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Market Analysis: Dec 03, 2010: Elaine Kub, market analyst

posted on December 3, 2010

Grain prices trended up this week. Inclement weather in Russia and Australia served to push wheat prices higher despite a strengthening dollar.

March wheat gained almost a dollar, while the nearby corn contract moved 20 cents higher.

Soybeans also rallied as analysts are expecting Chinese imports to exceed last month's orders. January beans moved 45 cents higher. The nearby meal contract followed suit with a gain of $7.80.

In the softs, cotton got back what it lost last week – and then some – with the March contract gaining $15.75.

In the dairy market, December Class III Milk futures gained 25 cents while the deferred contract moved 34 cents higher.

In livestock, the February fed cattle contract gained 77 cents. Nearby feeders moved 40 cents higher. And the January lean hog contract went against the trend and fell by $1.43.

In the financial markets, the Euro gained 65 basis points against the dollar. Crude oil brushed $90 with a gain of $5.33 per barrel. Comex Gold advanced $32.40 per ounce. And the Goldman Sachs Commodity Index gained just over 33 points to close at 609.30. Here now to lend us her insight on these and other trends is one of our regular market analysts, Elaine Kub. Elaine, welcome back.


Market Analysis: Dec 03, 2010: Elaine Kub, market analyst

Kub: Good to be here, Mark.

Pearson: All right. Well, there's a lot of things we're going to need to talk about because there's a lot happening as we go to the close of 2010. What a year it's been.


Pearson:Let's start with the grain markets. Let's start talking about the wheat market. Then I want to talk about the financial -- I want to talk about the currencies and all these things that are impacting everything. Looking at this wheat market right now, we've got trouble spots again in Russia. Trouble spots again in Australia. I've talked to some guys in Kansas that are concerned about the lack of cover and what it's doing to this year's crop. We have a relatively worldwide tight situation after what happened in the former Soviet Union, now this rain in Australia. Where do we go on wheat prices. What do you see ahead?

Kub: Well, personally just looking at the chart, there's nothing on there yet that makes the chart look particularly bullish. We haven't broken through August and November highs. That 822 on the Kansas City board for the hard red winter wheat, we haven't broken through that yet. But that being said, there were a lot of people getting really bullish this week, and they had some justification for that. This is a really interesting market because there are actually fundamental reasons for it to be moving like this. This 90-cent move was, like you said, tied to Australia. Even though I'm not particularly concerned about U.S. wheat production beyond what just didn't get planted yet, the Australia concern is real, particularly because the Australian dollar has moved up so much in relation to our dollar. I think that's going to make the export situation really strange. You remember in 2008 when we had these wheat shortages or rice shortages. I don't think it was so much that the world didn't have the grain on hand. It just was moving in different directions and it wasn't where it needed to be. So when you disrupt the Australian export pattern and try to take it from the U.S. that can create these weird situations. And I think it's possible that we could get a really incredible rally sometime in the spring. But that being said, I mean $8 futures is a great price to sell hard wheat at.

Pearson: Absolutely. And for the hard wheat people, the spring wheat people, every class it would appear, we're in some really strong prices, even though we're not back to like those highs that we hit back in August. Are people sitting on their hands? Are farmers becoming more aggressive sellers in wheat? Is that your feeling out there right now? Are that getting some price?

Kub: No. I think like you were saying, you know, we talk about the U.S. having some production concerns, I don't think anybody can be a very aggressive seller for next year's crop yet. What's in the bin maybe. Like I said, $8 futures is a great place to sell, but I think you'd want to take a look in the mirror and make sure that you're still going to be happy with that $8 price if it does go higher. And it might. But I think you should -- $8 is a great price for wheat. I think what we really see, what was interesting as far as who is getting bullish in this market, it was the commercial traders added to long positions in Kansas City and Minneapolis and Chicago. And they took the may to the July futures are now at an inverse in all three of those markets, and that just happened within the past couple of days. So that's showing that these commercial spread traders are not seeing this massive amount of wheat sticking around the country all through the summer anymore.

Pearson: We're finally starting to kind of get a push in here because that's been the beef. You know, if you're down in Fort Scott, Kansas, you might have a $1.20 basis. So, finally we're starting to see that maybe come together. These commercials are finally stepping up.

Kub: Yeah, we're seeing basis -- basis at the Gulf and everywhere else is about where you'd expect it to be for this time of year. So, it's not as strange as it has been the past couple of months.

Pearson: All right. $8 wheat. You know, in my lifetime, that's awful darn good.

Kub: That's right. I think you just be prepared. If it goes higher, just be prepared for that.

Pearson: When everyone says it's going to go higher, I always get a little nervous. Everybody is saying it's going to be higher. I've talked to a lot of producers up in Fargo, North Dakota, this week. I was up in Wisconsin this week, and they're nervous. They're saying everybody is on one side of this boat right now, and yet we've had a pullback. And let's talk about it. Let's talk about the corn market then. We had this pullback in corn. Corn had a nice rally this week, moving back up. A lot of people are saying $6 is a possibility again. What are your thoughts?

Kub: Well, for instance, corn moved up 18 cents today and that's because the dollar went down. That's because the Euro went up. That's been the story all week. It's not so much that corn ever went down because there was any specific reason for corn to go down. It was just responding to all these macroeconomic situations. So that was sort of artificial. There hasn't been anything in the corn market itself that necessarily caused this drawback other than just a time for the market to take a breather. I think it could be a situation where we see this chart as just now forming the first shoulder of a head and shoulders formation that's going to cause that top maybe in -- you know, after the first of the year. Certainly for right now and through the end of the year, I don't see us forming any new highs, particularly because there's a massive amount of open interest in this market. At the beginning -- second week in November, there was the highest ever open interest in the corn futures ever. But that's already started to draw down, and that's typical for December. You get funds and speculators taking their profits, re-evaluating their portfolios here at the end of the year.

Pearson: What are these big funds do? Where are they throwing their money? Are they buying all the grains, or what are they doing?

Kub: Well, gold is over $1,400 now, so I think that's getting a lot of money. But that's the problem. Stocks aren't the greatest place for them. Currencies are interesting plays but they're really volatile. I think grains, particularly your corn, wheat that has a good fundamental story, those are starting to attract. And cattle, they're starting to attract a lot of fund money simply because, you know, it's a place that you can get some returns on. You can go short on them also. But you know, it's volatile certainly.

Pearson: But at some place where they're doing something. They're expecting movement one way or the other.

Kub: Right.

Pearson: So the funds you think are probably looking at grains again, and maybe we'll see those long positions develop in a big way again.

Kub: And I think it will be more towards after the first of the year. I think from here through the end of December, we're going to see liquidation.

Pearson: Okay. And evening up at the end of the year. Everybody has had a good year so maybe they'll just have the sidelines through the holidays. All right. We've locked the crop away, so if they're going to want to buy this corn, they're going to have to bid it up to get it out of our hands.

Kub: Yes. And we've also seen the spreads in corn widening. Spread between December and may has widened by a nickel just in the past couple of weeks. So the commercial traders are getting somewhat more bearish. They're not expecting to be as hungry for corn this spring as they were earlier this month. So that's not a particularly bullish argument for corn there.

Pearson: Okay, all right. But they've got to buy acres. If beans go up and wheat goes up -- and cotton had a huge week that week, which we'll get to in a minute. So corn, you don't want to sell corn here.

Kub: I think if you already -- if you don't need any cash for your 2010 crop that's sitting in the bin now and if you already have locked in some of your 2011, just some at this $5 -- above $5 level, then I think it's perfectly fine to wait and see what shakes out in the spring.

Pearson: All right. Let's talk about soybeans. China is back in there talking about more Chinese demand than we had last month. We just continue to have one huge month after another. A lot of concern about South America. This La Nina pattern that we've gotten into never bodes particularly well for South America. It could be an exception this year, so you can never go to the bank and cash that check until it's over. But now if you look at what's happening in the soybean market, soybean demand as evidenced by demand from china in particular and the fact that we had a shorter crop than expected this year and South America is also kind of off to a rocky start, what's your feeling on selling beans?

Kub: Well, like you said say about the La Nina, that's more of a prediction. Looking at it right now --

Pearson: Right. I just throw it out there.

Kub: Yeah, yeah, but as of right now, they've got some decent weather this week. Right now I don't think their weather situation is a problem, certainly not in Brazil. And even in Argentina, it's looking a little bit better. So that's not a particularly bullish argument for soybeans. And I think you kind of see this uncertainty in the speculator's behavior. They're not really moving one way or another as a group this past week or the week before that. So what we see there is that actually we do have the highest ever open interest still in soybeans. They haven't started to sell those off yet. So I don't feel like there's a really, you know, a big consensus in soybeans yet. It's very uncertain. And that will tend to wash out some speculators just by that volatility. On Wednesday the front month soybean futures had a 40-cent trading range. That's just a huge amount of capital to risk if you don't have really deep pockets.

Pearson: That's right. And of course, some of the big trading houses are looking at some huge margin calls, and this is a whip saw deal here. Okay, so China is coming in. China is going to stay big. Let's say we get normal weather in South America. What's the balance sheet going to look like?

Kub: Well, I don't -- you know, USDA has a new report coming next Friday. I don't look at them making any major changes for soybeans. They might for wheat. For the world ending stocks, I would expect them to kind of look at that. Soybeans I don't predict any major changes for them there.

Pearson: All right. So at this stage of the game, soybean sales, you'd still be in a holding pattern there?

Kub: The thing with soybean sales, like I say, if you've already got them locked in. But if you don't, what do you do now? It's so volatile, I'd hate to be a naked short or a naked long one way or the other. I think options would be the way to go in this volatile of a market. But the problem with the market that volatile is these options become so expensive. If you want to buy a $12 put for November 11 beans, for instance, that costs $1.31 today.

Pearson: That's a big piece of insurance.

Kub: That's a huge piece of money. So what you'd have to do is do a put/call spread to try and bring that money down.

Pearson: All right. Other than that you're not in a big hurry to sell beans.

Kub: No. I mean this argument you make for the battle for acres next spring, obviously beans will be in there.

Pearson: Keeps everything on a hair trigger. Okay. All right, let's move on to cotton. Huge week this week in the cotton market. Cotton has been trading at levels that we haven't seen since the civil war. We're talking about since the '70s sometimes on corn and beans. We're talking about now the 1860s in cotton. You talk about volatility, it's certainly been there. And cotton is buying acres. They're trying to buy acres. And going forward we'll see what kind of a crop we get. Should we be selling this cotton? This is unbelievable. This is maybe once in a lifetime cotton prices.

Kub: It's super, super volatile and it's inverted, so you see these highs in the front month. And this December contract didn't go back to its 157 high. It only made it to 150. What's interesting is if you look at the more deferred months, they were even jumpier. The move from day to day to day had gaps between it. It was jumpy. Very unstable. So I think absolutely this is an opportunity where you see weird trading -- speculative trading going up and not a lot of stability, not a lot of justification behind it. That's a great chance to let the speculators do their job for you. I mean they're making these great opportunities for somebody to sell, absolutely.

Pearson: When you have an irrational market like that, sometimes that is a presage up move.

Kub: I guess that's possible certainly. But I mean personally I would be really cautious of getting bullish in cotton just because this move this past week didn't feel very stable.

Pearson: And you're going to ration the demand at some point with these kinds of prices. We'll be wearing the same jeans next year. All right. Let's talk about the livestock. We've been watching fed cattle market has had this nice recovery. This calf market this fall has held together really well despite $5 plus corn. Where do you see us going fed cattle? We're going to be closing out the end of the year. What do you see at the end of the year and the first quarter of next year?

Kub: I think we could see it go up to $1.10 next week. I think that's reasonable. There's definitely a lot of interest. Like I said, this is a good place for speculators to be putting their money -- for investors to be put their money. I think it's sort of tied to the economy. Today on Friday, you know, we saw some sort of uncertain trade in the morning, and I think that might have been tied to some of the economic news in the morning. So, you know, I think the market itself is bullish, and I think long term I have bullish inclinations toward it. You look at export situations. The fact that this herd has not shown any great increase yet.

Pearson: No. No expansion.

Kub: So long term I'd be bullish on it. Seasonally we expect it to pull back here this month. But I could see it going to $1.10 here before it pulls back.

Pearson: And next year?

Kub: Next year I could see it going higher, but I guess don't want to put a number on it.

Pearson: My long-time collaborator says that this calf market has been very strong. We're just not seeing much in the way of expansion. Despite the fact that corn prices are high, we are seeing, despite the unemployment report this week, a strengthening economy, which is always good. What do you tell that cow/calf producer out there?

Kub: As you mentioned, it's been very strong. And the may April/May contracts have been above 120 all week, and I really like that number to sell at because the uncertainty is of the feed markets, that's something that if you don't lock in these prices and lock in some of your feed now, spring could come around and really kill you. So I really like that 120 number. I think we've seen that all week and the cash market has really held up even in Colorado and in Oklahoma where they've got moderate drought situations. So I think these are great opportunities for them.

Pearson: Take advantage of it. Okay, let's talk hog market. What do you see happening there?

Kub: They -- you know, this recovery that they've had through November feels more like short covering, feels more like a dead pig bounce, if you will. It doesn't feel like it's something that's going to keep going up. I think, you know, they had some opportunities as feed prices came down. I think that's part of the reason why they moved up this past month, but I don't think they're going to continue moving up.

Pearson: All right. Do you take this opportunity with the pullback we had -- obviously we had a rally on Friday. Is this the time to cover some feed needs?

Kub: Yes. I think the smart money is doing that. We see a lot of the commercial money going in and locking in these corn and wheat prices, yeah.

Pearson: All right. I want to come back to some other stuff. Foreign currency, you mentioned strengthening dollar, weaker commodities, and then last week we had stronger dollar and stronger commodities, which is really hard to figure out. But now we're getting back more into that normal trend. Where do you see the dollar going versus the euro, versus the bucket of currencies out there?

Kub: Well, you know, if we could push pause and everything stays the same and we don't have another Greece, we don't have another Ireland, no other surprises, I think the dollar should come up more and I think that these other commodities should -- currencies should move down. I think that we've sort of gotten into it too far out.

Pearson: All right. You went out on the gold front earlier. You said something about gold and 1,400 bucks. When is this thing going to stop?

Kub: You know, I don't know. If I was going to pick one commodity -- I hate to use the commodity bubble. I hate that because I think usually you've got an underlying asset that justices the price. But gold itself is a currency, so it's hard to call that a bubble. But generally I don't think people should be buying this gold. It should be bought as an inflation hedge, and we do not have inflation. So it just feels like it's a safe haven and that's the only reason is in there. I think as soon as any other opportunities comes up, I think gold could really come crashing down.

Pearson:Big move in energy this week. Crude oil was up $90. Backed off -- actually went over 90, backed off some. What's your take on crude oil? Improving world economy, I understand that and people are going to burn more gas. Is that all that's going on here?

Kub: No, I think it's been really interesting that it hasn't come up more. We haven't seen demand draw down to ways that would keep these prices as stable as they've been, really. So I think the producers, your opec, they've done a good job of keeping demand in there by managing the price. So I guess I don't anticipate them letting -- you know, letting a situation come about where there would be a shortage and where prices would come up any more until the economy improves.

Pearson: All right. So crude oil you wouldn't necessarily be concerned about locking it in at these prices. If things will back off -- take advantage of this --

Kub: I think there are more urgent things to do than lock in crude oil prices.

Pearson: Like?

Kub: Like lock in your profitable gains as a producer.

Pearson: So you're not worried about tying that asset up at this point in the game.

Kub: That's always what you should be doing. You should be managing both your inputs and your sales. But at this point in time, I don't see as much volatility in there.

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.

Before we go we'd like to remind you that it's fundraising time here on PBS. If you value programs like Market to Market, and the comments you've just heard from people like Elaine Kub, then please consider phoning in a pledge and investing in a service providing you with accurate information and timely market analysis.

And be sure to join us again next week when we assess the market impact of USDA's latest crop production report. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices cotton markets news soybeans wheat