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Market Analysis: Elaine Kub

posted on January 3, 2014

Grain prices fell again this week as futures contracts were pressured by a surging dollar.  For the holiday shortened week, March wheat lost another 3 cents while the nearby corn contract moved 4 cents lower.  Despite favorable export numbers, soybeans also trended lower as the March contract settled with a loss of 43 cents.  Nearby meal followed suit giving up more than $20 per ton.  In the softs, cotton's rally last week proved to be short-lived as the March contract declined by $1.18 per hundred weight.  In the dairy market, January Class III milk broke through the $20 barrier with a gain of 57 cents while the deferred contract moved 92 cents higher.  Over in livestock, fat cattle traded in record territory again this week as the February contract settled with a weekly gain of $1.35.  March feeders advanced by 30 cents.  And the February lean hog contract improved by more than $1.00.  In the financials, the Euro lost 13 basis points against the greenback.  Crude oil shed a whopping $6.36 per barrel.  Comex Gold gained $25 per ounce.  And the Goldman Sachs Commodity Index declined by 25 points to settle at 615.00.

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: As we mentioned there in the lead up we saw a big sell off this week in crude oil.  Talk to us a little bit about what happened this week.  What changed?

Kub: Well, the crude oil chart got really close to $100 per barrel and I think traders just decided there is no justification for crude oil to be $100 per barrel right now.  The demand, the economy recovering is recovering but it's nowhere near exciting or growing at a great pace that would support $100 crude oil.  So we have dropped quite a bit, come down to $94 per barrel.  This was also coincident with the dollar going up and just sort of a general New Year change in the tone of trading.  It seems like we've gone back to that risk off idea.  I think investors are jittery about the stock market being so high at the end of the year but feeling like there's going to be a shoe dropping here at some point in 2014 and I think they had the feeling of getting off a lot of risk here in the first couple of days of the New Year.

Pearson: Okay.  Alright.  Now, you mentioned the dollar surging and that kind of leads right into the exciting story on Friday that had people's attention was the wheat story.  Saw an 8 to 10 cent rally across all three classes of wheat.  Was that dollar related?  Or what has happened to the wheat market?

Kub: I think what happens to the dollar from this point forward is very crucial to wheat's prospects.  And I would point out that even though wheat came up on Friday a little bit you're still looking at an unrelenting, bearish trend in wheat.  There was a new, fresh contract low even Friday morning for the Minneapolis wheat contracts and I believe also for Chicago wheat.  It has just been 21 sessions in a row I think for the Minneapolis March contract to be having continual new contract lows.  What happened in the wheat on Friday that brought it up is Egypt started buying.  This is the thing that might change that trend is eventually you'd think it's going to get cheap enough somebody is going to want to buy this wheat.  So Egypt put out a big tender and between European wheat and American wheat it's neck and neck for the price.  To get to Egypt it works out to $300 a ton is about $8, a little over $8 per bushel in Egypt's front door.  So what happens to the Euro and the dollar right now is going to determine which of these wheat markets is going to be able to go to these foreign customers.

Pearson: Alright.  And either way we're finding a buyer for the huge global wheat supplies that we've got out there.

Kub: Well, we hope.  I mean, hopefully somebody is going to step in here and buy that.  And Canada obviously is going to be trying to compete for this business also.  They have so much wheat right now the elevators aren't even willing to accept more wheat from the farmers who are desperate to deliver it.  They're just crushed with wheat there.

Pearson: And advice to producers in that situation?  How do you handle trading in this wheat market that we've got?  What does the future look like?

Kub: Well, I mean, the conventional wisdom would say to store it.  I mean, hopefully you've got the storage to store it.  And the good news is that there is a carry spread in the wheat market so the market will reimburse you for those costs of storing it, of keeping it off the market while they just can't handle it right now.

Pearson: Any price points or ranges out there you think producers ought to be keeping an eye out on while they've got it in their bin?

Kub: You know, it's really hard to say.  Like I said, we haven't been able to establish any sort of a pattern that would change that trend.  It remains to be seen if this upward movement on Friday would change and I think I would look ahead to the January crop report obviously as the next big thing on the calendar that could spark some sort of excitement.  I don't know that there's anything in there that's going to be bullish for wheat, probably increase Australia's numbers which is actually bearish, but that is something that could change trend.

Pearson: Wait and see what happens if what happened on Friday is a major trend, reversal or if it's just a blip in the unrelenting bearishness.

Kub: Probably.

Pearson: Alright.  Well, let's take a look at corn.  Where are we at in the corn market?  How do things look for the old crop '13 corn?

Kub: You know, it was interesting again there was a new contract low for old crop corn.  The March contract had been holding steady at $4.18 and a half and now on Friday it slipped down below that $4.17 so there does not seem to be much support there.  You're looking at $4.10, if it goes below there it probably starts hitting some stops and with that January report coming up historically that is a day of incredible volatility for the grain markets.  It always tends to be very wild on that day, possibly in both directions and maybe changing the trend, maybe not.  But if you hit those stops, like I said, we could end up with lots of downward movement in the corn market.

Pearson: Now, we are expecting that report coming out next Friday, I believe.  How should producers prepare in advance to that report because of the volatility?

Kub: Right.  For both old crop and new crop honestly I think that the best opportunities are going to be ahead of us in the spring.  We're going to go back to this pattern.  But it used to be when we had abundant crops where you have a seasonal high in the spring when the crop is having the most risk.  So if you're looking at maybe making your sales in the March, April, May, June sort of timeframe that is a plan that I think makes sense in this kind of a year.  But the risk of it is that in the meantime if you don't have anything sold and you're intending to sell in the next few months and need some cash, yes, you should probably be doing something right now like buying puts or putting some sort of downward protection on your crop.

Pearson: Because if your plan is to wait until March, April, May and you see corn with a 3 in front of it, it's going to be an unpleasant springtime for a lot of producers out there sitting on bins full of corn.

Kub: Exactly.

Pearson: Now, let's take a jump down to soybeans.  We're talking bearish news throughout the grain and into the oil seeds market.  43 cents almost this week in old crop soybean prices.  What happened?

Kub: Well, what happened, there was a time there when the bullish story of the United States, our tight supply and demand was really driving that old crop market, but looming over this for months now has been the idea that the Brazilian and Argentinean crops are going to be huge and that is continuing to be the case and even more so I think that is what really triggered it this week.  There has always been this idea that it had been a little bit dry but the forecast turned very decidedly wet right as it is filling the pods.  We're fairly safe to say that they're going to get the 88 million metric tons in Brazil, possibly up to 90 million metric tons is an idea that has been tossed around.  So that could be some very bearish news coming in again on that January 10th report.  So somewhere between now and next November there is $1.57 spread between the old crop and new crop soybean futures and those are going to have to come together somewhere.  And my feeling is that it is probably going to be closer to the downside, to the new crop prices.

Pearson: Now, how much risk is there on November '14 beans?  Should this be a time for producers to be making sales looking at a potential 90 million metric ton crop?

Kub: Right.  That also took a great hit this past week.  And I think that if you could see that November contract get back above $12 that is a great selling opportunity.  It's not there now and, again, with all this bearishness coming out of South America it may be like corn, not something that we're looking at in the very near term but again more of a seasonal pattern hoping to see some sort of battle for acres develop in the spring.

Pearson: Maybe late spring into the early part of planting season maybe get a weather scare and see what happens.

Kub: Right.

Pearson: Alright.  Well, now let's take a jump down to livestock.  Break the bearish trend, now we've got bullish stories going on in the livestock market.  As we talk fat cattle we had record high cash prices paid in Colorado at $139?

Kub: $139 is the story I heard.

Pearson: What's happening in the cash cattle market?  Where is all this demand coming from?

Kub: Well, the packers are finally just having to pay these prices.  And it's not necessarily because they're making money.  They're probably not making money or not making very much money buying fat cattle at these prices.  But there just aren't -- they just are not able to find the supply out there and this is just the price that they are simply having to pay.  So that seems to be what is causing that and the futures is following that also, that also hit a new record high of all-time here on Friday.


Pearson: How high can this go realistically as we look at demand factors in America and overseas?  Is there still some life left in this rally?

Kub: Yeah, well $139 is awfully close to the psychologically significant $140 number which would be historic to see obviously.  And you think back the last five or six years where you get commodities that go on these wild tears and sudden streaks.  I don't have the feeling that the fat cattle market is going to be like that simply because there's not enough room for those packers, like I said, that are not making money.  You're not seeing the boxed beef market at any new record high.  It's at $200 but it's not at a record high.  So I don't see this going on a tear, some speculative upward streak.  I see this maybe getting to that $140 level but tapering off.

Pearson: Kind of creeping up there and then possibly holding steady dependent on where demand runs.

Kub: Right.

Pearson: Now, I know we've had some talks in Korea.  Jamey was on last week, talked about how Korea might be opening up their cattle under 30 months of age.  Have we heard any more on that in this past week as that looks like it's going to happen?

Kub: I don't know and I don't know that that's been what is a driving factor.  There was another little bullish snippet of news this week that the USDA is allowing or recommending the school lunch programs to include more lean protein or larger portions of them and I know that's something that has been challenging the beef market in particular, to not have that ability to move into that market.  So there was one little piece of bullish demand news for you.

Pearson: Alright.  Well, now let's take a look at feeder cattle. As we watch corn touching new lows, feed prices have come down substantially.  Does that give the feeder cattle market time to move or room to move with record high cash fats and lower corn?

Kub: It was interesting to me to note that they did not.  They stayed steady this week.  They certainly did not drop.  But they did not establish new contract highs in the way that the fat cattle market did. And that may be a representation of not being certain about that corn market perhaps coming back up, not being very optimistic about the fat cattle, like I said, getting much above $140.  For whatever the reason it doesn't seem like that cash cattle, the feeder cattle index is probably going to get any higher than $166 for the time being.

Pearson: Okay.  Well, now let's jump to hogs for a minute.  Hogs we were on a bit of a sell off last week, turned it around, saw the dollar move north.  What happened last week to change that sentiment in the hog market?

Kub: Certainly this week too there were a couple of exciting upward days in the hog trade just this past couple of days as the New Year got started.  And there are some bullish stories here about the supply of hogs being down probably based on the virus activity that happened late last year.  And also there was some bullish concern about the transportation and the logistics of actually getting the supplies where they needed to go.  But really these were bullish stories that, like I said, inspired some excitement in the futures trade but I think that it's overdone and the actual cash trade is probably still pretty close to that $80 level and the widening discount between the futures and the cash business in the hogs.

Pearson: Now, as we look to this next week we're seeing record cold temperatures across much of the country, the flash blizzard that struck the northeast.  How do the cash prices for livestock look here in the short-term?

Kub: You know, I don't think that's going to have a lasting impact or it's something that you sort of see every winter so these things will happen.  But as far as actual demand or the actual supply and demand, the supply of hogs, the numbers may be slightly down but their weights are higher so you're really not looking at a fundamentally bullish story to the hog market.  I would be more neutral for the next few months in hogs.

Pearson: Alright.  At $4.20 corn should we be looking to cover some feed needs do you think?

Kub: I think absolutely.  I think that there's -- whatever bearishness is known about corn is fairly well known.  So except for the volatility that may be downward this would be a good opportunity.

Pearson: Alright.  Thank you so much, Elaine, for being with us tonight.

Kub: Thanks, Mike.

Pearson: 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 examine the impact of USDA's annual production summary.  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