Market Analysis: Jeff French

Traders seem to think the Plains’ wheat crop is in good enough shape while a series of major USDA reports wait in the wings. For the week, the nearby wheat contract sold off 8 cents while March corn added 14 cents. Changes in weather patterns were not enough to overcome a private estimate of a smaller South American crop. But whoa, Nelly, here came Friday with a volatile session. The March soybean contract jumped higher by 71 cents. March meal increased $25.90 per ton. March cotton expanded by $2.52 per hundredweight. Over in the dairy parlor, February Class III milk futures rose 86 cents. A down week in the livestock sector. February cattle shed $2.37. March feeders dropped $3.27. And the February lean hog contract lost $1.83. In the currency markets, the U.S. Dollar index added 14 ticks. February crude oil gained $3.72 per barrel. COMEX Gold decreased $32.30 per ounce.  And the Goldman Sachs Commodity Index gained almost 16 points to finish at 577.50.

Yeager: Joining us now to provide some insight is Jeff French. Hey, Jeff.

French: Hey, Paul. Great to be here.

Yeager: I think I can still say Happy New Year, it's still the first week.

French: Sure, Happy New Year.

Yeager: But we're going to try something right away and you have to watch the monitor because what I'm about to show you is a map that was put together, a series of maps of the drought in the United States. And we're going to focus on the wheat area first with these maps. It has been dry in the Southern Plains, it stretched to the Northern Plains, when you see the map this is in April. You can see in North Dakota, South Dakota it was extreme drought there and as the year progressed things got better and now there's this debate of are we better or are we worse? What do you see the disparity between the North and South Plains when it comes to wheat?

French: Well, it's two different classes. And we've got the hard red winter wheat obviously in dormancy here. Fundamentally we got the first winter ratings, the winter wheat is in poor condition, 25% to 30% of the crop is rated poor to very poor. But you've got to remember, money flow will always trump fundamentals, especially in the first week of January. And we've seen that here in the wheat. Wheat got to $2.50 premium to corn during the last month. Historically that is very expensive to corn. So that is corrected here the last two weeks, it's down a dollar in that spread. Historically maybe you see that spread 80 cents to a dollar over the corn market. So seasonally it has come in to narrow. We expect that. But I think the wheat just got a little bit overdone. So yes, it is dry, but it is January. It can improve in a long time.

Yeager: Does this selloff last much longer?

French: It's overdone. We spent this week, we sold a lot of $8 wheat earlier and we spent the last couple of days buying some of that back. But you've got to watch the March Chicago contract. You've got the 200 day moving average down there at $7.31. We tested that last night, got down to $7.35. But we bounced today. I think a lot of today was profit taking. Again, the funds have gone from being net long, betting for higher prices in the last couple of months, to here in the last few weeks they've actually sold their long positions and now they are net short wheat. They're looking for lower prices. So can they reverse and go long again? Sure. But I think right now here during the winter they're going to continue to sell wheat against being long corn and long beans.

Yeager: That's where I was going to go next. So, in corn what is this doing on the spillover into positions and what should farmers do in corn?

French: Well, if you look at it from the fund standpoint they're long probably 380,000 contracts of corn. And corn in the last 60 days has not done much. But you're sitting here at $6 futures, $6.10 futures, $6.05 in the old crop. These are fantastic prices. Basis levels are extremely strong. I would never tell anybody not to sell $6 corn. But if you are, just defend that sale with a cheap call option, especially going in with some of these explosive reports next week.

Yeager: Well, that is something we will discuss as we go on as it drips into all of these things. But I want to ask you a question that came in via Twitter. Matt in Nebraska was responding to something you tweeted earlier today. So forgive me, Matt, for kind of combining this. But he says, do you like Dec '23 corn sold at $5.15 even if ammonia goes to $2500 a ton?

French: Well, Dec '23 corn, that was a new contract high here today. I like selling new contract highs. And we're talking 5%, 10%, we're not talking too much. If that is our worst sale of 2023 corn is $5.15 I think we're going to have a pretty darn good year. But yeah, if we have $2500 per ton ammonia I think we have bigger issues here the next couple of years.

Yeager: Well, everybody thinks nitrogen, the ammonia is the big issue in the corn market. Is it? Or does that have an effect on other markets?

French: Yeah, it has an effect, especially some of the areas that don't normally grow corn, some of the “I” states, they're pretty set in their rotation. But the inputs will definitely affect those acres that are a little more mediocre out there. But I think in the “I” states you're going to see pretty much a normal rotation.

Yeager: Switch to soybeans. I think I got your attention when I said 70 cents on the week. 40 of it was today. What is going on?

French: Well, you have the funds are long, they're long about 100,000 contracts so they're looking for higher prices. Next week is expected to be extremely hot, we're talking 110 degrees down in Southern Brazil and Northern Argentina. So, you have the weather story. You also have, this is the first week of the year, so you have a lot of pent up energy, money being put to work on the long side. But then you also saw March soybeans close above $14 and when we traded above $14 it was quick, it was within 10 minutes that we were trading up to $14, $15. So charts look good, especially on the November '22. Beans, new crop beans are trying to buy acres, new contract high close here today up there around $13.20, extremely good price. Again, sell some grain here or protect it because these are phenomenal prices, I know it's a long time until harvest, but these are extremely good prices.

Yeager: So you answered my own question. Should you reward the market right now? What is a percentage ballpark of where maybe I should be thinking?

French: For the new crop we're not getting over -- 20%, 25% sold here, cover some of the inputs. Historically these are still very good prices. The old crop we’re about 80% sold on the old crop, we'll hold the 20% through the South American growing season because we all know that can get explosive. If they continue to stay hot and dry it is a La Nina year, it is expected to peak here at the end of January. But if they don't get these rains that are forecast in the next two weeks then we can go much higher.

Yeager: And there's a lot of people thinking that that's what is going to happen. But no one is a meteorologist, even they struggle sometimes to get the forecast right. Let's quickly slip in cotton because they had quite a series of moves this week as well.

French: Yeah, it's related to the bean market, new crop cotton, new contract highs right up there at 94 cents, just below 95 cents. Every time the beans gain in value the cotton is going to fight for acres there. So looking at the old crop cotton, traded up there in that $117, $118 area. $120 has been pretty stiff resistance in that March contract. I like selling some old crop cotton up here. If we get a close above $120 look to reown it.

Yeager: Meats are seeing a little bit of an impact of higher grain. They did rally when specifically live cattle when grain was lower. What's going there with live cattle?

French: Well, we've had excellent performance here in the feedlots. Carcass weights right now for this week are all-time highs, 12 pounds above last year levels. That's weather related. But the performance has been great. Seasonally I like cattle here. Nine out of the last ten years their first quarter prices for cattle are higher than the previous fourth quarter prices. And historically the highs for the first quarter prices in cattle are hit during March. So fourth quarter prices were $136 to $142 in the cash market. I like cattle here, especially if we can get through the next 30 days with the COVID. Demand has been exceptional. Numbers are coming down and I like this cattle.

Yeager: So would you be expanding a feedlot right now?

French: Well, I'd wait here and see if we can get through this next 30 days here. But I'm a buyer of cattle. I think the prices, the numbers fundamentally are going to get tighter, feedlot managers are going to have more leverage. The one thing you must watch though, kill capacity. If we start killing below 580,000 head per week and that comes to the packers, the absenteeism we've seen with the illnesses, you've got to watch that number because that is the thing that can affect this cattle market the most.

Yeager: If it's into processing then it could also impact the hog market too?

French: Oh certainly, absolutely. Hogs, the numbers on the hogs are friendly. We saw that last week in the hog and pig report. The charts look friendly. Now today they did have a big reversal. It was actually a textbook key reversal lower. I don't know if that was profit taking on Friday but we needed to see a lower close Monday might open the door to prices. But hogs fundamentally should be in strong hands. Again, you've got the summer months traded above a dollar a hundred, not bad protection at those levels, but hogs should be in strong hands here.

Yeager: I'm going to put you out on a limb in Market Plus on a prediction about USDA's report on Wednesday. But before we go here in this discussion, the dollar impact. It has been fighting up and down and the grains seem to be responding to it. Do you see that moving forward that the two are in concert for the foreseeable future?

French: Well, on the export market absolutely. The dollar is at 95 cents here, it has been up at these levels for about the last two and a half, three months, that's strong if you look at it here in the last couple of years. Absolutely will affect the exports. Beans, wheat, bean meal and bean oil all had marketing year lows in exports last week and that is probably a result of the strength in the dollar.

Yeager: All right, thank you so very much, Jeff, the gold medal performance, golden performance there for you. Thank you.

French: Thanks, Paul.

Yeager: That will do it for our installment of Market to Market. We will talk more in Market Plus so you can join us there. Find that on our website which is MarketToMarket.org. Now, if you have made a New Year’s resolution to spend more time on social media, how about making Instagram part of the plan, specifically ours? We have behind-the-scenes pictures and stories on our feed of MarketToMarketShow. Next week, we examine the major government reports with a panel discussion. Thank you so very much for watching. Have a great week.

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