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Market Analysis: Nov 28, 2008: Jamey Kohake, Market analyst

posted on November 28, 2008


Grain prices moved higher this week as the bountiful harvest draws to a close.

For the week, December wheat gained more than 35 cents while the nearby corn contract moved 15 cents higher.

Soybeans did even better and recovered nearly all of last week's losses. For the week, the January contract gained 46 cents, while the nearby meal contract was up $13.30 per ton.

In the softs, cotton broke out of its long decline with the March contract posting a gain of $4.75.

In livestock, December cattle were up more than $2.50. Nearby feeders gained $2.80 and the December lean hog contract gained $1.80.

In other markets of interest, the Euro gained 378 basis points against the dollar. Crude was up $4.50 per barrel. Comex Gold gained $16.70 per ounce. And the Goldman Sachs Commodity Index moved more than 27 points higher to close at 395-even.

Market Analysis: Nov 28, 2008: 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: The air has been slowly let out of the commodity balloon that we had through mid-summer. We've seen this slow decline but the market showed a little buoyancy the first part of this week. Are we at the bottom or close to it?

Kohake: I think we're trying to find one. I don't think that bottom is going to be defined by a V formation like we've seen in past depressions or recessions and shoot straight back up but I think we are searching for a bottom. Last week we saw the Dow break 8000 and close below for the first time. We had tripped it two other times but did not close at that and then we came back higher Monday of this week on a new treasury secretary being announced, the trade liked his name, Tim Geithner, and always we saw new bailouts again, $600 million announced today, $200 million more for the credit markets as well and we're seeing a bounce off that.

Pearson: Of course, the easing of those credit markets or unseizing the credit markets is critical for agriculture.

Kohake: Yeah, that is right. I don't think money is moving as freely as the government would want it, it's still tight and this $200 million plus put in yesterday and part of it today that was the reason for it.

Pearson: Broadly as we look at commodities around the world -- I look at these lower oil prices and oil prices were up a little bit on Wednesday but obviously we're down by two-thirds where we were in July from $150 down to the $50 range. As we look at this oil market and I look at what our supply lines are it still looks like we could see oil prices jump right back up.

Kohake: That is right, I think it would be after the first of the year, though, if we do see it. Today's stocks report was bearish again. We are creating a bigger inventory than we had last week. Really the reason with the dollar rallying this week was because of the dollar, the dollar corrected back lower since all the funds came back in fixing profits with the crude.

Pearson: A lot of stress in the biofuels world, the bankruptcy of VeraSun certainly a factor, other biofuel operations suffering similar fates as we see gasoline prices drop as well, that hits the corn market too. What is your observation on that? What do you see happening on that front?

Kohake: I think there's going to be more to come. VeraSun, like you were saying, it's the biggest one I've seen so far and a pretty scary situation where farmers maybe forward sold some grain last July, $6, $7 taking delivery of it. Now with VeraSun they're taking market price so losing $2, $3, maybe $4 a bushel from where they had it sold at. I think there are more bankruptcies, I don't think there's as big names as VeraSun but smaller ones especially out east. Going back to your ethanol question we've seen ethanol go to a premium now of unleaded gas on the board, you know, a 50 cent premium at one time last week.

Pearson: That's right and that cuts into the demand big time.

Kohake: Exactly.

Pearson: Even with the 51 cent credit so that's a critical -- that's a big number for agriculture. That is 3 billion, almost 4 billion bushels of corn that's going into ethanol so that market needs to stay strong to keep this corn market. Let's get to corn in a minute. Let's talk first about the wheat market. You're a Kansas boy and you're looking at what's happening in the wheat market today and, again, in this holiday shortened week a little bit of an uptrend.

Kohake: Yes, we have. We've seen some short covering. Funds were short about 100, 110 million bushel last month, coming into today roughly short only about 10 million. It's a good sign to see that funds have been taking profits in a bearish market, good moisture in the southern plains and also huge, huge world supplies is really what's been the major factor of this last leg lower. But we're seeing fund profit pushing us back up. I'm not bullish wheat right now by any means at all. I would look for wheat to push over $6, $6.20, $6.30 and sell into it then. Funds get back to maybe even by Christmas and I'd sell back into it again.

Pearson: So, if you need to make sales you'd target that $6.20 area?

Kohake: I would, maybe 30, 40 cents more of a rally and then sell into it.

Pearson: Kansas City? Chicago?

Kohake: I still think Chicago would be the one to sell into, I think that's where the funds are going to come back into first and probably get back to a heavier short position there than in Kansas City and there is a lot of active spread trading going on back and forth buying Kansas City, selling Chicago. I don't like where they're at right now and don't have a buy signal flashing. I'd wait for a pullback and try to do it.

Pearson: So, again, if you don't need to make sales right now wait and hit those levels to make some sales.

Kohake: Yeah, a 30 cent rally would do it.

Pearson: Take me out a little bit further. What do you see first quarter of 2009 for wheat?

Kohake: I would hold off on any sales there at all. I think we're going to get some spillover from the corn and beans into wheat and I think the acres are going to be less for next year and I think once we get out to February, March, April timeframe we'll see the July '09 contracts start to rally a little bit.

Pearson: Let's talk about corn. We talked earlier about the ethanol. Obviously that is incredibly key to maintaining the corn market. And if we do maintain that demand for corn, if these ethanol producers continue to produce and purchase corn we should be okay. But almost 4 billion bushel demand there.

Kohake: That is right and we also have a pretty comfy carryout right now, the largest in four years that we have seen so that's going to be probably the bearish influence through the first quarter of next year. Right now corn is trying to form a bottom, December first notice day is today so everybody is going to go to March or has went to March already. I could see 20 more cents of downside in the corn back down to that $3.45, $3.55 area but below that I think you see the funds pretty much liquidate about half of what they are long right now and push it on lower.

Pearson: First quarter of 2009 or 2009 sales looking for the December contract? Is that what we should be looking at?

Kohake: I wouldn't look at it too hard right now. We are still about $4 there. I think we can push this thing back closer to $5 and start some sales there, maybe $4.60, $4.80 and start some there. I don't think anywhere we're at right now roughly $4.12 would be a good place to start. I think we're going to get some type of acreage battle the next year and see a bounce off that and also get a bounce in the crude back up to $60, $65 a barrel would help the corn our drastically as well.

Pearson: That would and that may be another opportunity to make sales. So, first quarter of the year, again, you're not in a hurry to sell 2009 yet. First quarter of '09 for old crop sales probably?

Kohake: Exactly and hold off any sales right now. Basis is tight. I've got merchandisers calling me pretty much every day anywhere from five under to twenty over depending on where you're at and there's just no grain moving right now at all. And you look at the exports too, exports are very slow. Part of that has to do with the sharper dollar but there's just credit is tight and nobody is moving right now at all.

Pearson: You mentioned the credit issue before and that's certainly a factor it would appear too in the corn market. So, at this stage of the game unless we're getting $5 or close to it you're not anxious to sell the 2009 so we're not making sales. That is reflected in this cash market.

Kohake: That is right. Basis is tight. Farmers selling is zilch. The University of Illinois this week forecasted profit losses for next year and they've got corn at $28 per acre of loss right now where the prices are trading at and also with the chemicals.

Pearson: Are we starting to see a break on some of these inputs, fertilizer and so forth? Are we starting to see that break?

Kohake: It's starting to pull back a little bit but now as fast as the futures market has pulled back. It's been a slower pullback. The commercials are wanting to get rid of their supplies that they had bought this summer, get rid of those and then once the new supplies come on hand they are coming in where the market is.

Pearson: Then we'll see the break. Let's talk about soybeans. What is your take on that market? What is happening in South America?

Kohake: South America was turning very, very dry coming into this week. They got about a half an inch of rain Tuesday and Wednesday, Argentina did and their forecasts are for another half an inch to an inch this weekend. They're going to be back to pretty much areas where they're going to be okay at for the time being. The key with the beans right now is China, great exports from China buying two to three cargos at least a week, usually more than half our weekly exports are going there. And then this morning we saw China cut interest rates by over a full percentage point which is huge and that got the bean market sharply higher early this morning. We came back and closed closer and changed just because of the holidays. But China is a major, major factor especially cutting these rates.

Pearson: Absolutely. What is your outlook price wise on soybeans? You talk about the acreage battle, that's where it's going to shape up is between corn and beans?

Kohake: Right and if you look at the numbers in the beans the University of Illinois is forecasting about a 68 acre loss for next year. Beans I think you get closer to the $10 mark you would be more aggressive there than you would with the corn at $4.50 over 70. Old crop beans I think do have some bullishness there. I think the beans have come a lot closer to putting in a low than the corn has. For corn I think it could retest and beans I'm a little more bullish with right now.

Pearson: So, again, at this stage you're not recommending sales?

Kohake: No, no sales right now. For the November '09 I think 30 to 40 cents at least higher, closer to the $10 mark start some there. Old crop the only sales I would make would just be to pay some bills, hold off until the March timeframe.

Pearson: Let's go over to livestock. Obviously with the break we've had the complaint from the livestock sector has been these grain prices have been incredibly high, these meal costs have been incredibly high per rations. Now we've got a break. Should we be getting our feed needs covered? Is that the first order of business for livestock producers right now?

Kohake: That is very important. I would be buying some calls, buying some deferred futures contracts out into next July, maybe even further out than that at the next Dec. and start some there.

Pearson: Alright, let's talk about fed cattle prices. You talk to a lot of feedlots down in Kansas and those areas. What is their status right now? Are they buying some of these calves or are they working? Are the spreads working?

Kohake: Spreads are working real, real lightly, not as aggressively as, of course, most guys would want. I heard some reports today of cash trading $2 higher in some areas, most areas it was $1 and I think that will help the market out on Friday and the first part of next week. I think the live cattle board has two to maybe three cents more upside, 92 to 94 with the April board I would be selling into it. I don't think there's much above that right now.

Pearson: At 92, 94 you'd be selling into that one?

Kohake: Yes.

Pearson: You're not that optimistic then.

Kohake: Right, I just want a three cent rally.

Pearson: You're not that optimistic on fed cattle the first quarter of next year.

Kohake: Right.

Pearson: These small numbers and everything else just a slower consumer demand?

Kohake: Just lower demand and if you look at a cattle chart, even a feeder chart and overlay the Dow Jones with it they're pretty much trading step-by-step with each other. I think until the Dow gets a bottom the cattle won't either and lose track of each other. Recession talk, consumer spending down, consumer confidence down is just all spilling over into the cattle market right now.

Pearson: Of course, that is spilling over into how much they want to pay for feeders too.

Kohake: Mm-hmm, feeder cattle the same story there, you get up to the mid to high 90s I would be a seller there, about a three to four cent rally and that, of course, depends on corn too. I think the best trade with the cattle right now are still the crush spreads. I don't like where they're at right now, let them pull back and get into them fresh again and let corn pull back ten cents and the cattle market rally and put on a crush spread real heavy.

Pearson: Let's talk about the hog market and what you see happening there. I keep hearing big numbers. I keep hearing big export potential for both cattle and hogs, both beef and pork overseas. Pork has held up pretty well. The stronger dollar though has kind of slowed some of that down, is that your impression?

Kohake: It has slowed down a little bit but the pork exports are still very, very strong. Back to the cattle just for a second, South Korea did open back up again so we're going to see some new business there again. Over to the hogs, the key to the hogs right now is the cash market and a firm up there I think there could be three to five cents of upside very, very quick. We're going to see a lot of short covering if that would happen and it would be a very, very sharp rally. I don't think there's much above that. Next week we're going to see a huge, huge slaughter number, probably the biggest of the year and we'll see how that plays in the market also.

Pearson: And, of course, those numbers based on the last hogs and pigs report, are they going to start to decline in the first quarter of next year? Could that be maybe the catalyst for some stronger hog prices?

Kohake: I think it very easily could be. I think once you get past the middle to end of December I think you're going to see some more speculative money, a little bit of fund money come into the hog market and I think once we get through these next two weeks it's going to be fine. Like you're saying, the dollar is a very, very key point here, getting this dollar pulled back 81 to 83 cents it would keep these exports strong and get the cash market back to where it should be at. You look at the lean hog index right now the futures are at a $5 premium to December and roughly about a $12 to $13 premium to the Feb. So, that's kind of limiting any type of major buy in by any type of fund.

Pearson: Real quick, Jamey, hog guys same thing, feed need coverage?

Kohake: I would, I'd be buying meal, I'd be buying corn on breaks. I think there's a little more downside in corn, maybe about ten to twenty cents and I would be stepping in pretty aggressively.

Pearson: Good point. As usual, Jamey Kohake, 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 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 segments absolutely free at our Web site. And be sure to join us again next week when we'll examine the Indy racing league's decision to fuel its cars with Brazilian ethanol. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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