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Market Analysis: Oct 09, 2009: Market Analyst Jamey Kohake

posted on October 9, 2009

USDA released it much anticipated October crop production report this week predicting U.S farmers would harvest a little more than 3 billion bushels of corn this fall with an average yield of 164.2 bushels per acre. If realized, the U.S. corn crop would be the 2nd highest on record.

For the week, December wheat gained more than 26 cents, while the nearby corn contract moved nearly 29 cents higher.

USDA now pegs 2009 soybean production at 3.25 billion bushels with an average yield of 42.4 bushels per acre. For the week, November soybeans moved 41 cents higher and the nearby meal contract gained more than $38 per ton.

In the softs, cotton moved higher with the December contract posting a gain of $2.36.

In the dairy market, Class III Milk futures continued their upward trend with a gain of 68 cents.

But in livestock, October cattle lost 33 cents. Nearby feeders gained 60 cents. And the October lean hog contract was up $1.60.

In other markets of interest, the Euro gained 120 basis points against the dollar. Crude oil gained nearly $2.00 per barrel. As fear of a weakening dollar rises, Comex Gold stayed well above the $1000-mark with a weekly gain of $44.30. And the Goldman Sachs Commodity Index gained more than 30 points to close at 470-even.

Market Analysis: Oct 09, 2009: Market Analyst Jamey Kohake 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 with us. Let's talk about a couple of things. We mentioned the weak dollar and then it kind of popped up on Friday. What is your take on the dollar? Everybody seems to be convinced that it's going to continue to sink lower. Where do you see this thing going?

Kohake: I think it could be a bubble the same as the gold market could be right now. It is getting to be a very crowded trade, a lot of extremists talking 72, 71 point dollar and $1100 gold so I'd be very careful in here right now of adding new shorts on in the U.S. dollar. But really the start of this new low this week was some rumors, no truth to it at all yet right now was OPEC meeting in secret saying that they were not going to take the U.S. dollar for shipments of crude any more so it's all a big fall out of bed with that.

Pearson: We've had that before and I've heard from many people, as a former Navy officer it always seems like whoever has the biggest guns is who becomes the nominated currency and that would still seem to be the dollar. But this conversation did happen so people are looking at the dollar and wondering. And you mentioned gold, maybe a bubble there? $1000. I'm hearing some of these mining companies are getting ready to start turning the wheels again.

Kohake: There is a lot of talk of that. The gold reality is completely based off the dollar, inflationary hedge, a flight to safety is pretty much what we have seen and I think gold will continue to trend higher for the short-term but I'd be very cautious about getting long in here right now. I'd look for a setback and then try to buy into it.

Pearson: Jamey, if we go to gold as the flight to safety and I'm going to go up and fill up my big Ford Excursion with a gold piece I better be packing too. So, you do kind of wonder about the world economy. Globally the world economy everything seems to be perking up, India looks like pretty decent gross domestic product growth this year, China still pretty decent growth overseas.

Kohake: That's right, we've seen the Dow hang in as well. We're still very, very supportive there and we're just seeing more good news come along very, very slowly. But I'd still be very cautious up in here. I do agree with you about getting one extreme too hard, too fast like the gold market could be and the dollar could be right now as well.

Pearson: Let's talk about some explicit cases. Let's talk first about the wheat market, some rallies there this week but the wheat supplies appear to be plentiful. What do you see ahead for wheat?

Kohake: I do agree with you on the supplies are plentiful, we saw that on today's report, we saw the carryouts increased but we did see the market get oversold, we saw a relief of that this week, saw some short covering, lower dollar spilled over from corn and beans supporting the market. I think we're in about a $4.45, $4.90 range right now for December wheat. I would sell December Chicago at $4.83 and look for a re-test of these lows. We have to keep the exports very, very supportive in here and if you have the correction to the U.S. dollar higher it's going to bring the wheat back down to around the $4.40 mark.

Pearson: So, make sales up in the top end of that range. Let's talk about the USDA's crop report as it relates to wheat. What is your take on that?

Kohake: I don't think it was a big surprise for wheat. It did show an increase in the carryout which was expected. I think we will come back down and re-test these lows. I would sell into it next week if we do get a rally in corn and beans, sell December at $4.83.

Pearson: Let's go to the corn market. Again, you can look at this crop report from the USDA and you can see some bullish stuff in there, you see some bearish stuff in there, a lot is going to come down to what the reality is that we're dealing with after the first year and once we get the crop harvested finally which is not moving along too smoothly for corn or soybeans at this point and we get this crop put away and then we'll see where the world is. But give us your take now, more confirmation of a big yield for 2009.

Kohake: That is right. We saw very, very big numbers, second biggest crop ever if everything comes to fruition like was forecasted today. I would be selling rallies in here right now. We saw nice, sharp, higher opening today and I would look on Monday or Tuesday's trade off of weather scares to sell against those highs. I would be looking at selling new crop December '10 as well up around $4.19, $4.20, the December '09 I would sell a rally too against today's highs like I was saying. But the key is not really the freeze that is forecasted for this weekend coming down close to I-80, south of I-80, the key in here with corn is harvest, getting the wetness out of the forecast, drying out and getting the combines to roll. Once that happens I think we could break this thing 30 cents pretty quick, the pipelines get full again, basis levels calm back down, we saw firmness of that this week and I think if that happens we will see a correction. I would sell into these rallies right now.

Pearson: So, take advantage of this while we've got a little bit of a harvest weather delay, take advantage of it. You mentioned basis values, it's been a roller coaster for basis values so far this year.

Kohake: Yes, it has. We've seen here just recently a pick up, again, in the basis just because there are no combines to go anywhere, harvest is delayed all over the country and ethanol plants especially are short bought. But still if you've got the storage I would store the corn to next July, the market is telling you that there's full carry, the excess grain is coming with the combine here. I would go and sell in the cash market, look for a pullback and buy calls.

Pearson: Buy some calls, you're also talking about selling some of that December 2010 corn as well at almost $4.20?

Kohake: That is right. I think that is a great sell for the short-term right now. The carryout is very, very comfortable, 16 carryout reported on today's numbers and you look at the break evens, the cheaper input costs, a guy can make money at $4.20 corn.

Pearson: Let's talk about soybeans. Similar story, a slow harvest so far, some of the stories anecdotal, exceedingly good yields from many parts of the soybean belt. USDA's number pretty much lined up with what people were expecting and we keep hearing the demand for soy protein worldwide is unquenchable. So, do you want to sell beans in here?

Kohake: I don't want to yet. I'd wait and see the weather forecasts Sunday night and Monday. I think we will continue the volatility to very, very extreme measures right now. The key here is the same as the corn, going to be how fast we can get these beans harvested, get the pipelines back full again. We saw a nice firmer trade today, the opening calls are lower off the report, the report was pretty much neutral, same as last month's but we're seeing a tremendous amount of fund money come into the beans. Funds are back up along roughly 20,000 contracts again, getting a spillover from the higher crude trade, the lower dollar and I think that will continue at least on Monday. But to hear the same as the corn I would come in and sell short-term November '09 and longer term November '10. I like selling these November '10 beans up around $9.49 and I like selling the November '09 up around $9.80, $9.85.

Pearson: Those aren't permanent, you're going to take advantage of those and move them off the table at some point?

Kohake: I will take the short-term November '09 off relatively quick, get a 40 cent pullback and take those off. But I think November '10 up around $9.50 that's a longer term hedge that I want to stick with.

Pearson: You're not real bullish about 2010 for corn or beans.

Kohake: November '10 beans completely depends upon South America. If they come in forecasted like they are with the acres and we have no delays planting wise down there I think you could see a sharper setback here in with the beans. But right now it's a money flow game. The outside markets are very, very supportive, they're spilling over in corn and beans, we've seen the funds use the grain market as a hedge again for inflation and that's what has been happening.

Kohake: November '10 beans completely depends upon South America. If they come in forecasted like they are with the acres and we have no delays planting wise down there I think you could see a sharper setback here in with the beans. But right now it's a money flow game. The outside markets are very, very supportive, they're spilling over in corn and beans, we've seen the funds use the grain market as a hedge again for inflation and that's what has been happening.

Pearson: How much of an inflation monger are you? Are you all concerned about inflation going off the charts again?

Kohake: Not for the short-term right now. Like I said the U.S. dollar I think the market is becoming very, very crowded right now and we're getting extremely bullish or bearish, one way or the other looking for a setback.

Pearson: Let's talk about livestock while I've got you here. Cattle and hog business, dairy business, the poultry business, it's been under huge stress. We keep waiting for a turn to come. We hit the turn in fed cattle.

Kohake: I think we were very, very close in there. We did see a lower cash trade again this week but we did see a lot of short covering Thursday and Friday which was nice to see. If I was looking to trade cattle I would buy them around $83.30 December live, sell them up around $86 and I would hedge them again at $86 as well so the two sides are a spec and hedge play. The key right now for cattle to me is the cutouts. We've got a combined cutout number of 131.5, that's about a four year low that we're at right now. There is no support below 131 so if you close below 131 two or three days in a row then you've got to get short on the hedger back again but I think we will see a correction up in here to be able to sell into. I'm not doing any hedging right now. I'm looking at $86 December live to sell into.

Pearson: What about the calf market? What is your take there?

Kohake: I think a lot there depends on the corn market right now. We had a reversal on the charts this week that I do like and not getting short in here right now looking for a little bit of a setback, selling November feeders around $95.60 right now.

Pearson: Let's talk about the hog market. It seems like there's been so much frustration on that one. When will we see some liquidation start to occur? When will we start to see prices start to turn? Obviously the cheap dollar helps us overseas moving some pork. Is that what is going to be the catalyst to some stronger prices unless this liquidation occurs in earnest soon?

Kohake: That's what happened this week, Mark. We saw roughly a $5 rally in the hogs mostly off short covering via the U.S. dollar falling out of bed again. But I think right now we're not going to see the bullish numbers creep in until sometime first quarter, second quarter of next year. Seasonally between right now, 1st of October to roughly Thanksgiving every year for the last ten years we have lost between $6 and $18 so I'm looking to sell into this rally, $60, $70 in February, about $54.20 in December, get a higher opening Monday or Tuesday and turn around and get shorter we can look for that seasonal to kick in.

Pearson: Let's talk about covering some of that feed need. You're not really concerned about big prices for 2010 for corn and beans depending on what happens in South America, obviously depends on the weather which is always the caveat to all these discussions. But based on that near-term if you're in the cattle business, the hog business are you buying any corn in here as this basis started to hopefully break again?

Kohake: Right, I'm long quite a bit right now covered call strategies for cattle guys, hog guys right now. Where we're sitting at right now I would be very cautious of adding longs on. I think we could see 20 more cents of upside in corn, maybe 30 or 40 in beans and beans just because they have more delays. But other than that I think if you're not covered I would wait and sit back and wait for a technical correction to occur.

Pearson: Real quick, class 3 dairy prices continuing this up trend?

Kohake: First part of next week but I'd sell into it as a hedge.

Pearson: Jamey Kohake, we appreciate it, thank you so much. That will wrap up this week's show. But before we go we want to remind you about a special Rural Economic Summit we'll be taping in Shenandoah, Iowa on October 22nd. It's the first of four special road editions examining the rural economy. We'll assemble a panel of experts and you are invited to join the discussion by submitting your questions at the Market to Market Web site. But we want to get the conversation going by asking you the following: How has the economic downturn affected you and your community. This is your opportunity to have your voice heard and share your comments and concerns about the future of rural America. Visit the Market to Market Web site to submit questions for the Rural Economic Summit. Of course, be sure to join us again next week when we'll examine the latest global hunger efforts at this year's World Food Prize. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news USDA