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Market Analysis: Nov 05, 2010: Elaine Kub, Market Analyst

posted on November 5, 2010

Tight supplies, strong demand and the Fed's announcement this week to infuse $600 billion into the U.S. economy had bullish implications for global markets. And virtually all the commodities, equities and currencies -- except the U.S. Dollar -- rallied.

For the week, December wheat gained 12 cents, while the nearby corn contract moved 6 cents higher.

Despite predictions of increased production, soybeans also rallied, as the January contract moved nearly 50 cents higher. The nearby meal contract followed suit with a gain of $10.30 per ton.

In the softs, cotton's record-breaking run got even stronger this week as the December contract settled Friday with a weekly gain of nearly $17.

In the dairy market, December Class III Milk futures lost 74 cents while the deferred contract moved 27 cents lower.

In livestock, the December fed cattle contract lost $1.28. Nearby feeders were off 27 cents. And the December lean hog contract declined by 75 cents.

In the financial markets, the Euro gained 150 basis points against the dollar. Crude oil advanced $5.42 cents per barrel. Comex Gold gained $40 per ounce. And the Goldman Sachs Commodity Index reflected the full effect of the bull market by moving nearly 30 points higher to close at 592.50.

Market Analysis: Nov 05, 2010: Elaine Kub, Market Analyst Pearson: Here now to lend us her insights on these and other trends one of our regular market analysts, Elaine Kub. Elaine, welcome back.

Kub: Glad to be here.

Pearson: Well, it's good to have you. Let's talk about wheat first because this really all started with this rally. That was the big catalyst initially was short crop in the former Soviet Union. Then we had all the rain in the Corn Belt, reduced yields and the government is still supposedly, at least if our private analysts are correct, going to probably ratchet down this yield maybe a little bit further come November. Let's talk about wheat first. It hasn't been an ideal winter so far for the wheat crop.

Kub: Right. Yeah, exactly, that's what makes putting together a marketing plan for wheat really challenging right now I think for farmers. You have to have a good insurance plan at your back and if you have that you can hedge some good prices right now but how do you know how much to hedge? How do you know exactly how much production you're going to have when this all shakes out?

Pearson: Well, it is a big issue for producers, there's always risk involved and also the cash markets for wheat have been pretty miserable.

Kub: Right. They really have. The basis is pretty unpleasant, especially in the soft red winter wheat markets. Spring wheat basis is holding up there but that's another good reason to use maybe a futures plan or an options plan for hedging rather than forward cash sales. That will give you an opportunity to bring that basis in by the time you're actually making these sales.

Pearson: All right. So, what is your feeling now on wheat prices? Is this a level at which you want to make sales? Should we be doing something here? Should we be opening the bins as we used to say?

Kub: I think you should definitely have a plan for everything you are confident you'll be able to raise. If you're just going to sit around and wait for prices to maybe get better I don't think that's a good plan, I think that's gambling.

Pearson: All right. We don't want to engage in gambling, we're totally opposed to gambling. But as we look at the wheat market going forward obviously there's some acreage stresses going on here particularly in the soft red winter wheat vis a vis soybean prices and what's going to happen on that front. So, maybe we'll see a further tightening of world supply this year or are we starting to grow more wheat elsewhere in the world?

Kub: I don't think we've seen a good expansion in the major exporting nations. The former Soviet Union countries that started this rally back in July are also -- they're still in a drought, they're still having problems there. Australia, southwestern Australia is also having a drought, smaller, but it affects some classes of wheat that they export. And here we don't have necessarily the production that we have had in some previous years. So, I don't think that anything is changing to a more bullish pattern yet but it certainly could get that way.

Pearson: All right. Let's talk about the incredibly shrinking corn crop. USDA reports coming out this week and it is always tough to be on the show just before the report comes out because who knows what they're going to say. The reports have been anything but consistent. Obviously private analysts are looking for this yield number, it could shrink a half a bushel to a bushel and a half, something like that. A lot of people feel that has been baked into this market already. So, again, the question is we've got a lot of corn that has been harvested, harvested in good condition with low moisture. A lot of people are saying should we just go ahead and sell it off the combine? Is there enough carry in this market? Are we going to see higher corn prices?

Kub: Well, you know, whatever the USDA comes out and says on Tuesday maybe it doesn't necessarily matter whether the prices go up or down because right now you look at these prices and sure, you can sell off the combine and you're making a profit for 2010. But the thing to look forward to is in 2011 you can lock in a profit particularly if you've already purchased your input costs. These are amazing profits. We're talking more than a dollar depending on your own cost of production. So, I think that's absolutely the thing to do, to sit down with your lender and your market advisor and make sure that you have a plan in place to lock in some of your 2011 profits. That way no matter what happens on Tuesday with this report, no matter what happens in the spring if we have this battle for acres coming up you know that you have a good start, a good price locked in place.

Pearson: All right. So, you're more concerned about selling 2011.

Kub: Yes, I am. I think a lot of people had 2010 sold to a great degree and if you were going to try and buy back some of those bushels and get that built up again you've maybe lost a bunch of that opportunity. You know, this market maybe it could go to $7.72, maybe it could go back down to $3.00. But I don't think it necessarily makes sense to sit and wish and hope and pray that that happens.

Pearson: All right. Sometimes I've heard analysts on the show say they should book profits and they say sometimes the only book you can count on is a prayer book. But as we look at the market going forward, we look at what's happening with corn demand we've got some of these things floating around. What is going to happen with ethanol? Could that slow down? Is that where we're going to ration demand? Eventually we're going to ration this crop.

Kub: Right. So far beef prices, meat prices, ethanol prices have kept up and we're starting to see gasoline prices come up at the pump so that might help the ethanol industry here in the near-term. Also, their spot sales are working out okay, they're still in the black for right now. But if you're looking two months down the road, three months down the road I think they may start to struggle. I think that is why you should definitely be paying attention to the basis bids in your area.

Pearson: All right. Let's talk about soybeans where, again, fundamentally it looks like there's a lot of beans out there.

Kub: Yes, and also when you talk about next spring, let's talk about next spring. If you have soybeans versus corn and you're trying to make this decision of what you're going to plant -- everybody's got harvest done for the most part already, it's already time to be thinking about that. Soybeans are currently -- new crop soybeans are currently trading at a ratio of 2.2 to corn or corn to soybeans is 2.2. And that is historically low, it should be more like 2.5. So, there is some potential for soybeans and corn to get in kind of a rally here if you're looking in that sense fundamentally. But on their own, especially when you're looking at Tuesday and they're talking about bringing up acreage or bringing up production, there's certainly ways to balance out soybeans on the futures board.

Pearson: Sell soybeans right now?

Kub: I think the same thing as corn. You should definitely be looking ahead to what you're making. If these are profitable prices for you, you absolutely should get started, have these prices locked in.

Pearson: All right. Let's talk cotton. Wow, what a story that one is. I think that's the highest cotton price has been in my lifetime and I'm an old man.

Kub: Yeah and it's really getting a lot of froth and attention in the markets. Watching CNBC this week they keep on talking about all week cotton, sugar, cocoa, all of this is racing up, rice, all of the softs are really getting a lot of attention from speculative traders so you wonder how much of this is definitely overheated. But on the other hand cotton has fundamental demand from China. We saw China's manufacturing indexes come up this week. They were really positive. And China themselves is having trouble producing some cotton this year, and that's kind of rumor, you're never going to get that confirmed for sure. But I definitely think that it's justified for cotton to have a bullish move but maybe not this high.

Pearson: So, I'd be backing up the truck and selling cotton.

Kub: I think ...

Pearson: I'm trying to distill what you're telling me, that's where I'd go.

Kub: Right. And I'd definitely be looking forward to your plans for what you're going to plant. I think cotton will definitely get more acreage also.

Pearson: All right, Elaine, let's talk about -- you're a cattle woman from South Dakota. Tell us now -- beef cattle market, we just haven't seen any expansion in that market in a while. Beef prices have been decent, we had a nice rally. What do you see ahead? Let's talk fat cattle first.

Kub: You know, it's interesting that, yeah, the live cattle prices are not as dependent on the corn or they're not as sensitive to the corn rally as some of these others because you can bring in so much of this distillers grains in the feed ration. And yet we're seeing some limited demand here in the cash market. We saw lighter demand this week than last, it's kind of stayed between 96 and 98 in the cash market. But I think that any bearishness we see here this week is going to run into this rally, we're going to have a seasonal rally coming into it and I think that the overall bearish picture perhaps, if we're going to remain in this recession, might be masked by some seasonal rally right in this near-term.

Pearson: All right. Your recession thoughts are that the recession is not over then?

Kub: I think that this $900 billion of federal money is sort of an artificial boot on the throat of the dollar which means that that's a friend to a commodity producer but how long can an artificial measure like that last.

Pearson: And obviously unemployment is high and they have always seemed to correlate that with pressure on beef prices which we haven't seen. It really hasn't been a factor. But I want to come back to this -- smallest cow herd since 1990, Elaine. When are we ever going to see that factory start to grow again?

Kub: I think it would take getting out of the recession. I don't think -- we haven't seen any evidence of herd decreasing again but I don't think it's going to start expanding. I mean, what lender is going to look at the profits you can lock in six months down the road, which are not really there, and say let's expand a herd?

Pearson: Well, that's the lender I'm always looking for. Tell me this, let's talk about the hog market and what you see happening there.

Kub: That's a pretty brutal market, especially on the futures board, and what's interesting there is we've seen a lot of speculative volume come into there on the short sides. We've had a lot of short sellers just driving that market down. And the positive news there is that if you get in towards the end of the year when they want to lock in or take profits, the speculators take their profits out that means short covering and you could have prices come back up. So, I think if you're a hog producer you're in a tough position but you've got to look for opportunities to hedge both your inputs, if you get sort of a draw down and what you're going to sell if you get even a little bit of a bump, definitely just watch for any opportunity.

Pearson: All right. Elaine Kub, as usual we appreciate your insights. That's going to wrap up this edition of Market to Market. Now, if you'd like more information from Elaine on where these high flying markets just may be headed step on over to the Market Plus page at our Web site. You'll find expanded market analysis, audio podcasts and streaming video of our program. By the way, it's all free at the Market to Market Web site. Of course, join us again next week when we'll examine the market impact of the much anticipated November crop report. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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