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Market Analysis: Aug 15, 2008: Elaine Kub, DTN Grains Analyst

posted on August 15, 2008

Though U.S. wheat production is expected to be up more than 15 percent, tight global supplies are pushing prices higher.

For the week, September wheat gained nearly 60 cents and the nearby corn contract was up more than 30 cents.

Soybeans also trended higher, but only recovered about 20 percent of last week's losses. For the week, the September contract gained 35 cents, while the nearby meal contract was up $13.00.

In the softs, cotton declined again this week, with the December contract posting a loss of $2.09.

In livestock, August cattle were up 20 cents. Nearby feeders lost 72 cents and the August lean hog contract was down 72 cents.

In other markets of interest, the Euro lost 327 basis points against the dollar. Crude oil was down $1.43 per barrel. Comex Gold lost more than $72.00 per ounce. And the Goldman Sachs Commodity Index lost nearly 7 points to close at 695-even.

Market Analysis: Aug 15, 2008: Elaine Kub, DTN Grains Analyst Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Elaine Kub. Elaine, good to have you back with us this week.

Kub: Good to be here.

Pearson: Let's talk about this -- that Goldman Sachs Commodity Index, wow, I wish I had a toboggan.

Kub: Yeah, it's really volatile and a lot of that volatility is just tied to the flow of money, how these commodity investors, the speculative commodity investors feel that commodities as a sector should respond to the dollar's strength and so any time you see the dollar coming up, and the dollar is just skyrocketing right now, you'll get bearish pressure on commodity prices but it's questionable how long that can be extended, that this isn't just volatility, that maybe this is really a valid argument because the reason the dollar is coming up is not so much of U.S. economic strength as it is just the weakness of other economies and it really will tie into them not buying as many raw materials dollar denominated or otherwise.

Pearson: And so expect the dollar to strengthen and continue to pressure these world commodity prices, obviously it makes us a better deal for buying oil, it makes us a higher priced exporter for corn, beans and wheat.

Kub: Right, but on the flip side of that as far as crop producers are concerned this may make fuel and fertilizer theoretically become relatively less expensive in upcoming years if the dollar really does continue to strengthen compared to the currencies where those products are produced.

Pearson: So, you're expecting that? You're expecting the dollar to continue to strength?

Kub: Yeah, the dollar moves in very long-term trends, it's obvious we've put in a low, especially if these other economies continue to struggle we're going to see the dollar continue on this path.

Pearson: So, let's talk about how that's going to impact us from a grain standpoint. And then, of course, a negative on the livestock front because one of the bright spots for the livestock industry in spite of these high input costs, high feed costs has been tremendous export markets. Let's talk about the wheat market first. Obviously a good crop here in the United States. Global demand continues to be extremely strong.

Kub: Particularly in the spring wheat contracts. We definitely see demand driven structures there. You see relatively stronger basis, very strong nearby future spreads, very small spreads that indicate really urgent demand for that and that has really kept that market stable, kept the feed wheat markets inclined to follow corn higher as corn moves higher. So, the wheat market does not look in danger of collapse right now although, like you mentioned, we have plenty of wheat around. When you look on the cash market it's still a completely different picture than the futures traders are saying in Chicago.

Pearson: So, with that in mind do we want to make sales here, post-harvest sales of spring wheat? Should we be taking advantage of this, and for that matter, all the wheat classes?

Kub: Yeah, I really foresee wheat moving in a pretty neutral pattern. I guess it really depends on where you think corn is going to go and I'd give corn a week or two before you really make that decision so maybe a week or two for wheat also. But I would suggest that soft red winter wheat basis is not likely to improve simply because these wide futures spreads aren't going to be encouraging any deliveries as we go into delivery on that September contract. I'm not going to see any convergence when you come into September so the basis is likely to be that ugly for a long time.

Pearson: So, wheat producers need to be aware of that. Let's see some basis improvement and then you'll want to make some sales. What about '09? You mentioned these higher input costs. If this commodity thing backs off some more and wheat prices back off some more should we be making '09 sales?

Kub: I don't really feel -- wheat is still in a demand driven structure to much a less extent than these row crops. But there is potential, there is definitely upside potential especially for this spillover feed demand for wheat, see how much wheat gets into these feed rations. I think there's upside potential for 2009 but I think a portion of your sales could be made now just because if these prices are profitable that's the way to go in 2009.

Pearson: And the USDA report was pretty much in line. Tuesday the USDA report came out on corn, a bigger number than most people I talked to were expecting, 12.3 on the corn, a huge average yield, 79 million plus acres. We've been waiting for this report to hit and everyone thought, well, everything is going to fall apart and we're higher for the week on corn.

Kub: I think it was a situation of sell the rumor, buy the fact. They turned that around. Any news as we go forward is not going to be any more bearish than those numbers. Those numbers, they are questionable, first of all, and people really think, some people, especially people in Iowa who go out and see these large pockets of fields just missing because of flooding think that those numbers are ludicrous. You can argue 105 bushels per acre, I guess that's a possibility. But we will never know that until we get into harvest. But I just don't believe that we're going to harvest anywhere near the usual proportion of what we planted. And USDA is staying with that 79 million acres number that farmers would harvest 91% of what they planted and they usually harvest 90%. I think that's just really, really crazy when you look at aerial photographs of the Corn Belt to think that this would be a normal year in that respect. So, I think what I'm saying is that as these reports go forward and observations, actual observations from the fields and yield estimates come out directly from the fields instead of these rough economic modeling I think we're going to see much more bullish news come in and the market anticipated that this week. When they traded on the fundamentals, when they weren't influenced by the outside factors like the dollar, on those days the market really saw an inclination to rebound.

Pearson: What's going to happen? Producers, again, I've talked to so many, I was in Indianapolis this week, a group of farmers all said, we missed it, we had $8 corn, we missed it. What do you tell those folks?

Kub: Yeah, they might have missed it. On the other hand there's good news in this too. If we think that it's way oversold, if you think that $5 corn or $4 cash corn is ludicrous just consider that your end users or customers will have the opportunity to make those hedges now and perhaps stay profitable. You want your customers to remain in business. So, by this volatility that we've seen in the last two months we have really put in good opportunities for the entire industry and maybe that's great for the long-term sustainability of this industry. And, like I said, I anticipate a lot more bullish news to come in the next few months so there are opportunities ahead of us.

Pearson: And the acreage battle starts all over again. As soon as we get this crop in then it's corn versus beans versus wheat and we're right back where we were, not enough acres. So, you're not in a hurry to make sales at this point?

Kub: No.

Pearson: And then for 2009 and 2010?

Kub: Actually in 2009 you can make some rough estimates that break even costs of planting corn in 2009 and $5.40 depending on how you have your fertilizer booked in that's a huge concern right now is booking these input costs, well, those 2009 contracts are above that break even price so they're profitable. If you're willing to put in that risk management tool right now you can definitely be profitable.

Pearson: $5.54 break even on corn, didn't think I'd live to see that. Now, let's talk about soybeans. Again, the soybean number from the USDA 3 billion bushels, 2.97 USDA came out with. That's going to be the number that people are going to have to live with here until we get another one in September. So, what is your take? What do you think is going to happen now with soybean prices provided there is no early frost?

Kub: Or they could just ignore that number really. It's just like corn, it's too early.

Pearson: People started ignoring it as soon as it came out.

Kub: And you might as well. It's really too early. I'm not putting blame on the USDA, it's just really early to peg these crops for anybody. So, sure, we could set that aside and pay more attention to the demand projections that they had which imply that we're still going to have very tight inventories. The stocks to use ration in soybeans is not going to improve from last year. And when you're operating on tight inventories like that it keeps trade very, very volatile and we saw that this week obviously, limit up gains, limit 50 cents lower today and we still post gains for the week. It's just so broad trading ranges and so volatile.

Pearson: So, again, if soybean producers with the pullback we've had from $16 down to these levels you're not making any sales?

Kub: No, absolutely not. I think that there's definitely the upside potential for that especially we see soybean oil come back down and Malaysian palm oil really correct as crude oil comes down but these are profitable prices for biodiesel producers and USDA recognized that. That's one of the things that was kind of buried in that report was the higher projection for soybean oil use to be used as biodiesel. So, the demand for there really isn't falling off the way that demand for crude oil is.

Pearson: So, what do you think the story is going to be, store the crop, wait for things to start to move again next year?

Kub: Depending on what the storage situation is, I guess that's a producer by producer decision. But I definitely think maybe we'll even get some of this bullish news before harvest comes on. It's not going to be one of these years where end users get an opportunity to put a lot of aggressive hedges on at harvest for these row crops anyway.

Pearson: Some great points on the grains. Now let's talk about livestock. Let's talk about the fed cattle market and what you see happening there. I've gotten this confirmed now from several people, we've got the smallest cow herd since 1950. And what do you see happening now with fed cattle, fed cattle prices? The dollar is strengthening, the crude oil prices are coming down, the consumer has not let up on beef demand.

Kub: Right, so sellers based on all of these arguments and based on the argument that we're not going to be importing as many foreign cattle as this COOL factors in they have really been kind of aggressive in not selling, especially in the north they really wanted to see 160 or higher this week. But what happens is that's a long-term argument. We surely will see long-term strength because as you mentioned the herd is smaller, we saw cow herd liquidation so we just won't be producing as many cattle for years and years and years. But in the short-term there's a lot of volatility and a lot of uncertainty right now because nobody really knows how many feeder cattle were on pasture and are going to be coming into these feedlots and coming into the supply chain in these next few months. And that's why you see packers not matching those asks at all.

Pearson: Is there a way we can hedge some profitability in here? And would you be locking in your feed costs with this break in the corn and the beans?

Kub: Yeah, absolutely this is a great opportunity to lock in feed costs and especially if Friday, if we see some more consolidation after Friday's losses on the futures market and it stays pretty strong in the short-term. I think there's the potential for very volatile short-term losses within these next few months so if you're going to be selling within the next few months these might be good prices for you.

Pearson: Let's talk about the hog market and what you see happening with hog prices. Again, this export market, the cheap dollar we really put a lot of pork overseas this year, tremendous opportunities. In fact, we really never saw the huge break that a lot of people were expecting. We saw liquidation in Canada, do you think we're going to see much liquidation of the hog herd here in the U.S.?

Kub: Maybe a little less now that corn prices have come down but it's not just foreign demand either. If you've seen pork bellies that market really skyrocketed this past week so there's a lot of domestic demand for pork too but we don't see that being passed along from the packers to the producers. They know that they no longer really have to reimburse producers for these costs on corn so you're just seeing really great packer margins at this point and not really following through into a higher trend in the hog market. It's stable but I wouldn't say higher trending.

Pearson: I've heard some packers are taking $13 a head out of this hog market right now. That's pretty fat. That typically changes. Are we going to see that change? Or will we see this hog price really start -- we've had a nice rally on the board, maybe we'll start seeing the cash market have a big rally too?

Kub: I don't think so just because there's still a really large supply. These packers aren't running out of hogs being offered any time in the near future. So, I don't think they'll be giving back any time soon.

Pearson: Same question -- get some feed needs covered?

Kub: Yeah, absolutely. This is not going to be a year when we have a harvest that is going to probably exceed any expectations, especially if our expectations stay the way they are right now I don't think we're going to be able to exceed that. That's pretty much our best case scenario. I wouldn't play chicken with that market.

Pearson: I like that idea. We didn't talk about chicken. Elaine Kub, thank you so much. 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 and you can download audio podcasts of our Market Analysis and Market Plus segments free at our Web site. And be sure to join us again next week when we'll pay a visit to the cutting edge of renewable energy research. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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