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Market Analysis: Jun 20, 2008: Elaine Kub, Market Analyst

posted on June 20, 2008


Despite high water and predictions of a smaller crop, grain prices actually declined this week but continue to flirt with record highs.

For the week, July wheat lost 15 cents, and the nearby corn contract dropped a little more than a dime.

Soybean planting is about 12 percent slower than last year, but even with the threat of diminished yields dampened prices. For the week, July soybeans declined almost 30 cents while the nearby meal contract was up $2.50 per ton.

In the softs, cotton trended higher again this week, with the December contract posting a gain of almost 70 cents.

In livestock, the June cattle remained even for the week. Nearby feeders were up a little more than $4.40. And the June lean hog contract rose slightly more than $3.50.

In other markets of interest, the Euro gained 275 basis points against the dollar. Crude oil declined 25 cents per barrel. Comex Gold gained $30.60 per ounce. And the Goldman Sachs Commodity Index gained nearly a point-and-a-half to close at 841.50.

 

Market Analysis: Jun 20, 2008: Elaine Kub, Market Analyst

Pearson: Here now to lend us her insight on these and other trends one of our regular market analysts, Elaine Kub. Elaine, welcome back.

Kub: Happy Summer, Mark.

Pearson: Oh yeah, well we're getting there on the 21st of June finally but hopefully things will turn out a little more normal. We're kind of hearing that being kicked around by our meteorological friends. Let's hope it's the case. All the flooding we've shown on the show tonight, the impact maybe 3 million acres of corn, maybe more washed out and a lot of replanting going on give us the market's view on this natural disaster that we're facing in 2008.

Kub: Well, the market has not even come near considering all the things that are going to come into play eventually throughout the summer that we're going to start observing month by month, week by week. The market has not observed those things yet. It has responded immediately to the flooding, put in some risk premium but we see a lot of uncertainties. The technical traders wanting to follow the trend, wanting to get confirmation from the trend and they pulled back this week. And you see fundamental traders wanting to get confirmation from USDA numbers and USDA has to be very, very conservative and do this a little bit at a time as they take down yields and as they take down condition ratings. They said last Monday Iowa corn was 15% very poor or poor. Come on, we know that way more than 15% is going to have some yield challenges. So, it's going to be a gradual thing. There's definitely the possibility for step-by-step throughout the summer that we're going to continue building in this bullish news as it becomes observable. And in the meantime traders wanted to get confirmation of how this is affecting demand. You get some bears in there because you know that there will be some demand destruction from these high prices.

Pearson: Well, certainly we're going to choke off some livestock feeding, we're already starting to see that. And, of course, other issues, ethanol, the overseas demand although the weak dollar continues to get weaker helping with our competitive situation there.

Kub: Well, the ethanol situation, the demand side -- we have 13 billion bushels of demand in this country per year and there's pretty much no way we're going to grow 13 billion bushels of corn this year and ending stocks aren't going to make up for the difference. And I really do think that the ethanol is where it's going to come out of and that's why all of this flooding could be long-term bearish for corn. We may not come back down to the level where we were before because we may not have the demand we had before. There may be policy implications that are going to take out some of that ethanol demand and what we're seeing already is that blenders are bringing in Brazilian ethanol because if you're losing 60 cents per gallon on a gallon of ethanol just to produce it, it's cheaper just to pay the 51 cent tariff and import the Brazilian ethanol. And if we start building in that logistics and the market gets used to bringing in other ethanol that's where the corn demand is going to come off of.

Pearson: Well, it's going to be interesting. You mentioned policy changes. What are you hearing? What kind of things are being talked about?

Kub: Obviously there is a lot of political pressure to change some of these renewable fuel standards. I don't know if that's going to happen any time imminently but there's a lot of calls for that. You get the impression that even the corn growers are willing to listen to some of these things because they know it's their customers that are hurting and you want to keep your customers around long-term.

Pearson: I want to switch over and let's talk about wheat first and talk about what's happening there. We're in the harvest for wheat right now. What is your take on wheat prices and what are the conditions on that side of the world?

Kub: Right, we have been following row crops higher in the futures markets but we definitely see the harvest pressure in the cash market. You get some reaction to news of scab in hard red wheat but that happens every year. I'm more concerned, more bullish about some of the hail damage. Wheat has also seen some weather problems this year. But that kind of got built in already. I think really this is still a bearish market if you look at the fundamentals and where other countries their wheat is priced. Europe has a great wheat crop, Australia and Argentina have some challenges but it's a little dry but a little rain will fix that. And their wheat is a lot cheaper than ours already so there's really no reason for the cash price of wheat to remain as high as it is.

Pearson: So, make sales?

Kub: Yeah.

Pearson: Absolutely, in the wheat trade. Alright, let's talk about the corn market. Obviously a lot of new things are going to be happening now. You mentioned the USDA's numbers which people will be hanging on literally until this crop is in the bin and the kind of damage issues and who knows what other problems we might be dealing with later on this fall. So, with that in mind, you're a corn producer out there and you've got a crop and let's say you've got it in the ground and you may have had some water damage, you may be seeing some yellowing but by and large you feel pretty good about your crop, what do you think would be at least a good starting point to start making some sales? Obviously over $7.

Kub: Well, especially if you start to see some yellowing and you have any sort of production concerns at this point I would be very careful to make sales because you don't want to sell something you don't have. You don't want to be making margin calls on a crop that you won't actually produce. And there's also the very explosive potential for much, much higher prices throughout this summer. So, I would not be in a hurry to make sales. Your banker might put some pressure on for you to be able to cover the production costs that you've had this spring, especially if you've had to replant. But absolutely I think this is a bullish trend and we're going to have more bullish news coming into the market and this is not a time to be making sales.

Pearson: Alright, let's talk about soybeans also. Of course, the jury is still out there on just how many beans will be planted or replanted as the case may be and what conditions are going to be of those beans going in. Obviously much shorter season, the window is closing fairly quickly. What is your take now on bean prices and demand as we go forward from this point?

Kub: Well, beans had tight ending stocks last year, we're still in a tight stock situation for beans. So, there's actually about as much bullishness for beans as there is for corn but we don't see as much concern about that from the traders. And part of it is, as you're saying, we've got more acres coming in, there's been plantings and a lot of the bullishness is definitely focused on the old crop market where we're seeing the export demand. But I think as we get into actual yield observations I wouldn't be surprised if the soybean yields, the percent that it comes down off of trend line actually is a larger change than the percent that corn is coming down off of trend line yield just because I think soybeans, from what I understand of the agronomics, is that soybeans are actually more prone to these problems of wet roots and they're going to have diseases and all kinds of yield problems.

Pearson: Soybeans don't like wet feet.

Kub: That's what they say, yeah.

Pearson: Well, as we look forward we have a lot of weather still to go. We talked earlier meteorologists are saying we should see a normal weather pattern resume in the Midwest. Should that happen we're able to produce more soybeans, maybe more acreage shifting to soybeans still as you look around particularly the Midwest, Iowa, Illinois and the low spots out there there's a lot of holes in all these fields out there.

Kub: Yeah, there's big puddles. And what's interesting about this weather market, we're definitely in a weather market, you see it right as the mid-day weather forecasts come in traders really respond to them, but what's interesting it's very different than the usual weather market where it's dry and suddenly you get a rain storm and obviously people will sell. Rain makes grain. But now we have a situation where it's wet and you think a dry day and traders are taking dry days and selling on dry days. Well, it takes more than one or two dry days to really affect how bullish the market is. So, it's a strange weather market to be expecting things to trade the way they used to.

Pearson: Things have been complicated also talking about South America and what's been going on down there. We've had strikes, we've had labor issues down there. That has been affecting the flow of certainly corn and soybeans.

Kub: Yeah and what's interesting there is the companies that are involved there, the exporting companies, they're losing a lot of money. It's like the barge operators in the U.S., the barge operators there are losing millions and millions of dollars and so I wonder long-term what this does for U.S. soybean demand because we have a lot of demand coming in from new places. China is definitely coming to Brazil and the U.S. more for their soybeans than they used to. And does that last? Does the suspicion you have for Argentinean soybean supply, does it last for many years? That's something that remains to be seen.

Pearson: Of course, a lot of this hinges, again, on the dollar. Any change there? Are we seeing any move of the trend for the dollar to strengthen at all?

Kub: You know, it's going to be a long bottom to really have confirmation of that. There hasn't really been technical confirmation that there's been a change in trend but there's just this feeling that you get that it's bottoming out. I guess it's going to be a matter of waiting to see. The economic indicators of our economy, they're not as bad as I think consumers believe so there's definitely potential for the dollar to improve.

Pearson: And, again, soybean sales? You're going to hold right now?

Kub: I would hold right now but that market I think has more potential for a short-term down side. I think the technical traders are going to get in there and think that we've got a top formed and maybe make some sales there. So, there's an opportunity to buy on a break if you need to hedge, especially if you need to hedge soybean meal, that's really been taking off. It's got a lot more bullish fundamentals.

Pearson: Absolutely. I want to talk quickly about cotton. The cotton market, again, has avoided a lot of the weather catastrophes to date. But it's very sensitive to what happens overseas in China and the demand over there. As we see maybe that economy slowing down some are we seeing somewhat of an impact on cotton?

Kub: Right, China has definitely made a lot of motions just this past week that it's trying to fiddle with the way that it buys commodities and provides those commodities for its citizens. It has dropped the money that it gives back to citizens to buy fuel, for instance. Does that happen to cotton? It's been very supportive of its farmers, though. The farmers will still be getting the subsidies for their fuel. And here in the U.S. cotton acres are a lot like soybean acres, they're losing acres to soybeans so there's a lot of different things that are going on in cotton and that's why we see on the charts they're really just kind of consolidating and staying between a kind of volatile 65 to 75 cents. It's a very large consolidation range but you get an opportunity to sell on the tops and buy on the bottoms and just know that it's going to remain along that path.

Pearson: So take advantage of that range as it continues. Let's talk livestock, fed cattle market an okay week this week. You mentioned the economy and the conference boards talking about 1/10th a percent growth for the next three to six months. Considering all the negative news that's out there to me that's fairly positive. That's got to be good for beef demand at least domestically?

Kub: Actually we've seen a really interesting season here. We've seen a lot more grilling than I think the industry usually expects for this time of year, people are staying home and grilling out. That has been seen in the demand and the demand is really leading the cattle prices themselves higher. We saw $3 higher up in the north and it's spilling over throughout the country. We're seeing higher prices for cattle and packers they really want to get their hands on the cattle. They have a lot of supply. We saw cattle on feed is finally coming down but the cold storage of the actual beef, the actual retail meat that is out there you see that is still there. So, it's going to be, as the piece mentioned just before here, it's going to be a while for this slowdown, this decrease of supply to work its way through the supply chain and in the meantime there's a lot of beef to get through in the retail sector.

Pearson: What are we seeing for cow slaughter? What is your sense there? Are we seeing this liquidation that you would think $7.20 corn would induce in the cattle business?

Kub: Yeah, a little bit. This is two months in a row now where we're finally getting cattle on feed numbers that are lower than last year and that's implying that we actually are reducing the herd size and that is definitely going to continue as we have corn prices this high. There was the opportunity last year to hedge in at harvest time and get your corn prices then but that's probably not going to happen this year. If anything the harvest this year could come in more bullish than the market was expecting. So, your hedging opportunities are probably already behind you even for this marketing year.

Pearson: Let's move over to the hog market and talk about what's happening there. And besides the things we've seen on the show tonight hogs are getting moved to higher ground and those challenges, this business has really been challenged as far as feed costs are concerned. Liquidation there and other opportunities in the hog market right now, some of those deferred contracts look pretty good don't they?

Kub: Right, it's the same sort of situation where they're expecting the most bullish supply situation to come in, in the fall or in the winter. But in the meantime we have a lot of demand but the packers are definitely willing to take it. This is another situation where there's bullishness from the demand sector, a lot of retail bullishness for pork and then the packers are willing to take as many hogs as they can which is fortunate because I think we really are starting to see people bring in hogs to the packers that wouldn't ordinarily be coming in, that wouldn't be quite ready or perhaps sows that are coming in. I think there's definitely this chance that supply is definitely going to start being cut sooner than usual.

Pearson: Alright, very good, Elaine, thank you so much. That's going to 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 be sure to visit the Market Plus page at our Web site where you'll find streaming video of our program. You can also download audio podcasts of our Market Analysis and Market Plus segments absolutely free at our Web site. And be sure to join us again next week when we'll further examine the impact of epic flooding on commodity prices. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Market to Market is a production of Iowa Public Television which is solely responsible for its content. Funding for Market to Market is provided by Pioneer Hi-Bred because sound information plus consistent yields can help farmers stay on track. The people who bring you Pioneer brand corn hybrids proudly support Market to Market.

 


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