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Market Analysis: May 28, 2010: Market Analyst Jamey Kohake

posted on May 28, 2010

The federal government estimated this week that U.S. agricultural exports would amount to nearly $105 billion in 2010, up nearly $8 billion from 2009. Nevertheless grain prices trended lower.

For the week, July wheat lost nearly 15 cents and the nearby corn contract was off a dime.

USDA credited Chinese demand for oilseeds with much of the improved export outlook, but soybeans followed coarse grains lower. For the week, the July contract lost nearly 5 cents, while the nearby meal contract was down $2.10 per ton.

In the softs, cotton traded higher this week as the December contract posted a gain of $1.16.

In the dairy market, June Class III Milk futures lost nearly 25 cents, while the deferred contract was down more than 50 cents.

In livestock, June cattle declined 86 cents. Nearby feeders were down $1.73. And the June lean hog contract gained 40 cents.

In the financial markets, the Euro lost 263 basis points against the dollar. Crude oil rallied nearly $4 per barrel. Comex Gold advanced 36.10 per ounce. And the Goldman Sachs Commodity Index gained more than 17 points to close at 489.50.

Market Analysis: May 28, 2010: Market Analyst Jamey Kohake Pearson: Here now to lend us his insight, one of our regular market analysts, Jamey Kohake. Jamey, good to have you with us.

Kohake: Thanks, Mark.

Pearson: Let's talk globally here first in what's happening in the world. Obviously the thing that's still floating around out there causing a lot of problems is what's going on in Europe. A week ago we saw oil prices fall off fairly dramatically. This week had a little bit of a rally back up. What's in store for crude as you look down the road here? Obviously we've got a big leak in the Gulf, not that that has a big immediate impact on oil supply. But what do you see going forward?

Kohake: I think there's good support at 70 bucks a barrel in crude. The key longer term is still a dollar. If it hangs up around 86, 87, I think it's going to be hard to get crude back above 80 and hold it. By I think you're going to see some short covering, see some new money come in next week in the energy complex and support it. A week ago today I went out and sold a ton of $55 July and August crude puts. Crude had broken $22 a barrel in July futures. It came under 70 and I thought it wouldn't go below 55, so I'm short-term just looking for more of a correction in this market.

Pearson: All right. A lot of that is going to be tied to what happens in the financial sector. The euro, we just talked about the huge loss it experienced again against the dollar, continuing to lose ground against the dollar. And now Spain, there's some rumblings there. What could happen? We'll see how the austerity measures work out in Greece, but where do you see the euro going?

Kohake: I think longer term still downward. I'm still bearish the euro. I'm not as bullish a dollar as I was before. I would lay off the long side there and just sell more euro currency on rallies, get back short more. We did have, like you were saying, Spain crop in the news this week. Also Japan was out and maybe with some financial trouble over there. of course, we had earlier this week, the federal government finally passed $13-trillion in debt, so we've just got everything still pretty much in disarray. Rallies are being sold and there's just no clear direction right now.

Pearson: Gold is up. Gold bugs are still out there.

Kohake: Right. This is just pretty much a safe haven for money hedged against inflation. Breaks still need to be bought there. A great play in gold markets just to buy the futures, come out and sell a foreign currency. Sell the euro, sell the pound, and just add on. I think there's still more room in that market.

Pearson: All right. Let's get down to some broader issues, then. Global economy improving in your mind? I know we went over the situation in Europe, but certainly Asia remains a fairly bright spot in a global economy Mideast?

Kohake: Right. There is still demand over there. There haven't been any rumors or wild speculation coming out of there at all. I think that's longer term supportive like you were saying to keep some support underneath the market. I'm not sure how many days we can keep trading the same old news. Every morning you wake up, you get short in the Dow. You buy the dollar and sell the euro. How many days in a row can you make money doing that? There's got to be a healthy flush out, and that's what I'm waiting for, to come back in and get short the euro.

Pearson: All right. Let's get down to our commodities and talk about what's happening on the grains front. Wheat market off a lot this week. Pretty soft week in wheat. The crop looks pretty good.

Kohake: It does. Wheat is pretty much a follower of the other markets, corn and beans especially. The dollar is a huge concern in wheat with it trading up around 87. Exports are decent. They're nothing great. What has really surprised me in the wheat market is the basis. We've jumped 20 cents down at the Gulf. We're above the five-year average surprisingly with the basis. Why this basis is moving firmer is because of Europe. England is turning dry, parts of France are dry, and Ukraine had a winter kill this year. So we could see demand pick up I think sometime this summer. But the key in here with the wheat, anything above $4.50 wheat, that's Chicago, we're still outpriced versus foreign wheat. I'm not selling wheat here where it's at right now. I'm still looking for about a 15-cent rally to get short.

Pearson: All right. So you're a little ways there from taking on additional sales?

Kohake: Right. I think we will grind lower coming into harvest. Usually we see a harvest low about 50 percent of the way through, and I think sell rallies until we hit that number.

Pearson: All right. Let's talk about corn. We got the crop in very quickly. We seem to then -- we put a stop to things about the ends of April, first part of May with a lot of heavy rain around many parts of the Midwest, delaying soybean plantings and maybe some corn replanting that might be occurring out there. And I know I'm going to get some e-mails from people saying, wait, I haven't got my corn in yet, it's been terrible here. Whatever, I understand that. But broadly, we've got the crop in. it looks pretty good. Southern oscillation index measures El Niña versus La Niña, and some of the experts saying we're kind of going towards La Niña. That's not good for the Corn Belt, typically.

Kohake: That is right, Mark. Longer term we could be into a weather situation. The crop is over 90 percent planted, so I think you're right, we're pretty much done there. We are going to see some replanting down south, and I think that's a key area. Right now the corn market is weather and china. China is -- where the support is coming from, we see weekly purchase from them. We run up to $3.90. We come back down to low $3.80s off weather. We had a really weak trade to Friday. We broke Thursday's lows and ran stops hard. That was liquidation coming into this three-day weekend. And also, there's no threatening weather for the next three weeks pretty much. We're warming up a little bit. We needed that this weekend and there's no widespread heavy soaking rains. Short-term I think a guy needs to stay hedged, and I would continue to sell rallies up at $3.93, $3.95, December, up around $4.20 for Dec 11. Until the weather turns bad, I would stay hedged. If you're concerned longer term, come out and buy some September calls against those short futures.

Pearson: All right. So you're getting pretty aggressive on 2011 then. So you're pretty optimistic it's going to be a big crop.

Kohake: I am, just the way the hybrids have been the last couple years, they've been able to withstand pretty much anything. I'm not thinking we're going straight to $3.30 right now. I think we will have a weather scare, and that's why I'm not getting a hundred percent sold. I think just continue to -- you know, 40 percent in this area and continue to take profits on sharp breaks and then wait for a weather scare above $4.00 to pretty much just get hedged on the rest of it.

Pearson: All right. Let's talk about the soybeans, then. What's your take there? This big crop in South America doesn't seem to impact china's buying of soybeans from the United States.

Kohake: It hasn't, Mark.

Pearson: Nor the dollar --

Kohake: Exactly. And last week we actually saw a cancellation from south -- China from South America to us, and who would have guessed that, you know, three months ago. Right now the key with the bean market is new crop, we can't break $9. We keep running down there and try to sniff a few stops out and we can't stay down there and close below it. And we saw a little bit of a bounce this week off the energy market bouncing back. But other than that, I would still continue to sell rallies. November is in the $9, $9.30 range. I would sell $9.30 every day right now until the weather gets a little more bullish. But right now I think with the weather warm and pretty much dry, we're going to continue to grind down lower.

Pearson: And soybean demand, like you say, you mentioned China. Obviously Europe is a big user. Japan is a big user. Some potential problems there maybe?

Kohake: I think longer term there would could be. Exports are still pretty decent right now. The basis has firmed up here domestically, but this time of the year usually running pretty tight to beans. There's not a whole lot left. But I think right now there's nothing too concerned with the new crop. Bull spreads will continue to work by July and sell November.

Pearson: All right. What about 2011?

Kohake: I'm selling that on rallies too. I think just '10 and '11 sell rallies until about the middle to end part of June. Expect some type of weather scare to turn right back around and sell into again.

Pearson: All right. The cotton market, which had a nice big move up, and has been a pretty good stalwart here as far as our commodities that we talk about. Again, it looks like global recovery is occurring there.

Kohake: It has. The only thing really limiting I think more of a short covering rally in cotton is just unemployment index here domestically hasn't improved. If we could get -- down close to 9 percent, I think you'd see a sharper rally. But that's just kind of kept the fund sidelined, off demand, and not doing much right now. I'm still in the mode of selling July up around 84 right now and looking for a retesting and around 78.

Pearson: Where is all the fund money going right now?

Kohake: I think you're going to see a little bit creep back into the energy complex. I think there's value down this here longer term, and I think, you know, August, July crude is a buy at 70. And I think energy is a play through August.

Pearson: All right. Let's talk livestock here for a minute. Fed cattle market took it on the chin last week. You know, still kind of struggling. What's your take?

Kohake: Demand is very soft right now for the cattle market. We had some live cattle trade this week at 93, 94. I think a cattle guy has to stay hedged. Who knows what's going to happen with Europe, you know, every night and how the Dow reacts off of that and spills over into cattle. I just don't see much changing in the cattle market until early fall. I think you've got to continue to sell rallies. I'd love to see August get up around 94 and be able to get a short on there. But until this Dow bottoms out, I don't think you're going to see a huge amount of new money come in.

Pearson: Let's talk about the hog market and what's happening on that front. We apparently did shrink the herd. Export demand seems to be again so critical for all the livestock complex.

Kohake: That's right. Even for, like you were saying, the cattle. The fundamental aren't terribly bearish right now, by any means at all. We had a rally. We finally saw some profit taking and the equities have really spilled over hard into the meat complex. Packer demand is soft in the hogs as well as right now. Really the only thing bullish about hogs is the futures are a deep discount to the index. And hopefully that is -- some short covering, because I'd love to sell hogs into a $2-$3 bounce. I'm short-term bearish in meats right now.

Pearson: All right, short-term bearish in the meats. What about longer term? Do you want to go out to 2011 on some of these cattle and hog contracts and on some of these up moves and place hedges out that far?

Kohake: I do. I already have in the hog market, Mark. I've gone out all the way out pretty much a year out right now and done some hedging. I think if your breakevens work, I'd go ahead and put them on and don't be afraid to trade them two or three times, you know, between here and the end of the year. I don't want to put them on and forget about them and wait until the first quarter of next year to look at them again.

Pearson: All right. for producers who are looking at winter fuel needs and going forward there, is this break under $70 to cover some of those needs, or how would you hedge your energy needs?

Kohake: I would. You break the crude back close to 70 and the nearby contracts. I would come out and look at the -- and heating oil for number two diesel and get some long calls on and I'd get hedged up.

Pearson: You think we're going to see this energy thing turn around. You seem to be friendly to energy tonight. You seem to be a little bearish on the meat short-term and you seem to be a little bit bearish on corn and soybeans longer term.

Kohake: Grains still bearish short-term until the weather proves me wrong. I think you've got to sell rallies there until the weather gets bad. And, yeah, meats, short-term bearish. Energy I just think there's value down here -- the crude. I don't think we go back to 90, by any means, at all right now. But I think you just see a short covering type bounce and you go back to the mid to high 70s.

Pearson: So what would be your trade of the week, with ten seconds left?

Kohake: I like wheat. Sell Chicago July 11. Buy Kansas City July 11.

Pearson: Excellent. Jamey Kohake, thank you so much. That will wrap up this edition of Market to Market. If you'd like more information from Jamey on where these 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 and it's all free at the Market to Market Web site. Join us again next week when we'll pay a visit to the world's largest producer of ethanol. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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