A surprising rally in the Chinese Yuan coupled with South American weather concerns fueled the markets. For the week, March wheat again improved 15 cents and took the nearby corn contract for the ride for a 6 cent gain. South American weather concerns waned by the week’s end and the March soybean contract gave back 9 cents. March meal declined $5.30 per ton. In the softs, March cotton expanded $3.34 per hundred weight. Over in the dairy parlor, January Class III milk futures improved 14 cents. An across the board sell-off in the livestock sector as the February cattle contract shed $1.22. March feeders dropped $1.30. And the February lean hog contract gave back last week’s gains weakening $4.10. In the currency markets, the U.S. Dollar index was off 8 basis points. Crude oil gained 27 cents per barrel. Gold gained buyers, improving $21.70 per ounce. And the Goldman Sachs Commodity Index improved one-half point to finish the week at 398.25.

Pearson:  Here now to lend us his insight on these and other trends is one of our regular market analysts, Ted Seifried. Ted, welcome back.   

Seifried: Hey, thanks for having me.

Pearson: Before we get started, you can listen to our market discussion anytime by downloading our Market Analysis podcast on our Web site, iptv.org/mtom.

Pearson: Ted, this was an interesting week, particularly in the currency markets. The U.S. dollar rallied like crazy early in the week, broke hard. Have we put in the top on the U.S. dollar?

Seifried: That's a great question. I don't think we have just mainly because I don't think we're done raising rates and I don't see anybody else who is going to get more aggressive on rates than what we might do. But a lot of times when we talk about tops we talk about exhaustion blowoffs and you can kind of see the case for that. I don't think so. We kind of did it really when we were still kind of hanging onto thinner holiday trade and so I don't know how much stock we put into that, just like the big sweeping reversals we saw in cattle and hogs last Friday or the Friday before New Year's. It's on a chart, it's there but low volume, you've got to take that with a little bit of a grain of salt. We'll see but I think the dollar has more upside yet.

Pearson: Okay. But this break in the dollar certainly appears as though it has been a wind at the back of the wheat market.

Seifried: Yeah a little bit. Wheat has definitely gotten some strength from that. Wheat has some other things going on too.

Pearson: Exactly, and that's one of the questions we've got from our Twitter follower, Tim in Minnesota is asking, as temperatures drop, he says it's negative 18 up there in Minnesota, wheat is heating up. How much more upside before I sell more old crop wheat?

Seifried: Yeah that's a great question. I think you want to look at it as a scale in sort of strategy and you can use sort of the similar strategy what we've done in row crops over the last couple of years and I think now is a great time to do that for wheat. We were actually going and buying calls for producers so that we could sell cash on a rally without giving up that upside potential and calls were very, very cheap. But I think you've got to start looking at that now because we've seen in recent history that rallies in wheat can be very fragile so I think you do want to take any sort of opportunities you get to start pricing in, but you do want to keep some of that upside potential open. Funds are very, very short. I've been talking about this for a while. If they want to get out of their short position for whatever reason there could be a lot of legs in say 40 to 60 cents. But I don't know if we have anything yet to say that they're going to get flat or go long the wheat market, if anything they may have trimmed the short position but they could be waiting to put that right back on again.

Pearson: Okay. Now wheat has been one of those markets that it seems like as we start the New Year everybody talks about where is the profitable trade in X year, wheat has been one of those thrown around, folks are anticipating that short covering by the spec funds?

Seifried: There's certainly that. When we look for things like that we look at the makeup of markets and who is short what and if you've got a very large speculative position a lot of times that's an interesting market to take the opposite side of. But also there has been what seems to be an interest in commodities as a whole from the large speculators from the funds and what they're looking for is they're looking for value, they're looking for commodities that are near the lower end of the five year ranges and inflation adjusted value. You see that in wheat. You see that in corn a little bit. And getting into the New Year I think we've seen some of that trade in the market where you've got the speculators, certain speculators looking for that specific setup and I think they found it to some extent in wheat but also a little bit in corn.

Pearson: And so a little bit in corn, we saw corn move 6 cents to the upside today, or this week on the nearby contract. Was that solely spillover support from the wheat market? Or are there fundamental factors going on that get you a little excited about the corn market?

Seifried: I think it's mostly spillover from the wheat market, which is very much tied into the dollar. So if you put those two together I think that's most of it. But we've got a report coming up from the USDA. I'm interested to see if we're going to see, a lot of people are talking about the USDA needing to increase soybean acres yet and that might mean less corn acres, I'm interested to see if that 175 national average yield holds. I'm kind of wondering if that comes down, maybe that's a little bit high. That's typically when we have the USDA give us a record yield in September, October usually that number comes back down just a little bit so maybe we're looking at a smaller production number. But overall the acreage conversation is there too. So we're getting to that timeframe where corn may want to not give up as many acres as what some people are forecasting at the moment. So if you look at the corn-bean ratio, corn might want to hold its own if not do a little bit better going forward.

Pearson: Climb a little bit. So now as we look out to next Friday and that USDA final report, do you anticipate any shocks? If we get a slightly smaller corn yield number is that going to be a big market mover?

Seifried: Yeah, I've got to say, we're not going to do anything to put this corn crop to a point where we're going to from a 2.4 plus billion bushel carryover to say a 1.6. But I submit my numbers, we're one of the firms that submit our numbers and looking at that I'm on the lower end as far as my production number, as far as my yield number and as far as my acreage number is concerned. So maybe, but the surprise can go either way. If that number comes in larger and we're at a 2.6 or 2.7 billion bushel carryover. I'll say this, this January report has a tendency to give us some big moves in the market and we tend to get some surprises on this report.

Pearson: If I'm sitting with a lot of unpriced old crop corn, if I'm still sitting on some unpriced old crop beans, what would I be doing to mitigate some of that stress come next Friday?

Seifried: Well, we got kind of heavy on Friday this week so we kind of took a little bit of your options off the table. But, March $3.50 puts were going for 3.5 to 5 cents. I got some off early in the day on Friday at 5.25 to 5.5 and I think it's a great way to take some protection for -- you can look at that as both old crop and new crop for just sort of a Band-Aid to say let's get through this report, let's get through South American weather, January and February tend to be heavy months for grains markets, corn and soybeans in particular if we're not getting a South American weather issue. So I think that timeframe wise works very well for me and price wise I think that was pretty value.

Pearson: South American weather, we had Argentina a lot of ground was flooded, maybe up to five acres, hasn't been much a market mover, still looks like a big crop down there. Are beans just in a downward trend here trying to tighten up that ratio between corn and beans?

Seifried: Well, we did have that reversal higher in soybeans Wednesday I believe. And until we take out the lows there that buy signal is still intact on a chart. So we'll see. We didn't quite do that on Friday. We might do it first thing on Monday. So take that with a grain of salt and watch that closely Sunday night and Monday. But for the moment possibly downside is, the downside potential very much there for soybeans if South American weather doesn't give us anything to talk about. At the moment there's some small pockets of not the most major producing areas that we're looking at. The concern there is that if they do expand into the more major producing areas then we have something to talk about. As far as the flooding in Argentina I think more than anything else that is a question of acreage. That's going to get planted, the potential is going to be there, but you may be losing some corn acres in Argentina that could be going back to soybeans, which that's not necessarily bullish for soybeans but might be a little bit supportive for corn. But South American weather, that's really the ticket right now. If we don't have a problem with South American weather things could get rather heavy between now and the end of February.

Pearson: And from a producer's perspective you're not heavy, using heavy in a good way. It's things could move downward --

Seifried: Yes prices lower.

Pearson: Fairly quickly. Let's take a look at the livestock market. We had cash trade most of the week around 118. We did see a little bit of a step back here on the board. Is this just a correction from that nice rally we've had for the past month, month and a half?

Seifried: I think it's a couple of things. Yes, it's a bit of a correction. We had gotten a little bit overbought and at some point you've got to take a breather. And so we've done that. But to some extent, and we've been saying this for a couple months now, I think it's very interesting that normally this time, normally period we have futures trading at a premium to cash and we're trading a discount, a pretty decent discount to cash right now. And you wonder if that's the futures market being very reluctant to embrace the strength in cash and trying to predict that cash softening over time. I think there's a good chance that might happen. I think you could have a deeper correction in cattle sometime in the relatively near future.

Pearson: The six to eight week timeframe?

Seifried: Again, I don't know how much stock we want to put into it because it was thin holiday trade, but we did have that big outside sweeping reversal down day the Friday before the New Year's holiday. That's usually a big red flag that hey, either the high is in or we're getting really close to it. So from a technical perspective, yeah I think maybe sooner rather than later. Now the question is, from there do we recover and go and test those highs again? There's a lot of what ifs in that and a big one is demand. Are we going to expand demand? Is China going to make good on, well, they said they were going to start importing U.S. beef in a big way by the end of the calendar year, that didn't happen. Is that going to happen in the first or second quarter? We'll see. But if we don't have that we'll keep watching weights. We've had our bouts of some very cold temperatures and weights have been a concern. But there's a lot of beef in cold storage and you could see a fairly deep correction in cattle at some point.

Pearson: And do you expect feeder cattle just to follow right along with corn in this range?

Seifried: Yeah, corn is going to be a big driver for feeders going forward.

Pearson: Let's take a look at this lean hog market. Again, it's got that incredible story throughout the year of a massive dip and then a major recovery, now we sold off $4.10 here this last week. Have lean hogs topped out?

Seifried: That's a really good question. When we put a bottom in lean hogs, unlike the cattle where we have a V or you can call it a checkoff bottom, you do have a nice little double bottom sort of formation in hogs and then with the recent highs you do have kind of a nice little matching double top formation. I think we had a compelling reason to rally off the lows like we did, in particular we saw cold storage numbers, well at the time we were putting our lows in we saw cold storage numbers coming in below expectations, yet we were looking at record kill weeks. That's a good sign for demand. But now that we've gotten through the peak demand season, Christmas hams and so on and so forth, you saw ham prices basically halve. And so products coming down, you do think that now is a time for correction lower, but I wonder if what we just did was kind of carve out the range, worst case scenario I think is carve out the range between the lows that we put in back in October and the highs that we put in just last week or in the last couple of weeks.

Pearson: 45 to 65 maybe is a range?

Seifried: Yeah, I wonder if we trade sideways to maybe higher because if you look down, further down the pipeline in hogs, while weights have gotten bigger up front and that kind of shows a little bit of a back log there, but further down the pipeline you do see supplies starting to soften a little bit. So there's reasons to be somewhat optimistic for hogs. I don’t think we're going to see new lows in hogs but we could spend some time trading this range that we just carved out.

Pearson: Alright. Well, Ted Seifried, thank you so much for taking the time to join us.

Seifried: You're absolutely welcome.

Pearson: That wraps up the broadcast portion of Market to Market. But Ted and I will keep the market conversation going including answering more of YOUR questions during Market Plus available on our website.  While you’re there, check out this week’s M-to-M podcast as we talk about globe-trotting’s impact on rural America. And join us again next week on the broadcast when we'll look at how a wood pellet company is finding new overseas markets. So until then, thanks for watching. I’m Mike Pearson. Have a great week!

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