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Market Analysis: Naomi Blohm

posted on September 7, 2012


Market Analysis: Naomi Blohm

Pearson: Grain markets were mixed this week as the trade considered European Central Bank efforts to shore up the 17-nation Euro and prospects for the Federal Reserve to jump-start the U.S. economy. 
For the week, December wheat gained 15 cents, while the nearby corn contract moved fractionally lower. 
Much-needed rains dampened soybean prices as the November contract settled Friday with a weekly loss of 20 cents while nearby meal prices moved $9 lower.
In the softs, cotton gave back most of last week’s gains with a loss of $1.54 per hundredweight.
In the dairy market, October Class III Milk futures lost 27 cents, while the deferred contract moved 35 cents lower.  
Over in livestock, October cattle gained 45 cents, nearby feeders were off 52 cents, and the October lean hog contract lost $2.82.
In the financials, the Euro gained more than 200 basis points against the dollar.  Crude oil lost a nickel per barrel.  Comex Gold advanced more than $50 per ounce, and the Goldman Sachs Commodity Index lost less than one point to close at 676.05.

Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Naomi Blohm. Naomi, welcome back.

Blohm: Hi, Mike. Good to be here.

Pearson: Glad you're here. How are you doing?

Blohm: Really well. Thank you.

Pearson: Well, it's been a big market in the broader scheme of things in Europe and in America with the jobs report today. What do you see happening in the equities markets here in America?

Blohm: Right now in America, we're going to see the traders really focus on the Feds and if QE3 is going to be implemented or not. With the unemployment number today being lowered, of course, it looks like it's nice on paper, but since people are giving up looking for jobs, it's really a telling sign of the economy. So many people now are thinking that QE3 will be implemented sooner than later. And much of the way it was really centered on regarding Europe and what they would be doing with their marketplace as well. So right now we will probably see the U.S. Economy just stay stagnant, not necessarily grow. A lot of people are waiting to see what the elections bring for results and also what the end of the year holds. If the market falls off the fiscal cliff just because of the taxes potentially starting to rise, so we will probably see growth hopefully just stay at around 2 percent. It definitely won't have reason to go higher than 2 percent and, of course, how that correlates with unemployment is that as long as the growth is under 2 percent, we're not going to see that unemployment number go under 8 percent. So that's what the current U.S. Government is going on right now. And in Europe what they did this week, European Central Bank actually was able to say we're going to go in and we are going to buy some shortterm bonds for any country in the union that needs help. So that's just nice for buying time for Spain and Italy to try to help them get out of their debt situation. And for the whole market in general, I think it's going to buy time until we're at year end. So we're at a standstill and hopefully just normal supply/demand fundamentals of the marketplace can come in, and we'll see what we can do.

Pearson: So we're pretty much going to be just treading water 

Blohm: Absolutely.

Pearson  until year end. Now, is there any black swan event out there that could  maybe is one traders' radar to cause us to move one way or another?

Blohm: That's a great question. At this time I don't think I know what it could be. Most people are just focusing on the elections and that's going to be the biggest potential and if QE3 will be implemented sooner than later. I know the Feds meet next week, so we'll get some new commentary on that.

Pearson: So sit and wait until next Thursday, Friday when that comes out. Moving into commodities, what do you see going on in the wheat market? How do the fundamentals look there?

Blohm: Fundamentals for wheat right now is that it's a follower of corn and soybeans. If you look at a chart right now, wheat has just been walking on the sideways plank between 875 as support and 925 as resistance on the December chart. It's likely to continue on that. The biggest thing in wheat right now still is with Russia. We've been talking about them for weeks. Will they or won't they stop the exports? The biggest thing is that with Russia, you can't count on what they're going to say. You just have to watch what they're going to do. The difference right now is that the USDA pegs Russian production at 43 million metric tons. Actually most of the trade industry in Russia this week has come out and said, no, it's probably more like 38 to 40 million metric tons. And in 2010 when they actually did implement the export restrictions, they had their production at 41.5 million metric tons, so we are below that. The other factor in this is that their ending stocks in 2010 were at 15 million metric tons. Right now they're at 10 million metric tons. So it's a very tight situation. I think they're playing Russian roulette with themselves, and they actually need to be on the up and up because their membership with the world trade organization is on the line. So they've got to play it cool and do the right thing. That's what we're going to be needing to watch in the market. Until then we'll likely see the market continue sideways possibly until the USDA report next week.

Pearson: Is there a timeline for Russia making any sort of announcement?

Blohm: Not that I know of. But I do know that there's going to be a G20 Conference in Russia in October, and they're going to be talking also about the food in the Black Sea Region and how the whole crop in general is down. So I would say between now and the middle of October when they're supposed to be getting together is our timeline.

Pearson: What are you telling producers with all this in mind?

Blohm: Be ready for anything.

Pearson: Okay.

Blohm: Absolutely. If corn and beans can continue higher, the wheat will follow. Technically based on this chart, if the market continues to go sideways on all this and it just falls on technical pressure or something like that, we could see a 50cent wipe out pretty darn quick.

Pearson: All right. Well, let's move over to corn a little bit. How are things looking there? Stagnant? Pretty stable in corn as well? Similar concerns.

Blohm: Absolutely. The corn market right now still is going sideways. It's been rather a boring market to watch. We're stuck with 775 as support and 825 as resistance for now. It just keeps flirting with the $8 mark. The biggest thing for corn right now to watch is the USDA report next week. We all feel that they'll likely lower that production number a little bit. They'll lower the yields. Industry right now is around the 120bushel number, and I think that's legitimate. The biggest thing to watch on Wednesday's report will be if they tweak harvested acres or not. We actually have some FFA certified acres that have come through now. Normally the USDA doesn't touch it until the October report, but some people think they might do it in the September report. If they do, this will be new market information that has not been factored in yet because harvested acres, of course, is dependent on how many acres have been cut for silage, huge this year because of the drought. So we're going to see actually the harvested acre number as a wider difference than what it would normally be. And some feel that we could see almost a million less acres on that, which would be new bullish information on the market, and that could be what finally gets it out of this trough that it's been in and push it higher. Until then, we're stuck. We're waiting till Wednesday.

Pearson: So for producers' advice, wait till Wednesday and see what happens or should they be taking steps to 

Blohm: What I've been recommending and encouraging is that if people have any old crop yet, maybe go ahead and move it. If you want to reown it, there's different ways based on your risk style that you can go ahead and do that with, but you just have to also be ready for anything that could happen in case nothing happens on Wednesday. If it's a quiet neutral report, sometimes the path of least resistance is down, and then they could use the scapegoat of harvest pressure, and that's what makes the market drop. But if we did see the market drop, that would be a nice buying opportunity because corn would be on sale.

Pearson: All right. So looking long term, what's your forecast for corn as we move through this winter?

Blohm: Well, I would say likely we'll see corn in the big picture ultimately have really solid support at $7. If South America gets off to a poor growing season, then that would be a reason for the market to ever try to push up toward that $9 level. At this juncture of time, I'm not quite willing to go beyond those boundaries because there's just too much outside perfectstorm scenarios that would have to take place.

Pearson: All right. Are you talking to producers about selling any of next year's crop, taking advantage of these prices?

Blohm: This conversation is starting to come up, and we're starting to work with some different scenario plans that would be a way that we could implement it. So such as if the December 13 futures ever got up near $7, that's a good time to pull the trigger and make some cash sales. On the flip side, if the market ever went a little bit lower, know where your pullthetrigger point is going to be on that side. We're starting to look at different option strategies to cover for the downside. Haven't really fully implemented anything yet, but we are definitely thinking about it.

Pearson: So time now is to get your thoughts kind of rolling on that. Similar situation in soybeans. Are you seeing kind of the same advice going forward there?

Blohm: The soybean market still has some longterm friendly indications. It is the friendliest fundamentally of the three grain markets, in my opinion, just because of the ending stocks are so tight here in the U.S. and globally. What the market is watching now in South America. They'll be starting to plant next month. And so far they're going to be off to a good start. The Nino pattern is weakening, and so what that means is they're going to have normal rains. It could be everything is good to go. And I think the market is really watching that and is aware of it. South America right now, Brazil is expected to be producing near 81 million metric tons of crop this next year. That's up from 65 million metric tons from last year. Argentina is expected to produce 55 million metric tons. That's up from 41 last year. So what that will do is alleviate what happened here in the United States. It doesn't mean ending stocks are going to grow. It means it buys us more time to see how the American crop can fair from there. So the meantime, on the soybeans, November beans most likely range from 1725 as support and 1775 as resistance. The bigger range is $17, $18. We will hold there for probably a couple weeks and see what happens in South America.

Pearson: All right. Would you be making sales in here?

Blohm: Cash sales, yes, be willing to reown with some options strategies. I think it's just good value. It's $18. The only way it's going to go higher is if something goes wrong in South America.

Pearson: All right. Let's talk cotton a little bit. They had a down week a little bit. What do you see going forward in the cotton market?

Blohm: Poor cotton, it's one of those markets where the supply right now is so big and the ending stocks globally are so large that it's not a happy tale for the cotton prices and it's likely to stay that way for quite some time. India actually is on pace to have a record crop. They actually have had decent weather because the monsoons have not been horrible this year, so they're going to be producing a lot. But the economy not good, people are not buying lots of clothing. That really affecting everything in China and their factories there. So likely we'll see cotton actually stay with 70 as support in the big picture and 77 as some resistance for now. I think we'll see that continue. Also, what I'm thinking for next spring is that we're going to see a lot of the cotton producers in the Southern States maybe switch to sorghum. It's kind of the upandcoming crop I think. There's a lot of potential for that. Of course, may a little more of a switch to corn and beans just because there's not really a big advantage in cotton right now.

Pearson: All right. Let's move to livestock a little bit and dairy. What do you see in the dairy industry short term and long term?

Blohm: Right now in the dairy industry, things are looking really well for the prices. We will likely see the milk market stay with prices with $19 in the big picture as tremendous support, but right now we've been hovering near $20, and that's likely going to continue to happen. Demand for milk is strong right now. Of course, production is just hanging tight. We've also seen an abundance of slaughter with the animals happening, and that's going to affect next year. And already right now, the USDA is saying that production is going to be down 1.3 percent for milk for next year. And 1.3 percent might not sound like a lot, but for milk it really is a big deal. Milk prices are going to stay firm. We think that prices could ultimately go up to $22, which would be a test of the highs from 2008. The big picture still looks friendly for that market.

Pearson: Let's talk fat cattle. Where do you see that market going? For those guys facing high feed costs, what do you see happening there?

Blohm: Right now with the marketplace, cattle in general, as we know, the bigger picture supply is limited and it's not expected to change. When looking at feeder cattle, that market is facing limited supply. It's going to continue to be that way. It's more a matter of guts from the producer, if you're willing to take on the high feed costs and not knowing for sure where the market demand is going to go. We feel that most likely the feeder cattle market is going to find its bottom in the next two months or so and then ultimately shoot higher just because of the demand picking up again long term. With live cattle prices right now on the October futures, there's some resistance at 126. Most likely that will just keep us trapped for now, because demand is firm, but it's not amazing. Actually the restaurant index is showing that consumers are not eating out. It's at the lowest level it's been at in a year, and that kind of makes sense because it's backtoschool time and people have to spend their money other places. So most likely for the live cattle prices and the feeder cattle prices, just a sideways trend until we get into Christmas holiday time, demand will pick up again.

Pearson: You mentioned just briefly you expect feeder cattle to hit their trough here in the next two months. Are you anticipating any specific price point roughly that they'll hit on the low end there?

Blohm: Great question. At this time I don't have anything specific on it, but I would just kind of keep an eye on it and you have to correlate, of course, with the grain markets.

Pearson: Let's talk hogs a little bit. The hog market also facing some tough times. What do you see going forward for hog producers?

Blohm: They're going to continue to have a little bit of a tough time for maybe another month or so just because there's such a glut of supply coming into the market right now. On Tuesday the slaughter was at 435,000 head, which was the largest it has ever been since 2009. That's just, of course, as we all know, that with the high feed costs, it's just not making sense with the math. The average hog price right now is 70 cents a pound, the lowest it's been since 2010, almost two years ago. The cash market is down and everything like that is going to just continue to weigh on sentiment. Now, the silver lining in this is that the sow market, and as far as slaughter goes there, they're not increasing sow slaughter. That means the producer is saying we're hoping that the speed issue is a oneyear deal, they don't want to reduce their reproduction, and so they're optimistic yet for the longer term. So we don't see them rebuilding herds anytime, but they're not giving up, and it's just can they ride out this storm or not. So probably see that hog market stay a little bit lower in the 70, 75 area for a little while longer yet, but because supplies are going to be dwindling, it's going to set up this story for a friendlier market down the road, especially with our export markets still being red hot, picking up steam yet even more. That's just going to create that demand base further yet.

Pearson: All right. Naomi Blohm, thank you so much. That wraps up this edition of Market to Market. But if you’d like more information from Naomi on where these lofty markets just may be headed, visit the "Market Plus" page at our web site. And speaking of the internet, visit Market to Market online this Wednesday at 5:00 p.m. Central Time when Farm Foundation and the National Association of State Departments of Agriculture present the Presidential Forum on Agriculture. I’ll moderate a discussion on rural issues with Nebraska Senator and former USDA Secretary Mike Johanns - representing Governor Romney - and Former Iowa Lieutenant Governor and Agriculture Secretary Patty Judge --representing President Obama. We invite you to post your questions on Twitter using #agforum and then join us online Wednesday afternoon at 5. Until then, thanks for watching. I'm Mike Pearson. Have a great week.

 


Tags: agriculture cattle commodity prices corn drought economy feeders hogs markets Mike Pearson milk futures Naomi Blohm wheat