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Market Analysis: Oct 15, 2010: Jamey Kohake Market Analyst

posted on October 15, 2010


For the week, December wheat lost 15 cents. But the nearby corn contract gained 35 cents.

The reports also were friendly to soybeans which recovered all of last week's losses -- and then some --with the November contract moving 50 cents higher. The nearby meal contract, meanwhile, gained $12 per ton.

In the softs, cotton also enjoyed a strong rally as the December contract settled Friday with a weekly gain of $2.70.

In the dairy market, November Class III Milk futures lost 80 cents, while the deferred contract moved 50 cents lower.

In livestock, the December fed cattle contract gained $1.25. Nearby feeders were up $1.72. And the December lean hog contract lost nearly $5.

In the financial markets, the Euro gained 50 basis points against the dollar. Crude oil lost $1.41 per barrel. Comex Gold traded in record territory briefly before settling Friday with a weekly gain $26.70 per ounce. And the Goldman Sachs Commodity Index lost more than 5 points to close at 561-even.

Market Analysis: Oct 15, 2010: Jamey Kohake Market Analyst Pearson: Here to lend us his insight on these and other trends, one of our regular market analysts, Jamey Kohake. Jamey, good to have you back.

Kohake: Thanks, Mark.

Pearson: Let's talk about a couple of things here. Obviously we're still reeling from that October crop report. The corn market just doesn't seem to want to take much of a break at all. The wheat market was the beneficiary earlier not so much this week. What's your take on wheat?

Kohake: It's mostly a follower of corn right now. We've been at a dollar trading range in December Chicago, $6.50 to $7.50, and the major support right now is the lower traded U.S. dollar. I think you buy a break in here right now. I'm looking at a $6.80 December as a buy, and looking to take off up around $7.30. But the key is to keep the dollar turning lower, keep the exports solid, and I think we stay in this range that we're at right now.

Pearson: Obviously wheat was part of what triggered this whole rally with the short crop overseas. We're starting to move that demand from the former Soviet Union over to the United States, Canada, and elsewhere, where there's plentiful supply. Are we going to start to see basis improvement? I mean your boys down in the home state of Kansas are still looking at some pretty wide basis levels.

Kohake: That is right. -- still at basis right now. I don't see any immediate improvement. I think we will once we get through closer to the end of the year. But right now I don't see any incentive for the commercials to bid up for it right now.

Pearson: All right. There's plenty of wheat here in the United States. That's one of the ironies of this whole thing.

Kohake: That is right. There is a surplus and we need to keep moving it overseas and hopefully this U.S. dollar does provide that incentive for foreign countries to come in and buy it.

Pearson: We've had a nice move here for wheat, for corn. Are you going to sell any 2011 wheat?

Kohake: Absolutely. I already have sold a little bit out in July Kansas City. Next December Chicago I've sold a lot. I'm not doing much in here right now at all, but if we could get a 30, 40-cent rally, I would step in and sell again.

Pearson: All right. What about beyond 2011?

Kohake: I think you do. The only option pretty much is with futures or with an HTA. But you can't sell the basis just crazy. But yeah, absolutely, stepping out there and just lock your flat price in.

Pearson: Let's talk about the corn market now too. Obviously corn has been the leader here of late. Continued shrinking crop from USDA's perspective. We'll see what happens in the final analysis, but this has been a huge correction. Rain did make grain in 2010. Give us a scenario going forward for what you think corn prices could do.

Kohake: I think longer term you can hit around $6.20. You run stops in that $6.00, get up in that area there. But right now the market to me is overdone, is trading toward an overbought scenario. The funds are long, up over 400,000 contracts yet right now. I think we could be in a little bit of a trading range right now until we get closer to next month's report. The scenario there is two bushels lower. At least one bushel lower again next month, and I think that will be bought into. Stocks usage ratio right now is about 6.7. Anything below 10 is pretty serious. You throw that in with all this rationing talk, higher energy market, lower dollar, is just more fuel for the fire. What I'm looking at here short-term is to reown some down around $5.50 for December. That's the topside of the gap that we have for Monday. And $5.28 we close that gap, and I would come in and buy some more calls down that area. Like I was saying, longer term up over $6.00, $6.20.

Pearson: All right. So you think we could gap back down to $5.28?

Kohake: I think that would fill the gap. We had to hit some very aggressive stops below $5.50 to do that, but I'm looking to buy up on the topside with some calls to start some reownership there. But the only way we have you selling is fund liquidation.

Pearson: The basis levels in corn around most of the Corn Belt have been decent for harvest time, not spectacular though either. Would you sell corn off the combine and then try and reown it? Is that what your strategy is?

Kohake: You can do that. If you have enough on-farm storage, I would -- I'd be good to sell right now, come back and buy some calls, absolutely. Buy some $6.50 Decembers, that area.

Pearson: Typically we get into harvest, there is a lot of that field sale occurring. Then we button everything up and then the market improves.

Kohake: Right. I think you're going to see that same scenario this year again. You get into middle, late January, into March, you'll see the basis tighten up. The commercials trying to price some loose. Right now they know it's just a matter of time until they can get it.

Pearson: $6.00 corn, that would look awfully attractive I would think to somebody in 2011. Are we selling 2011 at in point?

Kohake: I've sold 2011. I didn't do any today or this week, but I've been selling the rallies there. You can get a $5.00 basis and some areas are ready but, yeah, selling the board up there is a great long-term strategy to step into as a hedger.

Pearson: Obviously we don't know what the weather is going to be. We've got a long way to get there. But still we also know as business people that these are profitable prices historically.

Kohake: Absolutely. and I think looking back probably six months from now it's going to be, like, why didn't we do more. Right now you've got a lot of previous margin calls. Guys are still trying to get through, and it's like, well, we don't want to do this all over again. Let's wait as long as we can. I think anywhere out in here, these deferred grain contracts long term would look fabulous and you need to find a spot to draw a line in the sand and say I'm not going to take any lower than this price right now.

Pearson: Typically we do ration supply. That's how we get through all those. Where do you think the rationing is going to come from?

Kohake: I think you're looking up over 6 very easily. Looking back at the ethanol production right now, very, very aggressive. Huge numbers there. If you take your delivered price of corn, your basis, let's say roughly $5.20, divide that by 275. That equals about 1.9 right now. And spot ethanol is about 218 minus your basis, so those guys are still profitable. So that's one scenario that I don't think we're in trouble with yet. Rationing I think probably occurs closer to $6.50, maybe even $7.00.

Pearson: All right. Let's talk a little bit about the soybean market and what you see happening on that front. There are plenty of beans out there, Jamey. I know there's some concerns -- talk about South America. What are you hearing down there?

Kohake: South America is dry. They are forecasted for rain the first part of next week, but it's about six weeks late. All of this premium has been built in off of that. They're talking maybe a La Niña forecast down there, maybe some type of drought scenario. But the bean market is all this U.S. dollar energy market spillover, dryness down in Brazil, and just more fund money pouring in. funds are long over a hundred thousand contracts there, and I think they will continue to buy the breaks. I'm looking at getting long in the beans in the January contract down around $11.45. I think you see a 40- to 60-cent setback. Corn is overdone in my mind too just like beans have been, just like corn is, getting a little bit overbought and looking for a setback to buy into.

Pearson: Let's talk about the soybean market. Again, $11 plus soybean market. That will look like a good place to sell beans in 2011 as well as 2010.

Kohake: Right, it does. The only thing out there with the beans is this carryout, very, very tight. Roughly 200, 300 million bushel area. It's like corn below a billion. That's the longer term bullish number that the funds are playing off of. You're right, $11 beans is huge. -- for next year for a fabulous price. And I think the same thing here. Longer term why not do it. It's going to look great. It's going to be short term in here finding a spot to kind of limit the margin calls on it.

Pearson: It's going to be interesting to see what happens as far as you mentioned the dollar earlier, gold. Obviously money is still flowing. So the funds are still seeing big inflows of investor cash?

Kohake: They are. This past Monday we got a record amount of volume down in the CME, funds bought over 25,000 corn. They're buying beans aggressively. Kind of the key word with this whole market scenario right now is quantitive easing. The feds are buying treasuries like you can't believe. The feds have also said inflation might be the best stimulus right now. And all that has spurred some heavy selling of the U.S. dollar and buying in the grains and metals and energies.

Pearson: The gold market real quick. Where do you think that's headed?

Kohake: I think longer term, there's still plenty of upside. I think you need about a $200 setback to buy into with a higher dollar. That should happen.

Pearson: Certainly cotton can't be left out of this whole scenario. It's going to be part of an acreage battle. We're certainly seeing that right now. This cotton demand has been huge. Prices are at record levels. Are we selling cotton now?

Kohake: We are. We're at fifteen-year highs there, Mark. Pretty much the standard for cotton anymore is a limit move. One way or the other we are up for bucks or down four bucks. Today we were down limit. The export number had some cancellations in it. That finally spurred some profit taking. I think you saw rallies up to 122 in December. That's kind of been my target. We hit 11980 today so I think you want to find areas as a hedger and maybe -- and try and get short in here on some type of traction.

Pearson: All right. Let's talk livestock. Obviously the flip side is we've got high prices. I was surprised to see feeder cattle on the board. We were up. I was talking to a couple cattle buyers out there this week who were saying calf prices were strong. Figure that out for me.

Kohake: Right. The market got a little bit overdone. Technically it looked like the downside was limited. We got the higher cash trade and that started to bust the shorts out of the market later in the week. Plus, the grain market settled down as well. I might seem a little crazy right now, but I think there's more upside in here for this cattle market right now. I'm looking at about $1.50 higher in feeders to sell into, pushing the November up around $111. Same way in the live cattle, I think you buy breaks there. You get a Dec. board at 97, 98, I think it's a buy.

Pearson: It looks like cattle are moving pretty good. I think the high 90s in Nebraska again this week, so the economy is improving apparently. Beef demand seems to be decent. We've go a very small cow herd.

Kohake: Right. We've got the feeders tightest since the late '50s, and you've got a $2 higher cash trade this week. finish support off of equities, we'll be seeing the DOW hanging around right around that $11,000 mark and you just get a little a better general sentiment of the whole market with demand.

Pearson: Let's talk about the hog market too, Jamey, and what you see happening there. Obviously we've had a nice run-up. That's been a nice upturn finally in hogs. Obviously these high prices come in. there's export issues. The cheaper dollar is going help out. But walk us through where you think the hog market is going to go in 2010, 2011.

Kohake: I want to sell rallies. I'm not near as bullish hogs like I am some of the cattle contracts. This week got kind of ugly. We got seasonally large splices, better quality corn being fed, weights are up, and I think you're going to see a little more pressure next week. What I'm looking at is not selling till we're off -- Monday. Wait for some more short covering to get short. I think a hedger, just like the cattle guys have to do, look at these deferred contracts. There's some great promise out there just like the grain guys. Don't get greedy and try to lock in some good profits out there. If you've got your inputs locked in, some of these profits are pretty ridiculous.

Pearson: Both on cattle and hogs.

Kohake: Deferred cattle and hogs. You've got next spring to next summer where we've seen the rally at based off the grain rally. I think have you to get some type of floor underneath there.

Pearson: That's going to be music to most pork producers' ears because they're going to be looking at this corn market jumping up. Meal market jumping up $12 this week, and they feel like they're back on that high input ride again.

Kohake: Right. That's where a lot of this buying in the grain markets come from this week is the end users. They didn't have enough covered, so they're buying limit up in the corn these some days and pushing on higher. You can get your breakevens right. There's some big, big money out there in these deferred hogs and cattle.

Pearson: Contrary to farm aid, farm income has been up now for going on almost six years in a row. We've seen record net farm income. We're looking at a lot of profitability in here right now. As you look at -- most of the producers that watch this show are raising one of these key commodities. Give us your broad scenario for where you see commodities going. I would say a lot of new money is flowing into commodities. There is this quantitative easing issue out there. There's concern about deflation. Commodities typically look pretty good in that kind of a scenario.

Kohake: I think don't get greedy. Come out here and lock some profits in somehow with futures or options or in the cash market. Don't let this slip away. I think this grain deal probably is going to be topped out I would say by March at the latest. we're going to have all this news factored in. the money is going to be looking for a way out as we come into planting time, unless there's some type of big weather scare. I think the same thing with the meat guys. You've got to look at these deferred contracts. Get your inputs locked in, find your breakeven, and don't get greedy and say I'm looking for $140 cattle, and see what happens now.

Pearson: You usually come up with a trade of the week for us. Have you got anything this week?

Kohake: I've got a couple of them. I like buying July corn, selling the red Dec. in spreads. We get a pullback there next week, I want to buy it. I also like buying April cattle selling Dec. cattle and spreads, and some type of setback as well.

Pearson: All right. Jamey Kohake, always good to have you with us. That will wrap up this edition of Market to Market. If you'd like more information from Jamey on just where these markets may be headed why not visit our Market Plus page at our Web site. You'll find expanded market analysis, audio podcasts and streaming video of our program. By the way, it's all free at the Market to Market Web site. And, of course, join us again next week when we'll examine efforts to reduce nitrate runoff and increase yields through innovative drainage management. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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