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Market Analysis: Feb 04, 2011: Market Analyst Elain Kub

posted on February 4, 2011

Grain markets were stronger this week as the trade reacted to prospects for increased demand from Egypt and other Horn of Africa countries.

For the week, March wheat gained 28 cents, while the nearby corn contract rose 35 cents.

Soybean prices surpassed $14.00 this week with the March contract gaining 35 cents. Nearby meal prices followed suit with a gain of $6 per ton.

In the softs, cotton traded in record territory above $180 this week, as the March contract posted a weekly gain of more than $3.

In the dairy market, February Class III Milk futures gained 10 cents while the deferred contract moved nearly a $1 higher.

Over in livestock, the April fed cattle contract gained two bits. Nearby feeders were off $1.22. And the April lean hog contract added to its lofty price level with a gain of 3 cents.

In the financial markets, the Euro declined 30 basis points against the dollar. Crude oil wrapped up a volatile week with a loss of 31 cents per barrel. Comex Gold gained $7.30 per ounce. And the Goldman Sachs Commodity Index gained seven points to close at 649.50.

Market Analysis: Feb 04, 2011: Market Analyst Elain 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.

Pearson: There's a lot of concern about what's going to happen over the weekend in Egypt. As we visit here on Friday afternoon, we don't know how that's all to come out and what the fate of Mr. Mubarak will be and perhaps a new leader and what's going to happen with all the government demonstrations. That's going to be a huge factor, particularly in the energy markets. It's going to impact equities and everything else. With that being said, we do know that all those countries want more food. They were concerned about food prices in those countries, so that's helping drive things. And one of the big drivers was the spike we've had in the wheat prices which, of course, pushed prices up over there. One of the problems we had in the former soviet union. Elaine take us out there. What do you see ahead now in this wheat market?

Kub: Well, like you say, it's a really risky time, geopolitical time so it's hard to sit here, especially on a week where we've had the dollar bump up a little bit and all the commodities take a little pause. It's hard to be very confidently bullish. But that being said, the whole sector is still bullish. Nothing specifically has happened to change the general upward trend of wheat and all these other commodities. Honestly, I am more bullish for wheat and rice and these staple grains but particularly spring wheat than I am for most of the other grains, because we're not really in the battle for the acres time frame yet, but if you look at the spring wheat prices compared to how corn has gained, they really still need to make some advances. You know, the corn-soybean question is pretty much settled as far as what's going to get planted. But if we need to create more spring wheat in Durham, which we do, these prices need to come up. For instance, if you have new crop corn to continue to trade around $5.90, you'd have to have new crop spring wheat trade more towards $13 for it to be the same price ratio as it was last spring to motivate that same amount of plantings.

Pearson: Of course, producers haven't made those decisions yet. Spring wheat is going to be the $64,000 question. With these prices they've got to be buying some acres.

Kub: Yeah, they're buying some acres perhaps. And we also see definitely the commercial traders, your mills, buyers of that sort, they are buying futures right now to hedge their costs. There's going to be another six weeks or so before this $10 spring wheat actually gets into the retail market where people are going to have to pay for their wheat products. So there's time for this market to keep moving higher and trading higher and buying these acres.

Pearson: All right. Let's talk about the corn market where we've had some big moves. Before we go to corn, your outlook on wheat is you want to hold off for stronger prices?

Kub: Yeah, and particularly because if you're talking about hard wheat varieties, the winter wheat, you know, the dry areas you may not know enough about what your yields are going to be to be very confident selling very much. And I think there's enough strength in the market itself that you can wait to make sales.

Pearson: All right. Now, down it in Texas, a lot of dry conditions down there. Talk of maybe some of that wheat might be torn up down there. Some of that winter wheat might be converted to perhaps corn acres too, which is another source of acres. We're running into prices now where federal crop prices -- federal crop insurance prices are going to be determined. A lot of fertilizer on last year, so you're right, some of this is already spoken for. So what's ahead for corn prices now?

Kub: Well, you know, if you -- again, the trend hasn't changed. I still think it's a bullish trend. Until we see something really change, what we're looking at this past week is maybe just a pause of the dollar moving. However, what's really interesting in corn when you talk about should you make sales or not, should you be locking in these prices, the cash market is really awful right now. We have basis about 40 under in the country, which is ridiculous when you think that a couple of months ago you could sell march corn at 10 under in some processors. So we definitely predict that basis is going to strengthen as we get into April, may, June, July. There are going to be areas of the country that are going to be in a corn deficit situation. It's going to be really hot basis situation. So if you want to lock in these prices, it's probably not a good idea to do it with a cash forward contract just because you're locking in this terrible basis level. On the other hand if you want to do a hedge to arrive with an ethanol plant, for instance, let's say this does get really hot and this commodity market keeps on moving higher and you get corn to a situation where you've got ethanol plants and feeders in considerable pain, you have to consider your counter party risk and consider the best way to lock in your corn prices is with your own independent hedges right now.

Pearson: All right. Keep that in mind. These are lofty prices. If we've got old-crop sales, should we be making some here?

Kub: I think that if you haven't sold anything, you should definitely be averaging this out and take advantage of what the market is showing. But like I said, this basis level is nothing to be proud of and I think you can wait for better basis in the next few months.

Pearson: All right. So you'd use the board. What about the new crop? Where are you 2011 or 2012 sales?

Kub: I think that, again, as a risk management position, you should have 30 to 50 percent locked in before March 15, and that's coming right up. So definitely this is the time to be making some sales and start your pricing.

Pearson: All right. Let's talk about the soybean market, again. Just unceasing demand over there. Decent prospects down in South America. Doesn't seem to be cooling this market off. We're over $14.

Kub: Exactly. Like you said, the weather there really seems to be favorable. On the other hand, they've had some pork strikes. It sounds like those have settled down too. But in the meantime, again, the soybean exports and the soybean oil exports have been very strong, stronger than expected. So that has supported the market. Meanwhile the basis on soybeans has also been very weak and very volatile just as we've been seeing our exports change. So we're looking to see that basis appreciate also.

Pearson: All right. So here again, it's so bullish, bullish, bullish. So we don't want to be selling a lot of beans right now?

Kub: I wouldn't be in a hurry except from a risk management standpoint. You want to lock in some of these profits. These are profitable prices in 2010, more so than 2011. If you look at prices for options if you want to just buy a put, the easiest thing to do to lock in a floor for your 2011 prices, they're very expensive and it gets you less than $13 by the time you factor in the price of the put.

Pearson: All right. Let's talk about the cotton market. Can't miss that one this week, up over $180. Where is this thing going?

Kub: Golly, I don't know. They did leave kind of a gap up around 157 so you --

Pearson: That's still a pretty high gap.

Kub: That is a pretty high gap. I think they could down and there and fill that. Once they did that, it would be more likely to go higher than go much lower simply because this market is doing what it's supposed to be doing. It's motivating more production. China, the Chinese cotton association came out and said that they have increased their acreage by 7 percent this year and it's going to be six months before that comes on line. So we've got strong prices here for a while in cotton, but it's interesting because that's where it's going to have to happen to relieve some of this pressure on cotton prices. It's not going to happen in the U.S. there's just not the infrastructure. So it's interesting to see the market working in that sense.

Pearson: This is still an old-crop cotton situation here.

Kub: Yes.

Pearson: Not so much on the new crop. Hopefully, like you say, acreage will be bumped up. Let's talk about livestock. Fed cattle market has got a nice move. That's been a nice up trend. Backed off a little bit. The cash market is pretty decent.

Kub: Yeah. The margin is sort of being passed along to the packers and the feeders, so they've been bidding in the cash market well. The futures market has held steady. Again, this is a great situation where the speculative market is coming in and boosting these prices, and it's working out.

Pearson: What's your -- as we go forward now, in terms of beef supply, which looks to remain fairly tight this year, is that right?

Kub: Yeah. It says we've got the smallest beef herd since 1958. Of course, these cattle are producing 50 percent more beef per cow than they were in 1958 but nonetheless, we've got a relatively small herd to work with to increase the production. And we've got, you know, lots of beef being slaughtered. Lots of beef coming on the market. And yet retail demand remains strong. So that's suggestive that demand is there to support this market, and I don't predict there being any major fall in the futures price.

Pearson: All right. So are you hedging cattle?

Kub: I would be hedging your feed certainly. The cattle themselves I think you've got an opportunity to let the market keep working higher.

Pearson: All right. Calf market, again, there's been tremendous strength there.

Kub: Yeah. Like I mentioned, the feed buying, this is certainly a time with that basis being so wide. This is definitely a time to be buying feed if you haven't already locked in your inputs in that sense. The cash market there has come up this week and taken back the losses for last week and just remained steady for basically the past two weeks. So these are good prices for someone to be bringing their calves to sale.

Pearson: All right. Let's talk about the hog market and what you see happening there. Record prices on the board for hogs. Again, it seems like robust demand from everywhere, overseas.

Kub: Yeah, the export demand, it sounds like we're exporting -- 20 percent of our total production is going to export demand. So that's a good place for the demand to remain strong or to grow, which is really impressive when we have higher hog weight, higher slaughter weights, and more hogs coming on the market, and yet this demand remains strong and the prices stay high. One thing that's interesting in the futures there is that they seem to respond to the movement in the dollar to a greater degree or to a more volatile sense than many of the rest of the Ag commodities do. So you see that being a much more volatile market, and they really benefit which when the dollar goes down.

Pearson: All right. Let's talk about all the commodities seem to be in short supply and very tight. Look across the board. The crude oil situation, we were told we've got plenty gasoline in storage here in the U.S. things feel pretty comfortable from a current supply standpoint. Obviously this situation in the middle east, particularly in Egypt, is going to weigh on this market.

Kub: I think so. And I think the crude oil market has struggled to move over $92 this past week, and I feel like if there wasn't so much tension in the geopolitical sense, then the market wouldn't probably be moving much higher than that. The demand factors aren't growing and there's a lot of uncertainty there. All things being equal, it would stay in this range of consolidation between $92 and $88. That being said, all bets are off. Some of this is probably priced in, but what happens next week, what happens the week after. There's no guarantees on this.

Pearson: People are very concerned. Obviously the metals and all that. What do you see ahead there? We only have about ten seconds.

Kub: Well, the demand is being spurred there by china, just like any other commodity, so I think they're not in any situation to drop that demand. I think the strength is going to stay.

Pearson: All right. Still bullish on the metals.

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.

And, of course, join us again next week when will examine the market impact of USDA'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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