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Market Analysis: Feb 18, 2011: Market Analysts Walt Hackney and Jamey Kohake

posted on February 18, 2011


Grain markets were mixed this week as China's Central Bank announced it will increase bank reserve requirements effectively tightening that country's money supply to curb inflation.

For the week, March wheat lost nearly 45 cents, while the nearby corn contract remained above $7 with a gain of 3 cents.

Soybean prices slipped below $14.00 as the March contract gave back last week's 35 cent gain and 15 more. Nearby meal prices followed suit with a weekly loss of $16 per ton.

In the softs, cotton traded above $200 briefly this week, before moving limit down on Friday, and yet the May contract still managed to put together a weekly gain of $9.37.

In the dairy market, March Class III Milk futures lost 22 cents but prices remain about twice as high as the 2009 lows.

Over in livestock, the April fed cattle contract gained nearly $2.50. Nearby feeders advanced more than $4. And the April lean hog contract lost 9 cents but the next four deferred hogs going out through August all settled above the $100-mark.

In the financial markets, the Euro gained 147 basis points against the dollar. Crude oil wrapped up another volatile week with a gain of 58 cents. Comex Gold gained $28 per ounce. And the Goldman Sachs Commodity Index gained more than 5 points to close at 658-even.

Market Analysis: Feb 18, 2011: Market Analysts Walt Hackney and Jamey Kohake Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Jamey Kohake. Gentlemen, welcome back.

Hackney: Hi, Mark.

Pearson: Walt, good to see you. You look very handsome tonight. And Jamey Kohake, good to have you with us as well. We're going to talk livestock with Walt coming up in just a moment. Quite a story there. Let's start off with the grain markets. Let's start with wheat. Very strong prices remain. There's a lot of concern about the Texas crop. There's some concerns about the U.S. crop, period. Obviously with the unrest in Egypt and Tunisia and Libya, we understand all increasing wheat imports. Is this going to continue to bolster this market, Jamey?

Kohake: I think it does, Mark. Longer term the wheat market remains bullish. The dollar has weakened up. Like you were saying, exports have been very strong. We're picking back up to Northern Africa in the Middle East again. We've also got extreme dryness in Northern China, dryness out on the Western Plains. We've got some very, very cool temperatures in parts of Asia and Eastern Europe Wheat Belt. So I think the breaks need to be bought into. I like may Chicago at 860, and I like hedging new crop up around 980. That would be for July Chicago, that area.

Pearson: How much of that new crop do you want to hedge?

Kohake: I'd just be 20 to 30 percent. I think we'll bust through ten. I would lay some more out there. The market is kind of choppy right now. We need probably about another two weeks to pass by, then see some buying come in ahead of the big March report.

Pearson: All right. That's wheat. This whole thing all comes down on an acreage battle between cotton, wheat, corn and beans. And mostly acreage estimates on corn, most people agree, are going to be inadequate to meet what is perceived to be the demand needs going into 2011, 2012's crop. Let's switch -- shift now. We've got very high prices for wheat. Let's talk about the corn market, which has been very strong and still trying to buy acres.

Kohake: Right. We saw a very wild trading session this week. We had the outlook report out on Monday. It came in roughly about 4.3 percent higher. That shook some money loose. It's pretty much been this February malaise that we see every year. Nothing new. Traders get tired and take some money off the table. We had a great close today. I think you buy the breaks on corn. I like buying may at 710. I like laying some more old crop sales off at 740. But as long as exports stay strong, which I think they will -- we've had three weeks in a row now up over one million metric tons being sold -- the market stays supported. And I would wait in here to make some sales.

Pearson: This week didn't scare you some? I mean the market kind of fell out of bed after those reports early on in the week. We finished up okay but a lot of volatility and there seemed to be some softness.

Kohake: Right. It was kind of expected. There wasn't any really big, fresh news out. We needed this flushout. The market has huge, huge length in it, and this is healthy for a long-term bull market. And I actually kind of liked it to be able to buy into. Have less long money out. These smaller guys flushed out and see new highs being put in.

Pearson: I've talked to farmers all week who are telling me they're going to plant shorter maturity corn, 104-day corn to try and catch the 2000 -- the remainder of the 2010-2011 marketing year. What's your thought on that?

Kohake: I think there will be some done, as there is every year. I don't think it's going to be the whole crop or probably even three-fourths of it. But there's always that early speculation out there. And there might be a little bit more than unusual, but I don't think it's something that seed dealers need to get in a panic mode about right now.

Pearson: All right. Where is the rationing occurring, Jamey? Seven dollar corn, we've got to be rationing somebody somewhere.

Kohake: Right. No sign of it yet. That's why I'm still bullish yet in here. Tightness is at fifteen-year lows right now. So I think you're looking up over 750, 775 before you actually see that happen.

Pearson: I know we talked about wheat earlier, but let's talk about the corn market in terms of making sales -- talking about your wheat strategy. What about on corn at this stage of the game? Seven dollar corn, if I've got some, I feel like I should be selling it.

Pearson: Right, if there was any left. I like 740 may, like I was saying, to take advantage there. Get a rally next week. 740 I think is a great spot. And new-crop sales, I still think you hold off in here. I think there's plenty of upside. You have to wait until at least the middle part of March until we get a longer term rally there coming into the acreage report.

Pearson: All right. Where are you on new-crop sales on corn?

Kohake: I've got 10 to 15 percent sold just at a base line. I like 640 as my next level to sell into. That way most areas can get a $6 basis. Sell your $6 cash corn in there.

Pearson: All right. And what about 2012? Have you sold any of that?

Kohake: I haven't yet. Really the only option out there, Mark, is to sell the board. You can't buy options that far out. You're going to go broke. Basis is too wide. So I don't want to tie up a whole lot of margin right now selling that.

Pearson: All right. You're not going to get a commercial to want to step into that. Let's talk about soybean market. Again, that's been strong as well. Are you concerned about this shift maybe from china's buying to South America, or is that already in the market?

Kohake: I am a little bit concerned about it. We had five down days in a row, and five out of six previously were down. What's been happening with China is the old-crop, new-crop bean spread has just taken a total crash here. They made some cancellations to Brazil. Brazil is harvesting right now. They supposedly got a bumper crop. It's a wait and see, but that's what the market is factoring in right now. Then last night, Thursday night, we saw China buy Brazilian beans and Argentina bean oil, and that totally crashed the market on Friday. I think we stay sideways in here, 20, 30 cents up, 20 cents more down side short term. But I still don't think you do much in the beans until you get $14 for new crop. I would buy, reown some old crop down about 15 cents lower in the may from where we closed at on Friday.

Pearson: All right. Let's move on to the cotton market. Obviously record prices there. Is this a squeeze play on the board that's going on with cotton. Is this real demand out here? Is this real supply demand, or is this a squeeze and the regulators are going to step in?

Kohake: It's a short squeeze, in my opinion. It started yesterday when we were lock limit up, and today just the opposite, lock limit down. The option pits have been shut down for two days. Yesterday they're showing an $11 move. They got shut down. But exports are strong. The dollar has been weak. And there's still a lot of, you know, acreage talk out there versus the beans. A can of beans is going up and cotton going down. But this thing is going to stay very, very wild I think all the way through July. We have to prove that we have a crop I think before this thing really sits back and holds.

Pearson: All right. So cotton sales. If you've got some cotton now, you're selling.

Kohake: Yes, I would sell the old crop. I think new crop you can still get maybe closer to 170, that area, to make some more sales at.

Pearson: All right. Well, it's never -- it's Disneyland as far as cotton prices, corn prices, wheat prices, and bean prices are concerned, and even killer bull prices, which I'll talk about in a minute with Walt. But before we go there, talk about currencies. What's your outlook for the dollar for 2011?

Kohake: I think we're still weaker. I think there's 40 points in down side short term; 77.5 is your next support line. Got inflation talk back into the market. The equities have seen a nice rally. The Bernanke rally is still in effect, QE1, QE2, maybe QE3 coming on line. That's all supportive in here. But I think the dollar stays weak, and it continues to support the raw commodity sector.

Pearson: All right. And fresh metals. Gold demand seems to be good. China is using a lot of gold. Gold has been hanging in there. It's up again this week. What's your gold outlook for the year?

Kohake: Right. Finally starting to see a nice bounce there. The month of January was very slow. We didn't see much fund money. Here the last two weeks it's picked back up. I'm looking more at taking profits there around 1398 for April. The dollar stays supported. Where the action is right now in the metals is in silver. July silver up over a buck today. I think we could run into a short squeeze there like we've seen in the cotton. But I think we're supportive in here. As long as the dollar stays weak, we're going to stay in a firmer tone.

Pearson: All right. The final question here, Jamey. That's energy. We've got this bizarre situation going on down at Cushing, Oklahoma, not far from Walt's home area. And so that is -- that's causing some concern right now with nearby oil futures. We've got a glut of oil down there at Cushing. A big difference between West Texas and Brent. What's your outlook for that? What are our energy prices going to be?

Kohake: Right. We've seen the spreads between WTI and Brent widen now. Here today they were correcting by over 10 percent at times. I think we're upper trend in crude right now. I like buying may at 90. Selling $84 puts I think it's a great spec play. And I think there's plenty of more upside here in the crude short term. All this talk the last two weeks about the WTI and Brent widening out, I think it's over with short term and both Markets continue to trend higher on their own.

Pearson: All right. Jamey Kohake, appreciate it. Let's move over to the livestock sector with Walt Hackney. Walt, just before we put tonight's show together, I had a message from a friend of mine. He sold a 2,000-pound Belgian Blue Bull, a six-year-old bull, killer bull, going to a packer, $1.06 a pound. Explain that to me, Walter. Is that a packer that's that short bought?

Hackney: Well, it's pure and simply availability and demand. And there is a serious default in the delivery of kill cows, butcher bulls going into the luncheon industry. The Belgian Blue you referred to, some of us in the industry would indicate they might be what's called double muscled. A lot of people would construe that as extraordinary amount of meat in the animal. That be as it may, there's just a tremendous demand for that quality of beef to go into the luncheon facilities. So Canada is not shipping to any extent on -- cows. The dairy industry has just come out of a huge program here in the United States, so there's a definite shortage. And I'm not surprised at the figure. I know that sounds enormous to you, and it would to most people. But there's still a chance that we'll get higher.

Pearson: All right. Cattle cow markets doing the same thing. Let's talk about fed cattle, Walt. What's your take? This has been a big rally. Demand seems to be good. Are we clearing the beef? What's your outlook now for fed prices?

Hackney: Well, you hit demand. For a long time in '10, we all were amazed at the movement of beef thinking as was being broadcast to us that the domestic demand was taking the majority of the beef going into the meat counters and et cetera, along with the same comments that the economy was not allowing our budgeted food dollar to go with the raises in the beef prices. We find out now that 2010 was an all-time record export year of beef. That was kind of a surprise to a lot of us, particularly in the last six weeks. We also find that through February 10 of this year, we are 54 percent ahead on beef exports than we were the same period last year. Through a three-year average through this Feb. 10, we're 69 percent ahead on exports. Now, there's where the safety valve has been on beef production, not in tonnage, not in the volume, because we're mediocre on our production in volume, but on price. Everyone has been worried that the housewife or the shopper is going to maintain their pace in buying beef as it progressively has gone higher. That hasn't been the issue. The issue has been that the exports have taken the extraordinary volume.

Pearson: Where is this fed cattle market going, Walter? Give me some prices. Where do you think we're headed?

Hackney: We sold cattle today at a dollar -- a dollar twenty -- excuse me, at $1.79 delivered to a northern packer. We sold steers today at $107 and -8, and there's some indication that by mid-afternoon today there were $1.11 cash cattle sold in Nebraska. The point being they're $6 to $8, maybe $10 higher than what we were getting last week. It's a matter of demand. It's a matter of available volume. It's a matter of feed lots being very current. And it's a matter of the feed lots governing their market process in order to get the market to move.

Pearson: Are you going to hedge any at this point?

Hackney: Well, there's quite a few cattle feeders that at the current price of feeders, Mark, they're hedging, if you will. They're selling on a cash formula to a packer based on a basis of The Merc. You could today get close to $1.20 a pound on December of 2011. For instance, you could get $1.19 today on the august, depending on delivery. That's cash delivered to a packer. It's unheard of. It's record prices.

Pearson: Calf prices, where is that market going? It's been like a rocket ship.

Hackney: I can only tell you what I've done.

Pearson: All right.

Hackney: I bid this morning a Montana rancher -- I've owned his calves twelve years in a row, as good as walk blacks. I bid $1.30 at 650 pounds for October delivery, and he turned me down.

Pearson: Okay. Let's switch -- and you see that being sustainable. You see that going forward too. Let's talk about the hog market. You mentioned exports. Pork has been another one.

Hackney: Pork is probably the lead meat item that we're contending with as a beef producer. Pork is very reasonable. Pork is probably the meat of choice at the retail counter. As that goes, the tonnage is starting to come down. Your average market weight on hogs is probably a pound, maybe a little over than it was even a week or two ago. Excuse me. That's indicative of a current supply getting currenter -- more current. So the pork industry is not going to expand. They can't expand with feed costs as exorbitant as they are today, not as Jamey is talking about, $7 plus corn and so forth. I know some of the ethanol bids of 685 today in Iowa. So that is so prohibitive that you're not going to see expansion. So we're not going to come with a group of hogs that were kind of an unknown accounting back there somewhere.

Pearson: I've only got about thirty seconds, Walter. Your outlook for price. Can we sustain these levels for a longer period of time, or do you want us to start locking in some of these prices?

Hackney: Well, I would think common sense would let you lock in $200 to $250 a head net profit at $117 to -20 as some of those deferred contracts will allow you to do, even at the price of feeder cattle. So my advice is if you have the opportunity to lock in your cash flow and your risk management needs, you ought to do it.

Pearson: Walt Hackney and Jamey Kohake, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Walt and 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, of course, join us again next week when will examine the outlook for U.S. agricultural trade... Until then, thanks for watching. I'm Mark Pearson. Have a great week!


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