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Market Analysis: Dec 05, 2008: Elaine Kub, DTN Analyst

posted on December 5, 2008

Despite a bountiful corn harvest in the U.S. and reduced South American soybean crop estimates, the market still took it on the chin.

For the week, December wheat lost more than 75 cents while the nearby corn contract moved 60 cents lower.

Soybeans fared no better losing what they gained last week and then some. For the week, the January contract lost a little more than a dollar, while the nearby meal contract was down $22.70 per ton.

In the softs, cotton followed suit with the March contract posting a loss of nearly $5.20.

In livestock, December cattle were down almost $6. Nearby feeders lost just over $5.50 and the December lean hog contract was off $1.22.

In other markets of interest, the Euro lost 186 basis points against the dollar. Crude dropped below $50 for the first time in four years losing $13.63 per barrel. Comex Gold lost $60.30 per ounce. And the Goldman Sachs Commodity Index fell more than 65 points to close at 316.10.

Market Analysis: Dec 05, 2008: Elaine Kub, DTN Analyst Pearson: Here now to lend us her insight on these and other trends one of our regular market analysts, Elaine Kub. Elaine, good to have you with us.

Kub: Thanks for having me.

Pearson: Every week it's like there's a new record jobless claim, global slowdown, corn prices, bean prices, wheat prices down 50%, 60%, 70%, crude oil cheapest it's been in four years. This whole bubble popping in the whole commodity sector just keeps going. What's next, Elaine? Have we bottomed out?

Kub: Absolutely not, the problem is the thing that's hitting all these markets right now and it's going to continue to hit them through the end of this month and this year is the fact that people, traders, investors, funds want to sell off their positions, there's just a lot of liquidation going on and they're still net long in most of these markets which means that liquidation is not necessarily short covering towards the end of the year, it's just selling, really aggressive selling and we saw it at the end of this week, this aggressive selling regardless of the reason, regardless of the fundamentals it really takes prices very, very sharply down.

Pearson: And so these were long positions that they have held for a long time so there are big losses in there too.

Kub: Absolutely and that's part of the reason too, you want to sell your losses and get that in the tax year prior to December closing out. So, I wouldn't even look for any sign of a bottom until the year is over and even then this recession can last for quite a while. It's difficult to say at what point all the selling is going to be done and it will be time for support to come back in, in time for these markets to explore what prices would be fundamentally justified.

Pearson: Talk about the dollar, the dollar jumped again this week.

Kub: The dollar is still off of its November high but it's pretty certain, especially with Henry Paulsen going to China today and coming up this weekend, that they are not going to do anything to help out the dollar and keep it steady. It's going to continue on that higher trend and that's going to be bearish for grains and other commodities. But at the moment it's being kept pretty steady.

Pearson: On this program typically we follow the commodity markets but I've been asked to ask you about the equity markets and what you see happening there.

Kub: Same situation, same kind of selling, very, very heavy selling, keep that going on through the end of the year. When you still have people getting in there, you see the talking heads on TV talking about what's a good buy, saying this is a good time to buy until we really, really get all of the selling out of the way that's maybe not the place to be.

Pearson: Catching a falling knife I think is the expression. Well, maybe this is all behind us and we'll see. But let's talk specifics, let's talk about the wheat market and what's happening as far as wheat prices are concerned, obviously a huge pullback here. Typically it's not a time of year when we sell wheat anyway but as we go forward what should producers be thinking about?

Kub: Well, actually we had been selling some wheat in these past couple of months and the big story this week -- this is one of the few grain markets that was responding to some fundamentals because there's a relatively greater proportion of commercial traders in there as compared to speculators that have already been washed out -- the big story this week was Australia and ordinarily this is a time of year, as you said, when we wouldn't be selling much wheat because the world would be going to Australia but Australia's harvest has been a month behind and they've been plagued by some rains so there was some commercial support up until late this week and whether it was just a coincidence that it happened while the rest of the markets tanked or whether it truly is this idea that Australian wheat is coming to the ports, it's coming onto the world market that really eroded that commercial support and now we're just back on that really lower trend.

Pearson: So, some more pressure there, not a time to make sales as far as producers are concerned. Going forward, world wheat demand. We're bringing in feed wheat into the United States, that's an odd situation.

Kub: It is an odd situation and when we talk about these really bearish trends this idea that U.S. wheat is overpriced in relation to most other foreign wheat markets that's true of the feed wheat market but you really do see some support in the milling wheat market because there is strong, steady demand for high protein wheat and the people who still have their hands on it are hanging onto it tight and we see a really strange situation in the spring wheat basis. The spring wheat basis, the average cash price for spring wheat is 17 cents above the March Minneapolis futures contract. So, that's a rare situation and it really shows that something is coming out of line, that this lower trend of the futures market for high protein milling wheat does not necessarily reflect what's really being demanded.

Pearson: More of the fundamentals of that specific market are being reflected. What about on the corn front as you look at corn prices and what's ahead? I was in North Carolina a couple of days ago, I was stunned by what producers told me there saying, we can't make any money harvesting and trying to grow this stuff at these prices.

Kub: Absolutely, just this week on Thursday the average cash price of corn dropped below $3 and the December futures contract dropped below $3 just today on Friday and that's the first time that it's traded below $3 since October of 2006. So, all of that time that we've spent these past two years talking about demand driven up trends has been washed away by all of this. And you could call it an overreaction, you can call these markets all of them oversold but it doesn't matter. We've got to get through this month. We've got to get through all of this selling that needs to come out of there before we care about what prices should or should not be.

Pearson: And what the fundamentals forward are going to be. Still we see demand for ethanol, we still see decent export demand, feed demand getting a little sketchy as the livestock sector pulls back but all in all it looks like it should be good demand in '09, yes?

Kub: Absolutely, this is what I say if it's oversold. A lot of this demand has been pulled back but generally speaking we still have this ethanol industry that's bigger than it was in 2006, we still have tighter ending stocks than we had in 2006, we still have the idea of international demand for livestock as a feed, as a human food so all of these demand factors are still in place and so this is why it's an overreaction. And you talk about whether or not this is going to make money for farmers in upcoming years, there is another bullish fact because you're absolutely right, if farmers locked in fertilizer prices, which was the smart thing to do when fertilizer was going so high, it's just now started to pull back but no sales are really going on so it's hard to track that but at the summer's fertilizer prices you're almost guaranteed to lose money per acre in 2009 and who knows for how long.

Pearson: Same issue really with soybeans I suppose to a certain extent, a little bit more of an international angle there. What do you hear out of South America as far as soybeans are concerned?

Kub: Right, that Brazilian production estimate has been dropped and we still have just as tight world ending stocks projected for this year as we had last year. So, there's really no reason for soybeans to be dropping back to these levels that we haven't seen for several years either. But that's just a really bearish argument there. When you see these bullish ideas come into the market, these bullish news items and the market just doesn't respond at all this just proves the point that fundamentals don't matter at this point and we just have to wait. And the question is when we stop all this selling and when we go back to looking at the fundamentals will they re-read their newspapers from these months? Maybe not. Any of the bullish fundamentals that come in right now may be just ultimately ignored.

Pearson: So, again, corn and soybean growers sitting out there thinking, hmm, the bottom has fallen out, December couldn't get any worse and it was just a couple of months ago, about the 4th of July we were saying this is unbelievable, we're at a new level, the world has changed and as usual it comes back to even again.

Kub: But the thing is the world has changed. These demand factors, they are still in place and so this is an overreaction to the down side. At some point it will come back up but don't look for it in the 2008 tax year. So, if there is any selling going on it's maybe tax motivated. If you want to get any costs covered, any profits made in 2008 you have to do that now because throughout this month the trend will continue to be bearish.

Pearson: Cotton same story, that's been an impressive market to watch too.

Kub: Yeah, cotton was a little bit like wheat in that it had that commercial support, they were bringing it up above 35 cents and then it's really just dropped back down and the problem there is liquidity. This is just really an issue of when you have the commercials in there and they can counteract this speculative selling from all of the outside markets it does seem to have some support. But this outside selling is just demolishing that chart.

Pearson: Another thing that's getting demolished is the livestock side. This cattle market just looks sick. What do you see ahead? Talk about fed cattle first.

Kub: This is a situation for a while there in November they were holding steady and the cash market was building better basis in because they saw the futures market as an overreaction but now they have bought into this idea of this recession and it's been very clear on the retail markets some cuts of beef, the cheaper cuts of beef are being held in but the premier cuts of beef are not. So, they are just adapting the same story that the rest of the markets are seeing, this recession, recession, recession. And so you're right, there's really not a lot there that's going to come in and bring that fed cattle market back up. We saw futures at $81 on Friday and throughout this week the cash bids were in the low 80s. They're likely to fall below 80 in the near future.

Pearson: And yet smallest cow herd since 1950?

Kub: Yeah, the smallest demand too apparently especially domestically.

Pearson: And, of course, we've got great genetics and we're able to produce more per head so that's another issue. The calf market same thing going forward?

Kub: There's a little more stability in there and you see better prices on the futures market and part of that is due to this corn market, as you say, less than $3 yet that's not very helpful when you think of the fact that we have kind of an overrun -- the packers will continue to run these cattle through but there is no shortage as far as what the demand is asking for. So, there may be relatively more stability in the feeder cattle market than in the live cattle market but it's still a pretty bearish picture.

Pearson: Of course, we used to think cheap corn would make for higher priced calves. It hasn't played out so far in the fall of 2008.

Kub: No and, in fact, you can kind of compare this cattle industry to the ethanol industry in that this is a rough time for them. Cheap corn is not a good thing necessarily for them because they're a part of the same picture that's driving the cheap corn, they're a part of that same recessionary picture and so they're experiencing a lot of pain in the industry and we're getting this contraction of the industry. We obviously see it in ethanol with people, some offers being made for VeraSun, now JBS is saying that they're no longer interested in buying anything in the U.S. cattle market because they don't see a lot of opportunities here. So, this is just saying that the entire industry is going through a contraction phase and we're not going to see a lot of bullish expansion.

Pearson: Contraction in hogs too?

Kub: Yes, also there too although they will hold up relatively better than beef and it's been very, very clear in these past few months in the retail market how pork, as is expected in a recession, does get more demand. You see especially for the cheap, cheap cuts, Spam is doing extremely well as everybody knows and so that's again this recessionary story but it's not a bullish story for pork either. It's a stabilizing story but it's definitely not bullish because cheap cuts mean that packers can't give anything except cheap bids and they also have plenty of head of hogs to work through especially during this holiday season. So, not much to say there for a bullish picture.

Pearson: Obviously this is a chance to cover feed needs.

Kub: Absolutely and you can do that. Going forward too there's good opportunities across the board, these future spreads are tightening up so these are good opportunities to look into the future and cover some needs and do this incrementally because these prices will continue to go down through this month. But if you start to see it come up that's definitely time to act fast.

Pearson: Excellent, Elaine Kub, as usual appreciate your expertise and info. That will wrap up this edition of Market to Market. But if you'd like more information from Elaine on where these markets just may be headed visit the Market Plus page at our Web site where you'll find streaming video of our program. You can download audio podcasts of our Market Analysis and Market Plus segments absolutely free right there at our Web site. And be sure to join us again next week when we'll check in with the undisputed soybean king Kip Cullers. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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