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Market Analysis: Jun 06, 2008: Elaine Kub, DTN Analyst

posted on June 6, 2008

With winter wheat harvest under way in the South and widespread storms in corn country, grain prices rallied.

For the week, July wheat gained nearly 50 cents, and the nearby corn contract was up more than 50 cents.

Delayed plantings due to wet weather boosted soybean prices. For the week, July soybeans gained 94 cents while the nearby meal contract was up $31.50 per ton.

In the softs, cotton kept its head above water, with the December contract posting a gain of 58 cents.

In livestock, the June cattle contract lost $2.67. Nearby feeders were down $3.77. And the June lean hog contract lost $2.63.

In other markets of interest, the Euro gained 213 basis points against the dollar. Crude oil gained more than $11.00 and flirted with $140 per barrel on Friday. Comex Gold gained $8.10 per ounce. And the Goldman Sachs Commodity Index gained nearly 55 points to close at 842-even.

Market Analysis: Jun 06, 2008: Elaine Kub, DTN Analyst Pearson: Here now to lend us her insight on these and other trends, one of our newer market analysts, Elaine Kub. Elaine, welcome back.

Kub: Glad to be here.

Pearson: Well, I don't know where to start. Every week it's a new record in crude oil. Let's start there, new record price in crude oil. What do you see ahead? The dollar keeps getting cheaper, we just saw the move, the Euro against the dollar. What is ahead? The worldwide commodity scene in a sentence or two, what's going on?

Kub: Well, crude oil is a pretty good benchmark for the entire scene. It takes out a record high and suddenly there's no resistance, there's nothing to stop it from going higher. As long as people keep paying for it and obviously people aren't going to stop, it would be a huge change in their lifestyle and that is for every commodity that we're consuming in America. There's just willingness to pay and higher and higher prices and speculators willing to benefit from that trend. So, that's the whole story right there.

Pearson: And speculators seem to be a part of this big thing to a pretty good extent.

Kub: Yeah, but you get some people wondering if they're building in a bubble, if these prices are unjustified but in most markets they wouldn't be buying futures at those prices if someone wasn't actually willing to pay for that out in the actual cash market. These markets are a proxy, you know, they're not a perfect substitute for the physical asset, they are a derivative of the physical asset but the have to be in line somewhat.

Pearson: Absolutely. The weak dollar, again, just adds to the pressure all the way around in the currency front. Do you see any change in the dollar? I know a month or so ago we saw a little bit of strength happening in the dollar and now that has faded.

Kub: Right, the fed Bernanke has come out and made comments that have led the stock market for a while to believe that the dollar will continue to strengthen and that may happen in the longer term. We may have seen the bottom of the dollar. But on the other hand there are definitely traders in there that see day-to-day and they trade those day-to-day little things. Tick by tick you can see as the dollar goes up commodities go down and vice versa. That's the idea that they're trading on very short-term now.

Pearson: We've had two years in a row where we've had troubles with the wheat harvest, '06 and '07, worldwide. '08 we're really counting on some big numbers. We've got a pretty soggy harvest underway in wheat and prices were up again this week. What is your take on the wheat market?

Kub: Well, the wheat market nominally sort of responded to the weather ideas, that it delays harvest and things like that. But really they're just following corn and soybeans and speculators buy all commodities and wheat is part of all commodities. But it's really found some resistance, particularly the Chicago wheat market is out of line with what the price, you could argue, should be. Obviously the spring wheat has its own bullishness, bullish supply and demand and so the spring wheat price ratio over Chicago is about 1.3 to 1 and the historical average is more like 1.15 to 1. But you could argue -- in the cash market the ratio is actually like 1.5 to 1 and that is justifiable, that's reasonable. That's really where we're seeing the resistance to any higher prices in wheat futures or the wheat market in general is the cash market just will not follow what the Chicago futures traders want to do here. By the time all the cash collections are done tonight it's possible that wheat basis, average wheat basis for soft red winter wheat will be $2 under the futures prices.

Pearson: That has to be a record.

Kub: As far as I know. I guess I haven't looked back the past 30 years but maybe in the 70s they did something like that. But no, that's huge and there are definitely, there's some places out east towards the south where it's more like $3. The cash buyers just aren't willing to pay this.

Pearson: So, we do have a disconnect between futures and cash right there, huge, in wheat.

Kub: In that market, yes.

Pearson: Alright, let's talk about the corn market and what do you see ahead now for corn? A very wet week for corn and beans, a lot of flooding, some replanting. We're on that bubble now on replanting corn. What do you see ahead now in this corn market, these soggy conditions?

Kub: Well, the soggy conditions have existed for a while but you saw traders just kind of willing to ignore that. But this week the storms were so severe and the idea that this USDA report is coming up on Tuesday that these traders finally started to pay back attention to these fundamentals and it's very wet. You can make comparisons, the last time we've seen a year like this would be 1993 and in 1993 the average yield was 100 bushels per acre which was 30 bushels per acre under trend line. If we had something like that this year that would be, you know, huge for prices and I think you're seeing finally some response to that, some bullish response to that. We had December corn within 10 cents of $7 today.

Pearson: That's right and that is, of course, record territory. But I had people call me today and say, well, you know what, I think now with this problem we're going to see corn at $8 and beans higher and on the speculation goes.

Kub: Yeah, it's like I said for crude oil, there's really no sense of where it could stop. A year ago I remember talking to livestock producers saying they really believe that $4 was unreasonable, it couldn't last and $2.50 would be the fair price for corn and now we've got it basically at $7. And yet at what point will price rationing come in? I don't know. I mean, that remains to be seen.

Pearson: Alright, cash basis on corn, is it falling away like it has for wheat?

Kub: No, actually that's just it, people are willing to pay that for corn. People have not gone away from that.

Pearson: Alright, let's talk about soybeans and, again, that seems to be the one where the replanting or the planting issue is the most severe in many parts of the Corn Belt. What is your take on soybean prices? Obviously a big move this week, almost $1.

Kub: Yeah, for most of the spring there has been that argument that people won't be able to plant corn and they'll switch to soybeans. But it's not until now, until June that people actually start to look at that because of the yield losses to corn. And on June 5th was the date that most people had to make that decision for insurance purposes. So, now you honestly kind of think that this wet weather should be bearish for soybeans but that market is just so caught up with the crude oil, following crude oil and following the broader commodity picture and so we do see some disconnect in the cash basis for soybeans.

Pearson: Alright, let's talk about making sales here. Again, these look like excellent opportunities but trying to get this high in on corn and beans and wheat.

Kub: Yeah, if you saw $15 soybeans, which could easily happen next week, how could you not sell? It's just so tempting. But DTN did a survey last week and about a third of corn farmers, by the number of farmers not the number of bushels, haven't made any sales yet. And that's an easy decision to make when these markets are trending up like this. True for soybeans too, you know, you can always sell on the down side and still obviously make a profit so I think a lot of people are wisely just kind of waiting, especially if they can take the risk, just kind of waiting to see how high this can go.

Pearson: Alright, same thing on corn?

Kub: Yeah, absolutely.

Pearson: $7.

Kub: I know, how can you not sell? I mean, a lot of commercial sales, a lot of producer hedges were made through the month of May and I think that is fine. I think that's a very wise decision. But yeah, it could go who knows how high.

Pearson: Let's talk about the cotton market. It was up a little bit this week. Again, there's a whole different scenario going with cotton. But what is your outlook for the cotton market as we go forward in the next few months?

Kub: I'm actually bearish on cotton and for the similar but opposite reason to crude oil and the other commodities is because cotton has taken out some lower technical points and it's difficult to say how far that could fall. The non-commercial speculator traders have been really exiting that market and then that puts pressure on those prices. The acreage situation is pretty well settled there and so I think it's pretty well settled where that market is going to be headed.

Pearson: Let's talk about livestock, bad week for fed cattle, bad week for feeders, a lot of pressure on hogs and yet at the same time the input costs are literally sky high. Take me out six, nine months, finish cattle, what do you see this market doing?

Kub: Well, I think the real only hope that a market bull has in this market is looking for the demand side, export demand, things like that. And I think that was the idea that led, obviously, these deferred contracts to put in such, you could say speculative bubble high prices in these past few weeks. So, there were great opportunities to make sales a while ago and actually I'm only surprised by how little it has eroded since then. $7 corn, I don't expect a one to one relationship between corn prices going up and cattle prices coming down but I'm surprised that especially the feeder cattle market didn't fall off more this week.

Pearson: The whole U.S. economy situation is always one that we're always worried about in the red meat industry. And, of course, the news on Friday about the jobless rate jumping so sharply, highest one month move in 22 years, going to be a factor?

Kub: I don't know if that's going to affect Americans eating patterns. We've seen a lot of attention for higher prices and meat prices are actually really cheap in comparison to the way other food prices and other consumer product prices have come up. So, whether that would erode demand, I don't think so. And I think we're still in a season where demand is still going to be a bullish factor for the retail markets of beef and that leads into the cattle markets, it did certainly through the beginning of this week.

Pearson: A lot of ranchers, cow-calf producers are out there thinking, you know, what about getting these calves priced this fall. And you see a day like today and obviously you see corn close to $7 and you've got to think there has to be some pressure there and that's not what I'm hearing out west, I'm hearing pretty good demand for calves.

Kub: Yeah, actually prices have stayed really steady and last week there was that reaction to the idea that we'll have more CRP available, you might see more pasture feeding programs and I don't think that CRP argument holds any water but all this rain that is bad for grain, the pastures are looking great. Really pasture feeding programs could come in and really maintain those prices for feeder calves.

Pearson: So, good demand there. Again, you're not in a big hurry to make those sales?

Kub: Well, actually I am. I think if you haven't made those sales back in those deferred prices, deferred contracts when they were up at their highs I think there is potential for them to continue to fall off, especially as corn continues to go up. I mean, you saw the speculators coming in and building in kind of a bubble and I think they're going to start to back away from that. They may realize that those were overpriced.

Pearson: Alright, hog market also, of course, under pressure this week. What is your outlook for that sector?

Kub: Right, whereas I think cattle still has some potential to have demand leading where that market goes, hogs are really in a supply driven market. They're like wheat, you know, there's a lot of supply and so prices just are under a lot of pressure. We're still seeing very large weekend slaughters and that is just very bearish, there's just so much out there and not a lot of new sources for demand there.

Pearson: We've got about 30 seconds. I was at the World Pork Expo this week and had a lot of pork producers saying, covering feed needs, what should we do?

Kub: I don't know and, you know, $7 corn, what can you do? Where can you turn? You look at Milo but honestly we've got ethanol plants going for that too. The demand for these starchy grains is across the board. A rising tide lifts all boats and I don't really see any way that they can go in and fix that.

Pearson: Alright, Elaine Kub, thank you so much. Appreciate your insight. 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 also download audio podcasts of our Market Analysis and our Market Plus segments free right there at the Web site. And be sure to join us again next week when we'll examine an aggressive marketing campaign that's helping ethanol race into the fast lane on the Indy car racing circuit. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat