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Market Analysis: Jul 09, 2010: Jamey Kohake

posted on July 9, 2010


USDA released its July "guesstimates" on supply and demand Friday. The report was viewed as neutral to slightly bearish for corn, and bearish for wheat. Both commodities trended lower on the news, but not enough to erase gains from previous sessions.

For the week, July wheat advanced 35 cents while the nearby corn contract settled Friday with a weekly gain of 11 cents.

Estimates of tighter soybean supplies were friendly to soybeans. The July contract closed well above the $10-mark Friday with a weekly gain of more than 60 cents. The nearby meal contract advanced $19.20 per ton.

In the softs, cotton trended lower again this week with the December contract posting a loss of 54 cents.

In the dairy market, July Class III Milk futures rose 12 cents, and the deferred contract gained 75 cents.

In livestock, August cattle gained 73 cents. Nearby feeders were up 53 cents. But the August lean hog contract lost 3 cents.

In the financial markets, the Euro gained 89 basis points against the dollar. Crude oil advanced nearly $4 per barrel. Comex Gold gained $2.10 per ounce. And the Goldman Sachs Commodity Index gained nearly 20 points to close at 498.50.

 

Pearson: Here now to lend us his insight on these and other trends, one of our regular market analysts, Jamey Kohake. Jamey, I want to get to these USDA numbers and I want to get to some of the fundamental issues that are impacting the grain and livestock markets. But, let's talk first a little bit about some of the stuff that is happening globally. Euro strengthening this week, gold was a little bit better, oil was higher this week, it looks like a big move into commodities again.

Kohake: That is right, Mark, we saw a late week rally in the Dow, we closed the week off with a nice four-day rally. Gold had a $60 sell off and we rebounded off it late this week. I like the long side of gold again after this flush out, October right around 1205, put a stop at 1184, that's trend line support and crude too rebounded again this week. We had six down days in a row, finally finished that off Wednesday. I like buying August there down around 70 but, yeah, we finally got some new money coming back in again.

Pearson: Well, it looks like the strengthening situation, the improving situation in Europe, at least fixing their problems over there for the time being, seems to be helping the euro out which, of course, is going to help us move more product overseas. But also it seems to be like we're getting a little bit of a restoration of confidence.

Kohake: That is right. The news of Greece every single morning is gone, other countries too, of maybe Ireland and a couple other ones too have kind of disappeared and just kind of seeing just a minor rebound and some sentiment figures too, feeling a little bit better, got back above 10,000 in the Dow this week and everything just kind of settled down. Really probably the wildest news was back in the gold market again.

Kohake: There was a bank in Europe that traded 346 tons of gold for cash. This was supposedly done months ago but it hit the market this week and that was part of the $60 sell off in gold was based off of that, that happened back in like March supposedly.

Pearson: But it affected the markets this week?

Kohake: Right, we sold gold off and then we hit trend line support, 1184 October, we got back about 1200 later that Thursday into Friday.

Pearson: All right, well it was a wild week as usual. Volatility just going to increase as we move on through the year?

Kohake: I think so. You get the weather in the grains to keep the volatility up, you're coming into some important reports in the cattle and hogs too so it's going to stay wild.

Pearson: China moving away from being pegged to the dollar. Is that a plus for the U.S.?

Kohake: There hasn't been that much lately, that ratio that we've seen in the past real heavy. They have been buying aggressively still from us, corn and in beans, they bought a couple cargos of corn this week. There were rumors that they may have bought up to ten but two was reported. We still have the cheapest beans in the world right now even with our rally, short covering rally that we've seen and with the dollar still hanging up around 85.

Pearson: All right, so your thoughts on the dollar now. Is it going to continue to -- is it going to hold its own? Is the dollar move done?

Kohake: I think the up side is limited right now short term. I think you sell rallies there.

Pearson: All right. Let's get to some specific cases. USDA supply and demand report came out on Friday. There's some wheat production issues we talked about earlier in the show, Canada, former Soviet Union, but the last time I looked at these numbers it still looks like there's plenty of wheat out there.

Kohake: There is, Mark. We're at 20 year highs on the global carry out figures which is wildly bearish, of course, but we are at about 30 year lows in acres. But the carry out number is huge. There was really no fundamental justification for this roughly 80 cent rally that we've seen in wheat. What really got the ball started was fund short covering, they were massive, massive short, funds were long the Dow, long gold, long crude and they got caught the wrong way in those three outside markets early last week and they had to pay the margin calls. Well, they had big profits in wheat so they blew the wheat off and stayed with the other commodities that paid margin calls that way. So, that got the ball started and spilled over into everything else as well.

Kohake: I think this rally is short lived. I like these summer Chicago up around $5.90 from the short side. I don't see this thing hanging in very long. A guy can sell $7.00 wheat calls too for about 10 cents. But longer term I think there's 50 to 75 cents down side at least in this wheat market.

Pearson: All right. So, make sales.

Kohake: Absolutely.

Pearson: In one way, shape or form. Let's talk about the corn market. And, again, there's a lot of issues floating around out there, a million fewer acres, big rains in key parts of the Corn Belt, in north central, southeast Iowa, southwest Iowa, parts of western Illinois, there have been some issues there, a lot of low level flooding, certainly Missouri has been hit. What is this going to do? Does the trade seem to be getting nervous about the corn production this year at all? We're at the same, in terms of crop ratings, we're the same as we were last year.

Kohake: Right, the crop ratings ain't showing very much right now at all. This previous week the only states that took a hit were Iowa and Indiana, they're major growing areas, but it wasn't as widespread as some guys had hoped for. We're still three percent better than the ten year average right now in the corn. I think more of the rally in corn is based off spillover from wheat, the Dow rebounding and a little bit of weather. There is maybe a little heat though moving in, in two weeks, a week from this coming Tuesday, a week and a half out but I think that's bearish. I think this rally has been a gift for producers. We finally got caught in a semi-weather scare we've been waiting on since spring and I think you have to sell into it. I think we can achieve $4.10, $4.15 December corn. I would be a seller there. In this red Dec., Dec. '10 I think $4.25, $4.30 is where I'd start stepping into it again.

Pearson: All right. What about 2011?

Kohake: I like that $4.25, $4.30 mark there, back close to the previous highs that we have been to but I think you have to take advantage of this rally and if you can run stops above $4.00 in the Dec. '10 corn next week, we get up to that $4.05, $4.10 is where I'd be making some aggressive sales.

Pearson: Do you think we're going to climb up there then? Do you think it's going to be that good next week?

Kohake: I do. This game in the grains right now is I think turning more into a money game. We erased all of our losses that we had seen over the previous six weeks, now we're back up against key resistance, $3.93, $3.95 December corn. It's been an area that people have loved to have wanted to sell two months ago and say, hey, we keep getting there we're going to sell more and more and more. We went down to $3.40, nobody got out, got flushed up, flushed out on a limit up move on the acres report so now they're back short again saying, hey, we've got a better price, let's stay short. I think the funds will run them out, run stops above $4.00, then we'll come back down. I think it's just too easy to say, hey, I'm short at $3.90, we're going to $3.60 right now. So, we run $4.00 and then get short.

Pearson: Okay. It's an interesting scenario. You mentioned China in corn. What is your feeling on that? That was sure a big catalyst for a big rally earlier in the spring.

Kohake: It was and we saw a bounce off of it this week too, Thursday. There's rumors that ten cargos -- I don't think it's a longer term deal right now to get concerned with. I think it could be long-term bullish but they still have a lot of corn in their reserves so they could release a lot and kind of slow everything down. But right now I think we're more weather and more and more based off can we push up corn a little bit more.

Pearson: All right. Let's talk about soybeans and what you see happening there. Obviously a key part of the soybean crop is going to be coming up in August so weather is going to certainly play a roll there. But bean demand, again, China stepping up and buying beans again.

Kohake: Right, they bought beans again this week, kind of surprisingly. They haven't shifted a whole lot of business out to America yet. South America is still sitting on a bumper crop and China hasn't really bought anything at all. We are the cheapest bean market in the world yet right now so I would look for some more sales. Same thing in corn and in wheat, I would take advantage of this rally in here. $9.70 beans I think it achievable, more short covering next week and that's where I'd make some sales at and I'd go up to $9.90 on some above that. But we still have time in here, like you were saying, to get in the weather game in August and see what happens, but $9.70 is where I'd be looking to sell.

Pearson: All right. Soybeans, as we look ahead to 2011, what are your thoughts on selling 2011 beans?

Kohake: I don't see anything wrong with it at all. You just look at the futures price right now and I think pretty much anybody listening to the show could make money where the beans are at right now so I would take advantage of it. I don't think it's worthwhile contracting cash beans that far out, the basis is too wide so you have to come in and sell futures, let the basis narrow up and then take advantage of it.

Pearson: All right. So, cotton market, what do you see happening in cotton?

Kohake: Since about June 16th we've been straight down in the cotton market, we've just completely fell out of bed since the middle part of June, getting a little bit oversold right now but I don't think the down side is done yet right now. If we could get a short covering bounce at 77 in December I would sell. I think the bottom side right now is 73 is what my target is.

Pearson: All right, fed cattle market, we've had some nice returns, this cash cattle market has been hovering in that $91 area. Where do you see us going for fed cattle?

Kohake: Short-term I think I'm a little bit bullish, looking for about another $1.00, $1.50 rally, push the August up around $92, the Dec. up around $93, $93.30, that area. I want to be short cattle within two weeks, that's when the next cattle on feed report is. I think the placement number could be a little bit scary. Who knows what is going to happen when the equities pull back down below 10,000, it's going to pull the cattle down. But I like that $93.30 area in December cattle to get short at.

Pearson: All right. As far as the feeder cattle market is going we've had this nice strengthening in the corn market and really feeders have hung in there pretty good.

Kohake: They have. Even when corn has called seven higher and the cattle are trading before the grains open up they ain't showing any major weakness at all any day at all this past week, week and a half. Feeder cattle have rallied $7.00 the last month, month and a half, live cattle rallied about $4.00. I still think selling rallies is longer term the way to go in the feeder cattle. I like $113 area in September to get short in.

Pearson: The hog market, as you look at what has been happening over on that side, that last hogs and pigs report and going forward it looks like the house is pretty much in order. What do you think is ahead for hogs?

Kohake: Short-term I'm bearish. I'm leery on demand right now and I think you need to take advantage of some quick short covering rallies to get short, the Dec. up around $73 is where I'd be selling at. This coming week is going to be very pivotal in the hogs, we're going to see the new kills report of the short week. If it doesn't come out as expected I think it could be a quick $1.00, $1.50 down side in hogs.

Pearson: All right, let's go back to these financials. You mentioned you think the dollar has maybe run its course, it's been a long, hard up move so maybe we'll see some softening there?

Kohake: I do, I don't think we're going back to 81 but I could see 84, 84.5, another one point down. But like you were saying earlier, we're finally getting just this news to settle down with Europe and it's not everything is off to the races, dollar higher, euro crashing every morning, everything has kind of calmed down and I could just see us slipping down to the 84 area and stabilizing there.

Pearson: All right, as we go forward and as we look at certainly some of the demographics that are affecting us worldwide, growth in many of the Middle Eastern countries, African nations, lack of growth elsewhere around the world, as you look at new demand going forward where do you think it's going to come from? Do you think we're going to continue to see Asia expand? Are we going to see continued growth in that part of the world and continued demand for U.S. commodities?

Kohake: I do, I think there is long-term demand there. Southeastern Asia, the Malaysian countries, I think that's probably the fastest growing area in the world right now. I think they'll continue to be huge importers of grains, meats, everything but that's really I think longer term where all of our strength has to come from and that's why I'm a little leery here in these meats right now just with the economy and I think rallies have to be sold into. But I think for a trade that you're talking about there buy metals on breaks.

Pearson: Okay, so if you had to make one trade this week what would you do?

Kohake: I want to look to sell wheat. I think there's 50 to 75 cents down side. I want to look at short calls at $7.00, $7.20 December strike price to sell.

Pearson: All right, so, negative outlook for wheat. All right, that will wrap up this edition of Market to Market. I want to thank Jamey Kohake. Now, if you'd like more information from Jamey on just where these markets may be headed visit the Market Plus page at our Web site. You'll find expanded market analysis, you'll find audio podcasts and streaming video of our program and it's all free at the Market to Market Web site. And, of course, join us again next week when we'll examine the merits of production agriculture with Michael Pollan, author of "The Omnivores Dilemma" and Blake Hurst, a Missouri farmer who wrote "The Omnivores Delusion". Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture cattle commodity prices corn crops dairy finance livestock markets money news pigs soybeans USDA wheat