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Market Analysis: Apr 18, 2008: Elaine Kub, Market Analyst

posted on April 18, 2008

Wheat prices trended lower this week, while the nearby corn contract tested 6.00 per bushel.

For the week, May wheat lost more than 26 cents, while the nearby corn contract gained 15 cents.

In oilseeds, May soybeans gained 29 cents this week, while the nearby meal contract was up $2.20 per ton.

In the softs, cotton trended lower with the December contract posting a loss of $2.20.

In livestock, the April cattle contract gained 85 cents. Nearby feeders were up $2.00. And the May lean hog contract gained nearly $3.00.

In other markets of interest, the Euro lost 19 basis points against the dollar. Crude oil set records all week and closed on Friday at more than 116.00 per barrel. Comex Gold lost 11.40 per ounce. And the Goldman Sachs Commodity Index gained 30 points to close at 737.50

Market Analysis: Apr 18, 2008: Elaine Kub, Market Analyst Pearson: Here now to lend us her insight on these and other trends is one of our newer market analysts, Elaine Kub. Elaine, good to have you back.

Kub: Good to be here.

Pearson: Well, let's talk about the wheat market which apparently is feeling a little bit better about production hence the lower prices I would assume.

Kub: Yeah, and that's just sort of factoring into the trend. You see that the trend there's a lot of lower momentum and we saw that throughout this week. But things have really quieted down in wheat. We've gone through the entire month of April without one of these limit size moves which was kind of par for the course in wheat anymore. But I wouldn't say that it's lost all of its volatility, it's still pretty volatile. It's a very illiquid market, people of non-commercial, speculative type of traders have really backed away from this market even though you do have a strong trend that they can probably get some profit potential by going short on. And you can also make the argument that wheat fundamentally is overpriced when you have especially soft red feed wheat, Illinois River kind of basis as much as $2 under the May futures contract price, there's definitely an issue there where the futures are overpriced.

Pearson: There is a definite sag there. What is your advice to farmers out there in wheat country? You mentioned soft red wheat, a lot more soft red wheat is going to be out there in 2008.

Kub: Right, my advice would be to obviously produce as much of it as you can, whatever you have seeded obviously keep seeded there. You don't see as much grazing on wheat down in the South this year and that makes sense just because these are favorable prices and that's on the assumption that farmers were able to lock in the prices when they were higher. I don't expect them to go much higher. There's not a lot of fundamental reason for them. They're staying pretty stable just because you get some weather factors here and there but for the most part it's a lower trend and it's likely to remain so.

Pearson: So, you're not in a hurry to make sales?

Kub: If you haven't already yeah, I guess that would be the thing to do.

Pearson: That's soft red, what about hard red wheat?

Kub: Same story there. Production wise it looks like everything, like you say, we're expecting to see a lot more of it out in the country. There was a freeze in Oklahoma but wheat gets killed nine or ten times a year and usually turns out okay.

Pearson: That's true. From a production standpoint you feel pretty good on the hard red side. Would you make sales there?

Kub: Yeah, again, same story. That is also an overpriced kind of market. You can make that argument especially on the world basis, we're not seeing as much export activity shipping wise as we used to. So, definitely.

Pearson: What about around the world? We can theoretically grow a wheat crop just about everywhere. Is it looking pretty good elsewhere?

Kub: Well, it's the same kind of thing. You see these stories of India having some flooding and China planting more wheat but both of these areas that I just mentioned it's kind of hard to get reliable information out of there and with wheat particularly if you see bullish news that says production will be down I kind of take that with a grain of salt. You can, like I said, kill off wheat a bunch of times and it looks like everybody just wants to produce as much wheat as they can right now.

Pearson: And 64 million acres in the U.S. planted this year, that's a lot. Alright, let's talk about the corn market where we're concerned about acres there and just how many acres may switch from beans to corn after that March 31 report from the USDA. Obviously the market is saying we want more corn acres.

Kub: Right, that's what everybody wants. You know, there is a place for all that corn to go, they'd like people to grow that so that's kind of what is moving this market right now. You see two things, you see the trend and you see weather sort of had an impact this week. You saw that a price premium or risk premium was sort of put in with this concern that we won't get that many acres planted. And on the drive over here from Omaha going through Iowa, western Iowa you see a lot of people have tried to get out in the fields and there's some really deep ruts. That's pretty typical I think of the Corn Belt right now. There's obviously areas that are even wetter than that so we've got a late start. But we had a late start last year and farmers have definitely proved that once they get started, you know, if this does dry out in any reasonable amount of time they'll definitely get it planted before the end of May, no problems there. That's kind of a big if though. So, the idea there is that this risk premium got put on but it's pretty vulnerable to a correction if at any point the planters start getting rolling. And that's why I think you saw a lot of selling pressure, the market stayed pretty stable throughout the week. Commercial hedgers were ready to sell, take advantage of these very favorable prices especially for the new crop corn even though you also have the speculators coming in there buying and just keeping things pretty even.

Pearson: Well, you mentioned the wheat market and the soft basis there. What about on corn where you can make a new crop sale at those elevators that are accepting them?

Kub: Yeah, you can generally make a forward contract I think in most areas and the basis has been pretty favorable and it has remained very stable. And it's a little surprising we're seeing a really stronger soybean basis right now and the general idea there is that you're not seeing as much country movements, not as many sales into the elevators. But with corn that hasn't really made an effect on the basis right now, basis has stayed pretty steady right around 34 cents.

Pearson: And as we look ahead and from a producer's standpoint who's maybe considering making this switch right now it's pretty easy to walk through what the economics are and there is a definite advantage to corn.

Kub: Yes, and of course it depends -- there are certainly some areas out on the fringes of the Corn Belt where that may or may not be so. And the other thing is if you're concerned about production risk this summer you've got the insurance prices that are really making your decisions and the decision has already been made if you're not willing to take much risk or if you have operating loans that you really can't take much risk on. But if you have acres to play with then these markets are still working on that definitely.

Pearson: $6 corn this week in December, what is your take? What could this market do? Let's say we continue to have planting issues.

Kub: If we continue to have planting issues I'd say we'd have to have planting issues for several more weeks before I would honestly be concerned about not being able to produce enough corn in this country. But if that happens I don't even want to give you a price prediction. I mean, it could go anywhere.

Pearson: It gets hot and dry in July.

Kub: Exactly, but there isn't a lot of that down side risk. There's a lot of volatility to the up side but to the down side it'll come down, if everything goes extremely well you'll get some of this risk premium taken off but we're still not talking corn less than $5 I don't think.

Pearson: You mentioned soybeans in the basis market strengthening there, like you say, which is kind of counterintuitive. But as you look at the soybean market going forward and maybe a pullback in acres -- could we see a rally there in the bean market?

Kub: We are seeing that and part of that is just maybe this idea when it came down off of its March high that when it started that lower trend in March, early March that maybe that was an overreaction so we're kind of just fluctuating there and seeing what price level is available. And particularly the U.S. market gets a little more bullish now. The export sales have really been supportive of the soybean market and that is also I think what is affecting that basis level. You mentioned it's counterintuitive, it's counter seasonal. This is generally the time when we get lots of beans coming out of South America but Argentina is playing games with their beans and all of their ag markets, Brazilian port strikes which are not totally unexpected but they're just -- China, everybody is not sourcing their beans from South America right now the way that they generally do and that is very supportive to U.S. soybean basis and that is really what is happening in that market. That's the big story.

Pearson: And you mentioned the transportation issues and export issues and so forth. Overall a decent crop down in South America.

Kub: Yeah, if they could get it shipped out that would be great for them and I really wonder, you know, prices there will probably be depressed because they can not store those soybeans very long in Argentina, they really need to get them out of the country.

Pearson: Alright, let's say you're a producer out there, you haven't done anything yet on the 2008 crop. You look at this bean market right now, you look at this corn market right now, pull the trigger?

Kub: It wouldn't be wrong to do that. These are profitable prices.

Pearson: In my 51 years it's Disneyland.

Kub: It's never wrong to make a profit and particularly in soybeans where you don't have these input costs that are so variable. That's probably a fine decision to make and I would say that this recent bounce that we've seen, that's a pretty good idea to sell on a bounce like that because there is technically a lower trend in that market. And if acres go the way that the planting intentions report said they would go the lower trend will take over again. Speculators have definitely been backing away from this market. So, I think the trend will go their way.

Pearson: Let's talk about cotton and what's happening with the cotton market. A little softer this week. Again, China is a dominant player in that one too.

Kub: Yeah, it was softer this week overall but we saw that one day where it just shot up higher. It's a terrible market to be involved in. I think it would be really, really risky unless you had very deep pockets. And it doesn't receive as much of the speculative support as these other ones because they have really backed away from that. When it came off of its March, late February, March highs they just backed away and they're still just slowly backing away more their net long position and the total open interest in that market is really just falling. Because of these risky things when you have days where it moves $2 that affects people's pockets, it affects their ability to stay in that market and this really isn't necessarily even tied to what the fundamentals will be.

Pearson: Of course, the concern about acreage losses there to beans and now everything else, a lot of things have been hitting it. Do we make cotton sales here at this kind of midpoint range or not?

Kub: If you can. That's the other thing is that I think of any of the cooperatives that have really been backing away from forward contracting cotton cooperatives have been some of the most notorious for that and that's another reason why maybe they lost some acres, maybe that is one of the decision points there is because you can't make sales, you can't get the risk protection that you used to be able to do and you wouldn't want to be playing the futures market yourself as a producer because I just mentioned how risky it is. So, yeah, they have lost acres and they have lost production interest. California is hardly even producing cotton anymore, for instance. Cotton is just not a favorable crop right now.

Pearson: Or Arizona. Okay, good points. Let's talk about the flip side to all these high prices in commodities. It all turns into high feed prices. That is first where we add value to our corn and soybean crops, feeding it to livestock. We had farm crisis meetings for pork producers up in central Minnesota. You've got cattlemen looking at a lot of red ink, some pretty serious red ink. What is your outlook? Let's talk about the fed cattle market first. What do you see ahead for that market?

Kub: That market received a major boost this week, several major boosts actually. You've had these speculators that have been in there bullishly and just waiting out to see if they'll get some confirmation and they did get some confirmation these past couple of weeks. They knew that the cattle on feed, the placements out on the feedlots would start dropping and they see that as a bullish factor particularly in the deferred contracts. So, they saw confirmation of that this week and came back in as buyers. Plus there was the rumor of the South Korea trade deal that actually came through and that was a major boost. And in terms of total volume on our export market that's maybe not that big of a deal but just in the fact that we have so much meat, so much livestock in this country that we need to export in order to make these markets strong. So, the fact that we were able to do that, that was very encouraging to the market bulls in that market.

Pearson: All those lower placements and all that is all great on the fat side of it. On this feeder market, this cow-calf guy going forward what do you see? what is the future for him or her?

Kub: Right, it's really hard at these corn prices to make that profitable and I think the feeding programs that will be more successful now are obviously the ones that are grazing. And that's been supportive of that market particularly in the north. You see people buying these feeder cattle looking to put them on some grass and put some weight on these fall calves. So, that's been supportive there but generally speaking I think you'll see more and more people getting out of that and maybe that will be -- that's where you see that again in the deferred contracts. You see some bullishness there just as far as the supply side.

Pearson: And let's talk about the hog market. I mentioned the challenges facing that industry. It's been intense. Big numbers -- big numbers in Canada. I'm hearing all kinds of stories about the pork producers up there. What do you see ahead for the pork producers in terms of profitability? What's going to happen with pork prices?

Kub: Well, pork prices are a little different story than cattle prices in the sense that they don't have as much speculative people coming in there and inflating those futures markets. So, they don't get that direction and they don't get that support on the futures market and they have, obviously, all these feed costs that are incredible and I think that is where, if you're concerned about feed costs, that's where you're going to start seeing the first signs of rationing if corn prices, soybean meal prices do start to go up to incredible levels. If you see hog producers really start to cut back on their feeding programs that will be the first sign of rationing in the U.S. and Canada. But that obviously hasn't happened yet. They're just riding it out. And the larger producers will obviously be able to ride it out longer.

Pearson: Alright, Elaine, thank you so much. Elaine Kub, we appreciate it. That will wrap up this edition of Market to Market. If you'd like more information from Elaine on where these markets just may be headed why not visit the Market Plus page at our Web site where you'll find streaming video of our program. And by the way you can download audio podcasts of our Market Analysis and the Market Plus segments absolutely free. And be sure to join us again next week when we'll examine the plight of migrant workers who claim slavery still exists in America's farm fields. 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