Market Analysis: Naomi Blohm

Market Analysis: Naomi Blohm

Jul 1, 2016  | Ep4145 | Podcast

Podcast

With Brexit in the rear view mirror, this week it was the U.S. government conducting the wild ride in the commodity markets. The USDA's acreage survey surprised many and was bearish for grains. For the week, September wheat dropped 35 cents as the nearby contract was a loser for the fourth straight week while the September corn contract has plunged 18% in two weeks to close 29 cents lower. Thursday's reports contributed to volatility in the soy complex which helped to raise last week's massive loss with a 63 cent gain. August meal came along for the ride to push $27.60 higher. In the softs, July cotton gained 57 cents per hundredweight. Over in the dairy parlor, August Class III milk futures added 6 cents. In the livestock sector, the August cattle contract improved $2.10. August feeders expanded $3.00. And the July lean hog contract weakened $1.02. In the currency markets, the U.S. Dollar Index moved 14 points higher. Crude oil added $1.35 per barrel. Investors kept going for gold as the August COMEX price gained $16.60 per ounce. And the Goldman Sachs Commodity Index broadened 8 points to finish the week at 377 even.

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

Blohm: Thank you.

Pearson: Tough week in the wheat market. The trajectory we are on here, where's the bottom?

Blohm: I think we're there is the good news. Technically speaking the wheat market has achieved its downside projected point. The USDA report this week did us no good. It increased the planted acres way more than what people thought. And if you take that along with the really good yields that we've been having the ending stocks are swelling to over a billion bushels. And so just all of that bearish sentiment is what made the market plunge lower this week. But keep in mind seasonally there is a little bit of a bounce here that happens in the July timeframe. And on a technical correction I'm looking for both the Kansas wheat and Chicago wheat to probably bounce anywhere from 20 to 30 cents. But that's probably as good as it's going to get because the fundamentals continue to be so negative.

Pearson: Okay. And even in the seasonality with yields in Kansas and Oklahoma, 100 plus bushel per acre in some cases, can we still expect to see that kind of a factor take hold?

Blohm: I think you'll see it from a technical standpoint especially if the weather is maybe getting a little bit drier, which would affect the soybean market and the corn market. So if we see that the wheat will kind of follow tail and get that corrective bounce but it's going to be a selling opportunity.

Pearson: Okay. Speaking of corrective bounces, 29 cents down in this corn market. You've got a technical bounce in sight for us?

Blohm: Well the corn market tested the major support level from late March and early April at $3.65 and that should hold for a while. The USDA surprised us all this week by increasing the planted acres by .5 million acres and it was such a big surprise that that's what made the market push lower. And they increased the quarterly stocks number too, which was another surprise. So what you have right now is a market assuming tremendous yield. We're still factoring in 168. And so where we are at now for prices at $3.65 is equivalent to the ending stocks being back over 2 billion bushels. If we come back from the three-day holiday weekend and if the rains that are supposed to be happening this weekend over the parts of dry Missouri and dry Illinois and Indiana, if those don't materialize like they thought, or if the weather forecast is for really dismal, dry and hot for the rest of July, that in and of itself will allow for a corrective bounce. What kind of a bounce should you be looking for? $3.95 September futures and probably that $3.95 almost $4 area on the December futures as well. Don't bank on $4 futures, it probably won't get there, but it will get close. But that is your opportunity for catch-up sales. And for the market to turn around substantially we would have to have the perception that yield is less than 163 because that would be what is needed to get the ending stocks low enough to get the market price higher than $4. But this USDA report just was the nail in the coffin.

Pearson: Okay. So it's weather, weather, weather is what we're trading from now until harvest.

Blohm: Yes. Yes.

Pearson: Keep an eye on those forecasts and don't keep your fingers crossed for $4. Given that we're going to be making some sales sub-$4 are you advising physical sales or should we be selling futures at $3.95? Should we be buying calls to offset? What are your thoughts on marketing that corn?

Blohm: Well I would say if you've got old crop this is going to be your last chance to clear our your bins so you've just got to do what you've got to do in your cash market. If you wanted to take a stab at reowning then I would say you could try the call options because usually we do get a seasonal bounce here in July based on weather. But, again, we're only looking for a 30, maybe 40 cent rally at the most and so you're only going to get 15 to 20 cents on a call option. So just keep that in mind. But I would say on the rally forward contract for your new crop as well, maybe a hedge to arrive.

Pearson: Okay. Well let's talk soybeans. The star of the show this week, big, big rally. I've got a question to start off this from one of our followers on Twitter. This if from Jeremy in Lanark, Illinois. He is asking, how far can we rally and not hurt the demand side of the balance sheet?

Blohm: That's a good question. I would say how far we could rally in terms of price before demand is affected would probably be $12.50 to $13. Do we have any reason for that to happen? No, we don't. The thing with soybeans is that the demand is so strong in general all over the world right now that the demand is what allowed that rally to happen yesterday. Even though the USDA increased the acres by 1.5 million acres, the reason for the rally is because of how important, again, the weather is coming up because if we take the yield at 46.7 with the numbers that the USDA gave us that puts ending stocks at 333 million bushels. That's kind of a negative number. But if the weather is hot and dry and we drop just down to 44.4 on yield, so just a slight reduction, that puts ending stocks at like 143 million bushels, that's a totally different ballgame. So weather is really important right now and the demand in general is so strong that I don't think we have any sort of a demand destruction in the short-term because it's just so strong right now.

Pearson: Are we still talking possibility of La Nina as we push into August?

Blohm: That's the latest that I've heard, it has continued to be there. I haven't heard anything different. And so I think that's also the reason why the traders kept the market up. They were thankful it wasn't a 2 to 3 million acre increase and they're very mindful that the weather forecasts are saying more about hot and dry La Nina for August for sure.

Pearson: Okay. As a producer am I selling this rally or am I holding back and watching for 12?

Blohm: You're cleaning out your bins on this rally, period. You need to because if the weather is fine this is your last chance. I would also get more current with the cash sales. But just be mindful if for any reason we can get through that $11.75 to $12 hurdle on the November price the funds will stay in it and continue to get in it and push it a little higher. But the weather is the only thing that will make that happen.

Pearson: Okay. Well let's talk dairy. You're our native Wisconsinite. A lot of strength, relative strength here in the milk market recently. Can that continue?

Blohm: I don't think it's going to continue much more because the reason for the rally, we've got prices up towards the $17 area, which was resistance from nearly a year ago, or I should say this winter I guess. But the reason for the rally right now is the cheese demand has been so strong domestically. And the cheese price for the black barrel price is 40 cents higher than it was back in May and domestic demand has been pushing this rally higher along with news that some of the milk plants in Wisconsin they're going to be cutting off any sort of BST hormone that has been in any milk, they're done with it at the beginning of 2016, so farmers are starting to, if they haven't already, most have, but if they haven't they've got to quit that process. Our exports are still lagging, they're not strong. And so if we didn't have this cheese demand right now we wouldn't have the prices that we have. So this is really a nice opportunity to get current with sales and be lacking in some further hedges.

Pearson: Okay. Good time to throw some cheese on that burger and celebrate the 4th.

Blohm: Absolutely.

Pearson: Speaking of the burgers, live cattle up $2.10 this week on the board. Strength coming off a bounce here. Can we keep running this thing?

Blohm: I think we see the cattle market continue in the sideways trend that it's been in for four months. We had stronger cash sales. Our exports have actually been pretty decent for the past few weeks. Year-to-date exports are up 2% from year ago levels so that's encouraging. But just keep in mind, the market is aware that the herd is slowly rebuilding. There is a perception that the herd and production is going to be larger in the third quarter. So what you have to be watching on cattle futures for the August and the October contract, as long as they can stay north of $110 you're fine, we're going to see more sideways trading. We don't have any reason for a big rally. But if demand destruction happens and I think the biggest thing would be if China stops buying hogs, that saturates the market domestically with product, that competes with the cattle. Then that factor is what would make the market price go below $110 and that would lead to a technical washout pretty quick down to 100 even pretty much.

Pearson: Oh wow, so that would happen very fast.

Blohm: Yes.

Pearson: Feeder cattle real quick, up or down in this next week?

Blohm: More sideways just like the live cattle.

Pearson: Lean hogs, you talked about China's buying, we've seen lean hogs show incredible strength for the past six months. Stepped back a buck this week. Are we just getting toppy or are we starting to correct here to the downside?

Blohm: It was a correction from the short-term high that we had had. The August contract got up to $90. It needed to kind of simmer down and come back to reality. Cash markets had cooled a little bit. The cutouts had cooled down a little bit as well. But at this $82 level for this August contract that's a really nice area. And, again, we have to continue to see the Chinese demand. That is what is keeping this market higher. If there's any wavering sense that that's leaving the market price will work lower. But for the short-term I'm looking, just like the cattle market, sideways trading from here probably for another month for sure.

Pearson: Okay. Are you going to take advantage of these higher deferred prices to make some sales out there?

Blohm: That's actually a great question. I think I would just because the perception again also is that the slaughter numbers work higher into the third and fourth quarter so any opportunities that you have for some sales it might be a good idea because production is plentiful.

Pearson: Still weights are pretty well in line, we're not seeing a lot of growth?

Blohm: I haven't heard too much there regarding that. It seems like it's pretty much in line with projections and year ago levels, things are just current. So no big supply issues coming down the road so make sure we're taking advantage of the rallies when you see them.

Pearson: Alright. Take advantage of the rallies. That's right. Sell when you can. Alright. Well, Naomi Blohm, thanks so much for joining us this week.

Blohm: Yeah, thank you.

Pearson: That wraps up the broadcast portion of Market to Market. But Naomi and I will keep the market conversation going including answering more of your questions during Market Plus which is available on our website. And while you're there check out MTOM, it's the newest podcast offering from the producers here at Market to Market. Listen as we go beyond the headlines to hear about upcoming stories and learn more about our market analysts. And join us again next week when we learn how American pork is finding fans in the Japanese market. So until then, thanks for watching. I'm Mike Pearson. Have a great week.

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