The agriculture department released its latest crop production and supply and demand estimates Friday. As expected, USDA called for a 13 billion bushel corn crop and a record yield of 162 bushels per acre. Nevertheless corn prices rallied.
For the week, September wheat declined about 2 cents while the nearby corn contract moved nearly 15 cents higher.
USDA projections of record soybean production pressured the deferred contract, but old crop prices recouped some of last week's losses. For the week, September soybeans gained more than 13 cents and the nearby meal contract was up nearly $6 per ton.
In the softs, cotton broke through the $60 barrier with the December contract posting a gain of nearly $3.75.
In the dairy market, Class III Milk futures continued their upward trend with a gain of 14 cents.
In livestock, October cattle gained 57 cents. Nearby feeders were up 77 cents. And the October lean hog contract gained almost $2.
In other markets of interest, the Euro gained nearly 300 basis points against the dollar. Crude oil traded above $70 before settling Friday with a weekly gain of $1.50 per barrel. Comex Gold closed above $1000 per ounce. And the Goldman Sachs Commodity Index gained nearly 10 points to close at 445.65.
Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Jamey Kohake. Jamey, good to have you with us. It was quite a day with the USDA reports, we want to talk about those in some details but I want to talk about some of these outside markets just to get things rolling. Gold up above $1000. Where is it going?
Kohake: I think we stabilize in here, get a new top formation in the market sometime early next week depending on what the U.S. dollar does. If the dollar keeps trending lower gold is going to be very, very supportive. What happened in the gold market this week was a big miner, overseas foreign miner was hedged very, very aggressively, got caught short, lost over $5 billion on his hedge. That was the first flush out we had on Wednesday above $1000 and then we saw some technical triggers come in today and push it back up there again.
Pearson: Oil is up $1.50, $70, are we headed higher in oil?
Kohake: I don't think so, I think the top side is defined right now, $67 to $74 looks like the range. This market also it depends on the dollar. If we would turn down lower there you might be able to run to $77 but OPEC said this week they are going to keep their production the same right now, no new cuts so I think we're still range bound.
Pearson: Let's talk about the crop reports, let's talk about the wheat market first and obviously big numbers on everything. Let's start with wheat, what are your thoughts there you Kansas boy?
Kohake: The wheat market has been severely depressed. We have lost about $1.30 straight down in the December contract in the last month, month and a half. The problem with wheat is still exports. Russia is exporting more wheat than we are and Russia has overtaken the U.S. pretty much as the largest world exporter right now. We are still roughly 47% behind last year's export pace right now so the market is trying to find some type of price discovery level to be able to compete with that.
Pearson: Have they found it? This has been a tremendous pullback.
Kohake: I don't think so. I think we will see some more short covering starting out next week but I think there is 20 to 30 cents more down side below this week's lows for December wheat.
Pearson: There has been some quality issues and some other issues on that Russian product too. Eventually will that come back to the U.S.?
Kohake: I think it will eventually, especially if the dollar keeps turning lower, that will help out as well but South America has had some very good rains, they're going to have good crops there so that's going to be another key factor to overcome.
Pearson: What about Australia, they getting some rain there finally?
Kohake: Yes, they are, looking better than they were. The crop is not made yet but they are looking better and the best thing for wheat like we're assuming is to have a drought scenario somewhere overseas to help our crop out.
Pearson: What are you telling producers of wheat?
Kohake: Hold shorts, we're not adding new shorts, the market is oversold right now but I think we will see a correction especially if the dollar keeps going lower.
Pearson: Let's talk about the corn market, a huge number, 13 billion bushels, almost 162 bushel national average and, of course, they're saying that may be true but not in my neighborhood. Bottom line the USDA's numbers are right so they are what we're going to be dealing with so take us out, new crop 2010 maybe should we start looking out there to perhaps make some sales? They talked about increased demand in this report too, it stunned a lot of people based on what is happening in the livestock world. what is your take on this corn number and that report?
Kohake: I would be selling rallies in December corn, look at the energy prices especially natural gas how suppressed that market has been, you can sell December corn and lock in a profit of at least ten contract, I would start doing that on rallies. The wild card today was the demand side of the ledger and that is why we put in a nice little rally of three to five cents at times today. But not a lot of people put a lot of faith in that with your livestock numbers being cut back, our exports keeping the same pace they are right now and this week they were huge up over a million metric tons again. China is also bullish and they were having a drought in parts of their corn growing areas so the assumption is they have a smaller corn crop and they're going to start importing more corn. This is all wild assumptions right now. I think the market is getting ahead of itself, I want to sell rallies. If we don't get a frost scare here in the next two weeks and right now the 11-14 day forecast is dry and no frost, I think corn could eventually pass $2.75. If we do get a frost scare maybe $3.50 but I would be a seller back up in those areas again. I think the crop will get larger and the October report will be more bearish than this one.
Pearson: And you're talking December of 2010 sales, right?
Kohake: Right, first number sell rally is December '10 and December '09 we could turn a $2.75 and we get a frost rally to $3.50 selling December '09 there.
Pearson: But you're making sales for next year, so you think this thing could be under some pressure all year?
Kohake: I do, we're going to have a very comfortable carryout and I think these numbers are a little bit to bullish right now based on the world economy that we're not going to be able to stay on this expected rapid pace that the USDA is forecasting.
Pearson: Big number in soybeans as well released this morning and maybe less of a surprise to some folks but as you look at the soybean market it just seems like demand just keeps coming at it. If you look at the difference between corn and soybean prices you've got kind of a disconnect going right now.
Kohake: Right, if you take the historical average, take the price of December '09 corn times two and a half that's still a buck and a half overpriced relative to beans right now. Back to the demand side of the market that is what has been keeping the support underneath it. China has roughly already forward contracted 41% of next year's expected exports and that is a huge number. I think they're going to be back to their old games like they have always done, our prices are going to move lower, harvest pressure, a large crop and especially with no freeze you're going to see China coming in and cancelling out, try to buy them cheaper and here we go again. I'm in the mode here of selling rallies. I think eventually no frost scare, the crop stays like it is and keeps growing for October's report you can turn down below $8 eventually. If we do get a frost scare maybe run this thing to $11 on the up side.
Pearson: As far as soybean production in South America you're looking at big acreage down there so you want to sell some 2010 beans?
Kohake: I do, I want to sell as close to $10 as you can, sell sharp rallies there, you can lock in some profits there and take advantage of that.
Pearson: Let's talk about the cotton market, it was on the up swing this week.
Kohake: We saw a nice rally, a lot of support from the dollar fading on lower, exports are the lagging factor there. I would sell rallies in December cotton up to $62.50. I think we're going to get some spillover, the dollar will keep us supported, but I don't think we hold in here right now based off of exports.
Pearson: Let's talk livestock for a minute, again, it's been a struggle. Let's talk about the fed cattle market. What do you see happening between now and the end of the year?
Kohake: End of the year I think we will see one more sharp rally on a short-term bullish in here right now. Futures are higher priced than cash so the cash is going to be the wild card. We traded 85 this week, I think futures are range bound between that and 89 right now. The demand side of the market is still the key. Supplies are bullish through the Christmas timeframe but we need to pick up demand. Pork is still cheaper than beef and that is the problem.
Pearson: Plenty of pork out there, we'll get to that in just a moment. So, as you look on first quarter of next year I see this kind of building a little bit more demand going forward, a little bit better economic news, maybe see some strength in this cattle market in 2010?
Kohake: I think we will. If I was a hedger and cash hits 88 to 89 I would sell into it. You look at last month's cattle on feed report the placement number is bearish starting the first quarter of next year and you take a break even of your input costs in cattle you can lock in some green right now up to $10 a head and I would be taking advantage of that this fall if I was a cattle guy.
Pearson: Green is a big word for us on the cattle side. Let's talk about the hog side. We're hearing a lot of things out there, there's a lot of rumors floating around about some of the larger operators out there. We have seen a little bit of an up tick, am I right, on sow slaughter?
Kohake: That is right. It is still a blood bath though for the big producers like you were talking about, still a lot of red ink. The only thing that has changed is from roughly February through next July you can lock in a profit not just like the cattle, the numbers are getting better with the cheaper corn. Supplies are still outrunning demand right now in hogs, I don't think that's going to change anywhere near in the short-term. Weights are up over eight pounds compared to last year. I would sell rallies anywhere near $52, in December I would re-put your hedges right back on again.
Pearson: A little bit of a turnaround for the livestock sector and also talk about the dairy sector and what you see happening there.
Kohake: The dairy sector looks like it has stabilized. We're not putting in new lows every day. I think it looks very, very well in here to form a bottom and start to see some short covering. I think we will see a sharper rally eventually but we need to get some support from the cattle, from the hogs and kind of see one big push with the dairy and beef and pork. But I like the stabilization that we have made in the dairy market.
Pearson: Tell me about covering feed needs at this stage of the game. Obviously a big harvest is coming in. Are we going to see a traditional harvest low say if we get started around October 1st for the bulk of the Corn Belt?
Kohake: I think we will. I would be buying sharp breaks in the meal, in the corn market right now. Another idea is to sell puts, if you're looking to buy some $2.80 December corn, make the market come to you and then turn around and get long what you need to get long with the futures.
Pearson: Meal side what do you have there?
Kohake: Same thing, keep some type of calls or short puts on right now just in case for a freeze scare, I think you have to have something wrong but I like the same strategy there, sell puts underneath the market, the market comes down great, we need to buy it and buy the futures then.
Pearson: All right, so start being a little bit more aggressive on the input side. You talked about that range on oil and there's a lot of producers out there that are burning a lot of diesel, get it covered there?
Kohake: On a pull back, we pull back down to 67, 68 I would but I don't think anything near or short term we're going to be running to 80 right now.
Pearson: Jamey Kohake, as usual we appreciate your insights. That's all the time that we have for this portion 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. Be sure to join us again next week when we'll examine a cooperative effort to provide health insurance to rural Americans. Until then, thanks for watching. I'm Mark Pearson. Have a great week.
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