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Market Analysis: Elaine Kub

posted on April 19, 2013

This week, cold and wet weather, traders unwinding positions , a change in Chinese demand for corn and a South American harvest on track to produce a record crop served to move the markets.  For the week, May wheat lost nearly 6 cents, while the nearby corn contract moved 7cents lower.  Soybeans rallied, again, this week as the May contract posted a weekly gain of 15 cents. Nearby meal prices followed suit, adding $12.30 per ton.  In the softs, cotton trended lower as the May contract posted a weekly loss of $2.10 per hundredweight.  In the dairy market, May Class III milk gained 88 cents while the June contract moved 29 cents higher.  Over in livestock, the June cattle contract rallied 55 cents. Nearby feeders were lost $1.72. And the June lean hog contract moved 30 cents higher.  In the financials, the Euro lost 19 basis points against the dollar. Crude oil lost $3.28 per barrel. Comex Gold declined by $105.80 per ounce. And the Goldman Sachs Commodity Index lost more than 17 points to settle at 624 even. 

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 for having me.

Pearson: It has been a busy week this week.  It all started on Monday.  We saw massive sell off across the board.  Talk to us a little bit about what happened.

Kub: Well, I could say that it actually started the Friday before because that gold sell of really started on that Friday.  And there's a number of things that could have been the spark for that.  Whatever it was that happened somebody was short-selling a lot of gold, the volume of selling was very high and it just sort of, you know, really scared a lot of folks I think into not having any particular reason to stay long in gold, like this was a good opportunity to liquidate your positions.  And when those margin calls came in for gold I think a lot of funds ended up selling out of other commodities as well and grains got hit in this big problem.  And the thing about gold is it's not like grains where you know that there's an economic value to turning it into ethanol or turning it into livestock feed.  It's only worth what people think it's worth so it's really susceptible to these kinds of fluctuations and that's true of all currencies and the Yen was moving around, the UK got downgraded just today on Friday so there's a lot of these fluctuations that could still come in, in the next weeks or months.

Pearson: So this is going to continue to be a bearish factor do you think on the market as a whole?  Or moving forward will it be mostly confined to the metals, the downgrades and the fluctuations in currencies?

Kub: The volume of trading in gold specifically and silver and these precious metals did quiet down completely through the rest of the week.  And here on Friday they did sort of aggressively try to have a recovery but it failed miserably.  I mean, I think gold is kind of stuck.  I don't know that we're going to see gold go back to its $1900 highs of a while ago.  So I think that that story has pretty well quieted down for gold.  But the idea that funds or anybody can just, you know, be very risk averse and want to sell out of them very suddenly, that can absolutely happen to the grains and I think we did see that in corn on Thursday.  You know, one little headline about the Renewable Fuels Association or anything, which was not even necessarily bearish for ethanol so much as it was bearish for biodiesel, all it takes is one headline and I think a lot of traders are looking for any excuse, particularly these large funds, are looking for any excuse to just take risk off the books.

Pearson: Just get out, get what they've got, move on, find something perhaps more profitable.

Kub: Right.

Pearson: Well, let's take a look, as you mention grains, we had a big week for folks out in the fields this week.  We saw -- it wasn't a big week, yeah, I guess that's a better way to look at it.  What is this delayed planting, and we're on April 19th, as we look to this planting getting delayed more and more, what impact is that going to have moving forward do you think on the commodities in general?

Kub: Well, when you look at the new crop prices or even the spring wheat prices, you know, the traders, the market does not really seem to be too concerned about it yet and for the past couple of weeks I have been sort of in that camp saying that as long as you get corn planted by May 15th is really the date that agronomists worry about yield losses from that point forward, so as long as -- and it can be planted very fast, we've demonstrated that over the past couple of years that once farmers get in the fields they can plant very fast.  So, like I said, for the past couple of weeks it's been, you know, don't worry, just wait, it's not as far behind the five year average as it is behind 2012's very early pace.  But I'm just about ready to hit the panic button on it now because when you look at the six to ten day forecast, Illinois has still got rain in the forecast so when are they going to be able to dry out before May 15th?  Iowa is still very cold so when is their soil ever going to be able to warm up before May 15th?  So there are these things and there's also the consideration that the prices, when we're looking at corn the prices for the September contract are 25 or 35 cents higher by the time you include basis.  So the motivation to get planted early was very strong and that's -- that's -- the window has pretty much been missed for planting corn that could be harvested in September and get those really high prices.

Pearson: Well, and you mentioned cold weather.  That's been on the minds of a lot of folks, especially farther west in wheat country we've had a couple severe freezes and I think another one in the forecast for next week for a lot of wheat country.  What impact has this freeze had on producers and the markets?  Have we seen any impact?

Kub: Yes, absolutely.  So the freeze damage was serious, you know, the wheat was heading -- it was, you know, maturing and the areas that froze were certainly affected.  I was surprised by how little effect it had on the overall condition ratings from the USDA and their weekly crop progress report and I think part of that is, is the crop progress report is this sort of a windshield tour of what it looks like and some of the worst readings right now are still in South Dakota just because it's not green yet.  So I think as we go forward there's the potential for any green wheat acres to sort of hide the damage of some lost frozen acres and there's also the consideration that wheat fields that get torn up or burned down and planted to something else and abandoned those will get missed on the condition ratings.  So I don't know that the market is going to receive a confirmation really of that freeze damage other than just the anecdotal evidence that you hear from folks who are actually seeing those frozen fields.  So, like I said, the market really has not responded to that or maybe it has and it's just been counteracted by the wider commodity sell off but wheat has been pretty flat.

Pearson: Well, and with that in mind what is your forecast for wheat?  Where do you see prices headed?

Kub: Well, let's talk about spring wheat real quick also because that's another situation where fundamentally you can say it's not been planted, its planting is 10-15% behind pace probably by the time Monday comes around.  And its prices are at about $8 but your break-evens may be above $8.  So my recommendations, if I had wheat to sell or if I was a wheat producers I would not be selling any right now unless I had it planted or unless I knew it was going to make it through these freezes.  So I think that fundamentally there are bullish things at play for wheat and we just have not seen them built in yet.

Pearson: And on winter wheat do you think we're, prices are going to be hovering in this level until we get sort of a demand shock?

Kub: Yeah, I think, I think exactly.  The chart is pretty flat.  There's not a lot of reasons to see it going, you know, above this $7.00, $7.20 level until you have corn going up because the cash feed wheat market is actually only about 20 cents higher than the average cash price of corn.  so that means that there are still regions, particularly in the east, where wheat is still going into the feed rations, which means that wheat and corn are going to stay married price wise going forward here.

Pearson: Well, let's talk about corn.  As we look at what's happening in the old crop market, where do you see prices going?  I mean, how is the demand situation looking?  The situation on the Mississippi River?  What issues are going to play into old crop corn prices in your mind?

Kub: What's been really interesting over the past few weeks is to see some ethanol actually production has been coming up.  The stocks have been coming down.  You could get some optimism for ethanol and for corn use in ethanol and you could also look at that chart and see that gap to the upside that is still open between $6.80 and $6.95 but the market has showed no particular interest in going up and filling that gap yet.  So I think, I think you can't get too excited about corn moving very far one way or the other unless it breaks through either $6.25 on the downside because, you know, honestly we know that there's a shortage of corn in this country and that it needs to be used for ethanol and for livestock feed.  So I think there's a minimal downside risk unless something strange happened to the dollar.  So I say if you see it go below $6.25 something is happening and you should be concerned or if you see it break through that $6.80 and start heading back to $6.95, $7.00 I think that is what a lot of farmers are looking for if they've still got some old crop corn sitting around that they, you know, really want to get a high gambling price on.

Pearson: Alright, look for that $6.95, $7.00 if we break $6.80.

Kub: Yeah, if we can.

Pearson: Taking a look at new crop, with the delayed planting potential that is out there and prevented planting acres, when is the market going to take that into consideration?

Kub: That's a really excellent question and I really want to see -- I want to see confirmation that the trade is paying attention to these late planting concerns.  Early this next week, you know, either in the crop progress report that comes out on Monday afternoon or within the next week or so and if that doesn't happen, if we don't work some sort of bullish enthusiasm into that you have to wonder if it's a kind of a gold situation where if a market is not going up it's going down.  So I'm still bullish for old crop corn and I'd like to see it move up to the $6 level, for instance, before I'd be really selling, interested in selling a very large portion of my production.  But I think it's in a precarious position and I just don't know what it's going to take to make the market be more concerned about this late planting.  You know, last year they were willing to be bearish about early planting which doesn't really make any difference because you don't get extra yield by planting early but you can lose yield by planting late.  So it would seem more legitimate to me as a fundamental argument to be bullish about late planting and that may certainly happen here in the next couple of weeks if it doesn't dry out.

Pearson: Particularly, you're right, if it stays wet and cold.

Kub: Yes.

Pearson: Now, let's look at soybeans.  How have soybeans been, been holding up on the old crop side as we look at demand from China and other places?  What are we seeing in the soybean market?

Kub: Yeah, the soybean market has been the one star of the grain sector.  It has been rallying this past week or past two weeks.  And the demand from China is one of those reasons because there are still these bottlenecks in Brazil that they can't move it out of there.  And what's interesting about that is that I think the industry has been assuming that we could ship all of the old crop soybeans out of the U.S. and then if the U.S. industry still needs soybeans perhaps we would import them from Brazil which makes a certain amount of sense particularly when you look at ocean freight rates, they're still quite cheap in historical terms or cheaper than a year ago.  But if it is bottlenecked in Brazil to get China to get cargos out how are we going to get cargos out?  Are we just kicking the can down the road for these supply shortages just a few months down the road?  So I think the soybean market could kind of keep this story -- even though we have a large South American crop exists, it exists, we just -- the market doesn't have it.  And meanwhile the domestic crush ratio has really quite improved over the past week so, I mean, there's a lot of reasons why you can see that rally in the old crop soybean market right now.

Pearson: So advice to producers with soybeans in the bin, hang onto it, continue to ride this rally you think?  Or where do you see it going?

Kub: You don't know.  I have not been -- I have not been bullish for old crop soybeans for the past couple of months just because the South American crop exists.  And, you know, when you look on a supply and demand chart, you know, the major bullishness of scarcity of supplies is really not there anymore.  So it is more of a localized concern or just a short-term concern and if you could see a $14.50 price again I would definitely be a seller.

Pearson: Alright, now taking a look at new crop, what are your thoughts there?

Kub: I should correct that to say $13.50.  Yes.  New crop --

Pearson: Well, if you get $14.50 definitely, yeah.

Kub: Yeah, take that too.  But new crop, again, has been like corn that has not really been responding to these same concerns or to the planting concerns, particularly when you look at the relationship between the corn and soybeans.  If the market believed that corn planting was going to be late they should believe that we would be getting extra soybean acres as acres get switched.  But largely on a day-to-day basis that does not seem to be the case, it seems to be, you know, divorced from that reality.  So soybeans, you know, I'm looking for a $13.50 price for new crop soybeans and it is sort of arbitrary because there's no reason to look at the chart and expect that to happen.  That was the February high and it would be, you know, a 2.2 ratio over $6.00 corn is really why that's a goal of mine.

Pearson: Alright, let's real quick take a look at livestock.  We had the cattle on feed report today, we saw feeders sell off earlier, live cattle are rising.  Give us a quick thought on the cattle markets.

Kub: Well, the cattle market is, the cattle industry is in a really ugly scenario right now and there's just no denying that.  The packers margins were already poor and they got poorer this past week.  The feeder margins for cattle are the worst of anything in the entire livestock industry is the feeder margins.  And meanwhile, if you look at the prices there at the grocery store, they're at an all-time high.  So, you know, you expect to see some of that passed on but it has not really been able to be the case just because of the high feed costs.

Pearson: Thank you so much, Elaine.  That wraps up this edition of Market to Market.  Be sure to join us next week when we'll examine the impact of heavy spring rains on nitrogen levels in Midwestern fields.  So until next time, thanks for watching.  I'm Mike Pearson.  Have a great week.

Tags: agriculture analysis cattle commodity prices corn cotton drought economy Elaine Kub hogs markets Mike Pearson soybeans wheat