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Market Analysis: Elaine Kub

posted on July 26, 2013

Grain prices declined this week as cooler temperatures and timely rains delivered much-needed moisture to portions of the Corn Belt.  For the week, September wheat lost 14 cents, while the nearby corn contract moved 52 cents lower.  Soybeans also were pressured as the September contract settled with a weekly loss of 51cents. Nearby meal prices followed suit giving up nearly $20 per ton.  In the softs, cotton gave back virtually all of last week’s gains as the December contract lost $1.06 per hundredweight.  In the dairy market, August Class III milk declined by 9 cents while the September contract moved 36 cents lower.  Over in livestock, August cattle lost 17 cents. Nearby feeders advanced by 35 cents. And the August lean hog contract posted a weekly gain of $1.30.  In the financials, the Euro gained 140 basis points against the dollar. Crude oil declined by $3.17 per barrel. Comex Gold gained more than $28 per ounce. And the Goldman Sachs Commodity Index lost nearly 15 points to settle at 637-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: Busy week in the commodity markets, both on the future side and in the cash markets.  Let's move right in and talk about wheat.  What are you seeing on the Chicago wheat contract?

Kub: Well, the Chicago wheat contract, it's been quite boring really.  When you look at this very longstanding pattern of just declining prices what is remarkable about it, like I said, is how long this has lasted and how unabated it has been by any sort of rally.  And there's sort of no really good reason for anybody to get in and buy wheat because of the weakness in the other grains and the fact that mostly world weather is okay, there was a little bit of frost down in South America but not enough to harm their winter wheat crop.  Same story in the Australian winter wheat crop.  In the feed grains market worldwide weather is basically okay in China and Russia.  So there's not a lot of good reasons for somebody to get in and buy wheat unless you looked at the fact that the dollar has been really trending lower throughout the month and yet we have not received a lot of bullish interest from any funds or speculators yet, even with the lower dollar.  So there's not really a lot there to step in and stop that tide in wheat.

Pearson: Continued sideways movements is kind of where you see things going?

Kub: Yes, sideways or down.  When you look at the spring wheat now you're still getting some fundamental news there, there was a crop tour that showed yields look great.  If we get that cooler weather that is being forecast they will probably have lower protein but probably continue to have good grain filling good yields.  So, again, that's not a bullish -- that's not a bullish something that is going to go in there and spark a rally that I can think of right yet.

Pearson: Advice to producers looking at the spring wheat in the field?  How do you best market what you've got?

Kub: Well, there is carry in the wheat market and like I said, with that lower dollar and the fact that it has just been going down for so long, I would look for a rally before I would be selling any wheat right now.  Hopefully you've got some place to store it or a plan to store some of that if you're going to harvest it now.

Pearson: And then be prepared and sell when you get a rally.

Kub: That would be my plan.

Pearson: Alright.  Now let's take a look -- if we look at corn we saw quite a move in the cash markets this week, we saw basis slide almost across the country.  Talk to us a little bit about what is going on in the corn market on the cash side with old crop.

Kub: Right.  So it has just been absolutely nuts.  And it was really sparked by soybeans more than corn but the fact was that they really scared folks -- the futures maybe dropped only about 50 cents, even in the old crop market.  But when you brought in the fact that basis was so positive or so much higher than the futures to begin with they could really, they had lots of room and no way to keep those two markets tied together and so they had lots of room to make the basis drop about $1.30 as a nationwide average and it's been more extreme than that in certain localized places.  So it has been extremely wild for folks who are still holding on to any old crop corn.

Pearson: Now as we look at the new crop corn situation we do have cooler temperatures, a lot of crops starting to pollinate, we're getting into that crucial area.  The market is aware of that.  We've also seen some rains this week.  What are your thoughts?  Where is this December corn headed?  Are we going to continue to slide?

Kub: Well, I wonder if the market really is aware.  As you say, some of it is pollinating and some of it hasn't been.  As of Monday Iowa's crop progress only 18% had been pollinated.  And obviously it's more than that now, a lot of it did over just this past week.  But that was a week ago and then that was Minnesota, Wisconsin type of pollination numbers for July 25th.  Next week is August and we have been very, very slow and Iowa is a very large portion of the corn crop so it has been late and I don't know if the market has just been looking at the calendar and saying, oh it's the third week of July, crop is made.  The crop isn't made yet.  We're in pollination weather now.  I mean, the late planting is still haunting us.  So I think the crop has, yeah, the market has been trading a calendar and the good weather or the decent weather, the good rain that has been coming, particularly to the eastern Corn Belt.  So I wonder if there will be more attention paid to the effects over the next couple of weeks.

Pearson: So, we might have the door open for an upside rally here if the market catches on that, hey, we've still got a lot of corn yet to pollinate, we get some hot weather something could spark an upside rally.  Where do you see December corn headed in the next month to six weeks?

Kub: Well, again, that's a situation like wheat where nobody seems to be stepping in, nobody wants to catch a falling knife.  It has been in this incredible decline so you don't know when you could predict any sort of a bottom there.  The contract low on that December contract, by the way, was back from 2010 and it was $3.98.  And we don't have a whole lot between where we are now and between that $3.98.  And I'm not saying it's going to go to $3.98.  I'm just saying that I don’t know how much farther it could go but I think it's underpriced.  I think between now and the reality of harvest, whenever the market realizes that yields are not made yet and if we don't have absolutely perfect weather from here on out or an early frost, between now and then I would expect to have this underpriced situation correct in the new crop market.

Pearson: So this might be a good opportunity for end users, feeders to stock up on some Dec corn?

Kub: I think these are great opportunities to be locking in profit.  I mean, ethanol plants, you've got pretty high crude oil prices right now and pretty cheap corn, you've got reasonably high fed cattle prices and pretty cheap corn so there are great margins to be locked in.  And not only the corn itself but the DDGs have gone back to a more normal relationship to the price of corn and the hay market has really, really quieted down from last year because we've got, you know, a crop of hay coming in now.  So, yeah, these are some good opportunities for buying some feed.

Pearson: Excellent.  Now let's take a look at soybeans.  As you mentioned it was soybeans that pulled corn down and really kind of set this whole thing in motion on the overnight on Wednesday.  Talk to us a little bit about what was driving that.  What happened in soybeans to affect the basis?

Kub: Well, I don't know what sparked it but there was a lot of things going on and it was sort of inevitable that this could have happened at some point.  On Monday, the spread between -- the inverted spread between the August contract and the November contract was about $2.31 wide, I think that was its widest point.  So you knew at some point between now and harvest, you know, the market was going to have to bring these two prices together.  Why it happened on July 24th or July 25th, I don't know.  I think the timing of that really caught folks by surprise and that probably exacerbated the reactions.  Whether the timing was because China decided to release some of their supplies and figured that they can limp along until the new crop comes along and then this scares a lot of processors and then processors dumped their basis bids by $1.20 per day, some of them.  So this is, you know, the proper adjective to describe the soybean basis this week, if I used it, it would probably be the first time anybody bleeped anything out on Market to Market.  I mean, this is nuts the way that the soybean basis market has behaved.  So if you even just look at a futures chart you don't even get the full picture of the fact that a cash price, a flat price to a farmer on average or in certain locations may have dropped as much as $3.00 this week.  We went from just above $16.00 to just above $13.00 in the cash market at an unusual time.  Last year we saw similar sorts of movements in September because, again, the market was inverted and it needed to make that correction eventually but it was much later.  So the timing of it might have been an overreaction.  You might have an opportunity to see if some processors really didn't have everything bought up and they might still need to be buying some.  But it really caught a lot of people by surprise.

Pearson: Alright.  Now, as you look at new crop, situation same as corn?  Do you think we're a little oversold here going into this next week or what are your thoughts?

Kub: I think the idea of late development is even more dire for soybeans than it is for corn.  You look at the fields that are not canopied over and may never canopy over just because they're very stubby, they did not receive the growing degree days that these crops really need in order to be able to fill pods.  And, again, that maturity progress is about 13 percentage points behind a five year average.  So we really are far behind and now you're really in a threat of early frost for soybeans in particular.  They are in a more dire weather situation than corn in my opinion.

Pearson: Keep an eye on the weather with soybeans.  Now let's take a look at the livestock market.  We did see live cattle taper off, fell a little bit this week.  Where do you see the fat cattle market headed?

Kub: The fat cattle market has been very flat really.  I mean, we're talking the same kind of prices we would have set a year ago at about $119 I think was the cash bid in the south this week.  And there has obviously been some fluctuation throughout the year but they seem very flat now.  The have not been able yet to really -- the actual -- the boxed beef cutout has not really been able to make it above that $200 level and it may not be able to make it above that level.  when is it going to make a breakout is another, the same question that we ask about these other commodities, is when are you going to get the interest to bring it back up to where it might make it in the fall?

Pearson: Sure.  We pushed it up over $210 briefly earlier this summer then it has fallen and it's been stagnant since so we'll have to wait and see if the demand picks up.  Is that what is going to be driving beef?

Kub: Right, that is what is going to be driving beef and that's sort of this larger economy picture.  We do see the slaughter rates slightly higher for beef than for some of the other, some of the other meats and meat in general has had more production than it had a year ago.  So you get the impression that yes, the economy is slowly recovering and it is working its way into the meat market.

Pearson: Alright.  And so then what are your thoughts on feeder cattle then as we look forward?

Kub: Well, feeder cattle have done a very nice job of recovering this past month and they have been exactly a mirror of the corn prices falling.  So it's just the way that historically normally you would expect to have feeder cattle go up.  So I think that trend, particularly if we see corn continue to fall, it would be very easy for that October feeder contract to make its way back up to $160 or possibly even go back up to its contract high of $164.  I think that is really a possibility.

Pearson: Alright.  So just, again, it's corn market driven, we're back kind of in the normal parameters on feeder cattle.

Kub: Yep.

Pearson: Now taking a look at the lean hog contract -- hogs have been a compelling story the past few months as a matter of fact.  And now we're seeing again the contract is up a little bit, up $1.00 over the last week.  Is it sustainable?  Where do you see the hog market headed?

Kub: I think that it's not going to be able to make it back over its peak from June, you know, right before the 4th of July.  I think that was probably the peak we've seen.  You know, the bacon season that we would ordinarily be looking at coming into right about now is probably also going to be late this year.  I mean, all of this is sort of determined by weather, again.  So I think that might also be late.  And I think that the processors are looking at a very large cold storage number, supply number right now.  So I don't think that they're going to have the excitement to bid that back up above $87 so I'm looking at that consolidating between that $83 and $87 level.

Pearson: Alright.  So those are going to be things to keep an eye on as we work through the rest of this strange year weather wise.

Kub: Yes.

Pearson: Thank you so much for being with us, Elaine, appreciate it.

Kub: Thanks for having me, Mike.

Pearson: That wraps up this edition of Market to Market.  But if you'd like more information from Elaine on where these markets just 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 again next week when we'll examine the impact of the government's latest estimates on U.S. economic growth.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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Tags: agriculture analysis cattle commodity prices corn cotton dollar economy Elaine Kub feeders gold live cattle markets Mike Pearson soybeans wheat