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THE HIGHTOWER REPORT
Prepared by The Hightower Report
The Outlook For Agricultural Market
A series of USDA reports over the past week should have a major impact on grain and livestock markets in the near future while international and U.S. weather developments should continue to have a major impact on agricultural markets which are not dominated by U.S. crops, such as sugar and cocoa and to some extent cotton.
The USDA shocked the grain markets last week indicating that producers planted over 5 million more acres of major U.S. grains this past year. The number came as a big surprise as many traders had anticipated less total acres this year after wheat farmers plowed up some Kansas wheat last year and planted sorghum (the acres were counted twice). The large deviation from the general trade expectations, however, was enough to trigger a major wash-out in soybeans and weaken grain prices in general.
In soybeans, the USDA reported 2.5 million more acres were planted than traders expected. The three factors that triggered the major liquidation break were Brazilian imports, the fact that end users are well aware of tight ending stocks and booked summer needs ahead, and excellent U.S. weather. From the tightest stocks/usage scenario in history, the market is now in a position of absorbing the highest ending stocks level in history for the 1997/98 crop year if yields are near the record highs. If U.S. weather remains favorable for July and August, there is still considerable downside vulnerability to the market.
In corn, the situation is a little different. The market appears to have already priced in a very high yield and planted acreage came in well under traders' expectations. As we enter the critical pollination period during the second half of July, the U.S. weather will have a significant impact on the daily price fluctuations. The other major difference is the technical make up of corn as compared with soybeans. Both large and small traders were holding a very large net long position in soybeans as of three weeks ago. In corn, this same group was heavily net short the market which leaves corn vulnerable to a strong short-covering rally.
In wheat, the large winter wheat harvest is approaching the half- way point. Typically, the bearish fundamentals in this market will peak when the supply peaks near the end of harvest. International weather is in flux with the strongest El Nino pattern since 1982/83 and uncertainty on just how much stronger the pattern will grow. This will be a longer-term factor for the wheat market as next year's Australia crop and next year's China and India wheat crops will be threatened with correlations of dry weather in these regions. This year's crops for cotton and corn in China are under stress from less than ideal conditions in northern China with sugar production for this summer being threatened in Thailand and the Philippines. Next years yields for Malaysian palm oil may also be threatened if this region of the world experiences a drought this summer.
The USDA quarterly Hogs and Pigs report could spark another leg up in the hog and pork belly markets this summer. Summer pork production should be lower than traders anticipated after the U.S. producer expanded at a much reduced rate during the first half of 1997. Breeding stock is only up 1% from last year. Japan should begin to import their second half of 1997 needs in the near future which will drive per capita pork production down during the July-September time frame.
For daily market updates of the Hightower Report of Comprehensive Commodity Research, call 1-900- 225-2200. The cost per minute is $1.33.
July 2, 1997 The Hightower Report
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