Market Analysis: Jeff French

Market Analysis: Jeff French

Sep 6, 2019  | Ep4503 | Podcast


The markets reacted in different ways to this week’s trade war news. Stocks went up and commodities went down. For the week, December wheat was flat while the nearby corn contract fell 14 cents. Weather and news of October trade talks with China did little to interest traders as the November soybean contract fell 11 cents. December meal dropped $2.30 per ton. December cotton lost a quarter per hundredweight. Over in the dairy parlor, October Class III milk futures gained ten cents. The livestock sector ended mixed as October cattle shed $4.05. October feeders put on a dime. And the October lean hog contract cut 3 cents. In the currency markets, the U.S. Dollar index lost 48 ticks. October crude oil added $1.61 per barrel. COMEX Gold fell $16.60 per ounce. And the Goldman Sachs Commodity Index gained jumped more than 7 points to finish at 403.95. Joining us now to offer insight on these and other trends is market analyst Jeff French. Jeff, welcome to the table.

French: Thanks for having me.

Howell: Jeff, let's start out here with a social media question we got from Pete in East Troy, Wisconsin. He wants to know, at what point are we going to see the wheat market buying acres for 2020?

French: Well, I think it's when the U.S. dollar stops its rally. This week the U.S. dollar is at a three year high. It has been rallying now for seven to eight months. That is a flight to safety. It is the strongest dollar in the world. But there are some dryness concerns in Australia regarding the wheat but then you also had Ukraine out a week ago saying that they potentially could have three to four million metric tons more to export. So right now the wheat market is trying to discourage acres and I think that really flips when the U.S. dollar stops its rally.

Howell: And one thing that we saw this week were some acre expectations for corn and soybeans for the 2020 growing season, crazy to think that we're already talking about that. But is the market factoring in a number of a bigger corn acre for next year yet?

French: Yeah, when you look at the economics of it, the market right now, Dec 2020 $4 corn pencils out better than what the beans are right now. Beans $9.30 minus your basis locally here, probably 90 cents to a dollar. So yeah, the projections right now the early projections are for 94 million acres of corn so we'll see if that actually happens.

Howell: And that's going to be something crazy to watch. Jeff, as we look at that number, that huge number coming down the pipeline potentially for 2020, how much of a cap does that put on any sort of rally we're going to see for this growing season once things are starting to get rolling in the combines?

French: Well, the focus right now of the market is for this new crop because we don't know what's out there. We've seen some guesstimates and we've seen some surveys but right now 90 million acres of corn, we'll see. The USDA has us at 91% harvested. I think that's a very aggressive number considering the late year that we had in 1993 we harvested 86% of planted acres. So we could lose some acres just from not harvesting them but we're going to find out a lot here moving forward once the combines start rolling.

Howell: And I think that's the big question, especially in the corn market, on the minds of so many producers is we're hearing varied numbers from the USDA versus private estimates on what yield is actually going to be. If we do get a higher yield number 165, 167, 169, does that give us much upside potential?

French: It does but it doesn't change the fact that demand right now has just been gutted. But yeah, it would be friendly. The trade expects a bushel or two drop next week in the September report. They also expected that in the August report, a drop, and they actually got an increase in yield, an increase in acreage as well. So let the market do what it wants to do. If I was sitting here with a bunch of unpriced grain going through the report I would definitely make sure I have it protected. There's these weekly options that are pennies because what you want to do is hedge for the unexpected. And the selloff looks like it has run its course, it's exhausted, but it definitely could take another leg lower.

Howell: Was the selloff what we were looking at here in the corn markets as they touched some contract lows?

French: Yeah, we hit contract lows here today down to $3.53. We bounced a little bit going into the close but not a good way to begin September. The funds continue to pile in on the short side. It's estimated they're short probably 150,000 contracts. So you take out $3.53, you go to $3.42, but this is not a place that you want to be overly bearish because at the end of the day we have a long harvest in front of us and the yield is going to be highly variable depending on when that corn was actually planted.

Howell: And some frost concerns potentially coming down the pipeline?

French: Yeah, I think that's what kind of broke the market here a little bit today. September right now is forecasted to be a little bit warmer. We all know that can change. But you can't rely on a frost for higher prices. What we need is we need some good sustained demand.

Howell: Absolutely. Jeff, let's take one more quick question here from Chris in Iowa. He said, when is the market going to trade on the crop we have, not the crop USDA says we have?

French: I think that's when the combines actually run. And I would just caution the first yield reports are going to be good. That is going to be your April, your May planted. You want to see the yield reports once we get 30% or 40% harvested. So it's going to take some time. This is going to be a long harvest. And yeah, it potentially has some chance that we could definitely move higher.

Howell: Jeff, tell me what is going on in the soybean markets. We had some positive trade news on Thursday yet we finished down pretty drastically.

French: Yeah, that was a big move down. We were 20 lower after that development, the trade delegation would be meeting. To me it looks like maybe the weather turns a little warmer, soybeans to me it looks like they could be hit harder with a frost, but if it's not going to come -- at the end of the day it's just the demand is, it's bad right now and we've got to work through these things before we can sustain this move higher. But if the USDA does come out with a friendly number, 47, 46 bushels to the acre, we might make a move. But the next resistance up is at $8.90. That would be the 100 day moving average, that would be pretty stiff resistance.

Howell: If the USDA does address some of the yield concern in their next report or here moving forward how much of a rally can we really have? We've still got this lack of demand from the Chinese, we've still got a huge carryout number.

French: If you look at the corn market the first area of resistance is $3.88 up to $3.93. But again you have the funds that have built this big short position down here. If they're going to cover their shorts and potentially even get long that rally can be pretty explosive. But you need to look at hedging at 20 or 30 cent rally.

Howell: In both corn and soybean markets?

French: Absolutely, until we know how long this trade war is going to last, rallies need to definitely be hedged, sold. If you do have to sell down here look to replace it with a cheap call option out to March in case we are selling the low down here.

Howell: Okay, what's the story Jeff when you look at the cotton market? Have we put a low in yet?

French: Well, for five weeks the cotton market has trade sideways, 57 cent support, 60 cent resistance. If we get a close below 57 it probably opens the door down to 52 and then if we close above 60 cents it probably will run it up to 67. But again, 14 year high stocks in the cotton market, obviously we rely heavily on the export, U.S. exports a third of the cotton that is exported throughout the entire world and China right now is simply just on the sideline. And the China's consumption is down 20%.

Howell: Okay, so export demand it sounds like it really what's going on in the grain markets. Jeff, let's talk about what is going on in the meat markets. The live cattle contracts had contract lows I believe in October, December and February. What happened?

French: Yeah, it was not a good way to end the week. The plant fire could have not happened at a worse time for the, it's never a good time, but we were coming six months consecutively of record number of cattle on feed. We had been staying pretty current. Beef demand remains robust right now. But it's not good right now. The funds are probably a little bit short this market, net short, looking for prices to move lower. That's the first time that they have been short the fat cattle for like 15 years here. So I like the February contract down here at $106 and in the April up there at $108. I think the winter months have no weather premium built into them and we could definitely see a rally here in the next five or six months.

Howell: Okay. A weather premium is what it's going to take though to get the rally?

French: Well, no, demand remains good. This was a total supply driven price decline. So demand has been good. So I like the February and the April contract there.

Howell: Jeff, what about when you look at the feeder cattle. Where are they headed from here?

French: They've acted all right. Obviously they were pulled down by the selloff in the fat cattle. If corn is going to put in a big rally here this fall it could potentially keep the pressure on the feeder cattle. But there's a lot of gaps up there in the feeder cattle chart and what we do see a lot of times in livestock is the gaps get filled. So after harvest we typically see a pretty good demand forecast and I would expect that here again this year.

Howell: What about when you look at the cash side of things? It has been pretty weak in both the feeder and the live cattle markets. Do you expect that to strengthen here over the next couple of months as well?

French: This week we took out the $102 support, then we quickly traded down to 99 cents in the South, up here in the north we've always been carrying a premium. But again, I don't want to be too negative here. It is going to take time to work through these animals but at the end of the day beef demand remains robust.

Howell: Okay. What about when you look at the hog market? It seems that the demand is robust there, especially Chinese exports. We saw record shipments in July yet prices haven't been reflecting of that. What is it going to take to see a little price action in the hog markets?

French: Well, I think it's coming. The Chinese what they're going through is friendly every protein in the world. Obviously we've got to get through this trade barrier and everything but the hogs to me you have the funds that are long probably about 35,000 contracts, I like the hogs here, I think they can move higher. Fourth quarter here domestically here in the United States we do have plenty of numbers, we're talking about record numbers, but as these trade deals come online, the Japanese trade deal, that should give us a lift in the pork demand as well. So I like the pork here right now.

Howell: Jeff, you said we're at record supplies for pork but you think they're going higher. How much potential do they have to move to the upside?

French: Oh I think they could rally here $8 to $10 pretty easily.

Howell: Within what timeline? I'm going to lock you down.

French: Late fourth quarter. It's going to be dependent if we get the Japanese trade deal signed, which we're hoping for next month. We also get the deal with the new NAFTA, USMCA here pretty soon as well. But I look for upside in the hog market.

Howell: Jeff, I'm going to throw in the dollar. You touched on it earlier. Obviously that's a big impact in our export markets. If we do get some of these trade deals put in place what is that going to do to the dollar and our export markets?

French: I don't know how it will really affect the dollar but trade deal is going to increase our exports drastically. Right now the exports are pretty much not very good. September 1st began the new marketing year, the '19-'20 marketing year. Corn and beans on average are about 50% to 60% behind.

Howell: Okay, Jeff, I'm going to save the rest of that for Market Plus. Thank you so much.

French: Thank you.

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 Seeds or no seeds. Search Iowa PBSMarket on Instagram and answer this week’s question. You’ll also find behind-the-scenes images from our producers. Join us again next week when we’ll look at a family business that has been refining an essential ingredient for seven generations. So until then, thanks for watching. I’m Delaney Howell. Have a great week!



Trading in futures and options involves substantial risk. No warranty is given or implied by Iowa PBS or the analysts who appear on Market to Market. Past performance is not necessarily indicative of future results.

Market to Market is a production of Iowa PBS which is solely responsible for its content.

Grinnell Mutual Insurance