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Market Analysis: June 3, 2011: Elaine Kub, Market Analyst

posted on June 3, 2011

Grain prices were mixed this week as weather issues and a weaker dollar supported corn, while Russia's decision to resume wheat exports in July pressured that commodity.

For the week, July wheat lost 46 cents, while the nearby corn contract moved 3 cents higher.

Planting delays and flooding concerns also were friendly to soybeans, as the July contract exceeded $14 with a weekly gain of 35 cents. Nearby meal prices followed suit with a gain of $12.80 per ton.

In the softs, cotton bounced back from last week's loss with a weekly gain of nearly $9 per hundredweight.

In the dairy market, June Class III Milk gained 79 cents, and the deferred contract moved more than 30 cents higher.

Over in livestock, the August cattle contract lost $1. Nearby feeders gained $1.50. And the July lean hog contract fell 75 cents.

In the currency markets, the Euro gained 354 basis points against the dollar. Crude oil traded sideways and settled Friday with a weekly loss of 37 cents per barrel. Comex Gold advanced $18.70 per ounce. And the Goldman Sachs Commodity Index gained 4 points to close at 702-even.


Market Analysis: June 3, 2011: Elaine Kub, Market Analyst

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.

Pearson: There's a lot of factors going on over in your neighborhood. A lot of concern about what that Missouri River is going to do.

Kub: Yeah, there's definitely farmland being lost there. When we look at next week's supply and demand report that USDA is going to release, I think a lot of the private estimators and a lot of farmers are expecting to see them bring the acreage down. I mean we know that there are going to be acres lost. I don't know that it's -- I think it premature to expect them to make a sudden change already in the June report, just because some of the issues of the rainy areas -- the areas that have been wet this spring like Ohio -- Ohio is very well drained. And just because the insurance planting decision has to be made by June 5, you can still keep planting after that and still receive some coverage. At these prices, it's going to keep on planting. So I think we don't really know yet. I don't think anybody can predict how much land has been lost for some of those concerns, and the flooding hasn't really even peaked yet, so it's really hard to put a number on acreage loss with that kind of bullish factor.

Pearson: No question about it. Let's talk first about wheat. Of course, the factor we mentioned at the top, and that was Russia's decision to resume exports. That was something that was kind of expected. No one knows just how serious they are really or what it's going to entail, so it will be interesting to see. But it was a big factor in the wheat market this week.

Kub: Certainly. And you certainly see it in the milling wheat contracts, that Minneapolis spring wheat contract, which is a higher quality, higher protein. That's where you see your reaction to the ideas of not only that, you know, it's past the time when spring wheat should be planted in the United States and some of that acreage has been lost, but also these ideas of a dry European Union, a dry Russia. The forecast going forward sounds a little bit better for that area of the country, so I think a lot of the bullishness for that wheat market has already been priced in and we may just see it sort of find a price level now.

Pearson: Your advice to producers at this point on wheat is --

Kub: Especially in the spring wheat, what you have planted, I would absolutely sell it at this point. We saw an incredible amount of money coming into here. We've seen the spreads between the wheat contract certainly go back to where they should be. We've seen $1.50 between Minneapolis and Kansas City wheat, which reflects the supply and demand situation there. So here's an opportunity, absolutely, to sell some spring wheat.

Pearson: All right. Now, what about on corn? $7 corn. $14 beans. I saw some cash corn was sold to a processor for $8 in august. These are some pretty fat prices.

Kub: Yeah, they're great prices. And this at point especially with the dollar -- the U.S. economy keeping the dollar lower, there's really not much that's standing in corn's way to keep on moving higher. I really wouldn't be aggressive with corn sales because we've got a whole summer of weather to get through. I guess that's true for spring wheat also. I mean all of these markets -- all the commodity markets still have a lot of potential to keep churning higher.

Pearson: Of course, always a concern that the short crop will make a long tail. So you generally want to get on the front end of it, don't you?

Kub: Yeah. I mean I think it makes some sense to have some coverage, certainly. An option strategy on some of this makes sense because you leave the upside open, or to be very, very conscious of the dollar coming up, anything that could make this market suddenly collapse. I think $8 is a reasonable goal, but I wouldn't be stubborn and I wouldn't wait for $8 and end up settling for $4.

Pearson: $7.95, you'd take.

Kub: Yeah.

Pearson: All right. Corn and the soybean market, what do you want to do there?

Kub: I'm more bullish soybeans than I am for corn because, you know, if corn has a late planting situation, soybeans are even worse. In the last progress report, corn was only 9 percent behind its average pace and soybeans were 20 percent behind their average pace. And they have a whole summer worth of weather to get through too. On top of that, the soybean price still hasn't caught up with corn. Since September 1 corn has gained 51 percent in its prices and new-crop soybeans have only gained 37 percent. So that ratio of soybeans to corn definitely has to correct, and I'm definitely bullish on soybeans.

Pearson: All right. So you're not in a big hurry to make soybean sales here?

Kub: No. I mean I think in the old-crop market with these overbids on the basis -- these basis bids that are bid over futures --

Pearson: These cash contracts out there -- both beans and corn.

Kub: Yeah, yeah. I think it certainly makes sense to, when you've got the time, go take a load of grain in and spot it out and sort of average it out through the summer and see where this goes.

Pearson: All right. Well, it's going to be interesting. The Missouri River now -- so we had good conditions in the Western Corn Belt, lousy conditions in the Eastern Corn Belt, and now we're starting to get this flooding. Those are some key areas. Those are some excellent crop growing areas that are going to wind up being flooded, based on what we're hearing from the corps of engineers. Talk a little bit about the cotton market. We had this wild run in cotton. Things seem to be flattening out some. What's your take there?

Kub: There does seem to be a little bit of a decline in that southern drought area. They did seem to get some precipitation. But nonetheless, that is what has been driving that new-crop cotton contract back over $1.40. That's the best opportunity that anyone has had to hedge or to sell new-crop cotton ever. So this is a real good opportunity for them, particularly because I think you need to keep in mind that cotton is a world market and India is talking about releasing some exports onto the market. China may be dry but the other thing to mind is that demand for cotton is more elastic than it is for grain. People -- if wheat is $20, rice, whatever, you've still got to pay it, but cotton you get by without.

Pearson: All right. Let's talk about the livestock market. We get this jobs report on Friday, very negative. And there's a lot of concern out there that the economic recovery is slowing, maybe stuttering, which is normal. Typically recoveries will continue to recover. But that doesn't do the beef market much good.

Kub: Right. It was surprising actually the boxed beef trade this past week after Memorial Day was relatively strong. Prices weren't great but the actual volume of beef being moved was strong, so that was good for the beef market. It's very good for the packers. They're making incredible margins, about $80 a head or month. And most of that improvement has happened within the past week. So I think there's certainly potential for the margins to pass this on to the market, but I don't think it's going to happen in the near term. In the near term the best you can look at for an August live-cattle contract is maybe to get up and fill that gap around 106. But other than that, you know, like you say, there's all this potential for this recession to come in and hit all of the meat contracts and I think that's why we see the futures really getting hurt.

Pearson: All right. We had a nice move in feeder cattle, despite the fact a little bit stronger corn market this week.

Kub: Yeah, but even there the futures are again below the cash index, which is about 124. So there again you see, you know, the futures traders coming in and really killing the prices on those boards. But, again, looking later into the summer and maybe into the fall, you can see all of these margins being passed along. At this point feeders are making negative margins, like losing about $40 per head. So there's certainly -- there needs to be time for these margins to change and for that to affect the market.

Pearson: let's talk about the hog market and what you see happening there. We've had really strong export demand there for pork. Has that pretty much continued?

Kub: Right. The slaughter numbers throughout these past couple of months have been pretty stable. So that's not really -- a supply concern is not what has been moving these hog futures lower. And I'm looking at them to continue to consolidate around the $80 level. But here again, the futures contract traders themselves are really responsive to corn prices, and we see them trading in a very wide range. The July hog futures traded in a $4 range just this week.

Pearson: It's been a wild one. A lot of what's happening with the recession and the recovery and so forth, a lot of that has hinged on energy prices. What's your take on the oil market, and where do you see us going there?

Kub: Yeah, it certainly seems to have calmed down and seems to be consolidating. Around $99 in the west Texas intermediate contract and higher than that for the Brent obvious. What's encouraging is that the fuel ethanol is still at quite a discount to the contract. So that means there's still a lot of potential for the corn market to come in and get ethanol demand, and there's still a lot of potential with the inventories that we see for oil here in the United States. There's a lot of potential for our own fuel prices to correct themselves lower.

Pearson: We've got that issue. I saw precious metals -- I saw gold came up this week. Is this just more concern about the world after the jobs deal?

Kub: Yeah. This was a very poor day certainly for economic news, certainly with the jobs --

Pearson: Housing.

Kub: Housing. With the idea of credit ratings -- of the U.S. credit rating. People talk about that. People talk about another qe3. There's a lot of reasons why the dollar has failed to sustain that bounce from last month.

Pearson: All right. And then finally, we talked about foreign exchange. We talk about the dollar all the time. We had a nice run up last week. We had the euro come up against the dollar this week, despite the situation in Greece.

Kub: Yeah. You know, all of this is really good news for farms. We have a strong euro. The Brazilian real is also at a three-year high. Meanwhile, the Baltic dry index, the shipping index, is near its 2008 lows so all of these things are very positive for exports. There's not a lot of this external foreign economic news that is a bad thing for farmers at this point.

Pearson: At this stage of the game, it's just a lot of wind at our back again, these are huge prices. These are huge opportunities. This is when we face the most risk in agriculture.

Kub: I would definitely have my hand on the trigger. I'd be ready. But at this point, I'd like to see these markets keep going and not be too aggressive with sales, except in the case of cotton or spring wheat, where a lot of the external foreign news could certainly come in and take the wind out of those sails.

Pearson: The frustrating thing -- we've only got about five seconds -- is trying to get feed needs covered is the most frustrating thing right now.

Kub: Well, you know, I think anybody that's giving advice has been saying that for several months, is getting that done for late summer.

Pearson:Elaine Kub, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Elaine on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

Pearson:And be sure to join us again next week when we'll examine the market impact of the government's latest estimates on global supply and demand. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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