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Market Analysis: Sep 12, 2008: Jamey Kohake, market analyst

posted on September 12, 2008

USDA'S crop production report awakened a few sleeping bulls.

For the week the September wheat contract lost 50 cents, but the nearby corn contract was 16 cents higher.

Soybeans followed suit on the upward trend. For the week, the November contract gained $1.25, while the nearby meal contract went – I said one and a quarter. I meant $1.25. The nearby meal contract went $18 higher.

In the softs, cotton slid this week, with the December contract losing nearly $1.30

and in livestock October cattle were down 80 cents. Nearby feeder cattle were down $1.20. The October lean-hog contract down $3.30.

In other markets of interest the euro lost 22 basis points against the dollar. Crude oil closed down $5.05 Comex gold lost $38.80 per ounce. And the Goldman Sachs commodity index lost a little more than 20 points for the week, to close at $637.70.

Market Analysis: Sep 12, 2008: 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, welcome back. Let's talk about this commodity market worldwide, the 30,000 foot view. Obviously oil is in a huge retreat. A lot of the commodities have been in a huge retreat really since the peak of oil. The air is coming out of the balloon. What's ahead generally as you look at commodities?

Kohake: I think the market is still heavily at the mercy of fund money right now. Like you were saying, we've seen a lot of heavy liquidation in grains, metals, energies, and in the dollar. The dollar has rallied four full points in the last 30 days. Crude has broke $14 in the last month. Gold has lost $80 an ounce roughly in the last month. So, you're seeing a lot of weakness, a lot of instability in the markets. You have Bear Stearns three months ago, Fannie and Freddie this week, Lehman maybe this weekend. So, there's a lot of money just coming out of the market and going to cash right now.

Pearson: So money never rests, so it's got to go somewhere. What's your bet?

Kohake: Right now cash. I think we need some fresh news. I think we need to trade sideways in here to form a base and then get a fresh injection of some bullish news and buy off that.

Pearson: How upbeat are you on the strength of the dollar in terms of this being a real rally that could sustain itself for a while?

Kohake: I'm not a raging bull of the dollar right now. I think 81, 82 is a short-term top. We pulled back down towards 80 today on a lot of profit taking. I don't think it's a runaway market. I think 76, 77 is now the bottom side instead of 72, 73. But we had some news this week of the trade deficit, the election coming up, so I don't think it really does that much. 78 to 82 range.

Pearson: Obviously a big impact on our ag exports, so that's going to impact everything else that we talk about. Let's talk about wheat. USDA report came out today. Pretty much in line with what people were expecting in terms of a number?

Kohake: Yeah, that's right. The wheat report was deemed neutral. We did close lower on the day because of corn. Commercials were buying corn, selling wheat and spreads. The report did confirm large world wheat stocks, which is not a big surprise in a large crop coming on line. Europe looks good. We look good. But there were two stressful spots in the world that could eventually lower the number, and that's Argentina and Australia right now. But the market is focusing on any supply numbers, stock coming on line and both those numbers are pretty much unchanged from last month.

Pearson: Wheat demand, of course, continues to be very good and there are a couple of, like you say, problem spots. Australia almost the third year in a row may be a crop problem down there. So in terms of getting some wheat sold, if you're a producer right now, do you stand pat and look better for times ahead?

Kohake: I would. I would hold any shorts that a producer might have, but I would not add any new ones on. The market is oversold. RSI turning to 30 – below 30, so just hold everything right now. Like you're saying, exports were good this week despite a surge in the dollar. The dollar can break next week like we saw today. I think that should be supportive to get exports again next week. But right now I would just hold shorts. I would like to see a bounce in December back to around 798 before I would resell it again right now.

Pearson: Let's talk about the corn market. You mentioned the spreading activity that's occurring on the commercial side. We're watching the production side too. Again, USDA report really about the same in terms of total numbers. A little bit smaller. Obvious the trade took it as a catalyst to send the market higher.

Kohake: That's right. We opened up pretty much limit up, closed limit up, but the key was short covering. A lot of bearishness the last couple of weeks and a lot of liquidation. The easiest path was down, so we saw some shorts come in and they pretty much got blown out of the first twenty minutes of the trade. Yields are cut by roughly 2.7 bushels per acre, which is bullish. We also have this weather system moving from the Gulf up to the Midwest this week, in areas 5 to 15 inches. Delays off of that probably and see buying interest off of that.

Pearson: Of course, that could have a huge effect on soybeans as well and everything in between, depending on what happens with the hurricane this week so that's going to be another market factor to watch. You don't want to make any corn sales at this point?

Kohake: No corn selling right now. If I was going to look to sell some I would like to get a rally back up to $5.80 and three-quarters. There's an open sharp gap up there if we get some follow through next week, get an opportunity to sell some. I think the corn market is more range bound right now, about $5.30, $5.80. Let's wait and see how big the crop is. Let's get some yields in. Build a base in there and maybe surge later this fall based off acres. If you look at the carryout numbers for this morning that we saw, you look at the usage numbers – or stocks to usage numbers are the tightest right now since we have seen since 2003. And you take that number and look at the upcoming year with the ending stocks and demand, we need 94 to 96 million acres for next year. So, I think there's longer term support below the market, and that's why we're not adding on any new shorts in here at all.

Pearson: And the acreage battle is going to begin again. Let's talk about soybeans. Again, a good rally there, following the USDA's number. Wasn't a huge change from their August number but it was enough to – I think it must have really excited some folks.

Kohake: That's right. It's also short covering there just like corn. USDA lowered yields by over half a bushel per acre. Saw some short covering off that plus a little new buying as well. Beans did not see the surge like corn did because crude ended up selling off about mid session. Longer term bullish in beans too in here right now. We saw the surge of basis on Wednesday. That was pretty much the big news, besides the yield report this morning. The basis of the Gulf rallied 90 cents roughly Wednesday and Thursday, and we saw the September contract up over $1.30 today. Today was the last trading day. We saw a huge, huge rally off of that. It will be interesting to see next week what happens to the basis and also what happens with the rain, how far it creeps in and delays harvest.

Pearson: That's right, and delays the harvest and causes beans to shell out and everything else with that kind of rainfall. Okay, so Jamey, you're not in a big hurry now. You're going to make your soybean sales later on.

Kohake: Later on. I think up around 13 bucks would be a good spot, get some spillover this week with the corn trade higher, see the dollar trend lower. See if crude can form a base here at a hundred bucks too. That's a key point. If you can get a rally back at the 105, 107 it should support the beans also, but no fresh selling in here right now. The market there is oversold just like wheat, just like beans. World trading towards 30 with the RSI.

Pearson: And what about cotton? What do you see now in the cotton market?

Kohake: Cotton right now, the key with that is the USDA U.S. dollar with exports. That's a very, very key component just like with wheat. With the dollar trading higher, I think cotton is range bound at best. I would be a little sharper to sell cotton rallies than I would beans, corn or wheat. I think you could see 30 to 40 cents there instead of maybe 80 cents in the cotton. However, it would be a little sharper in the hedging.

Pearson: Let's move over to the livestock side and talk about what's happening there. And fed cattle markets near term in the futures this week, pretty disappointing performance. What's your outlook? What's your take for fed cattle for the next 30 days?

Kohake: We did have a very disappointing trade, like you were saying, on Wednesday. We broke our recent lows on the charts around very, very aggressive stops, put in new lows for this last, like I was saying, longer term I think there's support underneath this market. We took rerunning the tighter supplies this fall and I would be looking to take some profits on some hedges than I would be putting new ones on. We've seen a lot of spillover in live cattle into feeders. Open interest in feeder cattle is down 25% in the last 30 days and that's not good either. The economy is slowing down, less meat demand, and just a lot of money coming out. I think we're going to form a base in here. I'd rather look to that – shorts than put new hedges on.

Pearson: So at this stage of the game, fed cattle price wise, we're going to see some pressure this fourth quarter. We're in a seasonal time here. It's not a great time to be selling fed cattle anyway, but maybe if you -- some profitability is probably going to come spring and summer, first and second quarter of next year, do you think?

Kohake: That is right. Sometime in the first part of the year I think it will be back up, demand picks back up, ad get a bounce off of that.

Pearson: Again, the calf market, you mentioned the production open interest there on feeders. What's your outlook for these ranchers out there pricing these fall calves?

Kohake: I would hold off right now. The market there is just like the grain market is, we're oversold and we've seen a lot of money come out. I don't think we're going to race right back higher to $112, $115 right now but I would just hold shorts. If it would break down to two bucks lower I'd go ahead and take the profits but I wouldn't add new ones on at all right now.

Pearson: And overall the picture, obviously feed costs have come down dramatically from those highs in July, so would you tell a producer to start locking in some feed needs now either cash or on the board?

Kohake: Absolutely. Any type of break in the corn market, meal market, I would be buying '09 needs for sure.

Pearson: Let's talk about hogs which sometimes gets short tripped on this program mainly because of all the vertical integrations that occur in the hog market, we don't have as much time to talk about it. We kind of saved some time today to talk about that with you here. Let's talk about what's ahead for the hog market. A lot of people very concerned that we would see maybe single digit fat hogs this fall. It hasn't happened. Not a great week, obviously, on futures, a $3 move south but the hog market has been hanging in there relatively well.

Kohake: That is right. Part of the selloff today was based off the unwanting of spreads. We saw the corn market break down in the last 30 days and the funds were bear spreading hogs. They're long next year's hogs, short the front months with the high priced corn. We saw the corn market break. They jumped out of those and bull spread it, bought the October and December, sold the February and the Julys of '09. Today with that sharply higher corn trade, they got scared, just pretty much liquidated all those trades, so it pressed the front month lower, back months higher. It really wasn't a shift in technicals or a shift in fundamentals at all. It was just all heavy, heavy spread trade that everybody pretty much said I'm done with.

Pearson: And so now give us your outlook for hog prices final quarter this year, first quarter of next year.

Kohake: Demand is good and that's one key part that we're watching right now. I'd watch the U.S. dollar. IF the dollar would continue to rally I would be selling rallies pretty aggressively. Right now I think we can stay away from new hedges, wait for two or three cent rally and sell into it. But I wouldn't be waiting back and waiting $100 or $110 right now unless we would see a delayed harvest in corn, some type of fresh injunction with some new news to disperse some fund money.

Pearson: And, of course, the stronger dollar is helping us out much because that's been the saving grace for the pork business this year.

Kohake: That is right. Exports are picking back up overseas, providing support. We saw the back funds, you know, up – June up around 100 at one time about 35 days ago.

Pearson: Yeah, those are times to take them – take advantage of those profits when you can. We've got to run. Jamey Kohake, thank you so much. As usual, appreciate your insight but that's going to wrap up this edition of Market to Market. 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. You can also download audio podcasts of our Market Analysis and Market Plus segments free at our Web site. Be sure to join us again next week when we'll meet another Idaho woman who is capitalizing on everything from organics to agritourism. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices markets news USDA