Market Analysis with Ted Seifried

A holiday-shortened week compressed some volatile moves as the commodity market moved lower on improved weather conditions before rallying by week’s end on new forecasts. For the week, the nearby wheat contract gained 46 cents, while September corn ran 14 cents higher. A record-setting U.S. Dollar seemed to hang over the soy complex as the American product was more expensive on the export market than the Brazilian product. After a volatile week, the nearby soybean contract gained 4 cents. August meal added $9.20 per ton. December cotton fell $1.85 per hundredweight. Over in the dairy parlor, August Class III milk futures lost 55 cents. The livestock market was mixed. August cattle dropped 65 cents. August feeders shed $2.77. And the August lean hog contract put on $6.20. In the currency markets, the U.S. Dollar index jumped 191 ticks. August crude oil lost $3.31 per barrel. COMEX Gold cut $68 per ounce. And the Goldman Sachs Commodity Index fell almost 25 points to finish at 694-even.

Yeager: Joining us now to provide some insight is Ted Seifried. Welcome back, Ted.

Seifried: Hey Paul, thanks for having me.

Yeager: If you took a four day weekend and skipped Tuesday, you would be like what was all this the sky is falling business on Tuesday?

Seifried: Yeah but I get the feeling that when you looked back at what Tuesday did you'd be a little bit concerned. But wait a minute, Tuesday was just an extension of what had been happening the previous two weeks. The switch kind of flipped after Tuesday meaning the selling pressures had subsided and that selling pressure wasn't necessarily coming from weather, although that did have a part of it on Tuesday, but it was this inflation off like we've talked about. Inflation off has been running rampant for the past two weeks, it came in on Tuesday, but then Wednesday they weren't really doing it and the markets were kind of quiet. Thursday we were kind of poking at it to see if they were going to do it and we started climbing and they didn't. And then Friday we really kind of were able to run with it a little bit. So the question is, Paul, is this inflation off trade, is it done? What was that two weeks about? Did they achieve their mission and then now are stepping back? Have they changed their minds? Or was this a period of time where they realized the markets are very oversold and I'm not just saying corn or soybeans or crude, really all of them, I'm saying these markets are really oversold, let's take a pause, allow them to recover a little bit before we unleash round two. I don't know. I don't know what the answer is to that. We're going to find out fairly early next week I think. But it was nice to see that recovery. You had corn and soybeans kind of recover right to the key areas that you would expect a corrective bounce to get to. They actually closed right at or just above key resistance points that were just recently key support points. It was a good look to the chart at the end of the day on Friday. But like I said, next week is going to be very telling.

Yeager: Well, technicals are one thing that maybe took over is what you're saying, maybe not the fundamental news. Let's talk about some fundamental news in wheat. Chinese buying some wheat. Is that the driver there?

Seifried: It's certainly friendly and that is where a lot of the strength on Friday came from. There was also rumors that China was in the market for some corn too. And actually we did see China in the market for a small amount of new crop corn when we saw export sales on Friday. But yeah, the other thing going on for wheat too is that we are now more than 50% past harvest, through harvest. And with a short crop like this you figure the harvest pressure is going to come early but end early as well. So I think we've gotten past the bulk of the harvest pressure in wheat. And if we're not doing this commodity wide inflation off dance I do feel like wheat is in a position to have a little bit of a bounce and kind of spurred along by the idea that China might be in the market for some U.S. wheat.

Yeager: You mentioned that they might be in the market for some corn. Only a 2% gain this week in corn.

Seifried: Only but what we were down?

Yeager: Considering how everybody was crying on Tuesday --

Seifried: It was miraculous that we were able to recover and close positive on the week. After Tuesday it felt like that would have been an impossible outcome but we did it and it wasn't a reversal higher week. We certainly didn't get over last week's highs. But we were able to recover to a slightly green bar on a weekly chart. That is really impressive. I don't think it necessarily means that the lows are in. But it was impressive, it was a nice bounce. It was a better feeling at the end of the day on Friday than what we had certainly on Tuesday.

Yeager: All right. So Mitch asked us online, he said, is this a buying opportunity right now?

Seifried: Wow, Mitch, proceed with caution. Here's the thing about that. You want to say that for the last two years anything that we've seen of this nature has been a really fantastic buying opportunity and funds have taken advantage of that as well. But then you've got to think, the old adage high prices are the cure for high prices. Well, that hasn't been the case, at least not for the last two years. At some point that will be the case again. But the reason it hasn't been so far is because of this underlying inflationary current. Inflation allows markets to stay at high price levels for extended periods of time because people are still willing to pay these higher prices for the products that these raw commodities make, i.e. beef for example, or ethanol or energies, really anything. People are paying that. But as soon as that demand destruction occurs at the product level and inventories start to back up and you don't have to use as many inputs to replace that inventory, then we do in fact have demand destruction occurring at these high prices. Think back to 2012 when we had record high prices in grains, we didn't have the same inflationary climate and we created demand destruction that lasted for four or five years. It took a very long time to build that demand back, to buy that demand back with low prices. At some point that is going to happen again, Paul. And when we see things like we just saw the last three weeks with the inflation off trade, that gives you a very good clue into what will happen when in fact inflation transitions from a 8% rate to zero or below.

Yeager: So you're not necessarily saying a trend, this is a signal of what could come?

Seifried: Again, we'll see how --

Yeager: I just want to make sure I'm getting what you're saying. I need to move to beans for a minute because they too caught heavy lower, didn't quite recover like the others. Why not?

Seifried: Yeah that's a good question. Like you were saying in the intro, the U.S. dollar being strong makes it more difficult for exports. I don't know, the funny thing is that the beans are the ones that still have that really potentially shockingly bullish story. When we saw the shockingly bullish acreage report, which I think is the most bullish acreage report we've seen for soybeans of all time and it might actually be one of the most bullish reports that we've seen for soybeans period for all time and yet 24 hours later we're $1.07 lower than the spike high that we created within 30 seconds after the report came out. That's bad news and it also means that we're not actually trading the individual market fundamentals. That was something that was a much bigger animal, a much bigger gorilla. But soybeans, with that new acreage number if I put that in the current USDA balance sheet that should give us a 145 million bushel carryover. That is really tight. Now, the USDA won't do that because they'll cut out some demand. The average trade guess is 211 million bushels. But even then that's with a 51.5 national average yield. If you cut one bushel off of that, if that 210 is right, you cut 1 bushel off of 51.5 all of a sudden we're back to 130. This is as bullish if not a more bullish soybean potential situation than what we've been trading for the last two years on this entire rally. So the soybeans do still have explosive upside potential if we don't have this change in the overall climate of the markets, which we've been seeing signs of that, Paul.

Yeager: All right. So Rob in Illinois wants to know, and he was paying attention when you said three weeks ago, Ted warned us that prices could fall quickly due to the fears of the recession, which you've already discussed. Is that story behind us now or is there still substantial downside risk? You've kind of covered both of those. This is the question I need you to answer right now though. What targets do you have for new crop sales between now and harvest?

Seifried: I think you, hopefully you're 50% to 60% sold to this point. But if you're at zero and let's say for the sake of the question we're at zero, wow, I think you've really got to pay attention on Monday. If you can't follow through on the very positive days that we had Thursday and Friday, I think you've really got to get fairly aggressive on making some sales. Now, you can use call spreads and reownership strategies to reown that opportunity to the upside. But there is a tremendous amount of risk to the downside. If you think about what happened in 2008 when very similarly a lot of these commodity markets put their highs in, in June, by the time we got to the end of the calendar year some of these were 70% off of their June highs. In particular, if you think about soybeans in that timeframe, we were over at $16.50 in June, we were at $7.83 by the time we got to December. Corn was at $7.99, got to $3.05. These are the things that can happen in an inflationary bubble burst. And I'm not saying for sure that is what we're having and that we're looking at but there's a lot of cracks in the foundation, there's a lot of concern and you just saw what the managed money thinks of that, they're worried about this too.

Yeager: All right. You have brought up several things that are in the questions that we're going to get to in Market Plus, the online version. I need to get to livestock for a minute, Ted, because again when I asked the buying question, you could take that as a livestock issue, also a reownership issue. But let's talk live cattle. We have the big holiday behind us now. This is a lull time. The market reflected it this week.

Seifried: Yes the market did kind of cool off this week and cutouts were actually not too bad. For me I thought they traded fairly well. But look, in that big slide that we had in corn, feeder cattle couldn't really respond to that and the feeders in a good live cattle rally the feeders are the leaders is the cliché we like to use and that disappointment in the feeder market once we had corn going higher Thursday and Friday you really saw that pull back. The outlook is the same. If we're talking about a recession, if we're talking about a slow down in the economy, if we talk about people not being able to spend as much money, then beef, currently fairly high priced beef is going to be one of the things that might get cut out of the budget. So that's the concern. I think the fundamentals are there from a weights are lower than the five year average, corn prices are getting a little bit cheaper so you think there's fundamentals there that could provide a rally if we're not worried about this recession and stock market being down 22% on the year in the first half having one of the worst first halves in decades, if we're not worried about the demand side of things I really do feel like cattle can go higher. But that's a reflection of the fact that we're concerned. Hogs is a much different --

Yeager: Hogs did go higher this week.

Seifried: Okay. So, once again, we're looking at the same thing because when you go to the grocers and you look at high priced beef and you're like wow, that's starting to really cut into my budget, you look next to it and you see very well priced comparatively speaking pork chops, another very yummy alternative. And you say, huh, I think I'll take those pork chops. And I think what you're getting right now is a lot of speculators thinking that there is going to be a rush towards pork as people start wanting or needing to spend less money. So pork actually seems to be coming up as the recessionary trade. That is the lesser cost substitute that people might move their demand buying habits towards. Packer margins aren't really all that great. You don't really have a whole lot of fundamental reason to say cash is going higher but hogs need to go higher. What you do have is you have the idea that pork demand could spike if we are getting into a recession.

Yeager: And I'll ask you about poultry and how that plays into it in Market Plus in a minute. All right, thanks Ted. We are going to put a pause on this analysis and we'll continue with Ted and answer more of your questions that you submitted in our Market Plus segment. You can find that on our website of MarketToMarket.org, which it's in podcast form and also on YouTube. All of these resources, by the way, are free. You never have to go back to school if you don't want to leave. We make it easy to be a career student with our Market to Market Classroom project. Check out the modules offered in entrepreneurship, government and history at markettomarket.org/classroom. Next week, we look at challenges for improving water quality. Thank you for watching. Have a great week.

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