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Market Analysis: Dec 25, 2009: Jamey Kohake, market analyst

posted on December 24, 2009

Commodity markets were closed Friday for Christmas. During the abbreviated week, wheat prices trended lower, while another massive winter storm in the plains supported corn.

For the holiday-shortened week, March wheat lost about 3 cents while the nearby corn contract advanced by a dime.

Soybeans followed wheat lower, as the January contract lost more than 12 cents. And the nearby meal contract was down $4.00 per ton.

In the softs, cotton fell below the $75 barrier this week as the March contract posted a loss of $1.63.

In the dairy market, January Class III Milk futures were down 50 cents, and the deferred contract lost 49.

Over in livestock, February cattle lost 10 cents. Nearby feeders were down nearly $1. And the February lean hog contract lost $1.33.

In other markets of interest, the Euro gained 34 basis points against the dollar. Crude oil gained nearly $3.50 per barrel. Comex Gold declined by $6.70 per ounce. And the Goldman Sachs Commodity Index rose more than 14 points to close at 514.50.

Market Analysis: Dec 25, 2009: 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: Well, 2009, the end is in sight. As we approach this big holiday period, some fairly light trading in Chicago on Thursday. What's your take, Jamey, on what's happening globally? We've had this big move up in the dollar. We've seen precious metals kind of back off from their high. Equity markets, as we pointed out at the beginning of the show, have been doing very well. What does that bode as we go into 2010, wrapping up 2009?

Kohake: I think the key starting the next year out is going to be the order flow by the funds. Do they come back in like they were 60 days ago, short the dollar, long metals, long energies, and long grains as they hedge against inflation? We'll have to wait and see. We have seen a lot of short covering in the dollar, some profit taking, but I think more than anything else, we've started to see a lot of financial trouble in Europe. Greece, for example, is in serious financial trouble. Might be going broke. So now we're kind of seeing some currency spreads there, bringing the dollar higher and the Euro going lower short-term. But I think it's along the order flow of how aggressive the funds want to be next year versus inflation.

Pearson: What about the funds redistributing their dollars per the CFTC's request?

Kohake: Right. There are some rumors that they're going to get out of some crude and go to corn, maybe a little bit of beans too coming towards about the 15th of January. I think they will do that, but I don't think it's going to be a big market mover myself. I think we're about at a short-term top in crude, $80. If we pull back to $76, we've got about a $4 to $5 range in there. I don't think demand keeps up for the first quarter of next year. The economy I don't think still has turned around to show big demand.

Pearson: All right. We'll, let's talk some specifics. Let's talk about wheat and what you see for this wheat market. You know, the soft market had a little bit of a challenge with late planting, getting the harvest out and getting the wheat in. Hard red wheat, we'll see what that looks like. The word that I keep hearing from all the analysts that we talk to is just there's a lot of wheat out there.

Kohake: That is right. We do have large carryover domestically and worldwide. It's pretty much the same news every day of the week with wheat. Exports are slow. There's no new fresh business. European wheat, especially the French market – the French wheat is about $25 cheaper per ton than we are, so they're getting business from us. And then last week we also had Egypt come in and say they have enough wheat on hand for five months, so that was kind of another damper in the market. So there's just no fresh news out there to be buying wheat on. The market is oversold right now. I'm – adding shorts on, looking to get short. Actually looking for one more break down to take profits on. Look to re-sell – if I was looking for a hedge, I'd try to sell July up around $5.80.

Pearson: All right. So that's your price target there. And that's Kansas City?

Kohake: That's July Chicago.

Pearson: All right. July Chicago $5.80. What do you see ahead for this corn market? It seems like there's been a bullish turn now for corn. Is that just my imagination or have we seen some momentum move into this corn market going forward?

Kohake: We have seen some momentum creep into the corn market. You look at what has happened to beans and wheat this month, and both have lost roughly 80 cents coming into this week's trade and the corn market has lost maybe 30 cents. We said the weather has been the big factor. The last two snow storms, including the one this week, have kept the market supported. There's still roughly 600 million bushels of corn in the field yet to harvest, and that's what's unknown. But you look at the corn bean spreads, corn should outpace beans. That is a supporting factor. Maybe have a new mandate from the EPA this summer in July, so guys want to make sure they're long with that. But I think more than anything the funds look to be going into corn, and fundamental wise I think corn is a lot more bullish than beans are right now, so it's easier to justify.

Pearson: All right. What are your price parameters for corn?

Kohake: I'm going to sell the July corn up around $4.30, $4.35 and keep re-selling December – December 10, $4.50. We've hit it three times now and I think it's a great hedge. I can't find any other sector in the country right now where a corn producer can come in and lock in at 30 to 40 percent profit for next year that $4.50 corn. To me it's a no-brainer. Get your grain hedged. There's nobody else can lock in 30 percent profit for the next year.

Pearson: Well, that's true. Why aren't people doing it? You've talked to a lot of farmers. Why aren't they taking advantage of it?

Kohake: Greed. It might go to $5.00.

Pearson: It might go to $5.00. With all the – obviously we're going to have some weather between now and then too. That's certainly a factor. What would be the best way to do that?

Kohake: I think you go ahead and work some type of strategy. Leave your top side open. I've worked a lot of three-legged option spreads, you know, buying puts, selling call above $5.00, sell $5.50. Just do a 20 or 30 percent amount. Leave the up side open so if it does go to $5, we have more to sell. Don't sell the farm off at $4.50. Do incremental sales and have a floor there, saying I'm not going to take less than $4.50 and sell into more rallies.

Pearson: All right. So with that in mind and with, of course, potential weather issues, you've got an opening on the other side. What are the factors out there for corn? The export sales have been a little sluggish.

Kohake: They have been just until the last two weeks. Last week and this week we had over a million metric tons roughly being sold. That has picked up. I don't think that stays very, very strong, which you've got to factor into – the wild card is still a dollar. If you go back to 80 or 74, that's going to be very, very important. Also too what happens here in this January crop report. Do we end up at a 12.9 or are we at 12.7? You know, the two to get bullish are –

Pearson: We'll get that report in January. Talk about the soybean market, Jamey, what you see happening in the soy world at this point? Obviously there's been huge demand there. Certainly until the other side. What are the factors out there for corn? The export sales have been a little sluggish.

Kohake: There has been. Kind of the opposite there. Kind of slowed down with the exports the last couple weeks a little bit. China has said they actually may have a surplus now, so they may be slowing down the first quarter of next year. Plus they've announced some forward sales to South America for the first quarter of next year. Obviously they're going to be cheaper than us when they start harvesting. I'm bearish beans longer term. South America is sitting perfect right now. Great rains last week. A little drier this week. Looks like they should have somewhere around a 60 million metric ton crop. I'm looking to sell November 10 beans between $10.20 and $10.35. As of right now, if nothing changes dramatically worldwide, I think you're looking at $8.50 to $9.00 beans at harvest.

Pearson: All right. So you are getting fairly aggressive. What percentage of that crop are you selling?

Kohake: I'd like to be up around 40 percent at $10.30 if we can get back up there.

Pearson: And your strategy to do that? Do you want to sell the board, or are you going to use options?

Kohake: Both, depending on how aggressive the guy wants to be. You can do options and lock in $10.00.

Pearson: All right. And you can still do that at this point. You don't think we're going to see some kind of a January move or weather scare coming out of South America later on?

Kohake: I think we very easily could, but South America's progress is so fast this year with their crop. They're going to start harvesting on the 15th or 20th of January. And there's still time to lose a little bit, but they're moving pretty fast. The wild card with the beans still is the dollar. Acres too – we saw Informa a week and a half ago, they're showing a little bit of a bean acre decrease We still have crude. If we go into some problems with Iran or some other problem overseas, you run crude back to a hundred, the beans are going to follow it.

Pearson: All right. So then they'll divorce themselves from the current energy move and we'll start again going back to the energy. Let me ask you about this one. As far as the soybean markets are concerned and in terms of that South America crop, that's going to start to be available in this market. You talk about that dollar. Do you think we've seen a fundamental shift, fundamental strengthening of the dollar with this weakness in Europe that could impact – obviously it will be less price competitive with South America if the dollar continues to strengthen.

Kohake: I think you're exactly right. They could slow wheat exports down to a more dismal amount than we see right now. Absolutely it could attract China, more sales to South America with them being cheaper just on a flat price. Then you throw in the currency exchange, absolutely, yeah.

Pearson: Yeah, it could be a challenge. Cotton market, what do you see happening on that front?

Kohake: We've had a huge rally in cotton, about a 14 cent rally since Labor Day. And a lot of that was off a dollar, you know, pulling back. I like selling March at 76 right now. And I think with the hedge – is a good sell. Until the dollar gets back below 75, I think cotton has put in the short-term top.

Pearson: All right. Let's talk the livestock sector. Bleak has been the way to describe 2009 for hogs and cattle and certainly dairy. Take us into 2010. Is there some light at the end of this tunnel? Cash cattle, what, 82, 84 this week in the plains? What do you see ahead?

Kohake: We do have tighter supplies ahead for the cattle market. I don't think it's going to effect the futures price a whole lot from where we are on this weeks' highs. Made a little bit of a pullback the last three days this week. Pretty disappointing close. It closed the week out. I think you sell April cattle – live cattle up around 90. Feeder cattle, a dollar, dollar and a half rally, I'd be selling them as well. We've had a nice short covering type rally. We had the firmer cash trade this week with the blizzard, you know, out in western Nebraska. No follow through in the next – with trading. That was pretty disappointing. Demand is the key for all the meats right now. And we're still not seeing it pick up in these restaurant cut steaks right now. And I think you sell April – I really do like that as a hedge. I'm looking for about a 2 to 3 cent break coming after the first of the year.

Pearson: Talk about the calf market because I'm hearing good calf demand. That's what I'm hearing out there. Cow calf producers are seeing a pretty good interest in these feeders with some of this wet corn out there.

Kohake: Right. We've had a nice rally in feeder cattle. We've had a nice 4 cent bounce. The market did look ugly kind of around Thanksgiving but has reacted nicely. I think you go ahead and sell a dollar, dollar and a half rally right now just because we've had a nice rally. The market is going to be turning oversold, and I think we're going to start correcting back lower. We had a bullish cattle on feed last week. That has helped out too, but I think the demand is all this beef market is about right now.

Pearson: All right. So watching the jobless claims, the unemployment issue, and getting people back eating out is a key factor in this whole meat sector.

Kohake: I think so. I mean, watch the unemployment and make sure we get back down below 10%. Get some fundamentals bullish news out there too, like you were saying, pick up in the restaurant business.

Pearson: All right. Hopefully we'll see that happen in 2010 and we can get those hedges and make that work. Talk about the hog market. What do you see ahead there, Jamey?

Kohake: I like selling June/July hogs 79 to 80. Come out there in the spring and summer months, you can lock in a profit. We saw bullish cold storage report. That got a little bit of a bounce in the market. We've got a nice little 4 cent trading range right now in the hogs. I think you sell those rallies. Key there is demand as well. We're going to see a big hog and pigs report out next week. It is going to show roughly about a 4 percent cut in the breeding herd. And I think that has been built into the market a little bit. Those estimates have been out for about two weeks. If I was a producer, I'd take advantage of the spring, summer month in hogs. You lock in a profit there. Leave the top side open and sell more – start getting a floor underneath these summer hogs.

Pearson: All right. So you're a little bit friendly to this hog market.

Kohake: Short-term, I think you can see 60 to a dollar rally, but I don't want to get greedy out there, you know, and say hogs are going to go up at 90 when you can make money at 80. Start putting a floor underneath them right now.

Parson: All right, real quick, flip side to the feed issue for both cattle and pork producers. What do you want to do on that front for covering feed needs?

Kohake: I've got a lot of calls, covering calls in the corn and the meal right now. I'd get a little more aggressive on this setback in corn next week and pull back 20 cents of some profit taking. I would go ahead and get some covered ahead of January crop report. And the same with meal, buy on the hard setbacks.

Pearson: All right. Basis values right now? Would you rather buy cash in the futures?

Kohake: If I was an end user, I'd be buying the cash. The basis is wide and I would go ahead and buy as much as I can. If I was a farmer, I would not be selling.

Pearson: Very good. Jamey, we're going to have to leave it there. 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 Market to Market Web site. You'll find expanded market analysis, audio podcast and streaming video of our program all free at the Market to Market Web site. And, of course, join us again next week when we'll examine the outlook for commodity prices in 2010. Until then, thanks for watching. I'm Mark Pearson. Happy Holidays!

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