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Market Analysis: Elaine Kub

posted on January 18, 2013

Private analytical firm, Informa Economics, predicts that U.S. farmers will plant 99.3 million acres in corn this spring.  And if current price trends continue, growers could be rewarded handsomely.  For the week, March wheat gained 37 cents while the nearby corn contract moved nearly 20 cents higher.  Strong export numbers were friendly to soybeans this week as the March contract posted a weekly gain of 56 cents.  Nearby meal gained more than $10 per ton.  In the softs, cotton continued its run higher as the March contract gained almost $3 per hundred weight.  In the dairy market, February Class III milk lost 28 cents, while the deferred contract moved 47 cents lower.  Over in livestock, February cattle lost $5.65, nearby feeders were off $5 but the February lean hog contract posted a weekly gain of $1.15.  In the financials, the Euro gained 46 basis points against the dollar.  Crude oil gained more than $2 per barrel.  Comex Gold advanced by $26 per ounce.  And the Goldman Sachs Commodity Index gained more than 10 points to settle at 661.25.

Market Analysis: Elaine Kub

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

Kub: Thanks, Mike.

Pearson: It's been a busy week.  We've had a lot of broadly supportive information come out on the wider economy.  Can you talk to us -- how is that going to relate to the stock market as we roll in through 2013?

Kub: Well, when you look at the stock market historically it is really interesting because the S&P 500 right now is within 6% of reaching its 2007 high.  So if it does that it's kind of like these last five years never happened and we're really on the path of back to normal.  And the Dow Jones is also similarly very close to reaching its October high and then its next goal would be that 2007 high also.  So we have seen billions and billions of dollars of investment money coming back into the stock market at the beginning of 2013 and that has really been the focus of the money.  But to some degree it has also come into commodities as well.

Pearson: And so we're seeing funds just rolling money in, is that how the money is coming into commodities?

Kub: Yeah, I think it is funds, I think it is speculators.  It's hard to tell.  I think at this point the commodities are still mostly being driven by the commercial activity and the commitments of traders bear that out.  In corn, for instance, it's still more than 60% commercial activity and not as much speculators and that is pretty much a historical average.  But I think that we are seeing some investors coming back in. 

Pearson: There's some excitement in commodities.

Kub: Yes, absolutely.

Pearson: Now, as we look to reaching those 2007 highs in the stock market what type of information are we going to need to see to get excitement up to that level to surpass that so we can kind of end this five year time out we've been in?

Kub: Well, I don't know to the degree that this has really been a big focus of the markets but I think it might be the hidden driver of it is that China has really started re-ramping up their consumption of goods and their current account has been growing and they really are not the spenders that we are in the west, they're more savers, but their economic activity has been re-growing at their old paces or coming back to their old paces.  So I think that is the real thing that is driving this global economy and we see that certainly in the commodity markets, things like coal, these hard goods.  They are certainly demanding that in China again.  And cotton, for instance, they are certainly ramping up their production there also.

Pearson: Now, as they're ramping up production I assume that means they're also going to be looking to consume more oil.

Kub: Yes.

Pearson: What impact is this going to have on crude oil?

Kub: Well, and you have seen that.  I mean, there exactly is a wonderful proxy for the global economic activity is this higher trend that we've seen in crude oil prices and energy prices in total.  And over the next five, ten years things like coal, other energy sources are probably going to take more, natural gas, are going to take a bigger role than crude oil.  But for now we certainly watch crude oil as our benchmark and it certainly has been rising over the past two weeks.  This has been a higher trend.

Pearson: And do you have any ideas where that trendline might be pointing?

Kub: That's a really good question and I don't know what the consumer can bear.  At this point the RBOB gasoline, which is something that would have more an effect on consumers here in the United States, has stayed relatively stable and the ethanol, for instance, is about 40 cents underneath that so there is still certainly some room for people to be blending ethanol with RBOB gasoline and making money there.  And the energy prices as a whole are higher but the consumers here aren't feeling the pain yet so I think there's still room for it to come up.

Pearson: Okay.  So we'll just possibly continue to watch that rise and if that is rising hopefully we're also going to see a corresponding increase in the stock market, maybe create a little bit of paper wealth to correspond to paying a little bit more at the gas pump.

Kub: Could be.

Pearson: All right.  Well, let's move to grain markets.  Let's talk wheat.  We had a decent little rally this week in the wheat markets.  Where do you see this going long-term?

Kub: Well, you guys just showed the drought monitor and I think it is very clear looking at that monitor that the fundamental situation for wheat, particularly hard red winter wheat that is traded in Kansas City is not a pretty picture.  But the markets, I think the rise that we've seen in wheat so far is basically a track with the broader rise in the general commodity markets and also following the corn market as the feed wheat sector is, you know, a substitute for corn.  So I don't really know that the markets, the futures markets have really felt the need to price in this drought yet.  So I think there's still a lot of room for wheat to come up and price that in as we get closer to spring and as we really get to see how a cold winter snap could affect that dormant wheat.

Pearson: And now, that is the next question, as we look to when the market might begin to put in a weather premium, how soon could we begin to see that taking effect?

Kub: Well, in my opinion, I think we know now that there's going to be abandoned wheat acres, that there just won't be the wheat there that was planted.  So in my opinion it could start now but I just think in general the markets don't really look at these things until February or March in history.

Pearson: Okay.  So that's something to keep an eye on as we get a little bit deeper into the winter months.

Kub: Yeah.

Pearson: Let's talk corn.  Corn, again, we saw a nice little rally this week.  What is running corn?

Kub: Well, I think the catalyst of the rally this week was certainly the last Friday's USDA round of January reports which showed the big number from that report was definitely the usage for the past quarter at 3.79 billion bushels.  Let's say we did that same pace for the next three quarters, for the entire year if we just took that times four, now you're looking at 15 billion bushels of corn that we don't have that.  That's about 3 billion bushels more of corn that we don't have.  And there are seasonal changes to how corn is used from one quarter to the next.  But we just can not do that.  And nobody has really slowed down using it.  Obviously we're showing that the feeders are still feeding it, the ethanol plants are still using it because these crude oil prices have come up and they're not necessarily making money and the stocks are rising but they're still using it.  So at some point somebody is going to have to stop using this so that means, in my mind, that these markets are going to have to get crazy again to reach a price level that's going to make somebody stop using it.

Pearson: Now, what price level do you think might do that?  Because we saw it touching almost record highs this fall and saw no reduction in hog feeding, for instance.  What is it going to take to really begin to ration the usage?

Kub: Well, I don't know that I am expecting to see another historical high.  I think the summer was when the pain was most fully understood by the market or was fully understood by the market and that would be a high that I don't think that we're going to exceed.  But I think we might certainly make a run at it.  And already we're seeing it in the cash market, the national average cash bid, the nearby cash bid is only four cents under the March and this is January.  So as we go into the spring and summer when supplies continue to be tight there is less of this corn in the hands of farmers that can keep it off the market than there are most years.  The on farm stocks are about 26% below what they were a year ago.  But in some states like Illinois the on farm stocks are 50% below what they were a year ago because I think people didn't want to store it for fear of aflatoxin or for a number of reasons.  So the farmers can keep some of it off the market and certainly drive the basis higher if nothing else.

Pearson: With that in mind, what is your advice to producers out there looking for anything they've got left in their bins or as we're looking to plant our '13 crop?

Kub: Well, for what they have left in their bins, if they have a very large amount I think there's a lot of risk in it.  I always think that.  So I would certainly see why someone would be tempted to sell at these price levels, particularly if you're in one of these areas in the center of the Corn Belt that has these very positive basis numbers.  I would be looking at selling some to get rid of risk.  But I would keep some.  I mean, if your goal is to inflict the maximum amount of pain on your end users the opportunities for that are probably going to be down the line.  I think that we're going to have a very hot spring and summer timeframe.

Pearson: Well, let's talk soybeans.  We've seen some information showing us perhaps a record crop out of South America.  But we still saw a decent little increase in price this week for beans.  What's going on there?

Kub: Sure.  And what is driving the prices here in the Chicago market is the export news here.  But you talk about South America, within the next couple of months all of this export business from China is going to be directed in their direction.  So I think there is a limited timeframe for the U.S. soybean market to be very bullish and I'm always very concerned that on any given day China could certainly come in here and cancel, put another big cancellation in and that could certainly drive these markets down 40 cents in an instant.  So I think the soybean market, the old crop soybean market is in a very precarious position.

Pearson: All right.  What do you have in mind then, again, producers with some beans in the bin?  Unload here while he can?

Kub: Yeah, I'm fairly antsy about the old crop bean market at this point just because they don't have quite the same supply and demand situation that corn does and there are certainly these opportunities for the export news to go away.  So I don't like holding onto beans anymore.

Pearson: Okay.  And now with news of record crop coming out of South America, what is your advice to producers as they're thinking of marketing next year's crop?

Kub: Well, I'm going to go back to corn for a second here just because that's kind of been my benchmark of where I'd want to start selling 2013 crop.  It's about 10 cents away from $6 a bushel and I think that the new crop soybean market and the new crop corn market will kind of work in tandem here.  It's at about a 2.2 to 1 soybeans to corn, the price ratio, so if soybeans want to buy acres they're going to have to work al little harder than that.  But I would start making a very limited amount of sales once we see the December 2013 corn contract get above $6.

Pearson: Okay.  That is the mark to keep in mind there.  Let's talk cotton a little bit.  As we're talking about increasing corn acres, increasing soybean acres, where is that going to come from?  And what impact is that going to have on cotton prices?

Kub: Well, right off the top of my head I would say that some of these acres are going to come from abandoned wheat acres.  But even if that wasn't the case I think that the United States farmer, particularly in the Dakotas and the western Corn Belt, have shown an ability to take land out of hay production or out of range and turn it into crop land. So I think we certainly can come up with more acres in these high acreage numbers that Informa and other estimators are coming up with.  And prior to this week I would say we would have been getting some acres out of cotton because the cotton to corn price ratio for the new crop had been slipping.  However, with this China situation of them producing more fabric they released some stocks of cotton but they weren't very good quality and so the world market is still coming back to the U.S. and other high quality cotton producers and the cotton market here got quite a boost this week and it had this rally that might stall out here, might find resistance at about 80 cents but perhaps not.  If it can break through there maybe we really do have a bullish situation for cotton and then corn really does have a battle for acres on its hands.

Pearson: And so that is something we'll be keeping an eye on here in these next couple of weeks.  Does China follow any schedule with releasing its cotton from its stockpile?

Kub: You know, I don't know the answer to that question, Mike.  And I think the market sort of knew that it was going to be doing it, it had made some rumblings that it would be releasing that stockpile.  But now that it's out there that story has passed and I think we just have to wait and see where the rest of the cotton comes from.

Pearson: Well, now let's talk cattle.  It has been a brutal week in the cattle markets.  Talk to me about fat cattle.  What are you seeing?

Kub: Well, the big news in the cattle market this week was on Thursday Cargill announced that it was going to idle its packing plant in Plainview, Texas and this is obviously a logistical nightmare for the feedlots down there because all of the cattle they had intended to send there, and it's a large plant.  It accounts for about 4% of the steers and heifers that are slaughtered here in the U.S.  So that is a very hard hit on the fed cattle market.  And the whole reason for this was that packers have been losing money on their packing margins.  They have been losing as much as $60 a head.  So they weren't starting out the year very well.  Feeders themselves were just starting to get to a situation where if they were hedged they could have been starting to make some money.  But now that this has happened the fed cattle market has certainly taken a hit.  I think it's a lasting hit particularly when you look at the threat that other packing plants could follow suit.  I don't know that any are going to, I'm not predicting that and I certainly hope they don't.  But it's the threat there.  The packers certainly have shown that they are not willing to pay these prices for fed cattle anymore and this is what they can do about it.

Pearson: So the market has backed off out of fear is what's going on, fear that more packers might close or further disruptions might happen?

Kub: Fear and unprofitability.  I mean, they legitimately were losing money so they can't, you can't expect someone to keep losing money like that.  So that has certainly been a problem for the fed cattle market.

Pearson: And you mentioned you might see this as a long-lasting impact on the cattle market.  How long-lasting is this going to be, these lower prices on fat cattle?

Kub: Well, by lower prices it's a relative situation.  These are still high prices.  And, in fact, the fact that this packing plant shut down itself was a bullish argument.  Right?  I mean, it shows that the supply -- their stated reason was that they have such a shortage of supply due to the drought and that's not just because of feed costs, it's also because of the drought in range, that people have just been diminishing the herd.  In 2012 the herd has diminished another 17 percent after diminishing 17 percent in 2011.  So we're just running out of cattle.  So that in itself was a bullish argument and fed cattle prices are still bullish historically, they're still high historically.  But how long-lasting will it be?  I think that this will definitely have to come out, the packers will have to make their money by finally passing this onto the beef consumer at the grocery store in 2013.  They avoided that in 2012 mostly because we had heavier animals being slaughtered.  But in 2013 I think people are just going to have to pay more for beef.

Pearson: And we're going to have to see what consumers are willing to pay.

Kub: Yeah, exactly.

Pearson: All right.  And so now this is having an impact on the feeder market.  What else -- is there any other major impacts on feeders that saw them take this big move south this week?

Kub: Yeah, they did go limit down on Thursday but I think that they will probably be able to recover much faster than the fed cattle market will.  And I say that because after this drought we had in the summer I don't think that we're going to see a very large crop of fall calves being brought to market in the spring.  So your real supply and demand crisis is in the feeder market itself and if a feedlot wants to remain in business it's going to have to buy those calves.  And hopefully they had some opportunities to hedge these feed costs before things get hot, in my opinion, going forward.

Pearson: Okay.  Let's talk hogs.  What are you seeing in the hog market?  We saw a nice little bump this week.  Is that going to continue?

Kub: You know, I am bullish on hogs long-term for 2013 and it is part of a continuation of this beef argument because if the American consumer finally sees considerably higher choice beef prices in 2013 that gives pork the opportunity to finally start charging higher prices too.  They have certainly seen an increase in demand, they certainly have seen an increase in export demand and now they can follow beef higher too.  And the futures market is backing that up.  When you look at like the May futures contract for lean hogs and onward they're already showing above $90 or above $95.  So the current index doesn't show those kind of values but I think they might recover faster, faster than we would expect seasonally.  We might see that recover.

Pearson: And to really see that recovery, to really see those prices take effect, we're going to have to wait and see what consumers are willing to pay for beef as those prices are moved on?

Kub: I think that will help.  And I think either way the market is already expecting to see the hog prices move higher here in the spring but I think a higher beef price would certainly exacerbate that.

Pearson: It would certainly increase it.  All right.  Thank you so much for being here, Elaine.

Kub: Sure.

Pearson: That wraps up this edition of Market to Market.  But if you'd like more information from Elaine on just where these markets may be headed visit the Market Plus page at our website.  You'll find expanded market 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 learn what happens when too many people compete for too little water in California.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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Tags: agriculture commodity prices drought economy Elaine Kub markets Mike Pearson