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Market Analysis: Elaine Kub

posted on March 21, 2014

Grain prices were mixed this week as traders prepare for USDA's prospective plantings and quarterly stocks reports due later this month.  For the week, May wheat gained 6 cents, while the nearby corn contract moved 7 cents lower.  Soybeans bounce back from last week's decline as the May contract rallied 20 cents, nearby meal traded in lock step with the underlying asset with a gain of $12.00 per ton.  In the softs, cotton continued its upward trend as the May contract rose more than $1.00 per hundred weight.  In the dairy market, April Class III milk gained $1.11, while the deferred contract also strengthened by more than $1.00 per hundred.  Livestock prices were mixed as the June cattle contract fell $1.73.  Nearby feeders took a breather from their stint in record territory as the May contract shed $1.80.  And the May lean hog contract also traded at an all-time high in route to a weekly gain of $2.50.  In the financials, the Euro gained 11 basis points against the dollar.  Crude oil rose 86 cents per barrel.  Comex Gold lost $47.00 per ounce.  And the Goldman Sachs Commodity Index declined by 5 points to settle at 640.35. 

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: Pleasure to be here.

Pearson: Well, let's jump right into it, Elaine.  We've got the wheat market still trading at a very high level, up slightly again this week.  Are we starting to get toppy in those nearby contracts?

Kub: Possibly, simple because we're back at the level -- before it had that big two months slide this was the level that it was at.  So we have basically all the way corrected from that crazy two month slide that had no let up.  And I think that all of the considerations that have made it bullish for the past week here or the past three weeks or thereabouts with the Ukraine chaos and the ideas of the winter kill in the Kansas or the southern plains' winter wheat crop I think all of that you could say might be priced in by now.  We might still see a little bit more of that.  We've got the next couple of weeks to really get a good observation of that winter kill because there's still some fields coming out of winter dormancy.  So there might still be a little bit of new information coming in, in the next couple of weeks.  But I think, to some degree, we might be reaching a high here.

Pearson: Now, is the wheat market waiting on too much information from the March 31st reports?

Kub: No.  I don't think so.  That's an acreage number and acreage is fairly well known, we can pretty well guess what the enthusiasm for planting spring wheat will be this year, which is probably not super high given the market opportunities that are there.  In fact, the Kansas City wheat is trading at a very strange premium to spring wheat.  So the market is not asking for spring wheat at this time, it's probably not going to get major acreage play in that prospective planting report and yeah, the story here is just watching that hard red winter wheat market is really the leader.

Pearson: And at these levels, as you say, we're getting back to those older, higher levels.  Is this a good time to be making some sales?

Kub: Absolutely, particularly in that hard red winter wheat market.  You're at about $7.75.  Let's say you got up to $8.00 or something, which is completely reasonable to expect perhaps in the next couple of weeks, it has never been wrong to sell wheat at $8.00.  That is a good, profitable level.  I think this is a great opportunity to be selling.

Pearson: Alright.  Well, now let's take a look over at corn.  We're still seeing corn relatively range bound.  We were down this week after being up last week.  Talk to us a little bit about where we're at on this old crop corn market.

Kub: Yes.  And from day to day you're only talking a couple of cents one way or the other.  So it's a very neutral market.  And at this point supply and demand is fairly well matched.  We know that we have lots of stocks, we'll get a picture of that -- on the same day as the prospective planting reports we have the grain stocks reports coming out and remember, we have a full week to trade before we really see that on March 31st. So there's certainly time for the markets to continue to guess at that, to have speculators come in and bring more money in.  We have been seeing more investment interest in the corn market, more than we've seen in the past year.  So we're starting to see a story in there again and the other hint at some bullishness in the corn market is to look at the spreads between the nearby and the December or even between the spreads between the nearby and the July or the September.  They are not very large.  So even though we have pretty comfortable supply we also have really consistent demand and enthusiastic demand from the ethanol sector, from the livestock feeding sector especially.  So it is fairly well matched, it's fairly well known and like you say we're kind of at this level where the market feels comfortable staying neutral at this point. 

Pearson: And as we head into the stocks report knowing that there could be a surprise, with the USDA report of course there's always that potential, for folks out there in the countryside sitting on old crop corn do you go ahead and take some cash off the table today or do you wait and see what happens with the report?

Kub: I think farmers have been selling their cash grain.  You see that in the basis level which has certainly dropped here in the past couple of weeks and that is backed up in the commitments of traders looking at who has been doing the selling, it has been farmers that have been motivating that weaker basis level.  So they have been needing the cash in the spring, very timely time to be making these old crop sales and like you mentioned the prices have been stable so if you have not already taken advantage of that you've still got these price opportunities.

Pearson: Alright.  Now let's take a look at new crop corn.  As we look out at December we are waiting on those acreage numbers it really looks like on March 31st.  What is the market anticipating -- what is the trade talking about?  What acre numbers are we expecting to see?

Kub: Yeah, for the past several months there has been this idea that farmers are going to be planting a lot more soybeans because they're disappointed by the profitability in corn.  And at this point, because we've had the last 20 or 30 cents added to the corn market, it is no longer looking so unprofitable.  Perhaps corn on corn or corn on poor ground where you wouldn't have good yields might still not be profitable.  But generally it's a good crop for farmers to be looking at for their acreage in my opinion.  So in my opinion if we can get the planters out there, if the soil warms up sometime before April, May 1st and really get going on this I think there's going to be a lot more corn planted than the market has been talking about for the past several months.  But as far as the prospective planting report the survey that was taken on March 1st, you're still going to be looking at the soybeans winning the acreage battle.

Pearson: Certainly.  Now as we take that into account, the idea that there could be a lot more corn going in at these levels, we've got Dec corn at $4.80, it's a penny spread between the nearby and December.  Would you be making some sales if you know you're going to be planting corn this year?

Kub: Yes I would because if we're looking at a normal year where you've got abundant crops, the typical pattern will be to have a high in the spring, in the sort of spring timeframe.  That hasn't been the pattern that we've seen for the past couple of years but this is not 2012, this is not 2013.  We have no reason at this point to expect poor yields in 2014.  There is even the chance of an El Nino which is generally supportive of high yields within the United States. So you're looking at a large production year, probably making pre-harvest hedge sales in the spring at some time of spring high, get some averages in here, is generally the right thing to do in one of these "normal" years.

Pearson: Alright.  Well, now let's take a look over at the soybean market.  Old crop soybeans up and down, up and down, back and forth across that $14.00 mark.  Where are we headed?

Kub: Gosh, that's a good question. The thing is that there is some potential for continued bullishness if it could make it through that resistance.  Like you mentioned it made a run up but try to get past $14.60 this week, couldn't do it so it's backing back down, profit taking like you mentioned very up and down pattern.  But the bullishness that has been in the old crop soybeans about demand from China is still definitely in play because the Chinese currency has been weakening but the Brazilian currency has coincidingly been going up at the same time.  So as far as our competitiveness for our beans in this country and our own domestic demand also has remained fairly strong, it's all those bullish factors are still very much in play for old crop soybeans.

Pearson: So is the March 31st report going to play as big an issue in soybeans on the old crop side as it is in corn?  Or are we going to continue to watch those fundamentals, the strong U.S. domestic demand and Chinese demand, keep us up in that $14 and change range?

Kub: Yeah, you could argue that the grain stocks report would have a bigger effect on soybeans because they're so much tighter than the corn supplies.  But remember that those grain stocks reports are backward looking.  So even for corn supply you're looking at the implied feed usage and also for soybean meal the implied feed usage.  But as of March 1st when they took those measurements things may have changed, the outlook may change, particularly with the hog market, the hog feed sector.  The outlook for hog feeding of soybean meal and corn could have dramatically changed between when they measured for that grain stocks report and what we actually see in the future.

Pearson: Alright.  Well, now as we're talking livestock let's jump in and let's talk fat cattle.  We had an interesting week in the fat cattle trade with a big sell off on Wednesday or Thursday and we're still seeing very strong cash trade.  Talk to us a little bit about what's happening there.

Kub: Yeah, the cash market completely brushed off that drop on Thursday I believe it was in the futures market.  And I would suggest that that drop in the futures market was really just anticipating the cattle on feed report.  You've got perhaps some funds or investors that have made a lot of money on this run up and didn't want to be exposed to the volatility of a Friday or Monday response to the cattle on feed report so they took it out.  And it turns out that the cattle on feed report could be interpreted bearishly so that was the right thing to take those profits out at that time.

Pearson: While we're talking, we had placements of 115% of last year's, the other numbers were sort of right around last year's numbers, is that correct?

Kub: Yeah, so they definitely during the month of February put more cattle on feed than the year before.  But overall supplies are still down obviously.  Overall you're still looking at a shortage of supply, nothing suggesting that these price levels that you’re seeing, particularly in the box beef or the retail beef sector, but there's probably no relief in that perspective from that cattle on feed report.  But just as far as the actual number of supply that packers can look for in the next three to four months, that was a bearish number, a surprisingly bearish number.

Pearson: Alright, now as we talk fat cattle we did see the choice box beef stay up there, it's hanging around that $240 level.  Does this give us continued support do you think for the next month or so?  How long is this trend going to continue?

Kub: I think it gives continued support through the summer.  And what is an interesting nuance in this is that if the pork market is as bullish as the futures seem to imply now you've got a situation where perhaps potentially if you really start putting pressure on pork prices the consumer could end up going to the grocery store and using beef as a substitute for pork in their summer grilling.  That's never the way that that relationship typically goes from a price perspective. But perhaps the beef market may end up receiving some demand just because of the shortage of pork if that happens.  I don't know.

Pearson: Well, let's talk pork.  We did see the pork market continue its run up, another $2.50 this week.  Realistically how much higher can this go?

Kub: Well, if this was a bubble, if this was a bubble that was driven by speculative investors that are just hearing a story about PED and just randomly buying futures then you would have no sense of knowing how high that might go.  But I don't think that this is a speculative driven bubble.  If you look at the actual participation of who has been buying these futures and who is holding these futures or who has been short covering it has been the actual commercial traders and they're the only ones who would rationally know in this market exactly how much influence that virus may have.  Because of the vertical integration of this industry the commercial hog producers are the ones that really know what's going on.  And that run up in lean hog prices has exactly followed the number of new cases each week.  It's been uncanny how much that has followed it and how much that may be a leading factor because we don't really know how many new cases there are.  The reporting of that is very hard to know.  So if that's who knows what is going on then it just will continue to follow the actual progress of the disease.  This is not a bubble.  I can't tell you exactly how fast or how high that price could go. 

Pearson: And really the only catch is when they cure it then we're going to see it tail down.

Kub: Exactly.

Pearson: Alright.  Well, Elaine, there's a lot of things to keep an eye on here over the summer, especially on the livestock side.

Kub: Absolutely, yeah.

Pearson: Well, thanks for taking the time to be with us tonight.  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 online.  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 record prices in the dairy parlor.  Until then, thanks for watching and have a great week.

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