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Market Analysis: Elaine Kub and Walt Hackney

posted on November 9, 2012


Grain markets reacted bearishly to Friday's report but wheat contracts still managed to post impressive weekly gains.  For the week, December wheat gained 22 cents while the nearby corn contract moved fractionally lower.  Soybeans followed the coarse grains south Friday exacerbating losses from the previous sessions.  The January contract settled with a weekly loss of 75 cents while nearby meal prices declined by more than $26 per ton.  In the softs, cotton fell below the $70 mark with a loss of 77 cents per hundred weight.  In the dairy market, December Class III milk futures lost 73 cents, while the deferred contract moved 50 cents lower.  Over in livestock, December cattle gained 33 cents.  Nearby feeders were off nearly $1.00 and the December lean hog contract topped the $80 mark with a weekly gain of $3.00.  In the financials, the Euro lost 115 basis points against the dollar.  Crude oil gained $1.21 per barrel.  Comex Gold advanced by $ 55 per ounce.  And the Goldman Sachs Commodity Index gained nearly 10 points to settle at 635.60. 

Market Analysis: Elaine Kub and Walt Hackney

Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Elaine Kub and Walt Hackney.  Welcome back.

Hackney: Hi, Mike.

Kub: Hi, Mike.

Pearson: We're excited to have you here.  It's been a busy week.  We had the election.  All that is settled.  We've seen a drop in the equity markets, pretty substantial.  Elaine, where do you see this headed on the broader market side?

Kub: Well, from a big investment market standpoint the big question that folks are looking at now is this fiscal cliff that you mentioned.  And there are a number of funds and retail individual investors that are concerned enough about that they are just not participating in some of these risk on assets.  So that means that money is coming out of, or has already come out of commodities and grains and livestock and might continue to do so for the next couple of months if we don't get that sorted out.

Pearson: All right.  Walt, are you seeing anything -- as this fiscal cliff relates to producers and cattlemen and hog producers out there -- are you seeing any impact of that in their day-to-day life?

Hackney: Not really.  The knowledge of the fiscal cliff is just not as rampant in the rural community as it probably is in the business sector and so not really.  The fear is what will the results be as what you indicated as far as stocks and so forth this past week.  And that is what will it do to the markets?  That is the only fear I hear.

Pearson: All right.  And with that in mind is there -- what effect is this going to have on the commodity markets specifically?  Is there going to be a noticeable impact as we approach the end of the year?

Kub: Well, I think this is the time of year that hedge funds in particular are rebalancing their weightings and so we have seen that certainly in the soybean market.  They have a net long position.  What small volume of trading there is in soybeans seems to be selling from the funds.  But how does this fiscal cliff and that fear play into it?  That could certainly continue but we would see that seasonally anyway.  But that is the thing to look for is just more of that selling.

Pearson: Just might be exacerbated.  All right.  Let's talk wheat a little bit.  Elaine, wheat had a big week, had surprising numbers this morning.  Where do you see us going from here?

Kub: Well, wheat is really interesting that it is the leader from day-to-day sometimes and certainly on a trend base when you look at the charts that wheat has been the leader for this week and for the past couple of weeks.  And the reason that is so strange is because for years now wheat has had these comfortable inventories, these 25% ending stocks in the U.S. and above that in the world and for it to be bullish now on a longer term basis is interesting and that is because of global arguments and from the drought argument that we have here domestically.  But today wheat prices came down and that probably is due to that USDA report not trimming Argentina's wheat production which is being harvested right now, poor quality concerns, not trimming Australia's, same story with the wet and the poor harvest, and also limiting the U.S. export, domestic export projections so they had a bearish report but longer term we've got a situation where wheat prices have been the leader.

Pearson: And so what is your advice to producers out there with all of this in mind?

Kub: Well, so the wheat prices have been coming up and they are near the top of this range that they have been in, this sideways range and if you were going to sell wheat now, if you have wheat on the farm and you wanted to sell it now I would do it with a futures hedge that would then carry through to about March because there is actually carry, there is a positive futures spread in wheat until about March.  So you could pick up a dime or more doing that.  But if you were willing to wait a while and see where this goes, see if this global bullish story continues.  I would wait to see if the December Kansas City contract can break above the $9.50 level and if it moves above there then all of a sudden you've got a real compelling story for anyone who does want to invest in commodities to keep that story going.

Pearson: Is there any news out there on the horizon that could force the December wheat over the $9.50?

Kub: I think continued concern from Argentina, from Australia, Ukraine, anything like that could do that and it could continue.  But that's a big if.

Pearson: Let's talk soybeans a little bit.  You mentioned funds doing a little bit of selling.  Do you see that continuing?

Kub: Absolutely.  They still have a lot of exposure to get rid of and they don't have, you know, the chart support.  If you look at the soybean chart, the November chart there's not really anything on there you could say maybe $14.50 would be a support level but really below that you're looking at $13 before we have a previous low.  We're sort of in a free fall motion.  What can you say bullishly about soybeans?  The oil sector, Malaysian palm oil has record high inventories.  So funds are bearish on soybean oil.  It is certainly the feed sector that is keeping that propped up but even that is vulnerable.

Pearson: All right.  And so advice to producers, if you've got it hold it?  Or unload before we start to test that $13.00?

Kub: Well, I have been of the opinion for the past couple of months that it doesn't make sense to really be holding onto soybeans.  So if you're holding onto soybeans now the only thing you're really hoping for is that things go wrong in South America.  And actually the huge drop we saw in soybeans today, 40 cents or more, you could argue that was because of the report but I would suggest that it's really because the dry areas of Brazil got rain and they have rain in the forecast and the wet areas of Brazil and Argentina got a nice dry forecast.  So this is really a weather argument.  And so at this point it is looking like they may not, they may be able to get a good harvest going on or a good prospect for a harvest.  So things look a little more bearish for soybeans today than they did before.

Pearson: And in terms of acres planted in South America, with decent weather what kind of crop will we be looking at coming out of --

Kub: Record large.  Bigger than we grew in the U.S. this year.  This would be the first year in history that Brazil, for instance, would have more soybeans produced than the U.S..

Pearson: All right.  So continued good weather reports, continue, possibly continue bearish effect on beans.

Kub: Yeah, it's a weather market.

Pearson: All right.  Let's talk corn.  What is your take there?

Kub: That is -- there is much less trading or there is more trading going on but it is more stable.  And when I look at the corn chart it seems to me like there is barely any volatility.  We have traded within a 50 cent range for the past month and a half.  But when the people who have to buy this grain and use it as feed look at a 50 cent trading range to them that doesn't seem like low volatility, that seems like a bigger challenge.

Pearson: And with that in mind, what is this 50 cent trade doing to beef producers and hog producers?

Hackney: Well, it prohibits you from making a very accurate estimation on your cost of production for the deferred months.  You have product that is available to you in feeder stock, feeder pigs, feeder cattle and you're going to need to hedge those in order to have a complete hedge which is absolutely you must have, you've got to be very accurate in your estimation of production costs.  If you are within 20, 25 cents a pound on your gain costs off that can completely rupture your entire hedge program and instead of possibly just breaking even you may absolutely be looking at something like $100 a head or $125 a head loss because of missing the mark on your production costs caused by a 50, 75 cent fluctuation in the corn market.

Pearson: Is there anything producers can do with this trend in place to minimize that risk?

Hackney: Well, I'm sure Elaine could solve that for many of the producers with an option program.  I would suggest that and Elaine could elaborate further on that than I'm capable of.

Pearson: All right.  And Elaine, coming back to your trend, do you see this continuing?

Kub: Yeah, for the next couple of months I think that's true and that is good for option strategies because this relatively low volatility from a statistics standpoint makes these options al little cheaper.  And going through the end of the year farmers do not seem to have much willingness to sell here, there's not a lot of selling going on in this market right now so that suggests to me that we may have a floor and this sort of neutral range that the corn market has been locked in for the past month and a half may continue through, through the end of the year let's say.

Pearson: Are we seeing much in the terms of the basis strengthening out there?  Is that still happening?

Kub: Well, basis is incredibly strong when you look at this from a historical standpoint of all the years of our lives, it's really odd to see a national average basis at only ten under in November, basically still harvest timeframe.  And obviously there are certain areas where we have very high over basis, premiums being offered to the market.  So that is odd from a historical standpoint and even from the past couple of years when we've had these stronger basis levels because oft he lower stocks this is still odd, this is still unusual and unusually strong but that is just because, like I said, farmers don't want to be selling right now.  So if you don't have people needing cash here through the end of the year I would expect to see basis getting started quite strong even into 2013.

Pearson: So, immediate advice to producers, what would you be saying?

Kub: I think it depends on your cash.  If you want to get things sold in the 2012 tax year, for instance, I don't know that there is a big opportunity for new highs to be hit in the next couple of months so if you want to get it sold maybe sooner rather than later for the risk but if you can wait until 2013 people will still be needing the grain.

Pearson: And do you see a more bullish picture as we roll through the New Year?

Kub: There is perhaps more of a chance for a bullish picture if the South American thing goes awry or if end users really can't find certainly the quality of corn that they need so there is more of a chance for it I would say after we get past the end of the year.

Pearson: All right.  Thanks Elaine.  Walt, let's talk a little bit about livestock.  Let's look at feeder cattle.  You mentioned the trouble that producers are having calculating the cost per pound of gain.  What other issues out there do you see for cattlemen?

Hackney: The first thing that needs to be recognized in the feeder cattle is this fall calf delivery run that we have just been finishing here in the month of November.  That got extremely perpetuated by the premature harvest of corn that would not make grain or sufficient enough grain and they cut it for ensilage, ensiled it.  Well there is only one thing you can do with that in July and August as they were harvesting and that is to put it into light cattle.  Well that stabilized the calf market extremely well.  On the other hand, now we have fairly well filled those orders, those producers with that enormous amount of ensilage on hand are already bought up with their needs for calves.  There isn't that much of a challenge out there beyond feeding this cheap feed to the calves.  You can't make good justification out of a $7 plus corn going into a feeding ration on cattle.  You're still looking at feed costs in the area of $1 a pound or better.  Now the farmer feeder has got certain luxuries that the commercial environment does not.  The farmer feeder doesn't have to mark his silage up, he doesn't have to charge himself yardage for putting his calves in his own environment.  So he may be able in his own arithmetic to get by cheaper than the commercial environment.  The commercial cattle feeder has got to make his profits off of additives that he puts into the cost of production which would be corn, anything in the ration, ensilage, he has got to compensate for shrinkage on moisture and all of those things.  As a result, his cost of production is going to be considerably higher than the farmer feeder.

Pearson: What impact do you see that having on the fat cattle market?

Hackney: I don't know that it will.  I think that our limitation of fat cattle availability for the deferred months of 2013 is probably going to become more personified than it is today.  We are in fact short of fed cattle in the feedlots.  We are in fact short of that product going to the consumer.  The problem is it is pricey enough that with the current economy the consumer is not really wanting to pick beef up.  We've had a regression, if you will, in the price of beef for the last ten days.  And it has went down again last night 70 cents a pound for choice beef cutout.  Probably, and I haven't seen the market tonight, but it probably went down again today.  The odds are, again, beef stabilizing and showing strength even though we have a known shortage of cattle coming out of the feedlots.

Pearson: So looking at all of that, are consumers, as they are looking at higher beef prices, are they making the switch to pork?  Are we seeing an increase in pork demand from these high beef prices?

Hackney: Absolutely, Mike.  Chicken, poultry would be one.  Pork would be a close second.  Beef would be a far third.

Pearson: So what impact do you see that having on pork prices as we roll through this year and into 2013?

Hackney: Well, there's the naysayers in this industry that would indicate that pork has just about hit its limits.  I don't believe that is true.  Any time we can maintain a stable demand for pork killing 2.3 million hogs a week, 435,000 head a day, 200,000 projected for tomorrow on Saturday, any time those projections are laying out like that the demand is really there and pork is really able to compete.  It'll come down to what do you prefer?  Do you prefer a poultry dinner or do you prefer a pork dinner or does it make any difference?   If it doesn't make any difference they'll both run a photo finish.  If it makes a difference that will be the ones that wins the race.

Pearson: All right.  And so this is just, we're just going to have to wait and see where the consumers have their final decision.

Hackney: Well, they're already into it as we speak, Mike, and pork is probably not quite the contender as we'd like to see it.

Pearson: All right.  Thank you so much, Walt.  Thanks, Elaine.  That wraps up this edition of Market to Market.  But if you'd like more information from Elaine and Walt on where these markets just may be headed, visit the Market Plus page at our website.  You'll find expanded Markey Analysis, audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account all free at the Market to Market website.  Be sure to join us next week when we'll examine early efforts to keep the U.S. economy from going over that fiscal cliff.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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Tags: agriculture cattle commodity prices corn drought economy Elaine Kub feeders hogs markets Mike Pearson Walt Hackney wheat