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Market Analysis: May 29, 2009: Jamey Kohake

posted on May 29, 2009

A deteriorating dollar this week brought new traders to commodity exchanges and was friendly to grain prices.

For the week, July wheat rallied nearly 25 cents, and the nearby corn contract was up 6 cents.

Strong foreign demand supported the upward trend in soybeans, as the July contract gained 18 cents and the nearby meal contract was up $7.50 per ton.

In the softs, cotton moved slightly higher again this week with the December contract posting a gain of 47 cents.

In livestock, June cattle lost $1.20. Nearby feeders were off 17 cents. And the June lean hog contract was down a little more than $2.00.

In other markets of interest, the Euro gained 118 basis points against the dollar. Crude oil gained $4.64 per barrel and is up more than $9.00 in the past two weeks. Comex Gold was up nearly $20.00 per ounce. And the Goldman Sachs Commodity Index gained more than 20 points to close at 443.15.

Market Analysis: May 29, 2009: Jamey Kohake Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Jamey Kohake. Jamey, one thing that obviously jumps out in agriculture because we're big users of fossil fuels is the much stronger oil price this month. Is this the beginning of an up move in oil similar to what we saw last year?

Kohake: I think the sharp gains are limited from here on up. I think we can still grind higher very, very easily. We've seen a weaker U.S. dollar, we saw bullish inventory report this week which I thought was a big surprise. Refinery capacity, the usage there is up by three percent this week. They also sold the regular inventory barrels down by over half a million compared to what the average was. So, two very bullish reports. We saw OPEC and Saudi Arabia say two weeks ago they thought $75 to $80 was a fair value and I think $77 right now is the target. That's 138% retracement off this winter's lows and I think that's the top side right now.

Pearson: That's going to translate to higher prices obviously at the pump, higher fertilizer costs going into next year. Are the other energies moving in tandem with oil?

Kohake: They are spilling over a little bit like the unleaded gas. Natural gas is still lagging but I think it will eventually catch fire there as well as the funds in that market. Natural gas has been depressed in the futures for quite some time now and I think guys are wanting position, they're longer term and try to get the spillover from unleaded and from crude as well.

Pearson: So, as we look at this market here tonight, of course, we had the dollar falling out of bed. Is that the big factor with the dollar is this higher oil price again?

Kohake: That is right, part of it is. We've seen a lot of fund buying too come in the market the last week, week and a half. Funds are buying corn, a little bit of softs and some energies and metals and they're selling treasuries against it. With all this money being printed and all of this debt being sold we saw $100 billion more debt being auctioned off this week in two year, five year and ten year bonds and the funds don't like that, they're selling that, they're assuming there's going to be an inflation increase which I think is very simple to see, see interest rates go up and they're positioning themselves for that longer term.

Pearson: One group that hasn't been participating in any kind of inflation is the dairy producer. We talked about earlier on the show class 3 milk prices still struggling. There's a lot of issues out there for the dairymen. We've had the buyout, we mentioned that, cooperatives working together. We've had the USDA now intervene and still we haven't seen much of a response in the mailbox price for milk. Consumers are wondering, they're saying where is this cheap milk? But the producers out there, they are seeing some very depressed prices.

Kohake: That is right. I don't have a whole lot of good news for these guys yet. I think the bigger sustained rally is probably sometime middle to late third quarter of this year. There is no big fund activity. The cash market is not providing any support. I think that's a major problem right now. Plus the exports are terrible and I think before those two turn around there's not going to be any type of fund money coming or any type of speculation money. It's a miserable trade right now. We just saw last week from Thursday to Wednesday of this week the August contract lost $1.50 again. The market got oversold, they had a late rebound this week, Thursday and Friday, but I don't see much upside potential upwards of 16 and above that until third quarter. I think you could see a short covering rally pushing 15, 15.5 for August, maybe 16 but that's about it.

Pearson: That's still a long ways from where we were 22 when this market was really good and people were building production. So, let's talk about the flip side of this. There was some optimism on the markets this week, on the farm markets, but pretty much on the grain side. The wheat market was up a little bit. Are these attractive positions to start selling now? Should we start selling some of this new crop wheat coming in?

Kohake: I think absolutely. I think you start close to $7 for December Chicago and you sell upwards to $7.20. There is an open chart gap up to $7.20, at $7.20 get up there, get sold some more. I'd be 30% to 50% sold right now and sell some more in rallies. Exports are still very slow for the wheat and I think that's going to be the most bearish factor. As the prices have went higher the exports are going to slow down despite the dollar correcting a little bit lower. But yes, I would be selling into this rally. We do have a couple of problems that are bullish, some fundamental problems in southern Illinois, Arkansas from all the rain, we still have roughly 2 million acres to be planted too but the funds that came out of the shorts they were short roughly about 25,000 contracts as a week ago, they came out of those this week and I think $7.20 December is where I'd be very aggressive on the hedge.

Pearson: So, sales idea there on the wheat. Let's talk about the corn market and what you see happening there. Obviously the eastern Corn Belt is still struggling and every producer that I've talked to in Illinois and Indiana has said they're going to plant corn for as long as they can and that may be in a shorter season hybrid, we've heard shifts of seed corn moving out to eastern parts of the Corn Belt. What is your take right now on acreage for corn and soybeans and what kind of a shift will we see?

Kohake: I think we're going to see a very minimal shift with corn compared to what everybody was portraying, you know, three, four, six weeks ago, eight weeks ago. You look at the past six years USDA reports, except for last year, we've seen an increase from March until June. Last year was an exception, floods out west, we lost 30,000 acres, there was talk 18 million just like last year. So, I think the USDA will find acres, they always do. I think it comes from wheat, maybe a million acres up in North Dakota that goes to beans and maybe some wheat acres down south, Oklahoma, parts of Kansas goes to beans and that's where you pick it up. I don't think a lot of corn acres get lost to beans right now. Guys that I talk to are going to plant until June 10th, that's their cutoff line right now.

Pearson: That's what we're hearing. So, with that in mind, without that shift occurring this corn price has gotten fairly attractive.

Kohake: It has, open interest what I'm watching right now has increased drastically. We are back to where we were in November with open interest. That is a major bullish factor. We had a great close today, $4.58 was key resistance, we closed above it today and I think we're probably going to see more follow through next week. I don't think we're going to run to $5.00, $5.50 at all, I would be making incremental sales between $4.65 and $4.80. $4.80 is my short-term target right now unless there's some type of drastic weather problem towards the middle of July.

Pearson: Any more drastic than what we've seen. Let's talk about soybeans now. With this shift over in the Dakotas, Oklahoma, more incremental shifts what is your take on soybeans and soybean prices going forward?

Kohake: I would be pricing some from today's highs up to $10.80 in November. That's a key retracement number in the November beans as well. What's going to be important to see in here with these beans the next two weeks are the spreads. The longest rally that we've seen funds are long July, short November, they have to come out of those for first notice day and how is that affecting new crop when they buy that back. I would sell into it because of the increase of acres and the bean market is getting a little bit overbought. A lot of the strength we've seen in the last couple of weeks, though, is the meal. Crushers are having a terribly hard time producing high protein 48% and 52% meal and that is taking pretty much the bean market right now. You can see by the Informa market front months higher than the back months and I think that's what takes the bean market from here all the way into the middle of summer.

Pearson: We'll see what happens weather wise, of course, another issue. Real quick, Jamey, your thoughts on the cotton market and the rally we've seen there?

Kohake: I think you sell last week's highs, December up to 60, the cotton market I think ran up too hard and too fast. We saw that with the export figure and they have dropped off. China also too is bearish right now for us because they are exporting cotton out and I would sell the cotton market up to 60 in December.

Pearson: Let's shift gears, let's talk livestock. It's been such a bad run in the cattle business and the hog business. Give us your take, fed cattle prices the balance of 2009 what do you see?

Kohake: Short-term I think we're caught in a range cash between 82 and 85. I do not think we'd do that much. You look at the combined cutouts, the average the last 20 years is about 144.5 right now and historically in the month of June we lose about $3 off of that. I don't think we lose that much now but I think there's maybe two more dollars of downside in the cash market. Futures are lower than cash right now, there's no big fund activity and I think by middle to late June we should have this bearishness factored in and I would be positioning longer term with these October, December and February for next year on a pullback to buy into it and get long.

Pearson: So, not much for the next couple of weeks and then maybe we start putting a bottom in, maybe start seeing this fed cattle market start to strengthen?

Kohake: Yes.

Pearson: So, let's talk about the hog market and what you see happening there. Again, we had a good thing going, we had the swine flu, the H1N1 unfortunately called the swine flu and took this market away. Are we starting to recover? Do you think we'll see that just continue to rebuild for the summer?

Kohake: I think we are in a compressed trade. Rallies are going to be sold yet right now. We saw a terribly disgusting trade today, new contract lows for most of the contracts, funds are short roughly 20,000 contracts coming into today, futures are higher priced than the index, it's a very easy sell for the funds, speculators got long too early trying to buy the tighter supplies and they're still getting flushed out. I think until the cash market firms up and the exports pick up we're just range bound right now.

Pearson: So, that's what we look forward to as far as the hog go, not a pretty picture, thank you so much Jamey Kohake, as usual we appreciate your insights. That's going to 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 where you'll find streaming video of our program. 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 learn how a renewable energy entrepreneur in the Midwest is enticing homeowners to give wind turbines a whirl. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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