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Market Analysis: Apr 22, 2011: Jamey Kohake, Market Analyst

posted on April 21, 2011

Trading in the grain pits was limited to four days this week in celebration of Good Friday. During the abbreviated week though, disappointing ethanol production numbers pressured corn, while arid conditions in the southern plains and a weaker dollar supported wheat prices.

As of Thursday's close, July wheat gained nearly 55 cents, while the nearby corn contract moved a nickel lower.

Soybean prices followed suit with wheat as the July contract settled Thursday with a weekly gain of 45 cents. Nearby meal prices also trended higher, with a move of $13.40 per ton.

In the softs, cotton's days above $200 appeared to expire with the May contract, while the July contract settled Thursday with a 4-day loss of nearly $10 per hundredweight.

In the dairy market, May Class III Milk prices declined 53 cents while the deferred contract was off 52 cents.

Over in livestock, the June cattle contract lost 8 cents, while nearby feeders moved $3.68 higher. And the June lean hog lost just over $1.

In the currency markets, the U.S. dollar traded at a 15-month low this week against the Euro, which settled Thursday with a 4-day gain of 139 basis points against the greenback. Crude oil gained just over $2 per barrel. Comex Gold advanced $17.80 per ounce. And the Goldman Sachs Commodity Index gained more than 10 points to close at 753.50.

Market Analysis: Apr 22, 2011: Jamey Kohake, Market Analyst Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Jamey Kohake. Jamey, welcome back.

Pearson: We've got a weather market going. Let's talk about wheat first. Obviously not ideal planting conditions for corn, but let's talk about the wheat market first. Dry down in Texas. Dry starting to creep into Kansas. I talked to a buddy of mine in Hutchinson this week. Dry weather. You're down in Topeka. And we've got very, very wet weather for the spring wheat up in the north to get planted, so we've got some challenges around the wheat belt.

Kohake: That is right, mark. We saw a 2-percent drop in the poor to very poor conditions on Monday's weekly progress report. Like you're saying, it's dry and warm down south. It's wet and cool up north. One day this week -- it was Monday -- 90 degrees in Dallas; 30 by Sioux Falls. You can see the extreme temperatures --

Pearson: And snow.

Kohake: And snow. Wheat saw a nice four-day rally this week, getting help from a weak dollar. I'm taking advantage of this rally, looking to sell cash. The new-crop Chicago up around 930 and the new-crop Kansas City up around 970. I think you have to use this weather scare as a tool to take advantage of it and use it in the cash market.

Pearson: All right. So you're making cash sales.

Kohake: That is right. Take advantage of this. We could go on higher, maybe closer to 10. But technically I think 980 Kansas City; 929, 930, Chicago, December. It's a good spot to start letting some cash go.

Pearson: Okay, let's -- let's talk now -- continue about the weather. Let's talk about the corn market and what's been taking shape there. Obviously very low planted acreage to get things started and slow again this week. Not exactly a perfect forecast going into next week. So what do you see ahead for new crop corn prices?

Kohake: I see a volatile trade just like we saw this week, forecast changing every 24 hours pretty much. Here this week the big setback was, of course, on two-week forecast being warm and dry the first week in May. And we came back on Thursday and closed it relatively well. Where we're seeing a lot here in this corn market is spreads, old crop verses new crop. Now, it's been out close to $1.30 at times, about two and a half weeks ago. 2008 we hit maybe 35 cents two or three times. So this thing is extremely wild. It's going to stay that way, I think, clear through the 4th of July, based off of weather. I'm looking at starting some hedging in here up at 680 for the new crop. I think you could use these weather scares the same thing at wheat, to sell some cash. Dollar stays weak. Exports, you know, stay here or better. I think we should get that opportunity to take advantage of that.

Pearson: All right. The -- both the corn and the wheat can combine for feed usage. We've really got plenty of wheat around the world, despite the challenges we're facing with our weather right now. But with these prices and, like I said, the fact that you want to move both wheat and hedge some new-crop corn, maybe you think this thing may not be as strong as it might perceive for the rest of us at this point.

Kohake: I think it very easily could be. I just don't want to let it slip by and go, you know, 50-80 cents lower and sit back until July and hope for a weather scare to get back up to where we were. Put a floor at 680 in this new crop, same as in the wheat, and take advantage of it. Leave your topside open and sell more later. Your point there with wheat has been across the news wires a lot this week, where there was talk of some importing out on the East Coast again. So hog guys out there and also wheat exports picking up off -- using it as a feed grain. Now the talk is that exports in corn could actually pick up. Wheat has priced itself out now as a feed grain. We should go back to corn. So I think corn does stay supportive in here short term. And it does push on higher based off the tight carryout, which we all know about. And the crop probably lagging 20, 25 percent behind last year's pace come Monday morning -- or Monday afternoon.

Pearson: All right. Well, it's going to make for, like I say, some very volatile trading certainly. And there's a whole other factor out there, currencies, which we want to get to in a minute, but let's move onto soybeans, Jamey. A big crop in South America. It's making its way to the marketplace, yet the bean market is hanging in there pretty strong.

Kohake: Yeah, it is. It's got a nice trading range. Today, Thursday, was the most impressive bean trade. We've had it about two weeks. The rumors on Thursday's rally was based on china saying that they might do a one-time reevaluation of their currency, 10 percent reevaluation. And that would spur some short covering and new money in. But we've also seen a surge in crude spilling over into the soy products. The weak dollar has helped out. But exports are still very slow. You have these rumors seems like every other day of, you know, China washing out maybe on a few cargoes, you know, moving them out to more deferred contracts. Brazil is 85 percent harvested. China has backed out of some sales with them as well. But what I like doing in beans is -- put a floor there with new crop. The wild card, like you've been saying, is acres. Is there less corn, more beans. I think you take advantage of $14 new-crop beans and do an HTA or do something with puts there and leave the top side open.

Pearson: All right. So continued good volatility there. And again, $14.

Kohake: Exactly.

Pearson: Why not. So we've got that situation going, and we'll see how the weather works out. We still have plenty of time to get everything planted. And who knows, we could start to see things improve in the Northern Plains, but a lot of concerns still about the Southern Plains. Let's talk real quick about cotton. That may contract didn't go off the board, so the big 200 has gone away. But we're still looking at very strong cotton prices. Are you getting more aggressive about making sales on new-crop cotton?

Kohake: I am. I like selling about a 10- to 15-cent rally. The last two weeks in the old crop July, we lost $30. We had a triple top at 198 about two weeks ago, and we just fell out of bed since then. Exports are very slow. The weak dollar hasn't helped out much at all. I think you sell the old crop July for 180 on a short covering rally. The same thing with Dec. Sell a 10-cent to 15-cent rally there.

Pearson: Jamey, on Monday we had historic news from S&P with a negative outlook going forward for the debt of the government of the United States. It was a watershed moment. Treasury yields rallied but the dollar has continued to slip. Obviously that cheap dollar makes commodities look awfully good. What's your take on the dollar and where is it headed?

Kohake: I think the trend is still lower yet short term. But the dollar, the metals have become a very overcrowded trade. Everybody is loading up hard. They have been. They're doing it more. I think it's a bubble pretty much. The silver -- the dollar, I am very cautious about adding new positions on short dollars or long metals. I think you've got to have an excellent plan. Both commodities could be a bloodbath very, very fast. What we're seeing with the dollar being so weak is a lot of spread action. We're at fifteen-month lows versus euro. We're actually seeing European countries enact these austerity measures, raising short-term interest rates, and that's helped their currency out. And we're still fighting over a budget --

Pearson: We're still doing quantitative easing --

Kohake: Exactly. So that spread action is hurting it.

Pearson: No question about it. All right. In the big boys, the funds. Are they moving back into the grain market? Has bean moved this week? Is that part of what that's about?

Kohake: A little bit of that. They're still long grains right now, long corn a lot. I think they'll stay out there I think until the crop -- you know, close to pollination time period. But I think here short term, as long as the dollar stays weak, they're going to buy the breaks yet.

Pearson: All right. Weak dollar, strong commodities. This has been the trend for a long time now. We'll see how long it holds up. Now, let's talk about livestock and let's talk about what's happening in that part of the world. Fed cattle market going forward, what's your take on that?

Kohake: Short term, I'm still bearish yet, probably for another month or so. What we've seen is the cash market pull back here the last three weeks or so. Cutouts backs off as well this week, especially on Thursday's midday report. But my trade out there with the cattle complex and pork right now is bearish spreads. Sell the nearby. Buy a deferred contract. I think longer term we still go up and retest the old highs, but short term we're still struggling right now to get demand back to where it was domestically with high fuel prices. And we're seeing exports just kind of just flatline right now.

Pearson: Let's talk about that for just a moment. Cheap dollar. High price the energy. We're back to a $1.12 in change on crude oil. As you look at these energy prices as we go into the summer, obviously the political impact on what's going on in the middle east is always a huge factor. Some of that seems to be calming down for the time being. Are we going to start to see crude oil break? Are you friendly to energy or are you negative?

Kohake: I'm a little bit friendly yet, just because of the dollar, like you're saying. The premium out there right now is the bubble off Libya, Northern Africa. Nigeria has some rides going on right now. A little bit of unrest with their election here about two weeks ago. Still some fighting there. But I think the play in the energy is just to buy Brent and sell WTI. I think that spread should widen out short term. But as soon as the dollar bottoms out, I'd watch out for silver, the yellow metal gold, and the energy needs to make a sharp correction fast.

Pearson: All right. So -- and the fundamentals are that we have, again, plenty of oil here in the United States the last --

Kohake: Right. This week we did have a little bit of a drawback bullish report, but it's not anywhere near the rationing of corn or beans. Demand is going to slow down too. We've already seen examples of that, especially worldwide.

Pearson: Over four bucks. That seems to be the tipping point of that oil price for gasoline.

Pearson: All right. Let's talk about the feeder market, which again had a nice rally on the board this week.

Kohake: It did. Out of the beef and pork, I'm bullish feeders more than the other two by far. Seasonally coming up these next sixty days, there's going to be several buyers out to buy feeders. I like buying short breaks. I don't like hedging in here at all. I think you could see a $2 or $3 rally pretty quick. The key in here is going to be to get the live cattle cash market to stabilize. I think you'll see some short covering here pretty quick.

Pearson: Are we going to see some expansion in this cow herd?

Kohake: I don't think short term. We do right now just because of the inputs.

Pearson: The inputs staying where they are. We're going to continue to keep a herd that's flat or continues to shrink. Let's talk about the hog market. Obviously competitive meat but one that -- a lot of it has been going off our shores.

Kohake: Right. That's been kind of the savior of the pork market this year has been the exports overseas. Obviously the weak dollar helping out. I like bearish spreads here. Sell the may. Buy the June or August. Watch that work. There's still a huge amount of premium with the futures versus cash right now. If you're hedging hogs, use puts. Same as with the live cattle, use puts, leave your top side open. It's a very volatile market. We're getting a lot of spillover from corn with its wild days, spillover from the energy complex. So stay hedged with your nearby beef and pork contracts, but I think do with puts.

Pearson: Jamey, when we talk about $14 soybeans, 680 corn new crop, and you talk to a livestock producer or somebody that operates their own cattle feeding operation -- I talked to a lot of them in Texas a couple weeks ago -- it's a frustrating period of time. On covering feed needs, what are your thoughts?

Kohake: I think you have to buy the breaks for sure right now until we at least get the crop in. We go through this every year pretty much of, you know, is it may 10 and is that the cutoff line to lose 5 percent or 10 percent of the yields and acres and all that stuff. We'll get the crop in like we always do and have a crop. I would buy the breaks short term. Do some bull call spreads, if you don't want the risk because of the weather shooting the market, you know, 20 to 25 cents wide every day.

Pearson: On the show tonight we talked about a couple of things that were on the up trend, that building permits going forward looked better, economically we look better. The dark cloud continues to be energy, and some people say food prices. What's your take on the general economy as we go forward into the second quarter of 2011?

Kohake: I think we stay firm until July. Like you're saying, technology companies -- we had about four or five of them being reported -- Tuesday and Wednesday reported grade 2 earnings. We didn't see a big selloff in the S&P or the Dow coming into the three-day weekend, and that signaled to me that this thing is still strong. I think until we get a signal that quantitative easing 2 is over, rates are going to be increased at a decent pace, quarter, half a percent yet this year. The money stays in the market.

Pearson:Jamey Kohake, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Jamey on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

Pearson:And be sure to join us again next week when we'll examine the outlook for "green collar" jobs. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news