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Market Analysis: Elaine Kub and Walter Hackney

posted on June 13, 2014

Grain prices plunged Wednesday after the government surprised the trade by increasing its estimates on global supplies. The market bounced back later in the week but not enough to offset losses in previous sessions. For the week, July wheat lost 32 cents, while the nearby corn contract moved 12 cents lower. Heavy fund selling pressured old crop soybeans as the July contract settled with a weekly loss of 31 cents. Nearby meal prices followed suit giving up $19.70 per ton. In the softs, cotton rallied this week for the first time in recent memory as the July contract gained $2.20 per hundred weight. In the dairy market, July Class III milk gained 57 cents, while the deferred contract improved by 32. It was an unbelievable week over in livestock where, with prices already at all-time highs, the August cattle contract gained $5.53. August feeders advanced by a whopping $7.63. And the July lean hog contract added to last week's rally with a gain of more than $2. In the financials, the Euro lost 10 basis points against the dollar. Crude oil prices surged to a 10-month high with a gain of $4.18 per barrel. Comex Gold advanced by $24.40 per ounce. And the Goldman Sachs Commodity Index gained more than 15 points to settle at 660.15.

Market Analysis: Elaine Kub and Walter Hackney

Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Elaine Kub and Walt Hackney. Folks, welcome back.

Hackney: How are you, Mike?

Pearson: I'm doing very well. And it's an exciting week. We've got a lot of news that broke this week both on the grain side and on the livestock side. And Elaine, let's take a look at the wheat market first. We continued to see this selloff, 32 cents on the week. Is it still burdensome supplies just pulling this market down?

Kub: Yeah, absolutely. Any bullish thing you could say for the U.S. wheat supply, and in fact you do hear bullish news from the harvest reports, there are some very terrible yields being seen, in Oklahoma 10, 15 bushels per acre being harvested and they're just now getting started into Kansas. You could even say maybe India is starting to get a little bit dry if you wanted to nitpick some sort of northern hemisphere weather concern. But all of this is, like I said, nitpicking when you're dealing with this much cushion of supply. There's just plenty of wheat around. And feed grains in general are on a very bearish slide.

Pearson: As we take a look at this slide, how much farther can we slide on some of these nearby months?

Kub: Yeah, looking at the Chicago wheat contract as a benchmark and looking at it alongside corn it has been on about a five week slide of let's say 6 cents per day sort of average pace, uninterrupted fall down. And you could continue that for another week or so before you started to hit like a $5.50 level where the September contract might start to see some buying support on the chart. And that would be right alongside corn slide maybe another 25 or 30 cents too. And remember that in two weeks from now there's going to be the June acreage report. So I'd say this next week or two is the timeframe to see hopefully some sort of bottom being put in.

Pearson: Has the trade started to anticipate what we're going to see in that acreage report? How should producers be setting themselves up in advance of that?

Kub: Well, the expectation and, for instance, Informa, which is an influential private estimator, they came out with some numbers today regarding what USDA might do for acreage. And I actually am really on board with what their thinking there is. Perhaps a slight increase in soybean acreage, perhaps 300,000 extra million, 300,000 extra acres adding onto the 81.5 million acres that USDA last weighed in on for soybean acres. And that makes sense when you consider that there has been some localized lateness, some wetness in the northern plains. They're on track now and they're certainly going to catch up and get all of, probably all of their soybean acres planted in North Dakota, Wisconsin type of areas. But there may have been some slight amount of switching from corn to soybeans that may be a bearish factor when that comes along.

Pearson: Okay. Let's take a look at the corn market. One of the big pieces of news this week was China's announcement that it will be no longer accepting American DDGs due to concerns with the MIR162. We saw that be a bearish factor in the corn market this week. Where do we go from here? What does the trade anticipate with China's ongoing concerns?

Kub: Well, you know, I want to point out that overall this does not affect the global demand, supply and demand of feed grains. They're going to have to come up with that feed somewhere and obviously they want to be directing that demand to their own local corn market rather than U.S. DDGs at this point. But frankly that may shake loose and they may come back to the U.S. DDG market when it is no longer convenient for them to have caused this raucous but it was a raucous and you're talking some DDG markets lost maybe 20% this week, within a week. That's a huge move. And soybean meal followed along because why would you pay extra for soybean meal when the entire feed grain market is falling apart like that? So, it may be kind of short-term for DDGs but I don't think that fundamentally that changes the equation for corn.

Pearson: Now, advice for producers out there as we've been watching this selloff. On the old crop side, if anybody has got any corn left in the bin, what do you do?

Kub: Well, like I said, just on a chart-based matter or in a timeframe matter you might see another 25 or 30 cent slide. But there is strong demand for ethanol. Feeders are certainly able to be making money with this is cheap enough feed relatively speaking, historically speaking. So, I don't think that there's going to be a bottom falling out here. I'm not bearish in the sense that I'm looking to see much more than 25 or 30 cents shaved off from this point forward.

Pearson: Now, as we take a look at new crop, we've got a question here from one of our Market Plus viewers. He sent in the question on Twitter. It's Chad in Randalia, Iowa. He is asking, up in his neck of the woods, northeast Iowa, new crop cash corn price is nearing $4. Is there any hope for a rebound on the new crop side?

Kub: Sure. I mean, it's very early in the season. All aspects point to probably good growing weather. They say there's a better than 70% chance that we could see an El Nino form in the next couple of months. That tends to be very supportive of U.S. grain yields. So, we could see above trendline yields. I mean, we could have U.S. average yields, you know, well above 162 bushels per acre. That's a possibility. And if that happens I would expect to see bearish or neutral movement through the summer. But if something else happens, any sort of weather thing could have a small rally or you could have short covering. The managed money has been adding in short positions to both the wheat and the corn markets for the last couple of weeks. And at some point they may run out of sellers and have to turn around on that.

Pearson: For new crop producers, is there any price level that looks appetizing on the new crop side?

Kub: It does not look appetizing to me to sell new crop at this point. Hopefully you had some sales made seasonally back in the March and April timeframe and hopefully you've got storage so that if you get some sort of a weather rally, an El Nino rally for the South American markets perhaps in the fall, you can store it away long enough that you could take advantage of that.

Pearson: Alright. Now, let's take a jump down and look at the soybean market. We still have exceptionally tight old crop soybean supplies. USDA I believe tightened us again here this week. Now, we did see another 31 cent fall this week in soybeans.

Kub: In their WASDE report this week they didn't tighten any of the demand categories. They tightened the beginning stocks category, which I think the market was disappointed because there's all of these reasons to expect some sort of tightening in that table and they may in upcoming months. But yeah, I think the fall we saw this week was perhaps just disappointed bulls that didn't see the bullish changes that they wanted to see in that June WASDE report.

Pearson: Okay. Now, on the new crop side, same question, planting is through, we've still got decent weather. New crops beans have held up reasonably well compared to this old crop selloff. What should producers be doing? What is a target out there for them?

Kub: Well, honestly this is the one market where you could be selling now at profitable levels. It doesn't look appetizing to sell corn now but you could be selling new crop soybeans and locking in a profit. So if that has not been done at all that is something a producer might want to be looking at. But if it has been done, again, you might be able to sit by here for a while because there does seem to be chart support at $12 in that November chart so there may be some room for this to bounce back up as time goes on.

Pearson: Bounce back up and then maybe catch a weather scare, an opportunity to make some more sales later on.

Kub: Any sort of small rally, yes.

Pearson: Alright. Now, let's take a jump over to the other sector that caught some press this week in agriculture which was the livestock side. Now, we heard DDGs fall in price and we saw feeder cattle move up a little bit this week. Walt, talk to us a little bit about what you're seeing in the feeder cattle markets as you're out and about in the countryside.

Hackney: First of all, the volume, the availability is an issue with cattle buyers, cattle feeders. There's a feeling among cattle feeders that we have a very limited supply due to the 4-year drought in the southwest, the Midwest, the west. And the liquidation of the cow herds over that period of time has created a serious shortage of that crop of feeder cattle availability. That is both yearlings and it's also the fall calves coming up now in October as an example. The western states actually had more snowfall, they had more rainfall going into the winter months and into the spring than they did in the southwest. The southwest still experiencing a drought. However, within the last week, why, they have picked up moisture down there, enough to give them some hope for summer grass. But there's still liquidation going on. So your point, Mike, is what caused the extreme run-up in the feeder cattle. To be quite honest with you it is rampant, the availability of cash and possibly the liquidity of the cattle feeding industry is such that they're not recognizing the risk exposure that they're presenting for themselves in the price of these feeder cattle right now. You made a comment about record prices. Granted. But it is record on top of record on top of record on top of record. And any time that you buy a 600 pound feeder calf, as an example, unweaned, off of the cow, October delivery, your risk factor goes through the roof. And that's what we're looking at as we speak. It doesn't seem to deter the majority of the cattle feeders. They're after the volume of the limited supply and that is all they think about. Some of the more astute cattle feeders that are looking at their risk exposure and how to offset that are finding that there's very few ways that they can offset that. So, they're opting to go with empty pens in a lot of cases right now. They're not going to expose their liquidity in their operation to the potential of an extreme bust if it would occur. Who knows. No one knows and that is the unknown that is causing the problem.

Pearson: Now, you mentioned a lot of the confidence on the part of cattle feeders. We have been seeing fat cattle trade relatively steady in that $145 to $150. Where do you see that fat cattle market headed here over the short-term?

Hackney: I don't find any reason to think that it's going to be anything but in the vicinity of the price range you mentioned, $145 to $150. We sold cattle today in Nebraska. Those cattle were $151, $151.50. Those cattle are making anywhere from $250 to $350, $350 a head. And that is not a very good deterrent to a guy that is wanting to replace an empty pen of calves or yearlings. But the fact remains you've got to eliminate that, maybe put that equity in the bank, maybe hold it until a better day because right now, if you really sit down and a lot of the, in a joking manner, Elaine, they'll say if you fed the calves corn for nothing they'd lose money. Well, that's not a very good excuse for buying the calves, is it?

Pearson: Don't be going to the auctions with a full wallet maybe.

Hackney: But they're doing it.

Pearson: Alright, now as we take a look at the pork side, at the other white meat here, we have also seen that come up a little bit. An indication that consumers are still out there buying and staying in that hog market it looks like.

Hackney: Well, they are and then the PED virus that affected the pig crop going into this year particularly, at first the industry thought it has been overstated a little bit, the death loss. We don't have the 10% death loss that had been anticipated. Then again all of a sudden it looked like well we do. Now it looks like that we're going to have a general shortage of market hogs through the third quarter. At the end of the third quarter, however, then the guess work really starts.

Pearson: Alright. We'll talk about this more in the Market Plus segment. Thank you Walt and Elaine for being with us today. That wraps up this edition of Market to Market. But Elaine, Walt 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, Facebook page and the rest of our social media outlets exclusively at the Market to Market website. And be sure to join us next week when we'll examine controversial laws that some say restrict free speech down on the farm. 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 Walt Hackney wheat