As expected, the suggestion of bumper crops pressured prices. For the week, September wheat lost nearly 40 cents, while the nearby corn contract was down 18 cents.
Prognostications of reduced output sustained the soybean rally. For the week, the August contract gained 50 cents and the nearby meal contract was up $13.50 per ton.
In the softs, the effects of extreme drought in the nation's top cotton producing state of Texas were evident this week as the December contract posted a gain of nearly $2.50.
In the dairy market, Class III Milk futures traded in a sideways fashion and ended up virtually unchanged. In livestock, August cattle were down 85 cents. Nearby feeders were off $1.00. And the August lean hog contract plummeted $7.23.
In other markets of interest, the Euro lost 82 basis points against the dollar. Crude oil gained nearly $1.50 per barrel. Comex Gold was up $1.50. And the Goldman Sachs Commodity Index gained more than 10 points to close at 466.30.
Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Jamey Kohake. Jamey, welcome back.
Kohake: Thanks for having me.
Pearson: It's going to be another interesting week. We're ending the final phase really of the corn and soybean crop production work for 2009. So, there's a lot of focus on that, there's been a lot of focus on the weather before we get to harvest so there's a lot of variables still out there. USDA's crop report is coming out next week so we want to talk about that. But let's talk a little bit about, step back and just take a look at the situation globally because it affects us so much. Obviously the unemployment numbers here in the U.S. coming down a little bit on Friday surprising everyone, maybe pointing to the fact that maybe this economy is starting to pick up, hearing rumblings overseas of basically the same thing, the global economy starting to perk up. How do you see things and how is this going to affect us down the road in farm country?
Kohake: I think we're starting to stabilize, I don't know if we're out of the woods yet but the broader numbers, broader equities do look very supportive. We've held 9,000 now in the Dow for several weeks, the dollar is very weak, that is helping out a lot, also seeing a lot of new fund money coming into the market as well so there is new investing coming in.
Pearson: So, we're starting to maybe see this capital market freeze and we maybe start to defrost just a little bit?
Kohake: That is right, I think there are people looking to maybe buy the lows in here right now, looking for something discounted and hold it for an extended period of time and historically this is probably a good time to do that.
Pearson: As we look forward to this and we're going to talk about the livestock markets in just a moment. We've got a disastrous hog market, disastrous dairy market, a fed cattle market that is not anything to brag about so we've got some pressure on that and a lot of that kind of hinges on what happens with our domestic economy and also with jobs overseas. People are concerned about what's going to happen with oil prices, we've been a wash in crude oil it seems like since the spring. As the economy starts to improve are we going to see crude oil start to jump?
Kohake: I think the energy market is completely based off the dollar right now and we went down to roughly 77 this week and the dollar saw a lot of short covering today and saw a profit taken in crude. You're right though, the supplies are very, very bearish in crude and we built our inventories by over a million barrels again this week. So, I'd be very cautious about buying $73, $74 crude oil in here right now. I think if the dollar does stay weak it can push to the high 70s but right now I think that is a top, just real demand isn't there right now to eat up all of the extra stocks that we have.
Pearson: All right, but you're not that worried about strengthening the dollar or a reversal of this trend in a big way?
Kohake: I think that is down the road when the dollar does see more short covering once we get back over 80, I think that does pull crude back to in the 60s but right now I think the dollar is having trouble getting back above 79, even 80 so I think crude is does stay stabilized at 70. But yeah, you're right, if we can get the dollar to break down the broader markets are going to see some profit taking.
Pearson: Well, the guess work is all going to go away when USDA releases its report on August 12th. We had a lot of numbers out this week. Let's talk first about wheat, your impressions. Informa's number on wheat, were you surprised at that number? Do you think that that's going to be the number that USDA comes out with that Informa is guessing on their USDA guess?
Kohake: Right, I think they're very close on the wheat, closer than they are in corn and beans in my opinion. Wheat right now the major problem is demand still. We lost some business to Egypt on Thursday, world prices are still cheaper to ours so they're having trouble eating our carryout away. Rolled stocks are very plentiful and they have been for several months and we're trying to find like a price discovery level where we can sell some of ours and be able to see a bounce off that. But I do think wheat will rebound, we will be buying acres this winter but right now we're just searching for a level to be able to sell some of our grain overseas.
Pearson: All right, so if you're a producer right now you don't want to be selling wheat?
Kohake: No, I would not. I would store it and wait for a seasonal bounce.
Pearson: Is it a seasonal bounce or, again, you mentioned plentiful worldwide supplies, as this global economy perks up could that increase and maybe give us a reason for a decent rally in the wheat near-term?
Kohake: Absolutely, that scenario and also we've got a little bit of weather problems over in Russia, Pakistan and also parts of South America wheat country so if those were to worsen or also to see some fresh demand news we would see some short covering. I think short-term the Dec. Chicago is going to hover around $4.00, probably break next week.
Pearson: Let's talk about the corn market. Informa's number, they came out with their corn estimate and they also came out with what they estimate the USDA's guess is going to be. So, it was a little bit confusing but as you look at the numbers, big corn yield, no matter how you look at it they're talking almost three bushels above what USDA has been talking about.
Kohake: Right, that was one of the first numbers they put out which was August 1. The numbers they're looking at for this coming Wednesday's report they're massively higher, 164 is what the estimate came in at, that's a massive crop, roughly a 13 billion crop size. Once that came out we pretty much put a high in for this week and we pulled back to roughly $3.30 today. I think corn is in trouble, technically on the charts I think we will trend on lower in here right now. The only supportive factor will be coming in Sunday night or Monday off weather scares with the beans and it spills over into corn. I would hold all shorts, turn down hedges through the report and see what happens. There is grain out there to be sold yet or unpriced, the market is telling you to store it. There's just about full carry from now until next July, the market roughly a couple cents short but the market is telling you to store your corn, it will be worth more later.
Pearson: FC Stone also came out with a big average acreage number too so is that now starting to deaden up this market, maybe if we get a bigger number from USDA in the report on the 12th maybe we won't see quite the reaction?
Kohake: I think a lot of it is built in. I think we are going to have to have a 156, 157 number at least on Wednesday to be in the low $3's, somewhere in that zone. Anything below 154 in the bean number is bullish and we're right back to $3.75 again where we started this sell off at. But I think a lot of this bearishness is factored in and we're looking at weather spilling over from the beans to the corn.
Pearson: As you look ahead the flip side of the corn market is what's going to happen with feed demand. I'm hearing a lot of negatives over in the dairy sector, I'm hearing a lot of negatives in the pork sector and the fed cattle sector too. So, we could be looking at some pressure on feed demand and a 13 billion bushel corn crop. To me it looks like potential train wrecks down the road. Is that a possibility or are we getting ahead of ourselves?
Kohake: No, I think it's very possible. You look at the Dec. 10 board below $4 maybe next week with a bearish report and you're exactly right, we could be up over a 2 billion carryout depending on what ethanol usage is, livestock usage is and where the carryout ends up at. But for a producer out there look at your break evens for next year, there are still some profitable levels a guy can hedge with December 10 corn with their input costs and still have money. So, I'm looking at starting some November 10 and December 10 hedging.
Pearson: What about over on the soybean side? As you look at this market, that's where the old crop has really been the big driver in soybeans, a lot of acres out there, again, a decent yield number from the private forecasters, 3.25 billion bushel soybean crop. Is that going to give us some carryout there or are we still going to be tight, are we still going to be on the bubble for 2009-2010?
Kohake: I think we will start to build a carryout, I don't think it's going to be anywhere near where the trade would want it, the bearish guys anyway. Right now the bean market is completely weather. We finally got a weather scare this week, they've been waiting for it pretty much since the 4th of July to sell into and we got it and we kind of flat lined the last few days of this week. The key is Sunday night's trade, what the rain and the heat looks like for late next week, Wednesday, Thursday, Friday. We had some rains today, tonight moving through northern Iowa, Illinois, heat moving in this weekend and a little bit of rain the first part of next week. It's beautiful, it's the best forecast that we've had in a while but the traders are still waiting to get confirmation that there is ample moisture before they gather longs.
Pearson: At this stage of the game you mentioned the new money coming into the markets and we've certainly seen that really since 2007, we've seen new money come and new money go. The money that's coming in right now is it creating some momentum in these soybean pits, are we seeing a build to the long side or could we even see some short covering as we maybe go into an early harvest low?
Kohake: Right, the first about 80 cents of this rally that we saw from about $9.40 up over $9.90 with a 50 day moving average it was mostly short covering. We have seen some new fund money come into the market off the weather forecast for this heat that's sticking around for the next five, six days come in but the key is next Monday, this coming Monday and Sunday night here with the weather. The money could come out just as fast that it did come in and any chance of rain next week and it does cool back down we're going to have a short-term top in place.
Pearson: What's going on with China? We keep hearing that China is a big buyer of soybeans and then it turns out they back out on a couple of contracts and then they're back in, in a huge way with some surprising buys. What do you think is going on there?
Kohake: There's two keys to their side of the exports right now. Two weeks ago they priced 1.8 million metric tons with us for the new crop, that was on this week's numbers, there were 2 million for the entire week and that's roughly 25% of our total exports for next year and they said, hey, we're going to take. The other side of the market is all this grain they bought with the old crop that ate our carryout down, they were just storing that and use it down the road. Well, now they're wanting to sell it, they have been trying to release about a half a million metric tons it seems about every three days and nobody wants to buy it. Their prices are higher than our prices and guys are saying, commercials and users over there are saying, hey, we'll wait until our harvest, we can buy it cheaper from the U.S.. That is one supportive factor to our new crop beans is going to be the exports with China again.
Pearson: So, again, advice to soybean growers is you're not making sales in here?
Kohake: I've already made sales, I didn't step in front of the market today. I think Sunday night we're going to be at $10, we're going to be re-testing the old highs at $11 off the forecast. It's going to be very volatile 30 higher or 30 lower Sunday night trade I think.
Pearson: Well, volatility, we've come to appreciate it. Real quick the cotton, we talked earlier about the situation in Texas, Texas cotton obviously having some terrible problems, horrific drought down there and, again, a lot of pressure on the livestock front nearby from herd liquidations and extreme culling and so forth. Your take on this cotton market, domestic production, we're going to see a reduction there?
Kohake: I think we are going to see that and a lot of that is coming into the market right now and it should be factored in. The other key in here with the grains we just spoke about and with the cotton market is the U.S. dollar, back to what we talked about with crude. If that stays below 78 it's going to be very, very hard to break any of these grains or the softs right now and that's why I'm kind of tracking the dollar. If the dollar goes back to 80, cotton has put a short-term high up here around 62 right now I would be hedging then.
Pearson: But 77, 78 on the dollar you're thinking it's buyable?
Kohake: I think supportive of the grains is 77, absolutely.
Pearson: Let's talk about livestock, the fed cattle market first. Again, unemployment dropping, positive there, you mentioned the equity markets, positive, seeing some of the revisions from the various government reports have come out higher, it looks like it's pointing towards a recovery, it looks like things are starting to move our way. Are we going to start to see some beef consumption start to pick up here?
Kohake: That's the major key with the beef market right now is demand. It has not crept up as fast as the market had hoped for this summer. We've already seen a massive tightening of numbers this fall which should be supportive to what we saw with the live cattle this week was starting on Wednesday when the market fell out of bed was all from the hog market and it has kind of pulled the beef down with it. I think cut outs will firm up for the next two weeks just on a seasonal rally but I think the live cattle right now at 84, 89 cent range and really don't do that much until the hog contracts find a bottom right now.
Pearson: I want to talk about the calf market too and this feeder market. Obviously we've seen this pullback in corn, a little bit of improvement in feeder cattle prices, very small factory out there any more, this cow herd is pretty small. Shouldn't we see this feeder market start to improve as well?
Kohake: I think the feeders will improve before the live cattle does, one trick is to buy feeders and sell live cattle right now with spreads that I like. I like the chart formation that feeders are kind of forming a base in here, a lot of consolidation in sideways patterns and I think we will hold a dollar here on the feeder cattle. Cash is pretty much trading par with futures right now so there's no big discrepancy. With live cattle cash is about two dollars lower than where the futures are right now. But I do like the feeder cattle return on the long side.
Pearson: As we sit here tonight and visit there are a lot of folks who are in the dairy business, good people, good operators and independent pork producers right now who are deciding whether or not to stay in the business. This class three milk price did nothing this week, we've had a little bit of improvement off the lows but nothing too extraordinary. Real quick what are your thoughts on dairy as we go forward?
Kohake: We did see another cooling report out this week, we were going to cull about another 80,000 head through the third and fourth quarter of this year, that should help out, this is our second big cut this year and the third one since last Christmas. And what is pointing to me to be a longer term bullish market is how much milk has been taken off the market. We've taken off roughly five billion pounds of milk since Christmas. I like this week's chart formation, we kind of formed a low hoping we stabilize next week. The key is to watch cheese in here, if the cheese can form a bottom too I think we will see more short covering.
Pearson: So, maybe some near-term better news on the dairy side. Let's talk about pork. It's been nineteen months of losing money in this business, it's been a long down cycle, high input costs, virtually everything has gone the other way and now we've seen that export market really start to shrink on hogs. Again, as you talk about this market and think about what's going forward in the hog business what do you see?
Kohake: I don't see much right now short-term that a guy can do. If you're hedging you're locking in a loss, the only contract that is close to break even or anywhere close to maybe 50 or 75 cent profit is the July 10 board, everything else you're just locking in red. It was another blood bath this week, very, very ugly, cash down, cut outs down, demand is very, very soft and exports are very, very soft and we're seeing more shorts come in the market. We did close good a couple of days this week but the next day we were right back two dollars lower. Longer term I think there is more down side but as oversold as the market is right now, as fast as we have crashed I would not be doing pretty much anything right now with this market.
Pearson: Are we seeing a liquidation? Are we starting to see this sow kill start to move up? Are we starting to see an increase in guilt slaughter?
Kohake: We are, the numbers aren't coming in but just like the cattle market and the dairy market not as fast as these big funds would like to see the cutbacks happen so they're still pressing the short side of the market.
Pearson: Real quick, break in corn, break in meal, are you covering any feed needs now on the livestock side?
Kohake: Absolutely, end users from March through next July on this pullback in corn get a sharply lower trade something like Monday by March through July with some calls, get some protection on before the report and same way with meal on a pullback next week.
Pearson: All right, so we need to guard those input costs, much more volatile world than what most of us have grown up with and that's certainly going to be the case next week, USDA's crop report is going to be really important. Jamey, thank you so much. That will 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 streaming video of our program and don't forget you can download audio podcasts of our Market Analysis, this portion, as well as our Market Plus segment, the bonus segment, absolutely free at our Web site. Be sure to join us again next week when we'll examine the market impact of USDA's much anticipated crop production report. Until then, thanks for watching, I'm Mark Pearson. Have a great week.
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