Iowa Public Television


Market Analysis: Elaine Kub

posted on October 11, 2013

Wheat futures contracts continued their upward trend this week while the corn prices were pressured by reports that the EPA is considering cuts in renewable fuel blending mandates.  For the week, December wheat gained 5 cents, while the nearby corn contract moved 10 cents lower.  The selloff in soybeans that began with last week's quarterly stocks report continued and the November contract settled Friday with a weekly loss of 28 cents.  Nearby meal prices followed suit giving up $15 per ton.  In the softs, cotton's recent rally ran out of steam this week as the December contract declined by $3.81 per hundred weight.  In the dairy market, November Class III milk gained 24 cents, while the December contract moved 38 cents higher. Over in livestock, December cattle gained a nickel, nearby feeders advanced by more than $3.00 and the December lean hog contract posted a weekly loss of $1.12.  In the financials, the Euro gained 1 basis point against the dollar.  Crude oil lost $1.82 per barrel. Comex Gold declined by nearly $50 per ounce.  And the Goldman Sachs Commodity Index gained just over 1 point to settle at 638.20.

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 with the shutdown.  One of the things we are seeing in the markets is wheat has continued to climb.  The spread between wheat and corn is still growing.  What's going on in the wheat market?

Kub: Well, wheat has a bullish demand story going into 2014.  But what really sparked this rally over the past month, it's gone up about 75 cents in Chicago, a little less in Minneapolis, a little more in Kansas City, what sparked it was really the freeze down in South America.  And, in fact, the Brazilian Statistics Service, which is still releasing reports, bless them, they did cut their production estimates for their wheat.  But I think we might be running into resistance here.  That Chicago contract that I mentioned was not able to make it above, or make it into $7.00, we got to $6.99 and three-quarters and it's sort of running out of steam, particularly with the dollar stabilizing and some of the export partners balking at this price level now.  We might be seeing that rally start to level off.

Pearson: Now, the only thing that might be on the horizon, there is a very powerful cyclone moving into India.  Is that something the trade is going to be watching throughout the week?  Would that be a market mover potentially?

Kub: It sure could, particularly because wheat's fortunes really live or die with the export situation.  So absolutely.  Australia is going to start their harvest here soon so they might be able to take in some of that Indian business if India does struggle here.  But absolutely we need to be paying attention to the foreign demand and the foreign supplies that are going to be competing with our American priced wheat.

Pearson: So advice on wheat, take advantage of these prices maybe?

Kub: Well, I would be a very limited seller if I was going to sell here because, yeah, the trend still is higher and there may be some of these stories, like you mentioned the cyclone that may juice things up a little bit more. The trend has not ended yet.  But I would be watching for that.

Pearson: Okay.  Let's take a look at corn.  The big news late this week in the absence of any USDA and other government reports was the leaked EPA document that purported to show that EPA was considering cutting the corn ethanol, the RFS basically, for the remainder of this year into 2014.  Talk to us a little bit about how the market is treating something like that, that can't be confirmed.

Kub: You know, it really didn't overreact.  I mean, corn didn't go down 20 cents today.  It didn’t go down 40 cents today.  It was a pretty measured response to that rumor.  And it's unconfirmed.  That's not an official number yet but they're going to, rather than raising their ethanol mandate, they might cut it to 13 billion gallons in 2014.  So the market did respond lower, which, again, like you mentioned, is seasonal, you would expect the natural direction for corn to be moving this time of year is lower anyway because of harvest pressure.  But it did, you know, just keep on driving that trend down.  The low I think in the December corn contract this week was $4.32 and a half so we're really getting into some prices that are uncomfortable for farmers as far as their break even costs.

Pearson: Now, as we look to the futures, farmers are out there in the combine.  Knowing that this EPA thing might be a player down the road, knowing that we did hurt a lot of demand with last year's high prices, how do you handle corn off the combine at $4.33, $4.35?

Kub: Well, yeah, I personally don't like selling at these prices just because, you know, these are not great prices and because I don't foresee a lot of bearish things down the line.  You have this harvest pressure now but once we get past harvest obviously ethanol producers are able to make money, they're making great money producing ethanol with corn at these price levels and livestock feeders are doing better with grain at these price levels.  And the DDG markets, you know, if we produce less ethanol then there would be fewer DDGs.  So I think that the pressure we're seeing now may just be seasonal and once you get past that the market may be able to recover.  And that is a risky statement but, I mean, that's what I'm here to do I guess is to make a prediction about the markets and if you're worried about the risk then obviously you could be selling into the spring markets.

Pearson: Now, as you look forward, as you're making your risky statement, do you have any levels that producers should consider selling at, any numbers that jump out at you?

Kub: Not particularly.  $4.75 looked like a level that we were able to maintain and everybody seemed to be getting by there.  If we could see that again, you know, the corn market I don't think, obviously with the yields that we're seeing, the production levels that we're at, regardless of what the USDA says or doesn't say on days like today, the production level is pretty ample or pretty sufficient.  So yeah, I'm not looking for a major rally in corn any time soon in the next six months.

Pearson: But potentially a little bit of an increase over the harvest pressured prices.

Kub: Right.

Pearson: Well, let's take a look at soybeans.  We have seen just about a 50 cent decline week over week in beans.  Is that going to continue?

Kub: No, I think beans is probably in a consolidation pattern.  What is happening in beans that is interesting is they have actually a lot more volume of activity.  The CFTC is also closed down so we won't know and we won't ever be able to confirm exactly who is doing what so some of it is just the usual harvest pressure of merchandisers hedging what they're going to buy over this three day weekend and some of it is also probably speculators that are actually participating in soybeans and finding momentum from day to day in that market.  So soybeans are in a little more interesting situation and they've also got the situation that is starting to get dry in Brazil so there are some things that could make soybeans rally here again but we probably have seen the highs.

Pearson: Probably have seen the highs.  So advice to producers are you're out there in the fields?

Kub: Yeah, particularly if someone is in a position that they need cash and some farmers are not but some are, they're going to need some cash here before the end of the year, beans is pretty clearly the crop to sell rather than corn.

Pearson: Okay.  Alright.  Now, as we're watching this harvest pressure continue, how low could prices get knowing what we know about harvest yields so far?  Where do you think we could head?

Kub: Well, the 2014 November contract is $11.63 so it's about $1.00 cheaper than the front month price now.  So there's a lot of room in there if you have sufficient South American crop, there's a lot of room for beans to keep falling.

Pearson: Okay.  Alright. So take advantage of the prices while we've got them.

Kub: Yes.

Pearson: Well, now let's take a look at the livestock market. And as we mentioned earlier on the show South Dakota suffering tremendous livestock losses up there and when you're talking 5-10% of the state's herd that's a big number and it's a huge number when it's your cattle.  But for the rest of the country as we try to get a handle on what that means for the trade itself, can you help us get that into a little better context?

Kub: Yeah.  Well, it's obviously, like you mentioned, not at all trivial if those are your cattle.  But even to the market that's not a trivial number and these were mostly breeding animals, pregnant cows that were going to be bringing calves into the market for 2014.  So as you look into 2014 feeder cattle market, yes, this was a significant number.  At 60,000 or 70,000 death loss, I think you guys mentioned 100,000, it's still unclear exactly what that number is, but that's about the number of cull cattle that would have been harvested.  That's not Temple Grandin's favorite word.  But that’s about what you would lose when we were diminishing the herd.  So it's not a trivial number but it's also not the reason, I don’t' think we can point to this reason alone for the incredible rally that we're seeing in feeder cattle prices.  I think that is a completely separate matter to this death loss.

Pearson: Alright.  Well, let's talk fat cattle prices.  We don't know cash prices really truly but what have you been hearing cash cattle trade?

Kub: They were a little stronger both in the north and the south and if we just assume that the cutout values are stable or pretty much where they were at the end of September then you're still looking at packers losing money.  But it did sound like the prices were stable or a little bit higher and yet the futures market doesn't want to seem to go higher or get to new record highs like the feeders until they see some confirmation.

Pearson: So we're going to have to wait until probably the government is back in session, we start to get some reports to see if this fat market is going to trend even higher.

Kub: I think so, yes.

Pearson: Alright.  Well, now let's take a look at the feeder cattle market, as you mentioned, we've been on a tear, we've been on a tear really the past month.  We are in uncharted territory.  What is the trade doing?  How do they handle something like this?

Kub: Right.  I mean, you can't really put a number on it because this has never been tested before.  We don't know where someone is going to get into there and sell.  And the volume of trading is really not that strong.  There was some exuberance here on Thursday and Friday in the futures market so probably some of that was a little overdone.  But really this wasn't driven by speculators, this was just driven because nobody is selling and nobody wants to sell until we've discovered where the high could be and it could be anywhere.

Pearson: And so it could be anywhere.  So do you have a forecast for us?  Any thoughts?

Kub: Well, the November contract, its high for the week here today was $169.7 I believe so I think it would be conceivable to see a $170 sort of a number here in the next couple of weeks.  Eventually we're going to have to run out of steam I would imagine.  Somebody is going to be willing to --

Pearson: Put something on the market --

Kub: Yeah, and stop playing chicken, yeah.

Pearson: Trend it down.

Kub: Yeah.

Pearson: Alright.  Well, now let's take a look at hogs.  Hogs had been on a bit of a rally and now we've lost $1.00 this week.  Where is the hog market headed?

Kub: Yeah, they fell throughout this week and if you look down the pipeline of supplies and if you look even at the futures spreads the market believes that there's going to be ample supply in the next few months.  So, again, even though we don't have confirmation about retail values or anything like that, it would suggest that the market is probably going to be stable or perhaps even lower, this $84 level is probably about where it's going to be looking.

Pearson: Now, this is a market that is hit especially hard with the uncertainty created by the USDA's closure.  We know there's a lot of hogs out there.  We also know slaughter numbers have been down.  The market was looking for these reports.  We're just going to continue sliding until we can have some certainty to do you think?

Kub: Yeah, I think so.  I mean, an efficient market will trade the information whether the information comes from the government or whether the information comes from the market itself.  So I think that the folks who are really involved in hog futures probably know where the slaughter numbers were this week and they probably know that they were fairly stable or about where they expected them to be because we have not seen any major collapse in these prices, they're pretty sideways.  But, you're right, I mean it absolutely would be helpful to have some confirmation of what is really going on.

Pearson: Sort of ringing the speculators --

Kub: Yeah.

Pearson: Alright.  Well thank you so much, Elaine --

Kub: Thanks, Mike.

Pearson: -- for taking the time to be with us today.  That wraps up this edition of Market to Market.  But Elaine and I will continue our discussion and answer some of your questions in our Market Plus segment on our website.  You'll also find audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account exclusively at the Market to Market website.  And be sure to join us next week when we'll meet the latest winners of the World Food Prize.  Until then, thanks for watching.  I'm Mike Pearson. Have a great week.

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