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Market Analysis: Aug 08, 2008: James Kohake

posted on August 8, 2008


The notion of larger-than-expected harvests had bearish implications for grain prices this week as the August freefall continued.

For the week, September wheat lost nearly 30 cents and the nearby corn contract was down more than 66 cents.

Things were even uglier in the soybean pits, where the August contract lost almost $1.60. The nearby meal contract was down more than $47.00 per ton.

In the softs, cotton got caught up in the sell-off with the December contract posting a loss of $2.72.

In livestock, the August cattle contract was up $1.45. Nearby feeders were down $1.00 and the August lean hog contract had a big week posting a gain of $7.40.

In other markets of interest, the Euro lost 530 basis points against the dollar. Crude oil was down nearly $10.00 per barrel. Comex Gold lost more than $52.00 per ounce. And the Goldman Sachs Commodity Index lost a whopping 61 points to close at 701.80.

Market Analysis: Aug 08, 2008: James Kohake 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, has it imploded now? Have we seen all the froth come out of this oil market in particular and seeing it cooling down these commodity prices maybe for some time to come?

Kohake: I don't think it's going to last very long myself especially in the meats and livestocks and grains and also the softs where we've seen a lot of liquidation. I think we will be back up on demand. It's a global market now, global usage is huge and I think that will drive prices back up.

Pearson: Crude oil?

Kohake: Crude to me is in a sideways pattern right now between $115 and $125, demand has slowed down which is not a big surprise, $147 was going to stop eventually, but I think $115 is a short-term bottom right now.

Pearson: Let's talk about some of our specific markets that we talk about weekly on the show and let's start first with wheat. Obviously a decent crop here in the United States. Worldwide demand, global demand continues to be huge for wheat.

Kohake: That's right, weekly exports were big this week above the expectations. The key to wheat right now is global supplies. Global supplies are huge and we're expecting about a 50 to 60 million metric ton crop size larger than last year. That is what has kept a lid on the prices the last couple of weeks. We're also seeing a higher traded U.S. dollar which is pressuring the market lower as well. I think the wheat market is close to a short-term bottom again right now, look for a 40 to 60 cent rally and then I would sell back into it again. I wouldn't press these lows right now.

Pearson: The dollar particularly strong on Friday, a huge move for the week. Have we turned a corner on the dollar? Could this impact our export picture going forward?

Kohake: It very easily could. That is a key to the exports and I think what's more important to watch are the spreads, funds are long grains, long energies and short the dollar and see if they reverse those spreads or not. The funds are reverting back and forth. They are net short to net long in wheat. We're long coming into Friday and probably back to net short after Friday's trade.

Pearson: We keep hearing about the funds liquidating, the funds getting out and the funds came in long and now they're getting back out. So, what is the implication of that going to be for commodity prices, for our prices in the grains and wheat?

Kohake: I think it's very, very important for the funds to stay long in here so we don't go into just a sideways, lower pattern through harvest. Funds stay long corn, stay long beans eventually these lower prices will drive demand up and see a bounce off of them.

Pearson: Let's talk about making sales. What are you telling wheat producers down there in Kansas?

Kohake: We're not making any sales at all for '08, '09 or '10 crop years, holding everything right now. The market would bounce back 40 or 60 cents just on a technical recovery, we might do some '08 clean up sales but that's about it.

Pearson: Let's talk about the corn market, again, a big driver of everything that we talk about on this show and the livestock too. But let's talk about where corn is headed right now. Obviously we've got a big crop report coming out August 12th, we're going to be probably pretty slow until we find that out. You're hearing these crop guesses from the various private forecasters. Where are you on this whole thing? Where do you think we're going to come out with the corn crop this year?

Kohake: I think right around 153 on the yields right now. I think that's a pretty accurate figure. Some guys are up around 154, 154.5 and the keys to corn right now are the crop conditions. We've had really beneficial weather the last 30 days and that has driven the prices sharply lower and we're about 10% higher than we were a year ago at this time but we also have seven million less acres and also how many acres are abandoned from the floods north of I-80, I think that will be the key in here right now. I think corn is very, very close to a bottom. If it wasn't for the dollar on Friday I think corn would sell more short covering. On Thursday we did see an increase in the open interest which is nice to see after falling out of bed the previous two weeks and I would look to buy corn rather than sell corn right now.

Pearson: I've talked to literally hundreds of farmers in the last few days and they're all telling me we missed the boat, we had $8, we didn't take it, we need to get out now. You're telling them to hold off, don't panic, better times are coming for corn sales?

Kohake: Absolutely, I wouldn't make any '08, '09 or 10 sales at all. I think we will be buying acres back again this fall if it starts two weeks from now or post harvest I think a guy can wait and it will go sharply higher.

Pearson: So, corn producers don't do anything at this stage of the game. Let's wait and see what happens. Certainly what the USDA report says is going to be critical.

Kohake: That is right. If I was an end user the opposite side I would be buying the market in here before the report just in case there is a surprise. I don't expect one but I think a lot of the report is built in right now, 153, 154 and I wouldn't be surprised if the report is neutral, we go back to trading the crude oil market and the U.S. dollar.

Pearson: The volatility is going to continue in there and in the dollar, again, we'll se what happens on that front. Let's move over to soybeans where we had an interesting situation, it seems like we have so many late planted beans that are going to be really critical to where we come out and if we hit 3 billion bushels.

Kohake: That is right. The key with the beans will be how early the first frost is there and how far south it creeps. I'm bullish beans myself right now. I would rather be looking to buy beans than to sell beans just like corn and wheat, no new selling there at all. Also with the beans right now is demand. We saw China back in the market this week, they weren't expected to be a player on this week's numbers and they were and I think with these lower prices we will keep exports solid which will support the prices. We're also cheaper than South America right now in the beans too and that is really beneficial also.

Pearson: What's going to happen this fall? What kind of acreage do you think we'll see in South America, Brazil and Argentina are going to be big factors in this thing down there.

Kohake: We've already seen some pre-estimates this week Monday and Tuesday coming out of South America. They're forecasting another bumper crop right now. They say that every year though if they're around a 60, 63 million metric ton crop size. I think more the key to the beans is the energy market and the funds spilling over back and forth. I think it's been very, very hard to pitch beans just because of the carry out. It will be a little bit higher than we were in the last USDA report but still bullish numbers, 135 roughly on the carryout.

Pearson: And, again, on soybeans in terms of making sales nothing in here, don't panic, this is a pullback, this is a preharvest pullback, this is not something we need to make panic sales.

Kohake: I would say no right now. I would take the opposite side, again, as a hog guy I'd look to buy meal in here or something like that, end user would be the only way I'd make a hedge.

Pearson: And we had huge breaks on the products in soybeans this week too. What does that tell us down the road?

Kohake: I think soy meal, I'm bullish meal more than anything in the beans myself just because of demand. Demand is huge in meal right now and I think that's what could support the beans and leave the beans to short covering rally sometime in the near future.

Pearson: And you would sell that rally?

Kohake: I wouldn't. Longer term I would. I wouldn't come on to sell a 30 or 40 cent rally, I'd wait for a sharper one and I'd wait and see Tuesday the numbers too how bullish or bearish they are.

Pearson: Tuesday the big report will tell us a lot and this is a pretty solid report from the USDA too, this is one generally people trust to a great extent so the trade is going to be looking at that one for a long time to come until we move up upon September and we see what happens crop wise. Frost dates, you mentioned it, huge impact in 2008.

Kohake: That is right. That's in a key with the beans especially. How fast does the fund money come back in on the first report where it's two weeks earlier than normal. It could spike quick. I think that's one key area, that and the exports is what we're watching in all three of the grains.

Pearson: Big sell off in cotton this week. Part of the sell off here is the air coming out of this commodity balloon is really what it looks like.

Kohake: That is right. We've seen a lot of fund money come on the cotton market. The key with the cotton market this week was just like the wheat market pretty much, sharply higher dollar slowing exports down, slowing demand down and we were seeing heavy liquidation based off of that.

Pearson: No sales in here?

Kohake: I would be a little quicker to make some hedges in cotton but with the grain market I would only do it on about a 60 cent to $1 rally.

Pearson: So, we're a buck away from making sales. You don't want to sell any '09, '10?

Kohake: Not yet, no.

Pearson: So, let's talk about the flip side. You mentioned livestock producers a great opportunity here to maybe get some feed needs covered, hopefully reduce some of that red ink that's been flowing particularly for these hog producers and some of these cattle feeders out there and certainly the poultry sector. Fed cattle market what do you see happening?

Kohake: I see a choppy trade, I would sell into rallies right now, if we took a $1, $1.50 rally I would sell into it. It's a premium structure to market right now meaning the futures are priced higher than what the actual index is, roughly about a $4 spread there. Eventually those will narrow up but in the meantime I would be looking to sell on a sharp rally.

Pearson: Alright, so cattle feeders out there -- and how aggressive do you want to be on the board?

Kohake: I would be pretty aggressive. I'd get 40% to 60% covered immediately at a $1.50 rally. Cash was about $1 to $3 higher this week down in Oklahoma City and if the corn would see another like Monday more liquidation, cattle got up $1.50 I would sell into it.

Pearson: Let's talk about the calf market. What do you see ahead for feeders? I've been told we have the smallest calf crop since 1950, smallest cow herd since 1950 going into 2008.

Kohake: That's the numbers I'm seeing as well. The feeder market is trading just inverse of the corn market right now and that's the key is the corn trade, $2 rally the market was selling to it, even $1 rally I would be more aggressive and hold off on $2 but I think it's time where you sell rallies.

Pearson: Let's go out a year, let's kind of play this thing out a year, year and a half ahead on the cattle market. Where do you think we're going to be?

Kohake: I think we're going to be lower than we are right now. If you look at the cattle board, live cattle board and we saw the deferred cattle contracts fall sharper this week, the funds were heavy into the '09 contracts based off the higher corn numbers and we saw the heavy liquidation this week. We saw the bull spreads come back in by the front months, sell the back months. We finally saw our seasonal balance in the cattle. Box beef rallied. And also the cash market rallied. And if I was a cattle guy in the front months contracts I would hold off for about another week to ten days. I think the demand will slow down past Labor Day. Right now demand is huge, exports are good. You get past Labor Day I would be selling the cattle market. I think there's more money in the short side than there is on the long side right now.

Pearson: You mentioned the turn of the dollar and how that could impact the livestock exports which has been our saving grace on the meat side this year.

Kohake: That is right, big exports, South Korea opening back up and moving a lot of beef over there.

Pearson: Let's go over and talk about hogs. I kept hearing that we'd see this huge sow liquidation and we've seen some certainly up in Canada that has been a factor but here in the U.S. it's not happening. Is it going to happen this fall? Have we had enough quarters of negative returns for pork producers?

Kohake: I think we've had enough quarters there has been this talk going on roughly for two years and haven't really seen a big sway one way or the other with numbers I think to show a big move and the futures market harvest had a nice rally this week. We saw the cutouts rally, running up in the August contract on Friday, funds are very, very active. The hog market looks very much to me just like the live cattle market does. We see a nice balance in the cash and the cutouts, demand is big right now, Russia is pretty much the biggest player in the hog market right now but I think the demand slows down past Labor Day just like the live cattle. You get at the end of August, first of September I think you pull the short side and that is where the front months contracts -- the deferred hog contracts looks just like the live cattle does too. For this week we saw the big fund money come out because of the large drop in the corn prices.

Pearson: If I had to get some of those deferred hog contracts, though, I'd be hard pressed to suggest liquidation.

Kohake: Absolutely. We saw the June contract, I actually sold some as a hedge for some of our customers at a hundred.

Pearson: We've got some black ink there. So, again, the liquidation seems to be held off for the time being. The situation in Canada is improving. What is your outlook for cash prices here for the next 60 days on hogs?

Kohake: I think we see this firmness for two more weeks. I think we top out in here by the end of August myself and we start to migrate back south again.

Pearson: And, again, just to repeat what you said earlier during our grain segment, good opportunity to get feed needs covered.

Kohake: Absolutely, meal, corn, I'd even go out and buy some '09 corn, July and December, and just spread it out.

Pearson: Alright, so good to get aggressive on that side at least in 2009-2010. As usual Jamey Kohake, good to have you with us, you always have some great insights. That is going to 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. You can also download audio podcasts of our Market Analysis and our Market Plus segments absolutely free of charge at our Web site. Be sure to join us again next week where we'll learn what 60 million barrels of beer have in common with a gallon of gasoline. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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