Market Analysis with Sean O'Leary

An approaching three-day weekend and end of month activities provided for irregular grain market movement. Also, a drier forecast in the Corn Belt and rain in the Southern Plains were the big influences on traders. For the week, the nearby wheat contract added 11 cents, while the July corn contract improved 50 cents or nearly 9 percent. The soy complex almost exited ‘beans in the teens’ territory for the first time in a year as drier conditions have yet to garner attention from market bulls. The July soybean contract gained 30 cents, while the July meal contract shed $6.90 per ton. July cotton shrank $3.37 per hundredweight. Over in the dairy parlor June Class three milk futures dropped 31 cents. The livestock market was mixed. June cattle improved $1.62. August feeders put on $2.63. And the June lean hog contract fell by $6.95 or 8 percent. In the currency markets, the US dollar index was up 107 ticks. July crude oil increased by 99 cents per barrel. COMEX gold cut $32.60 per ounce. And the Goldman Sachs Commodity Index gained almost 2 points to settle at 545.85.

Yeager: Joining us now is Market Analyst Sean O'Leary. Good to see you, Sean.

O'Leary: Good to see you, Paul. Thanks for having me back.

Yeager: This wheat market, we have people who are like it's raining, too little too late to save a crop. But as many times as the people have sat in your chair I have asked them why is the U.S. not moving the market, the U.S. is still not moving the market. This is still a global story, right?

O'Leary: Right, right. And I think it's the case where the U.S. doesn't really set the price. It has grown so many places overseas. Russia it sounds like is going to have a big crop. I think European weather is a little more normalized you might say. And it just remains kind of a sluggish market. The KC market has held up a lot better than the Chicago market. But it's just having a hard time moving higher.

Yeager: So, what are we going to do here if we are a producer in the United States who has a crop that may or may not be there? How does one protect themselves right now?

O'Leary: I would be inclined to instruct producers to maybe initiate some short call premium if the market stays range bound. That is a small reward, it's a small amount of protection, but you can cover that short position with further out of the money long call premium. So, if we do have kind of an upside price breakout you're covered there. That is a protection I would call somewhat passive because it's kind of limited protection. But it's sometimes better than sitting on your hands and not getting the price when all is said and done.

Yeager: Well, we have a couple of questions about that in a minute about not sitting on your hands or sitting on your hands. But, I need to mention this corn market first and it's our viewer submitted question of the week and it came via Twitter from Supply and Command. This is the question that we have here. How are people still bullish, Sean? Ethanol is down. Exports for beans and corn are down. We're importing wheat. When you look at the corn side of this, does the market reaction of the week dictate a bullish outlook on corn?

O'Leary: Well, we've lost a fair amount of value here recently and I think those are all things you could point to and you have to wonder when are those stories kind of baked in? We've just gotten to the point where we're talking about some hot and dry weather. It's primarily I think the concern is within the state of Iowa, Northern Illinois, so it's not overly widespread right now. If you look at the price I would say it's a little bit disappointing, in my opinion.

Yeager: That it should be what, higher or lower?

O'Leary: That it has not made more, a greater gain on that news. But we're at the end of May so it's plenty early as well.

Yeager: We've also in July and December we have moved above that 20-day moving average. What is the technical signal telling you and what I should be watching at home as a producer?

O'Leary: If you look at the relative strength index, a momentum indicator that I watch a lot, it actually showed signs of divergence, which on a move lower is bullish. And the December contract had a little bit of follow through. It has had a good week basically. The beans are just starting to show a little bit of divergence on that indicator so that is potentially bullish. I would say to anyone if you look at the price I kind of see it compared to just eight weeks ago as a good buying opportunity in those markets. It can be sometimes hard to find someone that is bullish, that is the contrarian in a person might lead you to be a little friendly just based on that. And it's the time of year, it's way too early to get comfortable on weather.

Yeager: Well, we have this long holiday weekend. We're not opening the overnight trade until Monday night. Are you nervous?

O'Leary: A three-day weekend always makes you nervous. I get nervous all-day Saturday and Sunday much less having Monday off. But there's ways to approach any of these markets where you can have a comfort level going into a regular weekend much less a three-day weekend. You can establish option trades that aren't as heavy or as fast as futures but still afford you some exposure.

Yeager: Let's get to beans specifically here. We have seen the meal be an issue, which headed the opposite direction. We also had Tom Skilling, the old Tom Skilling at WGN, say flash drought. At what point does the bean market respond to words like that?

O'Leary: I would think that would come to play pretty soon here. I saw a comment just today where they're trying to kind of balance the story of that. And kind of the counterpoint to it was we're going to get a lot of things planted in a timely fashion or sooner. We've also had years where that appeared to be kind of a bearish story because everything got done in a timely fashion, got off to a good start and then it turned out that early planted corn, for example, was the first to dry up. So, it's kind of a coin toss right now honestly.

Yeager: That November contract that we have on the screen right now, $11.89 and a half. How much lower does this move have in it?

O'Leary: Well, I mentioned that momentum indicator, that is a minor signal. I would say we really haven't shown any sign of a bottom yet. But I would say that over the course of, I think if you go back to mid-February or so the bean markets lost a $1.80 or $2 worth of value. That's a fair amount to knock off the price, pretty good percentage wise. So, I don't know how aggressive I'd be on the short side of the market right now. If you're a producer and want to take some protection, maybe you've still got some old crop sales to make, maybe you want to enter into some new crop sales, you can always turn around and take reownership if not with straight futures, establish some option positions including that short option premium. I think producers and end users would do well to treat their assets like insurance companies do, instead of paying for a premium, put yourself in a position to receive the premium from another customer.

Yeager: Let's move into livestock, let's get to live cattle. We had this $166 kind of looking like a top. Do you agree with that?

O'Leary: I would say --

Yeager: Considering at $167, I need to correct myself.

O'Leary: Okay, yeah, well most of those contracts just made new highs yesterday and today. The only thing bearish technically you could say is that they finished off the highs today. Big deal.

Yeager: We've had to say that a lot in this market lately.

O'Leary: Yeah, for a couple of years now, yeah. But I would say if I was a cattle producer and looking back over the past couple of years and trying to look forward to the next couple of years, if you have been fortunate enough to not really take protection and have to pay for it, losing some of that price because you protected it, I think the longer that goes on the better the odds that it's going to be good idea to do so.

Yeager: We have a question we'll get to in Market Plus but I do need to get to hogs quickly. There's quite a spread here. We had a pretty rough week in hogs. Why?

O'Leary: Yeah, just the inability for producers and the packers to move product. It's a competitive price now, it has been competitive with beef, it looks like it's going to continue to be. But it hasn't fallen to a level where it's going to bring some short covering in and really get to the point where you're concerned in any way, shape or form about supply. The supply has been there and the demand just hasn't met it.

Yeager: In the feeder market, do you see here in the last few seconds, same question I guess back with live cattle, is the top in there?

O'Leary: I see really no disconnect between those two markets. Feeders have followed cattle and vice versa and I think that will continue to be the case. If someone can pick one of those two as being kind of a harbinger of things to come it will be a great thing.

Yeager: They're going to be doing something different. All right, Sean, appreciate it. Good to see you. Thank you so much.

O'Leary: You bet. Thank you.

Yeager: All right, that will do it here for our analysis. We're going to put a pause here and continue our discussion about these markets in our Market Plus segment. You can find both analysis and Plus on our website of MarketToMarket.org. These resources are free. And if you are one of the thousands already in our YouTube subscription community, you know that little secret we have about the program. Click the Subscribe button at youtube.com/markettomarket so you can join the club. Next week, we look at the work being done to connect the last mile of the digital divide. Thank you so much for watching and have a great week.

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