Market Analysis with Naomi Blohm

Market Analysis: Naomi Blohm

Feb 7, 2019  | Ep4425 | Podcast

Podcast

Our first WASDE report since February was released alongside the Grain Stocks report. The commodity market greeted both with little, if any, fanfare. For the week, March wheat lost 7 cents and the nearby corn contract lost 4 cents. The grain stocks report was considered only slightly bearish for soybeans as the March contract fell 3 cents. March meal dropped $5.70 per ton. March cotton plummeted $1.09 per hundredweight. Over in the dairy parlor, March Class III milk futures gained 21 cents. The livestock market was mixed. April cattle gained $1.65. March feeders put on $1.57. And the April lean hog contract shed $1.70. In the currency markets, the U.S. Dollar index skyrocketed 110 ticks. March crude oil fell $2.56 per barrel. COMEX Gold lost $3.50 per ounce. And the Goldman Sachs Commodity Index dropped nearly 8 points to finish at 405.35. Joining us now to offer insight on these and other trends is one of our regular market analysts, Naomi Blohm. Naomi, welcome back.

Blohm: Hi, thanks Delaney.

Howell: Naomi, we definitely have a lot to talk about. We've got the WASDE going on. We've got Chinese soybean shipments going on here. But let's kind of break down the WASDE commodity by commodity. And let's start it off here with the wheat and also the winter wheat seedings report. Break it down for us. Were there any big factors driving the wheat market here on this Friday?

Blohm: Right now today with the news that we got from the USDA a good chunk of it was expected and there were not really too many big surprises. We did get news today that we were part of an export sale to Egypt so that was supportive. But as far as the wheat goes for the USDA report, ending stocks were increased, so both here and around the world. So kind of that same old story with the wheat complex in general. It will be interesting going forward to see if we can see any more wheat demand because prices of course are still cheaper and to see how the wheat comes out of dormancy this winter. But unfortunately the star of the show for the reports today were more towards soybeans and corn.

Howell: Right, definitely. With the winter wheat seedings report I read it was nearly a million acres below pre-report guesses, which is the lowest seeded acre since 1909. Do you think that was solely due to weather or has production in the markets seen this point where we're in a wheat glut, people are recognizing it and they're pulling back on those plantings?

Blohm: Yeah, it's a combination of weather I think primarily because harvest for soybeans was late this year in a lot of places where they would normally double crop. And so that was primarily a focus. The market in my opinion has been aware of that. It has been a talking point for a while and today's number, yes supportive, but won't become a factor until we see how production fares down the road.

Howell: Okay. Naomi, let's pull a quick social media question here. We don't often get wheat social media questions so I wanted to make sure we threw this one in from Roman in Brillion, Wisconsin. He said, why is Chicago wheat being so strong against the KC wheat this year?

Blohm: That is a good question, something that we're keeping an eye on too. I'm not totally sure is the answer but it's something you can use for spread trading between Chicago/Kansas wheat. Kansas wheat likely this summer will be able to make a push higher. And, again, I think it will be targeted on when we get the protein content information and to see what actually is coming out of dormancy and how well it's doing.

Howell: Okay. Naomi, let's transition here to talking about corn and soybeans because those were really where the bulk of the reports today impacted the markets. Starting off with the corn market, again, any big takeaways from today's WASDE?

Blohm: I think the USDA did us a huge favor by lowering the yield more than expected, 2.5 bushels less than the December report. Most people were thinking it would be a bushel less. I thought that news in and of itself would just send the market skyrocketing higher. It is such an important piece of the puzzle going forward. I'll get into that in a bit. But the rest of the report, what the USDA did was they kept the ethanol number actually a little lower. They tweaked the usage side a little bit from the standpoint of feed seed and then they left exports unchanged. So demand didn't really do anything exciting today but it did make our ending stocks come down a little bit both for the regular ending stocks number and the quarterly stocks number so those are supportive. But we just won't have that traction until we get going into the planted acres. Now, something to really be focused on is that in a couple of weeks the USDA outlook forum is going to be happening in Washington, D.C. assuming that they get funding and the government up and running on that. But what's important about that is that's the first time that we're going to see a guess as far as planted acres this spring and often times whatever is announced in February is quite similar to what comes out at the end of March. And here's the biggest things that you need to take away from that, is that we're expecting more corn acres this spring. I think that is already priced in the market also and that might be why we didn't see a rally. But if we see corn acres 2 million more this spring then assuming demand kind of stays where it is tweaking and massaging here and there ending stocks get smaller, they drop 300 to 400 million bushels.

Howell: Even with an increase in acreage.

Blohm: Even with 2 million more acres. If we go to 3 million more acres with today's data ending stocks don't change too much. So it sets us up for some nice summer rallies if we have weather issues and then if we see demand increases or ethanol exports increase, anything heading out to China, we have really still a friendly corn story but we have to wait a little bit longer until we get some more news.

Howell: So February is really when we can maybe start to see, after the Ag Outlook Forum, is maybe when we can start to see some pick up in summer rallies or beyond?

Blohm: Yeah, and we're still in a situation where this market is consolidating, even after today. And so the longer a market consolidates with prices not doing much of anything the bigger the price reaction is down the road. We just need some bigger stimulus to get this market going but it will be out there.

Howell: Absolutely. Naomi, I wanted to ask, we talked a little bit about it and I know you mentioned in your newsletter this week about the Malaysian ethanol kind of essentially China rerouting U.S. ethanol through Malaysia and then to China. Is this a sustainable practice for China to do if they're trying to reach this ethanol mandate?

Blohm: I think it helps in the short-term. I don't think it is sustainable by any means. It's a lot of rigmarole behind the scenes to massage the situation like they're doing it as far as taking it to other countries and then blending it with fuel in other countries to get it into China. That seems like a lot of effort. So if we can get trade negotiations a little bit more concrete, wouldn't it be nice to just directly send it right to China, but we'll see what happens down the road.

Howell: Let's say a couple of hypotheticals here because I know we're in negotiations, obviously ongoing negotiations with China, also this week announced with Brazil to try and get some ethanol into that market as well or reopening that market. If we get a trade deal in place with China and with Brazil for ethanol what is that going to do to the market?

Blohm: That will really be supportive because that is new demand for ethanol, that is new demand for corn. Corn has been trapped in this trading range for 4 years. We haven't been able to get out of it. And so to get through $4.50 on December futures, one piece of the puzzle happened today with the USDA cutting that yield, that was so important. Next we need to see new demand and that would be with ethanol markets. And then of course the third thing would be any summer weather issues in a few months. But then if those three things can happen we finally have a marketplace.

Howell: A lot of pieces have to line up in the soybean markets as well. Break it down for me, the quick nice and dirty talks here from the WASDE.

Blohm: So today the USDA cut yield by about a half a bushel which was expected so nothing dramatic there. And they also did reduce exports, which we were anticipating would happen also. Offsetting that though they increased the processing numbers and so that was supportive. The big picture summary is that ending stocks were reduced down to 910 million bushels. It's still a lot of soybeans. Soybeans don't have a friendly story yet. We know that we're going to see a reduction on soybean planted acres coming up this spring. But no matter which way you slice it because we have lost some of that demand we're going to still have a big pile of beans going forward.

Howell: How bullish or was it bullish that they also cut Brazilian production by I think 5 million metric tons?

Blohm: Yeah, so that was nice because they acknowledged the situation down there. But that was more of a true to USDA format where they just do baby steps to do reductions. So coming in at 117 million metric tons was a nice acknowledgement of the weather situation. But the reality is that because Argentina still has a big crop, even though there is a slight reduction in the Brazilian crop, the two combined is still more than what they produced last year.

Howell: So besides the WASDE report this week we've also had China continuing to buy shipments of U.S. soybeans. Is the market still placing more value on this than it did on the WASDE report? We really didn't react much at all on Friday from the WASDE but when we have those even little minute soybean purchases it seems like the market is very volatile.

Blohm: Yeah, so what has happened with the soybean exports that we've been seeing to China, the market has been more like phew. We're going to meet the demand that the USDA is hoping that we would have as far as exports to China. So it's supporting the market but it's not enough new purchasing to get the market to respond with a truly bullish response but at least it's keeping us afloat for now.

Howell: And to break out of this range that we've also seen in soybeans what is it going to take, Naomi?

Blohm: It takes a rally in corn, I really think so, or some potential additional crop loss in South America. But if we could get a corn rally going, if we could get some new export markets going for our soybeans as well that would be supportive. But corn is still the leader, beans are the follower.

Howell: Okay. Naomi, you're kind of our resident dairy expert. Quick question for you here. We were up 21 cents in the March contract from last week. What's going on in the dairy industry?

Blohm: Well, cheese finally got so cheap, that's what happened.

Howell: Well, good and bad then right?

Blohm: Yeah, so cheese was so cheap that finally the cheese buyers came in and they were aggressive about purchases this week and so that is what prompted the milk prices higher. That was quite frankly the only thing friendly in that marketplace right now. We don't have a milk production report for a couple of weeks. The last one that came out showed production still up. 0.6%. I think we're anticipating that production will still be up in this next report, hopefully it's not as high as what it has been. The surprise though that has been happening in the marketplace that earlier this year the dairy exports had been so strong, so strong and now we found out with report data that has been slowly coming out to us that the most recent export number that we have, our exports are actually down 12%. And that's year over year number. And that is really frustrating. And specifically to China the exports for year over year numbers are down 33% for all dairy numbers. So that is still keeping the market lower in general as far as prices go and still too much supply so not any big happy news to say yet for that milk market.

Howell: Okay, continue to watch that as well. Let's talk live cattle. Do you see live cattle continuing to trade in a rangebound pattern as well?

Blohm: I do. I don't think we have enough reason yet to go higher. The market is quite aware that second quarter production is going to be up 410 million pounds and that's a lot of production there. And the deferred contracts are already recognizing that, that's why they're $10 below the front month contracts, yet overall demand continues to be strong, domestic and export demand, so that is what is our saving grace. What I'm watching primarily is the demand numbers and that's the most important thing right now because we know where our supply is essentially. But I think it will be week by week case for that marketplace. But keep an eye on it. Technically speaking sometimes when we don't get any fresh news the market has the ability to sell of a little bit but a sell off, I don't think it will be anything that is overly dramatic just because, again, the demand continues to be strong.

Howell: Right. And the demand continues to be strong in the lean hog markets. However, we keep continuing to head downward. Are we going to find a bottom any time soon?

Blohm: Yeah, we're almost there. It's a technical sell off now and we're almost back down to the summer lows. So for the nearby April contract that gets closer to $58 and for the June contract it gets closer to the low 70s. That's the number we're targeting. And then there should be some good support at those points. Like you said, demand is fantastic for the pork market. And we're always waiting our breath to see if we get any more exports to China picking up because of the fever there with their livestock. So that is something to keep an eye on as well. But we're almost to the bottom in hogs. I feel confident.

Howell: Have we seen this bottom because we're just trying to get rid of this massive supply we're sitting on?

Blohm: I would say that's a fair statement for sure because we don't have enough additional demand to keep it going. And so if we can just get some more exports going to China that is what the market is waiting for and as soon as we see a glimmer of that the market will go right back up.

Howell: All right, Naomi Blohm, thank you so much.

Blohm: Thanks, Delaney.

Howell: That wraps up the broadcast portion of Market to Market. But we will keep this conversation going on Market Plus where we'll answer more of your questions. You can find it on our website at MarketToMarket.org. Find us on Facebook. Search IPTVMarket and get behind the scenes information and other stories of interest. Give us a like. Join us again next week when we'll look inside a prison dairy operation with outside benefits. So until then, thanks for watching. I'm Delaney Howell. Have a great week.

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