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Market Analysis: Jan 16, 2009: Jamey Kohake, Market Analyst

posted on January 16, 2009

Grain prices plunged this week thanks to USDA's release of bearish supply and demand numbers.

For the week, March wheat lost more than 50 cents while the nearby corn contract moved nearly 20 cents lower.

Soybeans also were hammered by the increased supply figures, but by week's end the March contract posted a weekly loss of just 16 cents. The nearby meal contract actually gained $1.50.

In the softs, cotton continued to flirt with the $50-mark this week with the March contract posting a loss of 32 cents

In livestock, February cattle gained $1.42. Nearby feeders were up nearly a dollar. And the February lean hog contract lost $2.50.

In other markets of interest, the Euro fell 184 basis points against the dollar. Crude oil lost $3.50 per barrel. Comex Gold was down more than $15.00 per ounce. And the Goldman Sachs Commodity Index lost nearly 20 points to close at 342.30.

Market Analysis: Jan 16, 2009: Jamey Kohake, Market Analyst 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 back.

Kohake: Thanks for having me.

Pearson: Well, a little bit of the air came out of these markets this week with the USDA's number, big carryout number on corn, big soybean crop, obviously the wheat market pressured by the news from what the government had to say and, of course, we saw oil prices come back down. So, again, we're still seeing this chilling effect in commodities worldwide. What is ahead and what do you see?

Kohake: We're still seeing deflationary selling in the broader markets. We saw it in the Dow earlier this week with the retail sales report down and we're still seeing usage with the energy markets being really, really low and the weekly storage reports are bearish every Wednesday, we're building a bigger supply, a bigger inventory every week so funds are still in the liquidation mode and they're still trying to get back to even yet.

Pearson: Let's talk about the wheat market first. The USDA's number on Monday was a bit of a surprise and towards the bearish side. We've had a couple of years where we've had very tight wheat stocks. We finally got some good production in the U.S. and elsewhere around the world and giving us plentiful wheat supplies finally.

Kohake: That is right. The carryout was raised compared to November's report. But the big number I think was the yields that came in unchanged and I think that was factored into the market. I think the report was more neutral than terribly bearish but we saw heavy spillover from corn and beans and we saw the heavy losses earlier in the week. We had closed the week off on a very, very strong note, it looks like we're going to be buying upwards of close to 4 million acres for this coming year and that's where this deep buying is coming from plus spillover from the corn and beans.

Pearson: And with the recovery we had near the end what are you telling producers in terms of making sales on wheat?

Kohake: We are holding off on new crop wheat sales. I think you can get the board longer term between $6.50, $6.75 in that area and selling to it then. I think it's going to be a long grind up but I think we should be able to get up there based off the shortage of acres.

Pearson: So, not in a hurry to make sales at all.

Kohake: Not at all, right.

Pearson: Let's talk about the corn market. Again, going into this report there was almost this friendly feeling, they were certainly upbeat going into this report on both corn and soybeans and then the numbers came out much bigger and the carryout much bigger. By week's end though, you're right, we came back quite a bit. So, what does this tell us about the corn market?

Kohake: The corn market is spillover from the beans right now. Corn is not trading on its own at all. We did see a bearish report trade limit down on Monday off the higher carryout, off the higher yields, we came back on spillover from the beans. I think corn still has roughly 20 cents below this week's lows to eventually get to. The key problem right now with corn is the export business. We've had about three weeks in a row of terrible, terrible business and the foreign markets are about 30 cents cheaper than we were on Wednesday's trade than where we need to be to attract more sales.

Pearson: What's it going to take and what is driving this weak export market for corn?

Kohake: Foreign corn is cheaper, especially the European markets are and so we're losing business to them and plus we've had a little bit of rally in the U.S. dollar the last two weeks as well.

Pearson: Make it a little bit more expensive to buy U.S. corn. What are you telling producers right now? The other number that I thought was interesting, again, back to another 100 million bushels of demand away from ethanol.

Kohake: That is right and you're still seeing roughly a 50 cent premium from ethanol to unleaded on the futures market and, of course, you get this bearish report. I think usage is going to stay slow right now. The carryout will be the biggest one that we've seen in four years and I'm in the mode right now with selling rallies and we're waiting to see how we come in Monday night and Tuesday but I don't think this corn is going to stay up here that long.

Pearson: So, you think we're going to see some pressure on corn this spring.

Kohake: Next two to three weeks I think we will and we'll start selling realities a lot harder.

Pearson: When will we start buying some acres? I think everything's going to go to beans at this point isn't it?

Kohake: Right, long return as you come into the middle to end of February I think you see the funds shift back in and buy a little bit more. I think the only reason the corn is higher Thursday and Friday just because of beans. We did see a report out today from Informa and they're saying roughly three million less acres compared to last year and five million more bean acres. But right now the carryout in the exports is really what the market is trading off of.

Pearson: Dragging this corn market down. Price targets what are you looking for, for corn? Where would you like to sell corn? Let's talk new crop.

Kohake: New crop corn longer term I'd love to get a sell up around $4.85, close to $5.00 -- that's going to be sometime by the very earliest the first or second week in March coming into the big acreage report then. Or you have to wait until July on a big weather scare.

Pearson: Let's talk about soybeans. Again, in terms of the way a producer is going to look at this thing with the input costs where they are in corn soybeans are going to look like an obvious place to go. And Informa's numbers today kind of reflect that.

Kohake: That is true and also with the at one point six million acres coming out of CRP too that's inferring that it goes to beans as well. The bean market right now is all South American weather. Argentina is very, very dry. There is talk of a 30 year drought down there and also we got a report from Brazil on Thursday and they cut their production also. Brazil has had some scatterbrains but they are dry as well. We're trading all weather right now and off the bean market.

Pearson: And so, again, when it comes to pricing what are your targets for soybeans? Let's talk new crop on soybeans.

Kohake: New crop beans there's roughly double top, heavy resistance between $10.35 to $10.42 in that area. I think that would be a prime sell if we can get it and I think we could the first part of next week. We closed very strong today. If we stay dry over the weekend we should see an early pop next week but these bull spreads buying the March, May and July and selling November is riding out big time -- 60 cents in the last three weeks that spread has worked so I think you've got to sell this November beans anywhere between about $10.25, $10.40 in that area.

Pearson: And, again, for the old crop beans that aren't sold yet what's basis doing right now in these beans?

Kohake: We are riding with corn and bean basis just because that time of the year, tax season so there's ample selling. But I think the basis will narrow back up in here, not this month, I think coming into February. I look at a flat price somewhere around $10 a bushel and try to price something to start out again.

Pearson: So, soybeans around $10 old crop and maybe $10.25 on new crop.

Kohake: That is right.

Pearson: Those aren't bad numbers, that kind of jives with what the USDA is saying in their crop report too so not a bad place to be looking to make sales. I want to talk real quick about the cotton market, up around 50 cents, it's been a rough go in cotton too. Is this a place to make sales?

Kohake: I don't think it is. I think you want to stay away from fresh ones right now. If we get one more pullback I would take some profits on some shorts but I would look to reown a little bit with some cheap calls out of the July or September timeframe, same as wheat here we're running into some acreage problems, cotton going to beans and maybe to wheat too and I would look to eventually see a seasonal rally in here and then turn back around and sell it in the mid to high 50s.

Pearson: Let's talk about livestock because we have been feeding some wheat, some cheap wheat from the Balkans that came in which was kind of interesting. But for these livestock producers out there this fed cattle market we saw a little bit of move, a little bit of strength here. Is this the beginning of some better things to come?

Kohake: I think it's close to it. These next two weeks are going to be very, very important with the cattle market, with the cash market holding 83 to 85 I think we are close. I would not be adding fresh shorts on right now. If you get one more pullback two to three cents I would just take profits and look for a rally, like to buy the April in 85, push it up to 90 sometime into the first quarter and I think it would be a very, very good trade.

Pearson: Calf market, last time you were on you were saying that we were going to see some strength, it had been very weak. It jumped dramatically here on feeders. What is your outlook going forward? Obviously this outlook for cheaper corn has got some people thinking we can buy these calves and make them work.

Kohake: I think there's still more up side in the cattle market. I think just like the live cattle one more pullback maybe, take shorts off and look for a rally in here. I'm a little bit bullish cattle in here, feeder cattle, live cattle and just looking for a seasonal rally.

Pearson: What is your target on fed cattle?

Kohake: I think you've got to look up close in the feeder cattle ... up above 100. We have two very important reports coming up at the end of this month, the monthly cattle on feed report and also the inventory report, I think both will be bullish.

Pearson: That might be the start of something good.

Kohake: I think so.

Pearson: Let's talk about hogs. The hog market -- we understand there's a lot of vertical integration occurring in the hog business but we're starting to see, aren't we, some liquidation, some slowdown of farrowings as we go forward?

Kohake: Yes we are, we are seeing smaller numbers. The key problem to hogs the last month or so has been the lean hog index. It has been at a big discount to futures, upwards of five cents at times, right now it's back to roughly two. So, any type of rally has been very, very slow and it comes right back down. I think we're getting close to a rally, the numbers will kick in, we'll start creating fundamentals again as soon as that spread narrows up. And I'd trade the hogs just like I would the cattle, you may get one more pullback the next two weeks, get out of your shorts and look for a rally and maybe sit back and sort of rehedge again.

Pearson: We're hearing all these negatives with the general economy and unemployment and so forth but despite all that you think these proteins are going to be in big demand.

Kohake: I think we're going to see a seasonal rally. I don't think we're going to shoot straight up. I think we're going to see a seasonal balance. Talk about down side markets, we did see the Dow come back up this week on Thursday and Friday and the meat markets came right back up with it too.

Pearson: The flip side for a livestock producer and the big question has been getting feed needs covered. This has got to be a great opportunity to be doing that particularly on corn.

Kohake: Absolutely and buy the corn -- I don't know if I'd chase a 20 higher opening Monday night or Tuesday beyond breaks down around $3.40, $3.50 in March I think is a great buy in there and also in the meal a pullback too. The meal has been leading the bean market higher.

Pearson: Explain that a little bit.

Kohake: Buy March meal off of a hedge, a long hedge but you look at the meal exports, very, very strong and also the bean exports. Over 70% of our exports right now are coming from China and I think that's going to keep this market firm another week. The key part in here is pretty much markets with grains and livestock too over the soybeans right now. China is going to come into a lunar holiday break a week from Monday. For two weeks they're not going to pretty much do anything at all, no exports, no imports. Historically after that timeframe they come back and buy from South America. So, I think you can get a two week window in here where you could pay short-term top in the market.

Pearson: Very good. Jamey Kohake, thank you so much, appreciate your insights. 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, it's at our Web site. You'll find streaming video of our program and you can download audio podcasts of our Market Analysis and the Market Plus segments absolutely free. Of course, be sure to join us again next week when we'll examine the Obama presidency and what that means for the rural agenda. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices markets news USDA