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Market Analysis: Apr 08, 2011: Elaine Kub, market analyst

posted on April 8, 2011

The Agriculture Department released its latest estimates on U.S. and global supply and demand Friday. And while expectations of tighter ending stocks failed to materialize, grain prices rallied.

For the week, May wheat gained 38 cents, while the nearby corn contract moved 32 cents higher.

Domestic soybean ending stocks were also left unchanged -- and so were their prices -- as the May contract settled Friday with a weekly loss of 2 cents... Nearby meal prices also trended lower, with a loss of $3.70 per ton.

In the softs, cotton exceeded $200 per bale this week as the May contract gained nearly $7.50.

In the dairy market, April Class III Milk prices were down 2 cents while the deferred contract declined by 50 cents.

Over in livestock, cattle prices retreated from record-highs posted last week as the June fed cattle contract lost $4.33. Nearby feeders were off nearly $4. And the June lean hog contract followed suit with a loss $2.82.

In the financial markets, the Euro gained 198 basis points against the dollar. Crude oil gained $4.85 per barrel. Comex Gold advanced $45.20 per ounce. And the Goldman Sachs Commodity Index gained nearly 30 points to close at 758.25.

Market Analysis: Apr 08, 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: Let's talk about this Wasde Report for just a minute.

Kub: Yeah.

Pearson: Okay. Now, according to the Wasde Report, if you compare that with the other reports that we've had, apparently there has been some rationing occurring. Where has this rationing occurred? Or you don't think it's occurred either? What do you think the deal is?

Kub: I think if it's occurred anywhere, it's out of the feed sector, which is what you'd expect. They're really struggling more so than apparently the ethanol sector is with crude oil prices coming up. So, yeah, the USDA today declined. They didn't make any changes really on the final ending stocks for corn and soybeans. Part of that may just be because they're unwilling at this point to bring that corn ending stocks level below 5 percent of a stocks-to-use ratio, because to give that signal now would add more fuel to this fire before we really know, you know, where this next quarter of demand is going to go.

Pearson: So the trade discount these numbers for the most part?

Kub: Some of them might have. I think they're still trading off the stocks report from last week. I think they're still trading, and the new-crop contracts are trading on planting intentions. I think, yeah, this report was not -- did not get a high reaction today obviously, and what was doing the reaction today was the dollar. You know, the dollar came down to -- it matched its low from November, and that spurred all of this commodity action, and that probably surpassed -- it would be hard to pick and pull apart how much of that gain was due to the dollar verses due to any of their own fundamental items.

Pearson: You know, we cover commodities and I want to get to wheat, corn, and beans, like we always do. But we always cover oil. We include that in our mix. And obviously this is a big move in oil this week. How justified is it? How real is this headline? The headline issue that we have obviously with Libya, which does supply crude oil to Europe -- but at $113 a barrel and $125 with a higher quality brand, you know, is this getting overdone here?

Kub: Well, the risk premium of losing Libya's oil supply has already been priced in. We've known about the Libya conflict here for a month or month. So, no, I don't think that this is new information necessarily. The Syria information might be adding some new actual concern. But I think at this point, we're seeing sort of a self-fulfilling prophecy of bullish traders getting in and buying and buying and saying, oh, oil is going to $300, which it may or probably will not. They're just talking their position, and it keeps going up. And at some point that is going to get price rationing there at the consumer. You know, we saw this in late 2008. The consumer just really cannot bear these kind of prices, and at some point oil will peak out.

Pearson: And typically on -- the oil companies sell, it's four bucks. They can't something over four bucks or, consumers, we just won't travel. But we've got to put a crop in, and so there's some pretty high priced diesel out there as well. All right. Let's talk about -- let's talk about what's going on in the grain markets. I just got back from a trip down to Lubbock, Texas. And boy, I'll tell you what, no one has got anything good to say about the wheat crop down there.

Kub: Yeah, it's really dry there. And it's dry through Oklahoma and it's dry through Kansas. Kansas got some rain this week. But I'm not an agronomist but, you know, there's concern that even rain -- there's a point past which rain really won't help this dry, dry wheat crop. So there's still the potential for some of these acres to be taken out and put into corn, so I think the acreage battle is still very much in play.

Pearson: All right. It's going to be interesting also what happens with spring wheat and the planting. Up north in your home country, up in South Dakota and North Dakota, what do you hear up there?

Kub: Well, there's still snow drifts. You know, they've been getting a lot of moisture. They would struggle to get their spring wheat in at a usual planting date. You know, people who still have the seed bought and are intent on planting that will probably still get some of that in, but I expect to see some of those acres go to soybeans. So again, that's still in play. There's still definitely a lot of things to pay attention to. In the inter wheat market spreads -- you know, to see the Minneapolis wheat, some of those contracts are priced at the same price or below Kansas City wheat contracts, which is not something you ever expect to see for a high-protein spring wheat market. So I think there's going to be a lot of spread trading continue to go on between the wheat contracts.

Pearson: All right. Well, it's going to be interesting -- it will be interesting for Durham too. It will be an interesting wheat market for those spring wheat growing areas. Let's talk about Kansas City and Chicago and what you see ahead for prices there.

Kub: Yeah. The Kansas City hard wheat contracts, if they were going to even regain the price ratio that they had over corn a month ago, they would have to move above $11. And they're going to have to do that just to stay out of feed rations if corn doesn't change. So I think there's definitely a lot of potential for bullishness still in wheat, despite a supply and demand issue that, you know, shows more ample stocks than the corn or soybeans.

Pearson: All right. New crop sales, what are you doing?

Kub: For wheat?

Pearson: Mm-hmm.

Kub:, Well, I think, you know -- I think I'd be really cautious to make sales before you know what you're going to raise. If you've got winter wheat, you know, you don't know at this point how -- what your yields are going to look like, so I would be extremely cautious and I would have a very small proportion sold if I was going to sell any.

Pearson: All right. Let's move to corn and old crop first. Obviously we're looking at some very strong prices here. I don't talk to a lot of producers who have a lot of corn available to sell.

Kub: No. And it's too bad because you're really seeing a really strong basis market popping up in that June/July time frame right now. You know, if you can wait and hit the June/July 13 under, let's say at a producer in Iowa, you're looking at 760 cash corn if you move it in June and July. So if you've still got the corn, that's what the market is telling you to do, to carry it through the summer. That's a difference of 40 cents between the cash market today, which is 720. So they're paying you 40 cents if you've still got the corn to hang onto it through the summer, when I think all of the commercial traders are expecting this corn market to be very, very hot.

Pearson: Boy, indeed they do. Let's talk new crop now. What are your thoughts there? December corn has made some interesting moves. Is it enough to track more acres?

Kub: You know, yeah, price wise it's definitely winning the battle over soybeans for sure. I think it started to lose some momentum. And I even sort of hit the trigger and sold about 20 percent of new crop corn here just within the last week and a half. And that's different than I think I've mentioned a rule of them before where you want to have about 30 percent sold by mid March. But this year with that trend going up, you know, I kind of delayed some of that, had a little more risk appetite. But I think now, you know, even if you sold all of your insured acres at a 650 sort of futures price and waited for the basis to come in next year, you're talking about selling $6 corn all year long -- $6 plus corn, and that's never going to be bad.

Pearson: No. Historically that's pretty good. As far as the soybean market is concerned -- let's talk about what's happening on the soybean front. You know, China has been so much of this demand. We had the issues down south in South America with wet weather. I talked to a Brazilian farmer here in the last couple of days who said the wet weather was an issue. They were having harvest issues and also transportation issues down there. What's your take? Where are we going on bean prices?

Kub: You know, we saw some reaction today, and the soybean market came up 30 cents. It was the leader of the grains today, which was surprising, considering that of any of the USDA numbers that Brazilian soybean production at a record large 72 million metric tons was the most bearish change that they made on that whole report. And so to see beans go up 30 cents after that does show that there was probably some buy coming into the U.S. Market. That could be a reason behind it. It could be more the index fund rolling. But it's certainly -- that's where the difference is coming in here, between the Brazilian Market and the U.S. Market and the exports. And we're seeing it here in the U.S. in the spreads. Just this past week over the past couple of days, the may to the July contract now has carry. There's 11 cents of carry between may and July. So now for the first time in months, there is a reason to hang onto your beans for another couple of months and store them through the late summer also.

Pearson: All right. So something certainly to consider and look at. But new crop sales, where are you on there? You moved up 20 percent on corn. Where are you on soybeans?

Kub: No, I'd still like to hold off on that just because I think there's more opportunity for that battle for acres to keep playing out between beans and corn. Beans are still underpriced compared to corn. They're really only about double or 2.1 to 1 price ratio between corn. If they were going to go to their more regular -- like a typical year sort of price ratio, you'd be talking 1550 if you had corn at 650.

Pearson: All right. So that's the way we're stacking up now right now outlike wise. Planting conditions going into the Corn Belt at this stage of the game don't look all that promising. It looks like we've got some wet weather. Maybe some warmer weather for next week. I visited with well-known climatologist Elwynn Taylor, who says we're still in the La Nina pattern, so that can bode either way for the Corn Belt.

Kub: Yeah, and I don't think that's necessarily the bullish argument it used to be, because we've had sort of late wet plantings for years now, and we haven't seen the drag on yields that you would otherwise expect. Last year was sort of an exception to that. But many of these years, you know, we can plant very, very fast. And I will say it's going to be very interesting in the government does shut down and we don't have a crop progress report on Monday afternoon. You know the market will kind of be trading blind, particularly on those wheat crop conditions. So it will be interesting to see. You know, I think the markets will be more jittery and react to more of these weather concerns for sure over the next week.

Pearson: Part of my byproduct of my trip to Texas was I got a big update on the cotton world down there. Fourteen-percent increase in cotton acreage, as you know. A big part of that down in Texas in the key cotton growing areas. What's your take on cotton prices? Obviously, the old-crop thing is just unhinged from all reality. And everybody I talked to in Texas, nobody had any cotton to sell, any old crop left. New crop sales, what's your take?

Kub: Well, just for one thing, if you do have any old crop left, now would be the time to do it sooner rather than later because the market is inverted all the way through 2012. So at this point you're getting these new crop prices reacting and being drawn up by this old crop, you know, very tight supply and demand situation. Eight percent stocks-to-use ratio on the U.S., which is tighter in the world. And we're going to have world cotton all around the Northern Hemisphere coming online before our U.S. crop does. So I think certainly these are the good times to let the market work for you. And if the market stays here between, you know, a 185 and 227 range and continues to consolidate there, you know, if it hits toward the top of that range, that would be a good time to lock in new crop.

Pearson: All right. December contract, a buck forty or so would be consistent for the new crops. All right. Let's talk about the livestock sector. Fed cattle market really didn't do much this week. Board backed off some. Big prices last week. And still a pretty good feeling out there for prices.

Kub: Yeah. And I think some of that was due to the index fund roll that happens this first week in April. And because of their gains over the past month, you know, they sort of drew back on the live cattle futures. We also saw an increase in total open interest trading in there, so that suggests that there's some short selling going on and driving the price says even lower. So, yeah, that was sort of hard on it, but I think there's still strength in the market. There's I think that there's a lot of positive things being said. Even the USDA report that touches on beef, you know, it said nominally bearish things, saying that there was more beef production. But that came from cow and bull slaughter, which means that this herd is still diminishing and, and that's a long-term bullish argument for beef prices.

Pearson: All right. You're not in a big hurry to hedge cattle at this point then. You think we'll see some better opportunities.

Kub: Not this week, yeah.

Pearson: Hog market.

Kub: Hog market. You know, the hog market compared to the cattle futures, they finally caught up with one another. But at the retail market, the pork prices still seem underpriced compared to beef, so I think there's still an opportunity for those markets to come closer together and the packers to pass that strength into the cash market. And we've seen some of that. The lean-hog index has come up even a dollar off this past week even with the futures losing, and it's coming up to 9103. So I think there's still some strength that's going to come into there just to help it catch up to the beef trade.

Pearson: All right. So we're still going to see maybe some strength in hogs as we go through the spring?

Kub: I think so. And seasonally we're a couple months away from summer grilling season. But I think for right now, within the next couple of weeks, I think cash hogs should remain strong.

Pearson: But the consumer is stepping up and buying meat?

Kub: Yes.

Pearson: That's certainly some good news for the cattlemen, the pork producer, and certainly for the grocer and the packer at this stage of the game.

Kub: And the free trade agreement that got -- that is getting passed through Columbia. We need more and more of those.

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 high flying 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 agriculture's leading role in America's, otherwise, gloomy trade picture. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news