add risk premium to the market those are opportunities to do some risk management. So I think when you shoot up like this and a vertical rally, which is what we've had, is usually not as secure a market. So I would use this as risk management opportunities. It looks like to us that the loss is more from a quality standpoint than actual yield loss. So that's what I would look for.

Pearson: Jump on there. Turning to the livestock markets, good week for live cattle. We saw some strength, decent cash trade. Is this going to continue on into the fall?

Roose: Well, the cattle market is down, it traded in this $103, $105 for some low ends. I think that the cattle market, the problem with the cattle market is we just have a lot of protein coming at us here for the rest of the year. The supplies, the total beef production up 5.5% in the third quarter, up 8.2% in the fourth quarter. You do dip down to up just a half a percent in the first quarter, then you go up 9.4% in the second quarter next year. So bottom line is I think this rally is $113, $114 Dec cattle, that's high enough. Remember, the weights are a concern right now. We're up 50 some pounds since the spring lows, the May lows on the weights. So we're on the rise. That was our problem in the last year. And we've got premiums in the market. So take advantage of some risk management opportunities.

Pearson: Given where we're at today do you want to be fairly aggressive in your fourth quarter '17, first quarter '18 marketings in here? Or do you want to let us get a little closer and see if this wall of protein develops?

Roose: No, I think you want to take advantage of it right now, not only in the cattle but in the hogs. I think you have to say that you're in a supply bearish situation. The cycle on cattle doesn't bottom until we get into the end of '18, early '19 so a little ways away. But the August cattle, or the April cattle have had about an $8 run off the bottom. You get up around $118 -- remember the government has the top for cash cattle for the next nine months up around $121. So I think we're high enough. The beef market like no other market has really domestic demand, about 10% of our market is exports where hogs is 22%.

Pearson: Do you anticipate the beef exports growing substantially here in the next year by opening up China with Governor Branstad, now Ambassador Branstad, being over there? Is that going to be a manifest change in the industry?

Roose: Well, I think it's a hopeful, there's no doubt about it and we're going to keep working it. But a little bit of a disappointment is we did have, usually we export 10%, import 10%, zero sum game. In the recent report we imported 11% beef. So that was a bit of a negative.

Pearson: Feeder cattle, we've heard, I've heard complaints from the countryside that feeders are still too high at the sale barn. Looking at the board there is a heck of a premium on these feeder cattle. Do you anticipate them taking a step back here as we get into the fall? Or is it just all going to be tied to corn price?

Roose: Well, the feeder cattle are really tied to corn price. We probably bid them up a little bit more than we probably should, try and work it backwards here, take a little bit of a chance. But I think the feeder cattle you get up around $150. That's probably top end of the range from what we see. They could, if the wrong thing happens, they could slip back to $130 area. So you certainly have some risk management opportunities, $150, $155 on the top side, things come under pressure $130. So there's more downside than upside.

Pearson: Yeah, $18 in the front month contract of risk in that market. You mentioned lean hogs, we do have a tremendous amount of new pork coming to the market. New plants are coming online really starting here this past quarter all the way through first and second quarter 2018. How much of that is priced into that market today?

Roose: Well, we did have the Sioux City plant came on board, a little bit of a disappointment, that really didn't shake the cash market, didn't help the cash market. In fact, we actually drifted lower so I'd call that a bit of a disappointment. Don't really see our exports changing a lot, 22% of production. So it is a question mark what's going to happen. But demand side probably going to have to be mainly domestic with hopeful on export front. Exports in July were a disappointment, down 3.8% from a year ago, drop in Mexico, drop in China. Supplies in the third quarter going to be up 5.5% over a year ago. So that's part of the issue. Up 2% in the first quarter next year then you're up 4% in the second quarter next year so much like the cattle a lot of pork coming at us. We'll see. There's always disease issues that can pop up. But our weights are jumping, weights are up three pounds here just recently over the previous week. So the weights are on the rise, tonnage is on the rise.

Pearson: And we've also heard concerns, or at least President Trump has threatened to change the free trade agreement with South Korea and they are a very large pork buyer. How much of that is in the market? Or are we just assuming it's all talk at this point?

Roose: No, I think the trade is watching it very close. When you look at the pork end of it, like we were saying, 22% of your pork has to be exported, hopefully that grows. The top end was just over 25%, low end you go under 20%. So that's enough to move the needle. So I think we're going to concentrate on it pretty heavy because the supply is there and we'll prove that out I think the September report on Tuesday also.

Pearson: The supply is there. We've got to have mouths willing to chew that pork.

Roose: Well, we do. And I think when you look at it we bottomed last year at about 41 on December cattle on hogs and about 52 in 2015.

Pearson: Alright. Don Roose, thank you so much for taking the time to talk to us this week.

Roose: Thank you, Mike.

Pearson: That wraps up the broadcast portion of Market to Market. However, Don and I will keep the conversation going, including answering more of your questions, during Market Plus, available in podcast and video form on our website. And while you're there check out the Classroom. This virtual school room allows you to explore the science, technology and business of agriculture. Join us again next week when we'll have a roundtable discussion about the commodity markets as the harvest season gets into full swing. So until then, thanks for watching. I'm Mike Pearson. Have a great week.

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