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Market Analysis: Feb 12, 2010: Jamey Kohake, market analyst

posted on February 12, 2010

Export sales and ending stocks figures were released this week. The news pushed grain markets slightly higher.

For the week, March wheat moved nearly 15 cents higher and the nearby corn contract rose by a dime.

Tighter U.S. and South American supplies served to push the soybean market higher despite the prospect of record harvests in both hemispheres. For the week, the March contract gained more than 30 cents, and the nearby meal contract was up nearly $9.00 per ton.

In the softs, cotton traded up this week, gaining back last week's loss and then some with the March contract posting a gain of more than $7.75.

In the dairy market, February Class III Milk futures rose 20 cents, and the deferred contract was up 23 cents.

Over in livestock, February cattle lost $1.95. Nearby feeders were down $1.43. And the February lean hog contract gained 75 cents.

In other markets of interest, the Euro lost 18 basis points against the dollar. Crude oil gained $2.94 per barrel. Comex Gold rose $36.70 per ounce. And the Goldman Sachs Commodity Index gained 17 and-a-half points to close at 491 even.

Market Analysis: Feb 12, 2010: Jamey Kohake, market analyst

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Jamey Kohake. Jamey, good to have you back with us.

Kohake: Thanks for having me.

Pearson: Let's talk a little bit about what's happening in the world first, and let's talk about the U.S. dollar, which seems to drive so much of what happens in our commodity markets over the past two quarters. Big move this week. A lot of concerns over in Europe and the Euro and that whole system over there and how it's going to hold up with the problems in Greece and Spain and now Ireland and some other deals over there.

Kohake: Right. And that's the big story, Portugal included. It looks like the EU is going to bail out Greece. That has pushed the Euro lower. More printing money, kind of like what we have done, and it supported the U.S. dollar and that has spilled over into the commodity sector at times. Then today we also had an announcement of China, they're going to require their banks to increase their reserves. They're slowing their economy down. Europe is going broke. We might be going broke so it's kind of an influx everywhere, and the dollar has actually firmed up quite a bit off of it.

Pearson: That's right. They still come right home to mama, back to the U.S. dollar. China, they've raised the reserve rates a couple of times. So maybe their economy was a lot hotter than we thought. Maybe that explains some of those soybean imports they had last fall.

Kohake: Exactly. They were very, very aggressive in these raw commodities. For about the past two years, they've been buying a lot. And I think that you're going to see some big effects of this between now and July.

Pearson: Everybody is afraid of these currencies so they were back buying gold this week. Gold was up a little bit. I thought the gold thing was kind of done.

Kohake: Right. Gold was just more short covering than anything else. We had a dollar breakdown on Wednesday and just saw a bounce off of that. I think we're more range bound in gold right now. About $10.60, up to $11.20 for April. $11.06 was where I was trying to sell at this week and missed out on it.

Pearson: All right. Let's talk about the commodities. Let's talk the wheat market first. It was an up move this week in wheat. There's plenty of wheat, though. It looks like all the charts I see, it looks like there's a tremendous amount of wheat to get sold in '09 and '10.

Kohake: That's exactly right. It's the same old broken record with wheat. Large world supplies. Large domestic supplies. I would sell this week's highs in wheat. We are attracting the dollar a little bit. We had some short covering at times this week. But another bearish report friendly USDA and I don't see much change in between now and about the first week of March, so I continue to sell rallies.

Pearson: You work with a lot of wheat growers. What are you telling them?

Kohake: Sell rallies right now. I think anything above, you know, $5.00, this is where Chicago -- $5.10, that area is a short-term sell. And then take some off middle of March and see if we can't get some type of surprise out of the big March report.

Pearson: All right. Let's talk about the corn market and what you see happening there. Obviously you were a big proponent of getting sold before that January 12 report. You thought it would reflect some bigger numbers. That's certainly proven to be the case. Hopefully people took advantage of that. We're past it now. Has this been just a big overreaction now because the corn supply and demand still looks pretty tight?

Kohake: It is. We do have 1-7 carryout. It could be lower based off quality issues, still more to buy 80 – mostly see how that comes out next month. But it's been in a reaction from a dollar from the crude breaking back down. But mostly it's just exports were slow at the beginning part of the year. They have picked up now since prices are cheaper. Corn to me is more range bound, about $3.90 to $4.10 in December right now. There's large supplies. You can see that in the carry in the market. There's still a lot of carry. The beans have narrowed up a lot. So I think it's just – you buy the dips, you take profits, and you sell the rallies right now.

Pearson: All right. Let's talk about the bean market. Talked to some people down in South America who said it's phenomenal, saying beans, 45, 48 bushel soybeans not uncommon down there in northern Mato Grosso and some of those regions. Obviously that's going to play into plentiful supply of soybeans. But the flip side tells me that bean exports look pretty good. We talked about what happened in China this last year. They bought just about practically every bean that was sold off our shores and has still been a pretty good buyer. How do you tie all this together, Jamey? I know that we don't know what that crop was going to be, what the final numbers are. But from a producer's standpoint as we look at soybeans, what do you see going forward?

Kohake: I'm telling guys right now to hold shorts. I'm short from $10.20 to $10.40 and I'm going to hold those probably through summer. Right now I think we're more range bound just like the corn. All the bearish news factor in right now. We've been talking to South America since November and they are expecting about a 65, 66 million metric ton crop. I think in pullbacks if a guy wanted to take profits on specs he could. Sell rallies. Really what's happened here recently with the bean market is the cash market. There's no beans movement in the Midwest pretty much anywhere in the U.S. The basis at the Gulf is 78 over at March right now. So we saw a futures rally off of that, we saw a late rally on Friday based off some more rumors of China again. So I think lay off in this area right now, just like corn in the middle of the range. Don't sell any more. If a guy wanted to sell more, I'm looking at $9.40 for November.

Pearson: All right. 2010's crop, are you selling any of that?

Kohake: That's what I'm looking at, 2010 November came out there around $9.40. I am short from $10.20 to $10.40 already but would add some more at $9.40 between now and the first week of March.

Pearson: Okay. So again, not a long-term hedge but you're thinking there will be some money made on that one.

Kohake: I do short-term. I think we will see some profit taking before the March report. You know, about a three week trade.

Pearson: Is that March report – is there going to be a surprise in that, do you think?

Kohake: I think there could be with acres. I don't know if we can get, you know, five million more corn acres depending if we do pull back and put new lows in between now and then or not too.

Pearson: All right. Cotton market, what are your thoughts going there?

Kohake: It was very strong, very impressive trade this week. A lot of short covering, open interest increased. I'm looking at July up around 76 to get shorted next week. But a lot of new money coming in, lots of specs late this week.

Pearson: All right. So we've got cotton, we've got soybeans, we've got corn all – with the exception of cotton, the others are all pretty much in a down trend still.

Kohake: They are. Selling rallies – like December corn I think you get up around $4.10, $4.15 is your sell. November beans up around $9.40. July Chicago wheat up around $5.20 is where I'm looking at for about a three week trade and then take profits coming in the middle of March.

Pearson: All right. Let's talk fed cattle market. What do you see happening on the whole livestock front? Obviously we can lead with the fact that inputs are lower.

Kohake: That is correct. We saw a nice jump in the cash market this week, pretty much based off weather. Trading 88, 89 pretty much all over. I think the cattle market is a little bit overdone in here. We've had a nice rally off of weather. I'm looking at selling April up around 92 next week and then see if we can't just see a technical correction taking about $2.00 off and start back over again.

Pearson: Well, let's talk longer term. General improving economic conditions, that's pretty much what we're seeing with consumer confidence improving that you talked about earlier in the show. We slashed inventories from the industrial side. Industrial production is perking up some. Again, unemployment has been slow to recede. But as you look forward it looks a little bit better in 2010 and certainly people have better ideas. So one would assume that that would mean some better beef prices.

Kohake: I think we should see better prices. The shorts I'm looking at are around 92 in April would be, you know, about a three, four week trade. If we do run into tighter supplies, the feeder cattle tighter since 1958. And I think we will see a bounce in here, but I think it's sometime around the March, April timeframe.

Pearson: Okay. And then through the balance of the year do you think we'll strengthen them, the fed cattle prices?

Kohake: I think you could see 92, 94, that area. But I think you're going to have to have some other type of factor that's not known right now to help out. You know, take unemployment back down to 7, maybe 8, that area, which I don't know if we can do in nine months or not.

Pearson: All right. Feeder cattle market, you mentioned that. That's been an explosive market. This corn has gotten cheaper and, of course, all this wet corn in the Midwest certainly is a factor.

Kohake: Right. And the market is overbought. We've seen about a $3.50 rally off last week's lows. So I think that's an easy sell next week. I got the April feeders looking at short of 102.80 that area, 103 for next week. Just looking for a short-term setback.

Pearson: All right. What's your advice then to cow calf producers out there? Obviously we've seen a spurt in demand for this calf market. Obviously cheaper corn is a factor in it. But again, going forward as the economy improves, restaurant traffic picks up, we see this demand pick up, maybe this beef market will improve some more.

Kohake: Right. I think it will longer term. Right now a lot of banks are requiring cattle guys since they can, you know, a lot better levels than they were a year ago, to go ahead and lock this in. And that's what we have been doing just to get a floor beneath this market and protect it. But I think leave your topside open. Just buy some puts right now and look to sell some calls later.

Pearson: All right. Class III milk futures have improved off the lows, which has been welcome relief. Still not profitable for a lot of dairymen that I've talked to in the last month or so. But as you look at this milk market and the volatility in there, and going forward with, again, strengthening the economy and hopefully in the case of milk better export demand, are you anticipating better prices?

Kohake: Longer term maybe this summer, you get a weather scare off some heat somewhere. We did have a nice rally. You go about a week and a half out – a week and a half ago, the market crashed back down again. So I'm looking at selling this week's highs coming into Tuesday, Wednesday of next week. Demand is the key just like the beef market, the pork market, if that can keep up or even get better. For the milk, I don't see that anywhere in the short-term. I think more range bound this week's highs is good resistance and probably re-trace the lows eventually.

Pearson: What's your outlook for the hog market at this stage of the game?

Kohake: Short-term. I take it we're going to slide back lower. Demand is key there. Supplies are very ample right now and I'm looking up around 69, that area, 70 for April next week. Been doing a lot of hedging there for the summer months, trying to lock in a profit. Canada looks like it's going to have about a 15 percent increase and feeder base coming in the summer. So I would sell rallies right now.

Pearson: All right. So you would take advantage of the this up movement.

Kohake: I would be, yeah.

Pearson: You're not optimistic we're going to see a lot more?

Kohake: Not right now for the short-term. As a hedger I think you have to do something in here. Spec wise I think sell rallies short-term. Coming into summer, I think you can lay off a little bit easier and take some profits but right now they're just not anywhere new news I think to hold rallies.

Pearson: All right. So you don't think we'll see sow expansion, then, anytime this year?

Kohake: Not really. They've been talking that for three, four years now, and it really hasn't affected the market at all.

Pearson: All right. Covering feed needs. You mentioned that at the start of the livestock segment. Obviously there's still a lot of volatility in both corn and beans. Bean meal not always trading exactly with the rest of the product inventory, so is this the time to be covering feed needs? And how would you do that?

Kohake: I would come out and try to buy corn on a 10 cent break. When corn goes ten lower next week, as an end user I would buy it and trade it, get it back up toward this week's highs and take profits. Same thing with beans. I think we're just more range bound in here until about the second week of March and then we could see more short covering.

Pearson: So as look at this market and you're talking to producers out there, what's your best trade for producers out there right now? When you're talking to them on the phone or you're out visiting with customers, what's the big thing that you're doing?

Kohake: I would say if you have old crop beans, let's take advantage of the basis right now. It's firmed up. Try to find a spot to sell a little bit of that. There are some tight corn basis areas too, so look on cash selling there. Spec wise I like selling feeder cattle short-term. And for the grains spec wise, I think we're range bound, so buy a sharp break and maybe take some profits on some hedges if you have to.

Pearson: If you're a corn farmer and you've got problem crop out there, you've got a very wet crop with some on-farm storage, do you want to get it to town now?

Kohake: I would be. I'd get it before the end of March. I would sell a little bit right now that basis has tightened up. And if you have to, come back in and buy calls or do a recovery call spread and re-own it. There's some very, very cheap trades that can get you through this March report or even through spring planting with some July options.

Pearson: All right. So you've still got some opportunities out there. There's still some things we can do in terms of risk management. We should be taking advantage of that.

Kohake: Absolutely. There is right now – I'm not getting real aggressive with adding futures on in corn right now or beans at these levels. If we can see more short covering we can step in there, put some new positions on with a new customer or something like that.

Pearson: All right. Take advantage of this market as it weakens, say, until we get some kind of catalyst to pull us up.

Kohake: Exactly.

Pearson: All right. As usual, Jamey Kohake, we appreciate your insights, sir. Thank you so much. That is going to 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, where you'll find streaming video of our program. And, of course, you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free at our Web site. And be sure to join us again next week when we'll celebrate an octogenarian's request to step back in time and harvest the old-fashioned way. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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