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Market Analysis: Feb 20, 2009: Jamey Kohake, Market Analyst

posted on February 20, 2009

Grain markets continued their downward trend this week in the wake of uncertain economic developments in Washington and on Wall Street.

For the week, March wheat lost more than 16 cents, while the nearby corn contract fell 13 cents.

Soybeans endured heavy losses in the pits as well. For the week, March soybeans dropped nearly one dollar and the nearby meal contract was down $27.70 per ton.

In the softs, cotton fell alongside the grains as the March contract moved exactly $1 lower.

In livestock, February cattle lost $3.38. Nearby feeders fell more than $6. And the February lean hog contract lost $5.80.

In other markets of interest, the Euro dropped 38 basis points against the dollar. Crude oil was up more than $1.40 per barrel. Comex Gold gained $60 to close at more than $1,000 per ounce. And the Goldman Sachs Commodity Index lost 17 points to close at 316.00.

Market Analysis: Feb 20, 2009: Jamey Kohake, Market Analyst 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.

Kohake: Thanks for having me.

Pearson: Let's talk about the week that was as far as commodities were concerned. Lower soybean prices, lower corn prices, lower wheat prices, lower crude oil prices -- as you look at these markets right now we're kind of in that time of the year where the news is mostly negative.

Kohake: That's right, there's not a whole lot of fresh news out right now. We're waiting on acres for the grains and just not a whole lot of reasons to get real bullish and to see fresh money come in. Right now the markets grains can not separate themselves from the financial markets, saw a meltdown there this week with the Dow. We went back to the November lows and tried to break through that and it looked like we were going to and it had the 2002 lows but we hung in there today and it stabilized relatively well late in the session. Other keys off that too is the U.S. dollar, we saw a strong surge there this week which is bullish to the grains and we saw a little bit of profit taking there. But there's a lot of uncertain areas, there's a lot of European meltdowns too in their markets that spill over into ours and there's no fresh money coming into the markets at all.

Pearson: So, obviously the credit squeeze is still continuing around the world and that's a factor too.

Kohake: That is right. The UK banks went broke this week -- they are lending sixty to one leverage wise so it just ain't us, it's global right now and it's bringing over to our markets and the easiest path is just conservative cash and get out of the market.

Pearson: That seems to be what people are doing. As we look forward that's not going to last very long. Obviously we're going to have a lot of issues coming up on the agricultural sector, a big one is going to be weather. Let's talk about the wheat market first, a lot of problems down in Texas with the wheat crop for 2009. Kind of give us your take on wheat prices and what are you seeing and what are you telling producers?

Kohake: Right now no new fresh selling. I would hold shorts and see how we come in next week but no new hedges, no new bearishness right now. 64% of the Texas wheat crop is rated at very poor to poor and we also have problems with parts of Australia and with China. China their major grain area over there is very, very dry. They have been getting a little bit of rain but nothing yet to make the crop. Another bullish area from Australia is with exports. Their ports right now are clogged up so they're not exporting any grain so it should shift some business to us. But wheat right now can not separate itself from the corn and the beans and the Dow and plus the dollar trading higher this week it was just a major liquidation type trade.

Pearson: But this is not a time to make sales?

Kohake: No, I don't think so and I've actually looked as a speculative trader maybe to buy a break next week and look for run back to $6.00. I wouldn't be pushing it past there right now.

Pearson: So, longer term, at least intermediate term you think this thing is going to bounce pretty well.

Kohake: I do, I think we'll see some short covering from here maybe into March 10th, March 15th where I wouldn't be getting real aggressively talking $4.50 or $5.00 wheat yet. I would wait and see what happens weather wise here in the southern plains and also see if exports keep up. They were great today. They were a day late this week and they're still strong.

Pearson: So, as we look at this wheat market and as we look at particular new crop obviously we're going to have some more weather issues before we get this thing harvested here in the U.S. but certainly bigger numbers worldwide in 2008.

Kohake: Yes, that is one problem back to the bearish side is the carry out right now. The U.S. carry out is comfy too and we need to keep the exports strong so we do have to grow a crop this year and see what China does with their numbers and with Australia. But for right now the market is turning towards over sold and everything crashed this week. Wait for it to stabilize, take some profits and then come back and resell it.

Pearson: Let's go over and take a look at the corn market too. Obviously that one has been dropping here substantially, a lot of producers are saying we're beyond break even with these prices right now so we're going to have to see this price come up to get acres for corn aren't we?

Kohake: A little bit, we are I think in a little bit more bearish mode than we were a month ago buying acres just because the beans have dropped so hard and so fast too. I would wait here same as the wheat instead of getting all beared up in here right now after we broke this thing so hard no fresh selling here either. Wait to see if we can see some profit taking. Corn closed good yesterday, it closed good today, exports are strong this week, up over a million metric tons again for the sales. I would see if we can push this thing back up forty or sixty cents before I would turn around and start new crop hedging. The basis levels are very, very tight right now in most areas, eight to ten under but I think we can wait for a bounce before we get into the selling mode again.

Pearson: So, would you cover cash sales then?

Kohake: If I did make some cash sales here the last two weeks or three weeks and the market kept turning down I would come back in and buy some cheap calls. You get some $5.00 July calls for seven or eight cents, maybe re-own with a couple of those real lightly and see if we can just get a thirty or forty cent dead cat bounce. Corn is over sold as well with the wheat market.

Pearson: Longer term what are you seeing? Obviously we've been struggling somewhat on the ethanol front with demand there, USDA reflected that in their reports, exports now have started to turn to the up side so we've got something real positive going on that front. Obviously there's more acres out there with CRP and so forth so give us the scenario for 2009 for corn prices.

Kohake: I think you still have to sell the sharp rallies. I don't see $5.00 you just sit back and hold your hands and sit back and wait for that. I would be a seller every thirty to forty cents on up from there, maybe every dime higher on top of that. The carry out is very, very comfortable, 1.7 billion, like you were saying the usage is down, our livestock herd is down so we don't need to grow as much especially with this large carry out. We can afford to lose a few acres and until the outside markets firm up, the dollars turns back lower I think you do have to sell sharp rallies for sure.

Pearson: What is your objective for price for 2009?

Kohake: I think longer term if we grow our crop you could see lower $3 very, very easy and then probably a break $3 sometime into harvest if we get a crop and everything pans out.

Pearson: Up side what do you see?

Kohake: I think stops over $4, a guy has to look at it very, very sharp there, look at basis and don't get too excited unless we are having energy market push back over $50 or $60 a barrel, Dow back to 8000 or something like that because if we don't get that I think you're talking stops over $4 is about it.

Pearson: Let's talk about soybeans. The soybean market, again, exports were certainly good from China, strong demand over there but, again, we've got a decent crop not quite the problems in South America we thought we had maybe three weeks ago.

Kohake: Yes, that is right. It looks like South America, parts of it, Brazil especially, is going to produce a crop. Some private estimators early in the week did raise their crop size by one million metric tons. And they are harvesting right now, parts of Brazil is 8% done, Argentina is still waiting and they are forecasted for a little bit of rain this week and the next eight days are pretty much dry so they will get more harvesting done and we'll get to see how big a crop they do have. Like you were saying exports were great this week, up over a million metric tons, again China was in for over 70%. Take the flip side of that part of the reason why we started to sell off mid week was off China. There was rumors flying around that they were going to cancel three to six cargos of beans because they were operating in the red especially their crushers. So, we saw that correct the market and I don't think beans do a whole lot in here right now and just like the corn and wheat time to get some stabilized markets with the Dow and the energies and the dollar to turn back lower.

Pearson: This is substantial pull back. Is there an opportunity in here maybe to go long on some of these beans now with this correction?

Kohake: I think so just on reownership you sold some early come back and buy some calls. We lost over $1 this week in the market, we were oversold, RSI is terribly over sold so we're due for a dead cat bounce just like corn and wheat are too. New crop over to that looking for a correction there, no new sales there either. Look at high $8, at least $9 before I would start selling there.

Pearson: Let's talk about the cotton market. It's also a lot softer this week. Of course, that was another acreage battle, how much would cotton lose to soybeans and we had this pull down in soybeans, it looks like it was paralleled in cotton.

Kohake: Yes, just an extreme spill over from the grains, from the meats, from the equity markets over into cotton, stronger U.S. dollar the same scenario there. And like you were saying how many acres are lost from beans down there, flip it back to the cotton and there's still fighting over that. But cotton can not separate itself from anything else right now and I wouldn't add any fresh hedging shorts on in here. Look for a correction.

Pearson: Let's talk livestock. The cattle on feed report came out this afternoon. What was your take on that?

Kohake: Pretty much neutral, no big surprise there. Even if there was a big move we might trade for thirty or forty minutes Monday and throw it out and go back to what the equities are doing. We saw a pretty heavy blood bath this week in the cow market, especially the feeders, very, very tight equity scenarios there, banks wanting more cash, not a lot of cash in the markets right now so we run into a very, very tight situation.

Pearson: Ran into a wall this week, fed cattle too and you mentioned feeder cattle. This is a sharp sell out and this is strictly a function of what is happening in the capital markets really not so much related to what we're seeing longer term for demand for cattle.

Kohake: That is right because we do run into tighter supplies here the first part or second part of March we will but the cash market and the feeders are down $36 this week down south and can't separate itself from the Dow and that correlates to demand, no buying steaks and stuff like that so supplies are outrunning demand still right now.

Pearson: So, we've got a demand problem as far as beef cattle are concerned but you don't think it will be with us all year?

Kohake: I don't -- I think they're going to separate themselves some time middle to late March and we won't get a correction. I think there's probably maybe two to three cents more down side, you're looking at live cattle, we traded 80 this week on cash and the futures are still a $2.00, $2.50 premium to that so I think there's a little more down side but you get below 80 on the futures for April right now and I would look to see how much money you'd be having profits on the hedges and maybe look to take something off.

Pearson: Take advantage of that. Let's talk about the hog market too and what do you see heading into 2009? There have been some analysts out there that have been pretty optimistic about hog prices mid-summer and what we see ahead. We have seen reductions in farrowings. What is your take on it?

Kohake: I think you're about two weeks away, three weeks away, March 10th, March 15th, I think that's when you run into the tighter supplies. We did get a bullish report this week from Canada. They are showing 10% smaller numbers and about 7% on their breeding herd as well. It's the same thing as the cattle, supplies are outrunning demand right now and cutouts are down, cutouts are lower than the futures price right now so the easiest path is lower and the fundamentals are showing that so the funds come in and get short early on and we hit stops and take out the previous day's lows. I think a guy can hold shorts maybe two more weeks and start taking profits and then look for a correction. I think there's going to be a great opportunity for option sellers eventually. You get this thing down two or three more cents to come in and even drop the market ten cents below that, sell that put and look for a correction. The market is very, very over sold and it's looking for a bounce there about two weeks from now.

Pearson: Bright side obviously cheaper beans, cheaper corn, cheaper feed, take advantage of that if you're a livestock producer?

Kohake: I think a guy could come in Sunday night as a long hedger and especially look at the corn. I like the corn the best right now to step in that first and then the wheat and then the beans after that.

Pearson: So, some great opportunities to at least get some of that side of the house in order and then we'll see if this demand starts to pick up hopefully in the second half of 2009.

Kohake: I think so, I think it will have to start in the outside markets like we were saying, the equity markets and to get the energy market going with driving season starting and see a bounce off that.

Pearson: Very good, Jamey Kohake, as usual great to have you with us. 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 our Market Plus page at our Web site where you'll find streaming video of our program and you can download audio podcasts of our Market Analysis and the Market Plus segment absolutely free at our Market to Market Web site. Of course, be sure to join us again next week when we'll learn how niche marketing and agritourism yield dividends for one Idaho producer. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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