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Market Analysis: Live from the Iowa State Fair

posted on August 15, 2014

Market Analysis: Live from the Iowa State Fair

Pearson: Wow. There were some big developments during the early years of the program. But one thing hasn't changed. Market to Market continues to feature the best commodity market analysts in the business. And joining me now are four of those experts. Sue Martin.

Martin: Thank you, Mike.

Pearson: Elaine Kub.

Kub: Thanks for having me.

Pearson: Virgil Robinson.

Robinson: Thanks, Mike.

Pearson: And Walt Hackney.

Hackney: Thank you, Mike.

Pearson: Folks, thanks for taking the time to join us here at the Iowa State Fair. Now, we have some questions from our live audience and also from our social media sites. But Sue, let's start with you. We had the USDA report come out on Tuesday. Talk to us a little bit about how that affected the corn trade this week.

Martin: Well, I think the trade has dialed in a yield of 170. And we're hearing yields as high as 173, even Lanworth is at 174.3. So, the expectations of the crop are quite large or quite huge. The USDA didn't ratchet  up that much. They came out with a new record yield of 167.4 but that was a little bit of a surprise to the trade. They were expecting more and, of course, the bearish traders will try to downplay that and say that the USDA has underestimated the crop. Still this is as of August 1st. You look at crop condition ratings and that yield probably will still come higher with time. Next week is the Pro Farmer Tour and I think that the market, with the help of a positive USDA report, also lowering global supplies by just a touch, still going in the right direction for agriculture. I think that was helpful to solidify a low here for the moment. And I think with the Pro Farmer Tour coming the trade is thinking let's just step back from our short positions and let's see what happens here. What do they see? Is Illinois's crop as good as they say?

Pearson: Alright. Now, Elaine, as we talk about new crop corn, with this recent rally we've had, for producers out there who maybe thought they had sold enough before the yields really started coming in big, is this a rally you look to make some sales on? Or do you think it could extend a little farther?

Kub: I don't think that this is probably the time to be making sales, to be catching up on sales of corn if you don't have enough sold already. I think that the best chances are probably farther down the line. If we get some sort of a weather event internationally there may still be a chance for a rally perhaps in the fall. But these prices are not terribly exciting, particularly when you start factoring in the basis, particularly up in the northern, northwest part of the Corn Belt there's some really ugly basis right now due to the rail situation. So hopefully if that ever gets, if those backlogs ever get worked through by the rail companies you might get some better opportunities just by waiting.

Pearson: Well, now let's talk about those rail backlogs for a second because that has been an ongoing issue since early spring into winter. Are they getting any better? There has been some federal requirements to the railroads to hopefully expedite that. Is it beginning to have an impact? Have you heard?

Kub: They are getting better. The railroads are certainly communicating well. They're trying obviously I think but they're still back -- I mean, you've got a backlog of a week, in some cases up to a month some places in North Dakota and it's not going to be fixed by harvest. So, one way or the other we're talking about very large piles and backlogs and dwell times and waiting for rail cars.

Pearson: Alright. Well, now let's talk about the global demand situation as we look to the future on this new crop corn. Virgil, what do you see happening? Is this lower price going to spur sufficient demand to create a rally here into this next year do you think?

Robinson: It's going to build the demand base, Mike. And before I forget regarding the crop size here, initially now the USDA has gone through stock count and row width, they have not addressed ear length, ear weight, number of rows and kernels. So, that is forthcoming. The other thing that may be of interest to the group is the FSA today rolled out their first prevent plant conversation. And clearly there is some prevent plant, not to the extent we had a year ago, but it is likely bottom line in October there will be some modest adjustments to the planted corn acreage number as well as the planted soybean acreage number. Global corn production, global wheat production, global soybean production, global rice production all forecast to be record large, Mike. So, as we visit about supply, at least as face value, there is not an overwhelming concern. Interestingly enough I spent a little time in a couple of country elevators, country terminals this week and I was surprised at the number of trucks in the lineup delivering old crop grain. So, we have an issue here approaching us regarding storage and transportation that is not going to disappear overnight. Warren Railroad made some progress. The Canadian National not so much. Okay. So we have lots of work to do with regards to railways, roadways and waterways. But globally at present no concern about supply. Some of the Russian crop, some of the European wheat crop is subpar and likely to find its way into the feed channels.

Pearson: Okay. Now, you mentioned old crop. There's still a lot of producers that I have spoken with here over the past couple of weeks that are sitting on at least some old crop corn. They're getting ready to clear out the bins. This little rally we've been on here, do you look to unload some old crop, Sue? What do you think?

Martin: Well, I think that we've had such a tremendous selloff here and the market seasonally tends to, in the last half of August, tends to lift a little bit. So, we're getting a chance at that. Corn had a higher weekly close this week. So, that is a positive. Actually I think it's a key reversal week too. And so that should portend a little better. The problem might be that this market can be more sideways than higher and markets have a tendency to just sort of contract that way, or how do I want to say it, just sort of correct that way, they move sideways instead of giving us the price appreciation we want to see. I think that the one thing we have to keep in mind is the cure for cheap prices is cheap prices. Global demand is going to be quite good and I think that when you look around that one of the bigger problems, like Virgil mentioned, is this feed wheat problem over in France and Germany that's going to probably allow them to feed that and sell corn. So, we're going to have a little competition there. The one thing in the back of my mind that I wonder about is in Russia and especially in the Ukraine, I sometimes wonder if they aren't touting bigger crops than they really have because they need money. And if they need money they certainly aren't going to go to their banker and say well, we're not going to have this or we aren't going to have a lot of collateral. So, I think I just sort of wonder if the production is actually going to be as good as they say. And you've got China dealing with some drought, in some areas some of the worst drought they've had in 40 years.

Pearson: That's true. Now, you mentioned wheat a couple of times. Elaine, let's talk to you as our South Dakotan here. Talk to us a little bit about what we're seeing in the wheat market. Harvest is just about wrapped up. How have things shaken out?

Kub: The spring wheat crop in South Dakota is so beautiful you would not believe. It's 80% is good or very good and I think maybe 1% is poor. It's incredible. It's the most beautiful crop you've ever seen and that is not, of course, very bullish to prices. But it wouldn't just have to be a spring wheat argument either. Globally, as Virgil and Sue have both mentioned, there is no shortage of feed grain globally and Australia is even starting to expect above average yields given their moisture situation. So, there's really no bullish stories for wheat. In fact, if you look, even wheat compared to corn as a feed value, wheat would be overpriced, just statistically compared to what its average relationship to corn should be. So, the feed wheat, the Chicago feed wheat market I could see falling down to $5, $5.03, which would be piercing new range on the chart but it wouldn't take very much, another 30, 40 cent drop and I think you'd probably start to find some support for wheat.

Pearson: So that being said, this might be a decent opportunity to make some sales if you haven't had a lot of sales so far.

Kub: Right. And if you don't want to put it all in a bin and use up your bin space for the oncoming corn and soybean crops, which also look good in most of the wheat areas, other than Kansas of course.

Pearson: Alright. Well, now let's talk soybeans. One of the trends we've seen throughout this year and the market hasn't put much of an impact on it is the bizarre weather. We've had abnormally cold weather all spring and into this summer. And now, in talking to producers out there, we're beginning to hear concerns on the farmer's side about an early frost. Virgil, have you heard any concern on the market side about an early frost? Or where do you see this new crop soybean market headed?

Robinson: I've not heard a lot about frost, Mike, but it's always an issue and there will be some areas where the state of the crop is not quite as advanced as others and is predominantly I think in the Dakotas, North Dakota, parts of Minnesota, parts of Wisconsin. What was your other question, Mike? I'm sorry.

Pearson: As we're talking new crop soybean prices how do they look? Where do you see them going in terms of demand and both crop supply as we saw from the USDA's report?

Robinson: Well, the forecast is for record soybean production here in the U.S., which is being followed by a record crop in South America. Now, the new crop soybean, new crop ratio, Mike, as we go to fields, the South Americans begin to plant a crop. The ratio is clearly tilted towards additional soybeans and the economics favor soybeans. So, it is conceivable, given that set of circumstances, that in the spring of 2015 the supply of soybeans in the western hemisphere will be the largest it has ever been. So, let's stop and define that as a risk. That is the risk. The prospect of a price recovery, an appreciable recovery, would be predicated I think solely by weather and that is normally not a very good marketing strategy. So, if you've sold nothing to this point, sell something. You have a risk here. And the risk could be as much as $1 or $2 below prevailing values. Now, your balance sheets are strong. They're the best they've been in 50 years. So, there are a certain number of folks who have a high tolerance for risk and for those folks I don't really have any advice. They're fine.

Pearson: Sue, do you have anything to add?

Martin: Well, I think yes, we are looking at a huge production in beans this year, but the one thing we have to keep in mind is, is that the talk is that Brazil is going to raise, Solaris I guess it was, talked about 91 million metric tons. But, you know, you've got others out there like Ag Rural that are talking 94 million metric tons and they're pretty astute and usually pretty accurate. That said, one thing that nobody is really talking about in Brazil is just how dry they are. Brazil is seeing a very dry situation. They went through the worst drought in 50, well more than 50 years, and the coffee crop was horrendously affected. But the one thing we're also seeing is that they're very dry at an abnormal time when they normally would not be and the Cerrado area is an area where they do produce a lot of soybeans and unfortunately they're very dry right now. So, they're going into their planting season in September and it'll be interesting to see just how they continue to flow with weather because maybe, just maybe they don't get that big crop. And, you know, they started off, they went up to as high as 93 million metric ton estimates this past season and they ended up with, well, the USDA is at 87 and some of the analysts are talking 86, 86.6. So, it is debatable where they get it but should the prospects start looking good for them to have a big crop our prices are going to be struggling big time. And on top of it, the one thing that has been our ray of sunshine and was also part of the reason we rallied this last spring and late winter, was because Argentina's farmers are holders of beans. And they haven't changed that habit just yet because of the high rate of inflation and the policies, government taxation policies, they're still not letting go of those beans unless they need money or have to buy something, then they take them to town. But other than that, because of that, the crushers in Brazil, or in Argentina, this past season ran anywhere from 64-74% of capacity. And that pushed the global demand to the U.S. for crush. And we aren't seeing that change just yet.

Pearson: Okay. So, there's some risk on the table with the soybean crop as we head into 2015.

Martin: I would really keep an eye on Argentine farmers for a change in habit. If they start to change in habit there's another thorn in your side.

Pearson: Alright. Well, now let's jump over to the protein markets as we look at cattle. And that has been a high flying market all summer. Last week we saw it break, continued the slide this week. Walt, what are you hearing on the ground in the fat cattle market? Is there still move to the downside?

Hackney: There is a real possibility that we could see another depreciation of possibly three to five bucks a hundred. On the other hand, with the federal inspected slaughter hovering around 114,000 to 117,000 cattle a day, that is minimal compared to the consumer demand that we have kind of unexpectedly realized at the price that fat cattle are bringing. Most of the analytical community were predicting last winter that if fat cattle got over $130 the consumer was going to go home, they were going to buy chicken or they were going to buy some extra pork. But the fact remained they were going to refuse to pay the price for beef. That hasn't bene the case. The packer, in fact, has had a dickens of a time keeping a high enough inventory of beef to keep the beef channel well supplied with good, high quality beef. The area that might have been a little bit restricted and that has been a surprise is hamburger. The lady from Wisconsin here with the good dairy cows that come in from the packing area, they have not had the appreciation that some of us thought would happen due to consumers backing off of luxury cut beef. So, as a result of that, hamburger hasn't has the phenomenal demand factor that we thought. That would be particularly 93% or something in that regard on the hamburger, Mark. Mike, I'm sorry.

Pearson: It's alright. So, that -- we do have the risk out there, the consumer has been buying. Elaine, what have you seen from consumer preference here as we look to beef? Do you anticipate the demand to stay relatively strong here going forward?

Kub: Yes, the demand has proven to be remarkably inelastic. If we had asked this question five years ago we would have definitely expected demand to be elastic and for consumers to make different choices. But people who are willing to pay for especially the prime cuts of beef will pay that price. And you mentioned the possible substitutions for pork because pork prices have also had a very bullish year this year I think that may have helped keep the demand strong for beef, although we are losing some demand in the export sector I think, or it's slowing and it is challenged.

Pearson: Okay. And now, Walt, as we take a look over at the feeder cattle side, fat cattle were down a little bit over $2 this week. Feeder cattle were up just about 38 cents on the board. Are we seeing a similar stabilization trend out in the field, cash feeders staying strong?

Hackney: There hasn't been enough of an adjustment in feeder cattle on the cash. Now, in regard to the Mercantile and the traders back there, who knows what they're going to do tomorrow morning, they don't even know what they had for breakfast. And the fact remains, they are driving the attitude of it's a bearish market, we lost $10 a hundred, we're going to lose more, etcetera if Russia doesn't step up to the plate and so forth. I don't subscribe to that. We've got the lowest feeder cattle inventory, well at least since the 1950s and maybe beyond, it may be in history. But the fact remains that inventory is anywhere in the area of two or three or four or five and there's a lot of debate on that short of where our needs are in regard to the feedlot capacity and the packer capacity and the inventory that we need to supply them. So, I subject that we will see feeder cattle within the current range -- I'm not saying a 450 pound calf will bring 350 a hundred weight like you're waiting for a higher market on. But the fact remains those markets are phenomenal. They are historic high. No one in this room has ever seen a market at this level, myself included. And the fact remains, if we took a $10 hickey, if we took a $20 hickey, who cares? They're still making $400, $500, $600, $700 a head. Now, how much damn money do you want to make?

Pearson: I think all of it is the answer to that question, Walt. Now, you brought up Russia. And Virgil, I'd like to talk to you a little bit, Russia cutting off trade with some of the folks who have put sanctions on it, do you anticipate that having much impact as we look at the pork production here in the next year or even in the shorter term? Is there going to be much of an impact there?

Robinson: I don't think it will be significant, Mike. Our best pork importers, Japan, Mexico, Canada and South Korea, have actually bought more pork to date than they did a year ago. So, I don't think that is a major factor. But as Walt, or one of the analysts mentioned, when you're at life of contract, or life of forever highs it's some of these little things that create movements in the market and we have just currently gone through a pretty significant one. Mike, I thought of something and this is something I'm just going to inject here because I had the opportunity just recently to visit with a group of Argentine farmers. And what was spoken to is correct and accurate. But there are any number of U.S. multinationals now positioned throughout Argentina that have offered a contract unique to that country. It's kind of like a delayed price contract here where they are acquiring possession of a specific commodity and giving that person a contract, a two-party contract that will allow them to price at a specific time in the future. So, that grain is moving into commercial channels and it's coming out of that country in the form of soybean meal and soybean oil.

Pearson: Alright. Well, thank you so much. Thanks to Virgil, Sue, Elaine and Walt, appreciate you being here. That wraps up this special edition of Market to Market here at the Iowa State Fair. I want to thank all of our analysts and our live audience for joining us to kick off the 40th season of Market to Market. We'll continue our discussion and answer some questions from the audience here at the Iowa State Fair 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. Be sure to join us next week when we'll feature more moments from the Market to Market archives and examine the outlook for prices heading into harvest. Until then, thanks for watching. I'm Mike Pearson. Have a great week everybody!


Tags: agriculture analysis cattle commodity prices corn cotton dollar economy Elaine Kub feeders gold live cattle markets Mike Pearson soybeans Sue Martin Virgil Robinson Walt Hackney wheat