Political positioning and wet weather across the Grain Belt went up against hot and dry conditions making for volatile grain markets. For the week, the September wheat contract fell 26 cents and the nearby corn contract moved 8 cents lower. Rain had more influence on soybean prices than potential Chinese trade retaliation or striking Brazilian truck drivers as the September contract plummeted 54 cents. December meal took it on the chin falling $13.90 per ton. In the softs, December cotton gained $1.82 per hundred weight. Over in the dairy parlor, September Class III milk futures soured 38 cents. Livestock had a positive week as the October cattle contract added $1.67 and nearby feeders moved $3.75 higher. The October lean hog contract bumped up 28 cents.  In the currency markets, the U.S. Dollar index gained 31 points. Crude oil lost 13 cents per barrel. COMEX Gold shed $10.70 per ounce. And the Goldman Sachs Commodity Index retracted just over 3 basis points to finish the week at 383.95. 

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

Gold: Nice to be here, Mike.

Pearson: We're always glad to have you. And in case you want to go over things again, you can listen to our Market Analysis and Market Plus podcasts anytime online at iptv.org/mtom.

Pearson: Mark, we saw just now a report on the creeping drought across the Corn Belt, particularly the Northern Plains, spring wheat country, wheat tour went through, found 38 acres, or 38 bushels per acre, almost 38 acres, that's what we're wondering. Where do you see this spring wheat market going? We spiked a dollar, dropped a buck, where do we go from here?

Gold: Well, I think the spring wheat still hasn't figured out what it needs to do. There really is no substitute for the spring wheat so it is its own market and it's going to follow its own song out there. So we could still yet have a strong spring wheat market with the soft and all the winter wheats kind of backing off a little bit because there is really no substitute. But I think it's getting worse, not better, and I think ultimately we could see a bounce in Minneapolis wheat.

Pearson: Okay, well now let's talk about Chicago. Chicago wheat market continues to pull back. As you mentioned, we might see continued weakness there. What are your thoughts? How much weakness is potentially there in Chicago?

Gold: Well, on the good news we've seen the dollar go from $1.03, $1.04 down to 92 and change, we had a little rally on Friday, off the lows a little bit of a dead cat bounce out here. I think the dollar is going to probably head closer to 89 cents before it really has a turnaround in here. That should help but we haven't really seen it translate into any new business. That's a significant break in the dollar, yet a lot of the traditional customers are still getting European wheat and until we see that change wheat is going to struggle a little bit.

Pearson: And just to kind of put that into perspective, we've seen 10 basis points come off the dollar index, which is kind of weighted, but effectively we have made wheat or all exportable goods roughly ten percent cheaper than they were six months ago.

Gold: Absolutely, and that should be enough to offset some of the price differentials but we're not quite there yet. If we can get the dollar down another two or three percent that would certainly be helpful but it's an export game. We've got to see some pick up and some demand to get rid of this wheat that we have out here. Now, I think we're going to certainly see changes in the balance sheets on Thursday, we're going to see tighter carryouts out here and that could be an impetus to rally this market from whatever lows the winter wheat makes in the next couple of days.

Pearson: Alright, you're not worried about us going back down and testing that $4.17, $4.16, wherever the lows were?

Gold: I don't see that with the dollar as weak as it has been. I think that would be tough. And there has been some carryover certainly from the spring wheat into the winter wheat. Winter wheat in some spots isn't all that great. And again with the lower acreage we've planted out there production is going ot be down, carryout should be getting tighter and that should ultimately be a little bit friendly.

Pearson: Now, you mentioned we could see some changes with the report on Thursday. We have a question here from one of our followers on Facebook. We encourage all of you to submit questions to us, just search for Market to Market on your favorite social media and let us know what you want to know. This one is from Mike Daniels. He notes that everyone is banking on this crop report to readjust the market and push higher. And we're talking corn here in this instance. What happens if USDA doesn't change any numbers? How much downside is open in this corn market?

Gold: Well, I think the risk of them not changing the numbers is small. I can't believe on this report that they're not going to make the adjustments on yield and on demand and see a fairly dramatic drop, which everybody is looking for. If we don't get it the market is in trouble because the funds are still long 40,000 or 50,000 contracts. We could certainly break that 30 or 40 cents if that were the case. I don't believe that's going to be the case. I believe we will see something friendly on the corn numbers, get some kind of a bounce. Now, if we keep raining out there and adding some bushels, and we can add bushels in early August to the corn crop certainly, that will be another issue we have to contend with. But I think just the report on its own should be a little friendly, we should get some kind of bounce.

Pearson: What do you think the trade is looking for to see on that Thursday report? Are they expecting 175 for a national average yield? Excuse me, 165.

Gold: I don't know that the government will get that aggressive right now. I think they might come out at 166, 167, somewhere in that range. That may be a little bit disappointing initially to the market but again it's an early, still a relatively early report and I would be more inclined to buy that break. If we come out with something strong I'd wait a few days and then maybe look to sell another rally anywhere near $4 again.

Pearson: Get back up there. Now, if we do get that 167, the market bounces down and then climbs right back to where we are today, for producers who are gearing up to watch the month of August go by and then get into their combines, at what point do they need to be pulling the trigger on making some physical sales?

Gold: Well, they need to have been doing it already. We sat here six, eight months ago and I kept saying to anybody that wanted to listen that you were going to have at least one opportunity this year to market your crops at profitable levels. We had that opportunity. Granted, it only lasted for a week or ten days. But it was there and guys needed to take advantage of that. Now what do you tell a guy to do now that he has left that opportunity on the table? Well, certainly don't let the next one go by. If we are fortunate enough to get some kind of a rally in here I think you've got to be looking at getting something sold. I don't think we'll know how bad this crop is, beans or corn, until we're through harvest. So we could even work our way lower here the rest of the month of August, certainly if we continue with more rains into September. Then as we start getting into the harvest and the yields aren't there maybe even have a rally during harvest itself because we won't have the grain that we think is out there.

Pearson: Start getting reports from the combine, reports from the field and then the market has something to act on.

Gold: I would think that could happen this year if any year.

Pearson: Could happen. Alright. Now, the soybean market, Mark, we've seen 54 cents drop off soybeans here in really in the past three days of the final days of the week, are we getting to a buying opportunity or are we still having some risk premium built into this market?

Gold: Well, we've got a 56 cent drop this week, first three days of August we had rains, first three days of August. If you're looking for a bull market in the beans that's not what you want to see the first three days of August. Now, in years past we have seen at a $9.50 level back in 1988 we went from $9.50 to $8.50 in one day when we had rains in July, on July I think it was the 18th, 1988. The lead option was a dollar a bushel lower. So that tells me that there's still some significant risk out here if we continue to see more rains. The funds are long maybe just a little bit, 10,000, 20,000 contracts. Certainly if they get out that will put some more pressure on. But right now on the charts what is key here technically is we had an inside day on Friday which means the market is trying to figure out which way it wants to go. If we close under where we left the gap at $9.54 and a half, we close under that, take out the inside day to the downside, close under where we were on June 30th, I think that's a negative sign that indicates that the market believes there's enough rain or we're getting more rain and this crop is actually adding some bushels to it. I would certainly be very cautious if we closed under $9.54.

Pearson: Alright. So how do producers handle that? Is this a put buying situation? Is this a call your grain dealer and start getting some beans sold physically? How do you do it?

Gold: Well, knowing that we've still got the whole month ahead of us I don't know if I want to get too aggressive on cash sales. But knowing that in the next three or four weeks we could see some real deterioration in here, maybe looking at an October bean put or a short-dated put, something that gets us through the next four to six weeks, get something relatively close to the money and protect it in case, we're at $9.50, we go to $8.50 in a day? Theoretically we've seen that before so I would still want to protect it. I don't want to spend a whole lot of money out here. But you want to flip a coin and go to Vegas and see what the dice are going to play out that's fine but if you want to manage the risk I think some of these short-dated options could help you get through the next four or five weeks.

Pearson: Alright. Anything on the demand side that gets you bullish for soybeans as you look out through harvest into fourth quarter?

Gold: It's tough. The dollar should help. What is China going to do is always the big question mark out there. We've got so many political factors in play now with China between the North Koreans, between trade issues with the Chinese, there are a lot of things that can happen there, unfortunately some of them aren't very good. And, again, do I want to be protecting that downside? I want to protect it just on the weather without even worrying about the demand side. But there could be a hit coming on the demand side too, which makes in my opinion those options even more valuable in the short run.

Pearson: Okay. Well now let's look at the livestock markets. We did see a bit of a bounce this week on live cattle. Packers came in, they were fairly aggressive cash bidding, I saw $119 reported in Kansas earlier on Friday. Where do we go from here? Demand has been strong, although we did just get slapped with that tariff increase in Japan. Mark, what is your read on that market?

Gold: My read is everybody got a little too short on the Japanese news and we bounced it back here. We're getting back to some of the levels that are pretty attractive again for guys to be looking at buying some puts, we've had a nice bounce up here. Certainly on the fats and the feeders you've got an opportunity to protect the downside. You've got the Japanese tariffs, you've got more cattle coming. I don't think there's any question of that. We've seen the numbers increase. Demand has been okay, should stay okay with the stock market as strong as it is. But on the other hand we've been in an export market and we're starting to see some of that maybe back off a little bit. So we've had this rally, I think it's kind of a shortcovering rally, guys got a little too short because of the Japanese move. We're getting those weak shorts out of the market. And this may be a great opportunity to buy some puts to protect the downside here.

Pearson: So then as you look ahead to this next week or two weeks you expect to see that potential weakness spill over from live cattle into feeders as well even with cheaper corn?

Gold: Yeah. I think they're going to kind of go tandem in here for a while. They both had a nice rally together. I think they can both break together. It will be interesting. The other factor is the hog market. You've had this rally in the hogs Thursday and Friday, Wednesday, Thursday, Friday. You were up $3 from the lows we made I think it was Monday or Tuesday, pretty surprising to me. I think, again, a lot of guys looked at that spread between the August and the December, it's a $20 spread, okay let's sell the August and buy the December, it's got to come in. Well that didn't quite happen and I think some of the guys that are short the August got blown back into these markets and made these highs. I still believe over time if the cattle is going lower it's going to be hard for hogs to sustain, particularly in the August contract. But the August goes off in a couple of weeks so anything can happen.

Pearson: The August goes off in a couple of weeks and you talked about that spread, we've got August, October then December. Last I looked we were $83 in the August, $66 in the October. When August comes off do you expect to see, do you anticipate to see a bounce in the October?

Gold: One would think so. And certainly the American farmer is hoping so. But I'm not so sure that's going to be the case. We've seen hundreds of times over 40 years where a lead month will get out of whack relative to the back months and a lot of farmers think well if it has been there the next one should go there. It could be in the beans, for example, if you have $10 old crop and $7.50 new crop everybody thinks that new crop has got to go back to $10, it doesn't. So I'm not sure that this isn't a great opportunity to be buying some puts on the fall and winter months out here.

Pearson: Even at a $20 discount to the nearby?

Gold: Even at a $20 discount.

Pearson: And at a $40 discount to the cutout?

Gold: It's one of those things where you've got the lead option can get carried away, do things we don't expect it to, whether you back to Minneapolis wheat at $25 at one point or we don't have any wheat, well you know what, things change and generally thinking that the next month is going to go up to that level hasn't been a winning play most of the time.

Pearson: Alright. So get those puts bought. And as we look out final December, as you mentioned 63, 62 in there, is that as far out as you'd be willing to buy puts? Or would you look out to first, second quarter of '18 as well?

Gold: I might even go out to Feb but I wouldn't go much beyond that. Things can happen in this market if demand stays good so let's hope we can get those, I have no problem with buying a put down here and watching October hogs to 82 cents. Great. We'll sell the hogs, take a couple dollar loss on the puts, that's fine. But I wouldn't go really much past February. Things should be turning around by the April contract so maybe out to February.

Pearson: Alright. Well, as long as we're talking hogs, a critical component of getting those hogs to market is getting them fed. We've seen huge breaks in bean meal over the past two consecutive weeks, we're trading just sub $3.10. How aggressive do you want to be locking in some of those bean meal needs as you go out through that fourth quarter?

Gold: I probably wouldn't be that aggressive right here today. I want to see what this market does Monday. If we do close under that in the soybeans, if we close under that $9.54 I think we could be in for a rough couple of weeks in the bean market. So I might think that sometime after Labor Day might be the opportunity to buy some calls on the meal to protect the upside and I think that would make a little bit more sense than trying to come in here where this market is breaking.

Pearson: Don't catch a falling knife.

Gold: No, I wouldn't think so.

Pearson: Alright. Well, Mark Gold, thank you so much for taking the time.

Gold: Thanks, Mike.

Pearson: That wraps up the broadcast portion of Market to Market. However, Mark and I will keep the conversation going, including answering more of your questions during Market Plus and that is available in podcast and video form on our website. While you're there check out the link to our Flipboard Magazine "Market to Market Reading Material". Each day our producers update the collection of news they are reading and put it in one convenient location. Join us again next week when we look at how young veterinarians are stepping up in remote regions of rural America. So until then, thanks for watching. I'm Mike Pearson. Have a great week.

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