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Market Analysis: Oct 17, 2008: Jamey Kohake, Market Analyst

posted on October 17, 2008

Grain prices traded in a wide range this week as the roller coaster ride in the equity markets continued. When the dust settled Friday little was changed.

For the week, December wheat gained nearly 3 cents while the nearby corn contract moved more than 5 cents lower.

Soybean prices trended slightly lower with the November contract posting a loss of 16 cents, while the nearby meal contract rose more than $2.00 per ton.

In the softs, cotton prices recovered a little of last week's sell-off with the December contract posting a gain of $3.13.

In livestock, October cattle gained more than $1.50. Nearby feeders moved almost $3.00 higher and the December lean hog contract declined more than $3.50.

In other markets of interest, the Euro lost 67 basis points against the dollar. Crude oil declined nearly $6.00. Comex Gold was down more than $70 per ounce. And the Goldman Sachs Commodity Index lost about 20 points to close at 473-even.

Market Analysis: Oct 17, 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, welcome back.

Kohake: Thanks for having me.

Pearson: An up and down week for sure. In the end we didn't move all that much. But as we look at commodities overall we see what's happening with what's really been the lead commodity of crude oil down from $147 down to $70, that's been quite a move down. And some people say that has popped the commodity bubble. Well, here we sit with corn and soybeans down by half, almost everything down by half. What is a producer to do? What are you focusing on in this broader commodity market?

Kohake: I think there is selling yet to be seen yet. I don't think it's going to be as heavy as we've seen earlier this week and the week before, 700 points in the Dow seem to be the norm now. Points of interest with the fund money that you're talking about is so far this month I've seen reports that they've lost $45 billion, in over the last quarter upwards of $60 to $70 billion. They're not getting out and getting short, they're just cashing out whatever money they have left and I think the key is going to be in here just to form a base in the market Dow, the crude and see what happens coming into I think the first quarter of next year. Energies might be closer than the Dow at the bottoming out based on OPEC. They were supposed to meet around Thanksgiving time, they moved it up to next Friday now to cut production and see how that spills over late next week.

Pearson: That's still a volatile part of the world where oil comes from so spikes certainly wouldn't be ruled out.

Kohake: Right. And like you're saying, geopolitical Israel or something like that you could see a very, very quick spike.

Pearson: It's had an impact across the board on all sectors of agriculture, this de-leveraging effect if nothing else but also we've had to come back to trading fundamentals and the USDA's crop report was relatively bearish for corn and beans and a bit of a surprise in terms of acreage and in terms of yield and now we have to deal with that. So, producers sitting out here those if you're holding wheat what are you telling them?

Kohake: I would say hold still right now probably into the first quarter of next year. I think the heavy selling in wheat is pretty much done. The funds are short right now, roughly about 100 million bushel, I don't see them getting long 200 or 300. The wheat market is different to me than corn and beans. Wheat has been selling off since pretty much the March and April timeframe and we've seen the corn and the beans just starting here recently. So, I think the wheat has seen a heavy, heavy amount of selling that is probably closing up right now. But the fundamentals are mixed to me right now. We are seeing dryness in Argentina, in Australia still and we are going to see a smaller crop but our crop here is getting planted on time, there's ample moisture and I think the key is going to be exports. This week we didn't see a drop off, the previous two weeks they were good exports. The key is going to be the dollar. Does the dollar top out in here to 84, 85 and bounce back to 75 and keep sales up? I think wheat is range bound right now. If I was looking for a trade in wheat I might buy Kansas City and sell Chicago but that's about it.

Pearson: You mentioned the dollar, that's been another key factor, this tremendous up surge in the dollar. Overall how do you see that impacting the export situation? It's been a dramatic rise that's been from exceptionally low levels.

Kohake: Right, I don't see the dollar racing back to 90 or 95 right now. I think 84, 85 is a top. With this bailout plan that got passed we should be printing money at a terrible rapid pace and see that come back down. But the key right now with the dollar is funding is coming out, the funds are long grains, long cattle, they were long the softs, long energies, long metals and short in the dollar so we're seeing the inverse of all of these trades right now and seeing all of the short covering push it higher.

Pearson: Yeah, no question about it we're seeing an impact. Let's talk about the corn market. Again, talk about the fundamentals. Obviously USDA saying we're going to have a bigger carry out than we anticipated, more acreage and a bigger yield and you add that on top of what you just mentioned with the deleveraging that's occurring, what is ahead for corn?

Kohake: I think corn is range bound right now and it's following the Dow pretty heavy with all the deflation over there is spilling over into the grain market. I think the key with corn right now is try to form a base of $4 in December. If you can do that I think we can surge in here later towards the December timeframe. Right now it's just trading the Dow, trading the crude, we can't separate ourselves right now. One point with corn is, though, is the stocks to usage ratio. We've only been below 10% three times since 1960 and right now we're at 9.8%. I think sooner or later we're going to balance out here but we need to separate ourselves, find some fresh news and like today we saw really, really strong exports which was beneficial and we saw a bounce off that.

Pearson: Looking ahead to 2009 and looking where those prices are in December around $4.40 a lot of producers are saying with cash rents up, with the input costs up it's going to be hard to make money at $4.40 on the board next year. Is this price going to have to go higher? Also we have a South American issue too.

Kohake: You're exactly right, I think we will have to bounce higher. I think it's probably into the first quarter of next year though once the Dow gets more calmed down, the liquidation gets done there. But the December '09 $4.40, $4.60 area there is some guys at a loss right now and at a break even at best so I think we will be buying acres out there and I think we will see a substantial rally but I think it's the first quarter of next year you'll see some of these funds get back in, maybe start some new funds and they buy it up.

Pearson: Harvest the crop and squirrel it away somewhere and hold.

Kohake: Yeah, exactly, hold it until the first quarter of next year. Farmer selling is zilch right now pretty much in corn and beans, wheat, everything. We are seeing basis levels firm up quite a bit. One interesting part of the country is Nebraska, the whole rally up to $7, guys are selling a negative basis and now going down there's a positive basis and you notice some areas of 30 to 40 cents. But I would still hold into the first quarter of next year if I was anywhere but there right now.

Pearson: Let's talk about soybeans. Again, South American component there, maybe more beans in South America going forward. What is your take on soybeans? What do you see happening on the soybean price let's say just between now and the end of the year? Will we see some recovery or is that going to be in the first quarter of next year too?

Kohake: I think first quarter of next year. The report from South America this week was a big surprise, a lot of talk speculation the last two to three weeks that South America would lose acres based off the credit crunch and money not moving and surprisingly we're going to have a couple more million acres than expected. The crop is not planted so it still can change, I would still watch it very, very closely the next 60 days. I think beans are range bound just like corn. I would store beans until the first quarter of next year. Beans are tracking the crude oil market extremely close and I think if we can get a bounce of crude next week off OPEC I think we could see 60 to 80 cents of beans pretty easy.

Pearson: And, of course, the other issue is harvest has been moving relatively slow, this corn has been very slow to dry down and problems with harvesting beans as well.

Kohake: Yeah, that is right. Harvest is about 50% behind last year's pace both corn and beans right now. Exports have picked up in beans too this week, we saw really strong sales. Most of it was from China. And one key point to watch the exports in here is the freight rates. Freight rates have dropped roughly 46% over the last week and I think that's going to be a signal too when corn and beans bottom out the same time the freight rates bottom out and we see exports stay strong over two or three or four week period.

Pearson: All good points and especially good points of this weakness right now for those in the livestock sector. Talk about the fed cattle market. You mentioned the funds have been long there, they've been about the wrong place everywhere here for the last 60 days. What do you see ahead for fed cattle? The USDA's cattle on feed report was released Friday afternoon. What was your take on that?

Kohake: I thought it was semi-bullish. I think we will see follow through short covering on Monday. Today we saw quite a bit of short covering and it will follow through for the next week. Watching the 90 level in here with cash and with the futures market for the front month October, next year we hold that and bounce off of it. One key point with the funds in the cattle that you're talking now is funds control roughly about 45% of the calf market right now, grain market, corn they're about 20% so I think there is still a lot of risk in cattle to see these $2 swings pretty much the norm any more. But I would not sell cattle here. I would not add new hedges. I would just hold shorts and see what happens Monday with the Dow and with the energy market and see if we can get some short covering. I'd like to see the board get back to 96, 98 before we add any shorts on.

Pearson: What about this calf market at this stage of the game? There's a lot of pullback in there and a lot of people are blaming the credit squeeze and some other issue but calf prices have been breaking pretty hard.

Kohake: Demand is a key, that is right. The economy is slowing down, global recession talk, cash prices have fallen substantially the last two to three weeks. The market is oversold looking for a balance there. I think the feeder cattle are going to follow the live cattle just like they have the last year, pretty much have gone straight down and they'll be pushed back up with it too. But I would not get short in the feeder cattle in here right now. Look for a bounce and then if you have to sell back into it then.

Pearson: The first quarter of '09 you think might be okay for livestock?

Kohake: Oh, absolutely. We're going to run into tighter supplies between October and Thanksgiving and that's the key point if guys are looking to hedge do it somewhere late November.

Pearson: But it's a pretty tough week for hogs on the board.

Kohake: That is right. Over the last seventeen days we've seen the cash market and cut outs drop $10. In the past 60 days exports are the saving grace and they're starting to slow down now as well. Hogs, just like cattle, they oversold and are looking for a bounce to sell into. See if we can get some spillover from the live cattle on Monday and spill over to hogs and then sell into it.

Pearson: Cover some feed needs in here? Obvious time to do that?

Kohake: I would, I would buy meal and I would be buying next year's corn like May, July and December '09 corn on the board.

Pearson: Take advantage of this if you're on the livestock side. First quarter of next year we see higher grains and potentially livestock prices.

Kohake: I think so.

Pearson: As usual, appreciate it. Jamey Kohake appreciate you being with us tonight. That's going to wrap up this edition of Market to Market. But before we go we want to invite you to share your perspective on rural issues at our new Market to Market blog. This week viewers are encouraged to participate in a dialogue on climate change. And be sure to watch HEAT, a Frontline global investigation coming to most PBS stations October 21st. Of course, you can also hear more from Jamey on where these markets just may be headed by clicking on the Market Plus page, view streaming video of our program and download audio podcasts of our Market Analysis and Market Plus segments all free at our Web site. And be sure to join us again next week when we'll continue our month long examination of the politics of renewable energy. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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