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Market Analysis: Apr 02, 2010: Jamey Kohake

posted on April 1, 2010


Commodity trading was limited to four days this week since the markets were closed on Good Friday.

For the holiday-shortened week, May wheat lost 10 cents, and the nearby corn contract fell nearly 12 cents.

Soybeans continued to fall on Thursday erasing gains in previous sessions. For the abbreviated week, May soybeans fell 10 cents, while the nearby meal contract was down exactly $5.00 per ton.

In the softs, cotton exceeded the $75 barrier this week as the December contract posted a gain of 44 cents.

In the dairy market, April Class III Milk futures rose 9 cents, and the deferred contract advanced by 5.

Over in livestock, June cattle gained nearly $2. Nearby feeders were up more than $4.50. And the June lean hog contract rose $5.36.

In other markets of interest, the Euro gained 170 basis points against the dollar. Crude oil rose nearly $5 per barrel. Comex Gold advanced nearly $21 per ounce. And the Goldman Sachs Commodity Index gained more than 25 points to close at 539.25.

Market Analysis: Apr 02, 2010: Jamey Kohake Pearson: Here now to lend us his insights is one of our regular market analysts, Jamey Kohake. Jamey, good to have you with us.

Kohake: Thanks, Mark.

Pearson: I want to get to that USDA report in just a moment. We have a world agricultural stocks report coming out this week. So, lots of government reports happening. We'll talk about that. Let's talk about the general global economic outlook first. The dollar weakened a little bit against the euro but the euro still kind of a mess over there with the folks in Greece trying to come to the market.

Kohake: That is right, Mark. Greece and Portugal are kind of the hot spots in Europe that are still having trouble. I think the euro is still a great sell up around $1.36 in the June contract. I think $1 is still a buy right about 80. I don't see anything changing in the short-term and I still like the spreads.

Pearson: All right. What about on precious metals and on gold with this strengthening dollar where do you think that's going?

Kohake: Precious metals, gold looks like we have some bottoming action right now. I still like buying gold on breaks but using a foreign currency as a hedge. Sell the pound, sell the Canadian dollar against it and buy the gold in futures. I think it's a great trade and I still think there's plenty of up side with it.

Pearson: All right. Globally, China it looks like things are still ticking along quite nicely there. The Chinese banks have been trying to tighten reserves since the start of the year so it looks like the economy is still rolling pretty good there.

Kohake: Right. That's really the wild card here with the raw commodity sector coming up through summer is if China can keep their pace up that they have been at. If they can, we stay supported in here. And not, there could be some surprises longer down the road. To the energy market with them we've seen a nice rally here, seasonal demand picking up. Fundamentals nowhere near justify $85 crude with what we saw this week. We had an increase of 2.9 million barrels in this week's storage report. So we're just seeing speculation, seasonal type rally that I think is short lived.

Pearson: All right. So you would not be in a hurry to cover fossil fuel needs at this point?

Kohake: I would not right now. I think there could be $1.50 up side but I'd wait for a pull back to $81, $82 with the nearby crude.

Pearson: All right. Let's talk some specifics and let's talk the USDA report. The prospective plantings report, again, we're early for the most part for corn and beans in particular. For wheat we knew we were going to lose acres because of what happened in the soft red winter wheat planting this year because we couldn't get the beans out. So, based on that and based on the stocks report that also came out from the USDA which was certainly described as bearish and certainly bearish was the reaction in Chicago. What is your take on the wheat market following that report?

Kohake: I think wheat is still the big bear of the grain complex right now. Exports are the key. They're okay. We're still not getting any new business. Europe is still cheaper than us. Until we can start picking up some new business I think you continue to sell rallies. I like $5.30 December Chicago to sell. The market is oversold right now. I'm not adding new shorts on where we're at but I sure would be selling hard rallies.

Pearson: All right, we look at this wheat market, we look at new crop and look at this acreage going forward, it doesn't seem a very friendly picture.

Kohake: That's right. The acreage number was pretty much neutral and that wasn't a big surprise at all. It's really just the same old story. The carryout and the export business – exports are the slowest since the late 70s and we either need to break the dollar sharply lower or bring prices lower to get rid of this carryout.

Pearson: All right. So, if you're a producer at this time you'd look at that December contract?

Kohake: I would. I'd be selling it up about $5.30 December Chicago.

Pearson: All right, let's talk about the corn market. Again, prospective plantings not really as big as the trade was expecting but still a big number for corn.

Kohake: Right, roughly about 2 million more acres than last year. That wasn't a big surprise there. It could have been up over 90 and really been ugly. The carryout number is huge and what sold the market off. The second largest number of acres ever reported, second largest carryout ever that we have seen. The lower annual numbers, the lower usage numbers finally caught up with the market. Usage was down 8.8% last quarter and we saw that build up in the carryout. Today's trade, Thursday's trade we saw some bottoming action. We're right back to a weather market right now. I would be selling December new crop up around $3.90. I wouldn't be selling at down here where we're at right now.

Pearson: All right, I think that's down lower than your last recommendation. Now I think you're kind of dialing down your expectations.

Kohake: I am. I think we're going to have to have a weather scare to get back close to $4.00 and see what happens there. This is a huge carryout and we need to keep exports strong and have some type of planting delay. I came across I-80 east today and combines rolling in one area and a planter rolling in another.

Pearson: One of the strangest phenomenons ever. We see corn harvested on one side of the road and there may be some planting on the other side, at least get some anhydrous on. It could be a challenging spring. We'll see what the weather holds. But we tend to get some kind of a seasonal rally as everybody gets those planters out.

Kohake: That's right. We'll see the weather this week and what happens and how heavy, where it's at. I'm hoping we do get a weather scare sometime into the middle of April to sell into but I'm not nervous. Take and sell the farm off where we're at right now and everything's over with. I think just give it some time, wait and see what happens. We've seen some new money come into these raw commodities which we spoke about with metals and energies and that might spill over into a little new buying in the grains next week as well.

Pearson: All right. And that's been another interest is will the funds continue to move money inside those futures divisions?

Kohake: That's right. And there has been some talk in the last two weeks that they're going to actually want to get out of commodities and go to equities. I think that's just all talk. As soon as the weather turns bullish or there's some problems somewhere they'll be right back in the commodity sector.

Pearson: All right. You think we can get back to $3.90 though in corn?

Kohake: I do. I don't think it will take that much. Use some short covering in here, get the dollar to break down to $80 again and it's just a quick shortcut now.

Pearson: Do you want to sell some 2011 corn too?

Kohake: I do. I've sold some already around $4.15, sold some the other day at $4.11 before the report. I like that.

Pearson: All right. Let's talk about the soybeans. As you look at this market – first of all, in South America we all know, we keep hearing the headlines that crops are great down there. We've got some other issues in there, strikes and other labor issues and other problems that are going to impact delivering that product. But longer term we know we've got plenty of supply coming from down there.

Kohake: Right. We saw a record amount of acres being reported this week, huge, huge carryout. The carryout number this week is what caught everybody off guard. We saw the old crop/new crop spreads collapse. Everybody was long May, July, short November and they just blew those right out of the water on the opening on Wednesday and that we because of larger carryout. The deal with the strike was what was supporting the nearby contracts. It was supposedly resolved on Wednesday. That, to me, is a non-factor. We go through this every year with bad roads, ports shut down, it got resolved. I'm still looking to sell rallies there. I'm looking at new crop November $9.00, $9.40 range. I'm looking for a sell up around $9.35. $9.40 with some profit taking. Get some rain maybe next two weeks, get some beans to pop, turn right back around and get short. I'm still bearish this whole entire grain complex looking at probably $8.00 basis this fall. So, I think $9.40 is where you've got to be selling more beans at.

Pearson: All right. A little more aggressive on that front. Talk about the cotton market real quick because the acreage number there is interesting. Cotton has had this huge rally and we'll probably see more of an impact.

Kohake: Right. We didn't see the increase in acres but it was enough to satisfy the funds. Last year's acres were a 25 year low. We did see an increase this year but they don't think it's enough to satisfy demand. I think it could be enough depending on what the economy does. I like selling December up at 77.

Pearson: Okay, so you'd go to 77 as opposed to 80. All right. Let's talk about the livestock sector. This has been exciting. This fed cattle market has really started to respond. The calf market has been off the charts. People have just woken up to the fact that apparently we shrunk the cow herd.

Kohake: Right. The feeder cattle market, like you were saying, is ripping higher, up $5 at times in the May contract, tightest numbers since 1958. I still think there's a little bit of up side in here right now. The open interest is increasing and that's pretty much what I'm watching right now. We had the big selloff in corn so that was supportive this week. But as a hedger I'm just buying puts, I'm not selling the board. I think there's too much risk involved right now. It's turning into a pretty big money game. So, buy puts and see what happens coming in with the grain market next week.

Pearson: All right. The fed cattle market going forward for 2010 now – we saw those unemployment numbers, they're starting to come down, we're starting to see a recovery in this general economy. Do you feel better about stronger fed cattle prices in 2010?

Kohake: I do, short-term. We saw another dollar or two dollar higher cash trade this week. I would be more aggressive in here short-term in the live cattle and in selling feeder cattle. Really what scares me is these lightweight feeders going for $150. How can you come in and do a break even on some of these deferred cattle? You really can't hedge them right now. But I think there's a little more up side. We saw a $4 break in the live cattle. We've retraced part of it now. I think there's still a little more up side to sell into. I'm looking at June up over $95 to start in at again.

Pearson: All right. Well, you've hit it so far. We'll see what happens with the fed cattle market. Let's talk about hogs and what you see happening in the pork complex.

Kohake: It's ripping higher right along with the feeder cattle market, June up over $6 at times this week. I think some of the deferred contracts are grossly overpriced right now longer term. You take the higher futures, the lower grain and the trade that we saw this week and that suggests slower marketings to me. So, that signals we have to keep demand at a big pace. Short-term we're going to see this thing collapse. I've been hedging the deferred hogs really hard with puts. I'm staying off the futures right now just because of volatility. But I think if you're a hog guy you've got to get out here and sell these fall hogs.

Pearson: Do you think that we're actually going to see the sow decline? We've had so much improved productivity in the hog business it's hard to see that production sheet drop very much.

Kohake: Right. I think you just come back to more seasonal type levels, retrace about $5 to $7 and see what happens with the broader economy too. The biggest question that I've had the last two weeks with this whole meat complex ripping higher is the seasonals. April has been a big month historically for the meat complex bouncing higher. Everybody is wondering, well, did that happen in March this year and April we finally see a setback? And you can go back to the year 2000, 2005 we just shot straight on up through the month of April.

Pearson: Of course, we are looking at a much better scenario in terms of the livestock sector with lower input costs and obviously a little bit better demand coming in and maybe some better export demand on the pork side as well which has been critical here in the last five years.

Kohake: That's right. We've got the borders back opened up with China and Russia again. But you look at China's longer term numbers in the hogs they are very likely going to have more hogs than we will within I think two or three years.

Pearson: All right. We'll see if they keep buying our bean meal. Okay, if there's just one thing you can do this week, Jamey, on the commodity markets what would that be? What would that trade be?

Kohake: For a spec trade I like buying September corn, selling December corn in a spread. I'm looking for that spread to go back closer to full carry because of the large carryout, the big acreage numbers being reported this week. It's about 9, 9.5 right now looking at it to go out to 15, 17 longer term.

Pearson: All right, for a hedge trade?

Kohake: For a hedge trade I think $3.90 December corn is I think a decent trade.

Pearson: All right, Jamey Kohake, we appreciate it. That's going to wrap up this edition of Market to Market. But 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 -- all FREE -- at the Market to Market Web site. And be sure to join us again next week we'll examine the market impact of the USDA's latest global supply and demand estimates. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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