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Market Analysis: Apr 04, 2008: Jamey Kohake

posted on April 4, 2008

As mentioned earlier, USDA's projection of 7.6 million fewer acres of corn pushed prices into record territory this week, while private estimates of a larger-than-expected winter crop pressured wheat prices.

For the week, May wheat lost nearly 15 cents, while the nearby corn contract exceeded 6.00 per bushel during several trading sessions and posted a weekly gain of nearly 40 cents.

USDA's estimate of an additional 11 million acres in soybeans appeared to already have been factored in the market. For the week, May soybeans gained nearly 10 cents, while the nearby meal contract declined $8.80 per ton.

In the softs, cotton trended lower again this week with the December contract posting a loss of 23 cents.

In livestock, the April cattle contract gained 25 cents. Nearby feeders were down $1.82. And the April lean hog contract gained 42 cents.

In other markets of interest, the Euro lost 31 basis points against the dollar. Crude oil was up 61 cents per barrel. Comex Gold lost $21.60 per ounce. And the Goldman Sachs Commodity Index gained three points to close at 689.10.

Market Analysis: Apr 04, 2008: Jamey Kohake Pearson: Here now to lend us his insight on these and other trends is one of our newer market analysts, Jamey Kohake. Jamey, welcome back buddy.

Kohake: Thanks for having me.

Pearson: Good to see you. Let's talk about what happened here with the -- the prospective plantings report was a big market mover for the whole week. We dumped out of soybeans last year, planted more corn acres this year. We're dumping out of corn, we're planting more soybean acres. Wheat was in very tight supply, continues to be in very tight supply worldwide and we're looking at a mild increase in the wheat numbers too. And spring wheat was up dramatically, all the classes of wheat seem to be higher. What is your take right now after this prospective plantings report and seeing these numbers? Let's talk about the wheat number first.

Kohake: The wheat number came in roughly about 3.5 million more acres than last year. It looked like it was already factored into the market. Then we saw a turnaround in the market Tuesday, Wednesday and Thursday led by Minneapolis. Minneapolis is limit up Thursday and Friday. Supplies continue to be very, very tight up there. And we did see a 20% increase in acres up there but beginning stocks numbers are really, really bullish. If I was going to be in the wheat market I would still be long Kansas City, long Minneapolis and short Chicago. The Kansas City wheat belt is very, very dry. The western 1/3 of Kansas is extremely dry and that's where the strength is still coming from.

Pearson: I just came back from Austin, Texas and that was the report I had from producers was continued dry weather, particularly concerned about in the panhandle and the traditional wheat growing areas in Texas, concerns that move on up through Oklahoma and into southern Kansas. So, not uncommon to lose that wheat crop five times and this is probably about the third time. A couple of more times to go. But what about making sales, Jamey, for this year and maybe for '09?

Kohake: I would not do anything yet right now. I still think there's a little more upside. The Chicago wheat I think could be sold into on sharp rallies. I think the Kansas City/Chicago spreads widen out more and the Minneapolis/Chicago spreads widen out more. I would leave the upside open in Minneapolis and Kansas City.

Pearson: Let's talk about the corn market, fewer acres of corn this year. The March 31 report based on conditions in March we saw a change in that last year, fairly dramatic move in additional corn acres between the March report and the June report. What is your take right now on this corn market? Is this going to be where we're going to end up? What do you see potential for prices?

Kohake: I do not think this is where we end up at, a roughly 7 million acre decrease like you were saying. I think it probably ends up four or five if the weather cooperates. Right now we are very, very wet from Little Rock up through Indianapolis right now and that's where this reality is coming from is the wetness. Missouri was zero percent planted last week. The average is five. You get even farther south, they're farther behind than that. I still think there's probably 30 to 40 cents of upside if it stays wet but it has to stay perfectly soaked in those areas.

Pearson: That's right and then the potential is we could be planting more soybeans. If that happens, as you look at the corn market certainly what corn demand has been and the export demand, the entire picture of corn as we look into 2008 for a producer it looks to me like you do the math, corn is still the favorite one over beans.

Kohake: That is right. We saw the difference in the spreads. Corn was roughly 2.5 times less than beans were this winter. We've narrowed that to that 1.8, 1.9 in the last two to three weeks so the incentives are shifting back to corn again. And if we get prices, you know, like you're saying staying up here over $6 and we can dry out and get the crop planted on time I think you'll probably see two to three, four million acres shift back.

Pearson: And that could be substantial, price wise maybe pressure in the corn market maybe giving beans a little bit of a rally. As we look at this corn cycle that we're going through right now where, again, we increased acres dramatically. Last year responded to the market, this year substantially increasing soybean market or responding to the tightness. The corn market tightness going forward any weather problem could set this market off it would appear.

Kohake: Absolutely, we stay wet and the wetness moves farther north especially that's where I think you'd probably have it blow off top somewhere in that area. But we could run into some serious trouble in two to three weeks if we're not planting up north of I-70 in that area.

Pearson: Jamey, how do you tell a farmer not to sell $6 corn?

Kohake: It's very, very tough. Right now I probably would stay away from futures. You might buy some cheap puts, $5.40, $5.60 Decembers coming back down to retest the lows if we would dry out for a week or so and we would take this last rally off. But I'm not stepping in front of it real heavy with futures contracts right now at all.

Pearson: And cash forward contracts aren't out there.

Kohake: No, that's exactly right. Basis levels are still wide and I think guys are waiting now to see what happens Sunday night. Do we come into a wetter forecast than we saw this morning? We get $6.30, $6.50 to the basis, you know, $5.75, $6.00 and then sell.

Pearson: Let's talk about soybeans. They're really kind of the glamour crop in 2008. Decent crop down in South America. I want you to talk about that. But first of all talk about this acreage number. We're in very tight supply, I'm hearing 28 day supply for soybeans, extremely tight. The market has been extremely strong. It seemed to run out of gas and then you get this big acreage number on top of it and yet as sharply as the market has fallen people are saying this thing isn't over yet. Maybe the bean numbers are a lot tighter than what we think.

Kohake: Big numbers are tight right now. We got a key reversal, very close to one on the charts on Tuesday. It was not an exact one but it came close. And we saw new money come in the market, new month, new quarter, a lot of fund buying, the energy market rallied, metals rallied and we saw a lot of short covering of the beans and we rallied it through the end of the week. I still think there's more upside for beans right now. There's still a lot of speculation in South America with the Argentina strike. They're off right now. I think it could go back on immediately next week. And also Brazil was on strike for one day yesterday and got back on today. There's a lot of uncertainty. Bullishness is coming from China -- South America losing their business is coming to us. Can we sustain good exports for two or three weeks and still push us in 40 to 50 cents higher.

Pearson: Jamey, you're in this market daily. Are you starting to get a chill on some of this demand from the livestock sector, first of all, and also there's been this drum beat, the cover of Time magazine talking about biofuels or pressure on them that's not the solution. Are you starting to see a chill? Should we maybe be looking at pricing some '09 corn or beans?

Kohake: I'm not yet pricing any so far. I think the beans would be the one I would be more than willing to look at than corn right now and that's just based off the increase of acres and if we can get it planted on time.

Pearson: Okay, but you're not in a big hurry to do that?

Kohake: Not right now.

Pearson: And as we look forward to the soybean market as far as certainly production this year we run into a wet spring chances are we're going to be adding beans.

Kohake: That is correct, if we stay very, very wet, stay wet through the first part of May, that area we will see an increase in bean acres. But I think the key will be can we get a window here two or three days here off and on and kind of keep that big speculative run up where we see two or three days there the beans are 30 or 40 higher immediately.

Pearson: And the situation in South America, obviously the labor situation is critical. Crop report has been pretty positive down there though.

Kohake: That is right. Brazil is estimated to be over 60 million metric ton crop which is a substantial crop size for them. The key is getting their taxes resolved right now on their exports. And if they do that demand will probably shift back down to them from China. But in the meantime some of it is coming to us obviously.

Pearson: Let's talk about the cotton market for just a minute, very dependent on exports and shrinking acreage there too.

Kohake: Yes, exports were good this week. We lost about a million acres on cotton this week. I think the cotton market is probably range bound. We've had a lot of bullishness, a lot of this is factored in. World supplies are plentiful right now and I think cotton has probably put in a short-term top.

Pearson: Alright, let's move over and talk about livestock. I have talked to a lot of cattle feeders this week down in the plains, the panhandle, the large feeding regions talking about a lot of red ink. What is your take on that on the livestock sector, on fed cattle as we head down the road? Obviously input costs with some of these breaks on soybean meal an $8 reduction this week do you want to get some coverage there if you're in the livestock business?

Kohake: I would on that side of the market. If we can get some follow through next week on the futures, Monday and Tuesday, I'd probably step back and put some sales back on in the feeder cattle. Demand just isn't there right now for the cattle market and that's where all this weakness is coming from. We've put in some new contract lows this week, some funds selling and I think a $60 to $80 rally next week has to be sold into.

Pearson: What is your long-term outlook? At some point we're going to make some of this money back and it's going to come from liquidation. We're going to see this cattle market. Could we see a sharply higher move in cattle in the next six to twelve months?

Kohake: I think you're looking farther out towards twelve months and it's based off the higher corn price, corn stays $5.50, $6.50 somewhere in that range and something happens like it did in hogs where you see a five, ten percent cutback.

Pearson: Talk about the calf market right now. Everything we're hearing is the season has gone really well for calving for many parts of the country. Some snow in some areas. But as you look towards this feeder market for this fall what do you see?

Kohake: I see lower prices right now yet -- going back to this week's trade we saw lower cash trade, we saw a seasonal tight bounce on Thursday and we saw some short-covering later on Thursday as well. I think if you get the June board 90, 91, 92, that area sell into it. Demand just isn't there either. We've seen the choice-select spread narrow up recently and that pretty much signals to me that demand is not there and is slowing down even more and that's all based off the economy.

Pearson: Alright, hog market a lot of red ink there as well.

Kohake: Yeah, we did see a lot of fund short-covering though on Thursday and Friday, fund buying actually out into the deep deferreds and I don't think hogs have very far to go. I'd probably sell into it Tuesday and/or Wednesday on a rally. Supplies are at running demand big time still right now. We have roughly over half a million more head online right now than we did a year ago.

Pearson: Yeah, big numbers, big numbers coming from Canada, just a lot of things, a lot of the other white meat out there right now.

Kohake: Exactly right, we're bringing in roughly 43,000 more feeder pigs from Canada right now than we were a year ago per week.

Pearson: It's a bunch. It's kind of taking its toll on profitability right there for the hog sector. Jamey, as usual, appreciate your insights. Jamey Kohake with us on Market to Market tonight. That will wrap up this edition of the program. 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, of course, you can download audio podcasts of our Market Analysis and our Market Plus segments absolutely free. And be sure to join us again next week when we'll learn how an innovative farm organization gets the planting done for those sidelined by injury, illness or natural disaster. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news USDA wheat