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Market Analysis: Jan 18, 2008: Market Analyst Jamey Kohake

posted on January 18, 2008

The rally in wheat prices picked up steam this week with the nearby contract approaching $10.00 per bushel.

For the week, March wheat gained more than 50 cents, while the nearby corn contract edged closer to $5.00 with a gain of about three cents.

Despite a December NOPA crush report of a record 155.9 million bushels, soybean prices trended lower. For the week, March beans gave back virtually all of last week's gain with a loss of nearly 35 cents, while soybean meal declined $19.30 per ton.

In the softs, cotton trended higher this week with the March contract gaining 77 cents.

In livestock, February cattle lost 35 cents. Nearby feeders declined $1.83. But the February lean hog contract gained 97 cents.

In other markets of interest, the Euro declined 162 basis points against the dollar. Crude oil prices fell more than $2.00 per barrel. COMEX gold lost $16.00 per ounce. And the Goldman Sachs Commodity Index declined more than 9 points to close at 597-even.

Market Analysis: Jan 18, 2008: Market Analyst Jamey Kohake Pearson: Here now to lend us his insight on these and other trends is a newcomer to the program, Jamey Kohake. And Jamey, we want to welcome you to Market to Market. Good to have you with us. A Kansas farm boy, welcome.

Kohake: Thank you.

Pearson: Let's talk about a Kansas product and that's wheat. The market has been insane ever since we had a short crop, the U.S. short crop and Australia, a lousy crop in Europe. We couldn't grow a wheat crop anywhere in 2007. Is this a short crop, long tail situation? Is that what we're looking at with wheat? The world demand seems to be fairly strong.

Kohake: World demand is strong, we did see a pick up in exports this week. Last week we were at a marketing year low, came in on the top side of expectations this week, roughly 400,000 metric tons. Got that report Thursday and we saw profit taking kick in, close lower, spill over on this morning's trade and then we saw the spreads being unwound. The favorite trade in the wheat has been long Minneapolis, long KC and short Chicago and also short the old crop and long the new crop. We saw the spreads being taken out of the market today and also the money came back in Minneapolis and Kansas City mid-session and pulled everything up sharply higher with it.

Pearson: Alright, well it looks like there's going to be plenty of soft red winter wheat based on plantings.

Kohake: Yeah, Informa came out this morning with the acreage estimates. They were unchanged from last month's report, roughly about 47.6 million, now it's pretty much all weather for the wheat as long as exports stay strong.

Pearson: Alright, so as we look at getting this crop priced, soft red wheat in Chicago, hard red wheat in Kansas City and the soft wheat up in Minneapolis what is your take? What should a producer be doing right now? $10 looks awfully good.

Kohake: Exactly, soft wheat I would be selling into sharp rallies like today's rally. Kansas City and Minneapolis I think I'm more up side. I would hold off on the sales right there.

Pearson: Alright, but you would make sales on the Chicago wheat?

Kohake: Yes I would.

Pearson: And so far so good on the condition of that soft red wheat crop.

Kohake: Yeah, exactly, crop conditions are above average from where we were a year ago right now.

Pearson: Alright, so bull markets going on in wheat continuing and, again, the acreage was not as large for the wheat crop as a lot of people anticipated with these kinds of prices.

Kohake: Yeah, we thought we'd pick up a lot more wheat acres especially down south. That did not pan out. We lost a half a million in Kansas, 200,000 in Oklahoma, 200,000 in Texas which is a very big surprise.

Pearson: A lot of people are saying they couldn't get seed. Is there any truth to that?

Kohake: Yeah, there is truth to that and also bean seed as well.

Pearson: Alright, let's talk about that, let's talk about the corn market and talk about what's happening there. We'll talk about beans in a minute. As you look at corn and corn prices at this stage of the game obviously this a tremendous bull market, historically chances to sell corn at these prices are rare, a little bit of a game this week. What is ahead for corn prices?

Kohake: I think there's still plenty of up side in corn. We saw a reversal in the market on Monday, limit up one time, closed back off limit and traded choppy Tuesday and Wednesday and we saw profit taking Thursday and Friday. Exports were a marketing year high on Thursday, over 2 million metric tons, South Korea was in for over half of it. Pretty much was profit taking, a three-day weekend get me out, take profits, I'll buy it back next week. Funds are still massive longs, up over 100,000 contracts net long and I don't see them wanting to pull out of the market right now until we have our acres situated.

Pearson: Alright, of course, we won't really know about that until the end of March when the USDA report comes out. Are we buying acres right now? Is corn high enough?

Kohake: We're still buying acres. I do not think we have bought enough. Informa surprised a few people today saying that we're going to have 2 million more than last month's estimate. I don't think a lot of people put too much faith in that report this morning.

Pearson: Of course, we've got a long way to go to get there. We've got higher input costs on the cord side too which is a factor the producers I've talked to at meetings this winter, that's one of the things they've all brought up to me. As you look at getting this crop priced what is your strategy? What would be the best way to do it for the typical producer out there?

Kohake: I would watch technicals, chart formations, choppy is toppy, that's what happened this week. Got a little choppy Tuesday and Wednesday, get everybody nervous, take the profits before the weekend. The main technical indicator I'm watching right now is open interest. Make sure you continue to gain contracts in the market. You start seeing the open interest decline people are coming out, they're nervous, that's when the chart break occurs. I think you stay long and you don't sell anything until that happens. Watch the energy market and watch the U.S. dollar.

Pearson: Yeah, right, the weak dollar has been a big factor. Oil, of course, also a factor. But that open interest, that's one of the key things you focus on?

Kohake: Yes, it is. I watch that very, very closely. Once that starts declining people are coming out of the market, I think you'll see fund liquidation taken behind that and that's usually when you see sharp 7-10% setback in the market.

Pearson: Alright, are you paying any attention to the weather at this stage of the game?

Kohake: Yes, we are especially in South America. It's all weather down there right now.

Pearson: Alright, what we're seeing down there, I want to talk about soybeans just a moment, but overall conditions are decent in South America this stage of the game, is that right?

Kohake: Brazil is sitting okay right now, about a third of Argentina is dry. That is where all the premium is coming from in the beans is from Argentina. They're forecasting for showers this weekend and heat moving back in Wednesday and Thursday of next week. Only one third of the belt is supposed to get hit this weekend so I think beans are still in an upward trend yet.

Pearson: Alright, let's talk about the soybeans a little more in depth and, of course, obviously here in the U.S. market we traded, we hit a new record for soybean prices, a lot of producers were out there thinking these are awfully good prices. Should we be putting a floor in this soybean market?

Kohake: I think you still have more up side in the beans as well. Exports were great this week, over 900,000 metric tons. I think the funds are still going to hold long until South America decides how big their crop size is. If we drop to the low 50's I think beans can new crop over $15 pretty easy, right now they're estimated to be about a 57 million metric ton crop.

Pearson: Wow. Alright, so your price target on beans again was?

Kohake: $15 right now if South America cuts their numbers down below 55.

Pearson: Alright, and right now they're sitting, what, around 60?

Kohake: Yeah, 58, 59, that area.

Pearson: Alright, so obviously South America is going to be a key factor in this market because they're the leading soybean producer.

Kohake: Exactly, a big surprise today too was Informa. They cut our acres down by a million from last month's estimate as well.

Pearson: What is that going to do? These traders are going to have three days to think about that number. Is that going to impact things come Tuesday?

Kohake: I don't think it is a whole lot. I think Monday night's trade is going to be all in South America and what the crude oil market is doing Monday night.

Pearson: Alright, and crude oil just quickly, what is your outlook on that? We've pulled back substantially. What is ahead?

Kohake: I think you're somewhere down side in the crude. I think you go to 85, 86 versus the front month contract. Global recession is the main reason energy has pulled back the last week, week and a half. Freight rates have dropped substantially. We saw the three largest sell offs in the last 17 years this week in freight rates and that's just all in a global slow down.

Pearson: That's right and boy there's opportunities there, at least in the agricultural sector as those rates drop. What is ahead now for the cotton market? A little bit of a jump this week. We talk about the acreage battle, corn, soybeans, wheat, hay is a factor. What about cotton?

Kohake: Cotton is still fighting for acres. I think there's plenty of up side in the cotton just because the exports, China usually comes in right now, the next two weeks of the season will play to start buying cotton so exports will pick up, they are good right now but even getting better for next month.

Pearson: Alright, let's talk livestock for a minute. That's the flip side of all this big news on the bullish corn and soybean markets. Soybean meal we mentioned on the show earlier a pull back of $19 a ton this week. That helps a little bit to the cattle feeder out there. The cow-calf producer, the feeder right now, a lot of stress out there with these high input costs and not much relief in price for fed cattle.

Kohake: No, it doesn't look like that. The only thing that looks good for the live cattle is the charts. They are very over sold. I think we probably bought them out today. We're going to see some short covering in the next week. I think steady to higher cash the next two to three weeks but I think the cattle are going to be sold into it pretty heavy again if we get the cash market back up to 93, 95 again.

Pearson: Alright, what is your prediction for the next quarter? Can we hit that 93, 95 level again?

Kohake: I think we can, especially if we get one snowstorm, one really cold snap out west and support the market. I think the deferred live cattle are fine right now, more up side there and that's based off what you're saying with the high corn prices supporting them.

Pearson: Absolutely, this calf market fell out of bed when the USDA came out with this hiccup on this last report and this corn price rally, the calf market has been under a lot of pressure. As you look at this feeder market going forward what do you see?

Kohake: I'm slightly bullish feeder cattle right now. I think there's more up side and the market is oversold. We traded $2 to $4 lower in the dress market on Wednesday and you have that factored in and we've been seeing profit taking since. I still think there's a little more up side even if corn is steady to higher Monday night and Tuesday.

Pearson: Alright, and your outlook you mentioned recession, that typically hits us in the cattle business. Is that going to be a factor as we get to the third and fourth quarter of 2008?

Kohake: I think it very easily could be. I'm not bearish as some guys are feeder cattle, talking low 90's. I think mid-90's, 95, 97 cents is a nice bottom in that area. And watch the supply number too if corn were to go to $6, $6.50 whatever and some guys will start backing off of the livestock production.

Pearson: Are we fairly current right now in the fed cattle?

Kohake: We are.

Pearson: Alright, that's a positive. Let's talk a little bit about what's going on in the hog sector and obviously big numbers were the story all through the fall. Is that still the case? Are we still looking at big numbers? And are we seeing some sow liquidation?

Kohake: Big numbers still same story, huge slaughter rates, lower cash, lower cutouts, we are seeing a little bit of support though just based off short covering. I think trade is tired, no fresh news, really the same old news, get out, take some profits to re-sell it. February I don't think is very well because we're still at a roughly 6 cent premium to the lean hog index but I can see a bounce in the April through the May contracts and then maybe the back months even more just based off the high corn prices, guys coming off line.

Pearson: I hear these stories that sow prices have gotten extremely weak at this point, again, would indicate some kind of liquidation going on. So, as we look at that cycle going out six, nine months are we going to start to see some positive then in this hog business?

Kohake: Yeah, I think we will. We've already started to see a little bit of a bounce in futures the last week, week and a half but I think there's more. If corn were to go back out and take out last week's highs or this week's highs of $5.40 I think the deferred hog contracts are fine. But I think eventually they will have to be sold in too, probably second quarter of this year my guy would do that.

Pearson: Alright, there's also been a lot of talk about potential business with China for pork overseas, we've had some of that. Are we going to see some more? And could that be maybe a catalyst for helping this hog market?

Kohake: Absolutely, I think we will see huge exports to China with the pork market. I think the beef market could be in a little different trouble there going back over there with the argument now with South Korea picking back up again and we might shut down our free trade agreement with them and back to the same old story.

Pearson: That's right, the ongoing sage but hopefully get some more product moved and get some feed needs covered. When we get some breaks I want to remind people, of course, to do that. It's been great having you with us Jamey. Jamey Kohake has been joining us this week, a new analyst here on Market to Market. I want to thank you. And that will wrap up this edition of our program. If you'd like more information from Jamey on just where these markets may be headed why not visit the market plus page, it's on our Web site. Hey, you'll also find streaming video of our program and you can download audio podcasts of our market analysis and our market plus segments absolutely free. So, check it out and be sure to join us again next week when we'll examine the impact of a new border fence on millions of migrant farmworkers. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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