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Market Analysis: Feb 15, 2008: Elaine Kub

posted on February 15, 2008

On the heals of last week's historic rally in wheat prices, the Chicago Board of Trade, Kansas City Board of Trade and Minneapolis Grain Exchange all raised their daily movement limits between 30 and 60 cents. While March wheat on the Minneapolis Grain Exchange soared past 19.00 per bushel this week, Chicago wheat trended lower.

For the week, March wheat lost more than 65 cents per bushel, while the nearby corn contract gained nearly 68 cents.

Private estimates calling for tighter ending stocks supported the rally in soybeans. For the week, March soybeans moved more than 34 cents higher, while the nearby meal contract went down $2.70 per ton.

In the softs, cotton lost all of what it gained last week-- and a bit more -- with the December contract posting a loss of $2.51.

In livestock, the February cattle contract lost 80 cents. Nearby feeders were off 40 cents. And the April lean hog contract declined 67 cents.

In other markets of interest, the Euro gained 167 basis points against the dollar. Nearby crude oil prices gained $3.73 per barrel. Comex gold lost $19.50 per ounce. And the Goldman Sachs Commodity Index gained nearly 16 points to close at 635.79.

Market Analysis: Feb 15, 2008: Elaine Kub Pearson: Here now to lend us her insight on these and other markets one of our regular market analysts, Elaine Kub. Elaine, welcome back.

Kub: Nice to be here.

Pearson: Let's talk about it, $19 wheat in Minneapolis, wheat off the chart in Chicago in the soft red variant and the hard red variant in Kansas City also has been off the charts. The board though the soft wheat was a little bit softer this week. Kind of sort this out for me. Are we -- is this a short crop, long tail phenomenon starting to come in or is this just concern about growing wheat in 2008?

Kub: You don't see it in the new crop contracts so it's definitely the short crop story and I'm not so sure about the long tail. The tail might be very short as well. It's definitely coming out of the spring wheat contracts as a shortage of spring wheat, a shortage of Durham and that's where you saw the initial franticness here was in the cash market in that carry over into Minneapolis and it carried over into Chicago and Kansas City last week but this week we saw them abandoning that and that makes sense. If you see just a speculative bubble there really in those Chicago and Kansas City contracts only because they couldn't buy as much Minneapolis contracts as they wanted to last week. And so now, you know, they shouldn't really even be that high. You can make the argument that those markets are really, really in a situation where they're going to fall so fast. And you could even try to apply some conspiracy theories here about why did they decide to raise the limits when the market is probably going to be headed downward? Now we've got a situation where it can go downward, you know, about four times as fast as it went up. In Minneapolis that daily trading limit is actually $1.35 as of today, Friday. They'll probably drop that down within the next three days, next three trading sessions which would be Thursday, next Thursday if it doesn't continue trading at the limit which it didn't do on Friday.

Pearson: Alright, so a speculative bubble, that's always scary. What could this portend for the other commodities?

Kub: You didn't really see as much spill over interest into the corn and soybeans. To some extent this provided some support but really they traded independently, it was mostly confined to the wheat contracts. But you do have a situation now where there is still this temporary bubble in the new crop contracts. They got a lot more value than they would have otherwise from their own fundamentals. So, that would probably cause some havoc with the battle for acres idea up in these northern crops. Wheat still would lose that battle for acres just because there's so many other considerations to keep in there about what a farmer is equipped to grow, what he's good at growing, what the yields in genetics point to and wheat really doesn't win on most of those counts. And so this price bubble right now may be what keeps wheat from going even crazier next year.

Pearson: Alright, wheat growers right now it looks like a selling opportunity you think on the new crop?

Kub: Yeah, absolutely. There is no reason why these prices would be this high without this little speculative bubble particularly in the soft wheat and in the winter wheats, they wouldn't have got this opportunity except for now. That doesn't necessarily mean that if you haven't already decided to put these acres into wheat that that's the right idea but if you know you're going to be growing some wheat this would be an excellent opportunity to let that speculative interest work for you.

Pearson: Alright, let's talk about the corn market. Like you say, not much spill over from wheat in what's happening there. As we look at corn -- you mentioned the acreage battle, I mean, corn prices, you know, we talk about this every week. Are we buying acres here? Do we need to go higher? What is your thoughts on the corn market? And should we be selling this thing?

Kub: As far as the battle for acres go corn is the opposite of wheat, it does not have to work as hard, it has excellent genetics and a lot of reasons why someone would want to grow corn particularly in the heart of the Corn Belt. So, its strength right now is actually its own long-term outlook and it's been very, very steady, it was steady in the first half of the week and then it was steady on its higher trend towards the last half of the week. And that is likely to continue because there is just this consensus, I think everybody in the corn market just believes it deserves to be this high, it's likely to remain somewhere in this range for the foreseeable future. And you do see less franticness here obviously. There is still carry between the contracts even throughout the 2009 calendar year so traders are expecting to have enough corn next year as well. But nonetheless, you know, this market is definitely strong and likely to remain so.

Pearson: Alright, so you're not in a huge hurry to make sales?

Kub: I wouldn't be -- I hesitate to say that though because seasonally you do expect to see kind of a bottom fallout here. You tend to see a top here in February. If it's something like last year and if we start to see some kind of pressure from the South American harvest come on but there is this idea particularly from South America that they may not get their second corn crop planted in the timeframe that they want. They are having some trouble getting their South American, their Brazilian soybean harvest off and if they don't get that off in time they won't be planting their next corn crop which is bullish to corn which means that we may not see that seasonal weakness. So, I'd wait to see what it looks like in the next few weeks.

Pearson: Alright, let's talk about soybeans. You mentioned Brazil, the reports I get on Brazil it seems to be all positive, it looks like they're on track for a pretty decent soybean harvest. You mentioned maybe a harvest delay here but the crop looks decent.

Kub: Right, as long as they can get the crop out of the field it should be plenty of soybeans. You know, they have their own selling issues, their own logistics issues but that is certainly something that they keep track of, that the traders keep track of in Chicago is the weather there and the size of the crop there. But that really isn't the motivating factor in Chicago soybean markets these days. There's lot of other things. There's soybeans own fundamentals, they have a battle for acres thing going on more so than corn because they have cotton to think about and wheat to think about on all of the fringes of the Corn Belt and they also particularly, this was the motivating factor this week, they have the energy rally to motivate them one way or another.

Pearson: And just so we don't leave out someone and I get a lot of e-mails and a lot of letters about it the hay market is also a factor in this acreage battle too. So, with the price for quality dairy hay at $200 and up a ton there really is a lot of incentive to start turning that up at this stage of the game.

Kub: Yeah, and will that even be available? Fertilizer prices where they are we're talking $650 or more in the western Corn Belt and I have heard people very seriously discuss $900 by July a ton for anhydrous ammonia. You know, that plays a part in hay, it plays a part in soybean decisions, it plays a part in corn decisions, it's something to keep in mind.

Pearson: What do you think we'll see for an acreage shift between corn and soybeans this year? Have you thought of a number yet?

Kub: I'm not going to give out a number but I will tell you that obviously soybeans are going to get some more than corn. I'm leaning towards soybeans if I was going to plant something particularly because if you look at the spreads between these futures contracts soybeans could be the next wheat. And if you take off from $13 with a rally like wheat, if we really do have some short crops North America, South America doesn't get what they expect you've got a really serious situation where it could really explode.

Pearson: That's right and so you might look back and $13 might look real cheap on soybeans.

Kub: Yeah.

Pearson: Again, of course, we also have the ongoing weather scenario which who knows what could happen if we have weather problems this summer.

Kub: Right, so to that extent I wouldn't be pricing soybeans right now or I wouldn't be pricing very many of them. You know, it's kind of a gamble to take if you've got a large operating loan to think about but if you don't there's really a potential for that market to take off.

Pearson: Alright, so let's talk about the flip side of all this which is the livestock business. And very tight margins for cattle and hogs with this move now in corn. Obviously you're not talking about feeding much wheat with these prices so we're really tightening down on what those margins look like and I know it's been a concern for, I've talked to a lot of pork producers who are especially concerned they're unable to take advantage of the DDG's from the ethanol world. What do you see ahead for cattle? Let's talk about the fed cattle market first. What do you see happening there?

Kub: Well, you think about the margins there, if you raise the price of corn from $3 to $5 that takes off about 67% of the revenue you're going to get from raising one calf. So, that definitely cuts down, you would think, on the size of the herd but we're not noticing that. You know, that's the two ideas that keep these markets strong, these livestock markets strong and keep bullish interest in the futures markets is this idea that meat has strong demand and the prices at the retail meat markets are staying high and that the herd might decrease. But we haven't seen any evidence of that and next week there will be a cattle on feed report coming out that is going to confirm that. And you see it carrying right on into the live cattle market that you're talking about. Prices have -- I feel the last time I was on here I said prices were at $94 to $150 in the north and that's still where they are. You know, they've pretty much just drifted along this winter. We haven't seen, you know, most of this past week the transportation issues from the storms pretty much wasn't an issue. So, prices are just hanging in there and none of these ideas, these long-term forecasts for herd size, for feed costs are really having an effect yet.

Pearson: Alright, so right now if you look at this fed cattle market what are your thoughts? Is there a place here where we can lock in some profit, we can hedge some of these cattle?

Kub: Well, I would say that these are strong prices all things considering. You've got, as you mentioned, the profit margin ideas and that is why I would say, yeah, these are good prices to look at particularly if you're up in the north. Things could really bottom out when they start to realize how things are headed.

Pearson: I want you to talk about the feeder cattle market here too because it certainly was pulled back late in '07 through the first part of 2008. Now it's starting to snap back, looking at some of those deferred contracts feeder cattle market looks pretty good.

Kub: Yeah, you really see a lot of activity towards the back of the board and that is because of these long-term ideas I was just talking about, these ideas of herd size. If you're a producer though and you were talking about locking in profits you can not only lock it in your revenue but now might be a good time to start thinking about locking in some of your input costs. There is the possibility that you'll see a break in some feed prices here within the next month or two just seasonally so that is something to keep in mind. You know, if you locked in $3 corn back at harvest time you won't get that again obviously but it's certainly something to look for on the breaks.

Pearson: Alright, the issue as far as the hog market is concerned and we have heard a lot on these discussions about sow liquidation and so forth -- are we really seeing that? Is that coming down to the bottom line?

Kub: I think that that market is starting to see it more than the livestock and part of that is just, you know, this packer ownership, this larger industry and that is something to watch for in the farm bill, one of these markets that actually might see some movement from the farm bill and some legislation is this idea of a ban on packer ownership. How will that affect the market? That is something to certainly watch. But in the lean hogs market themselves and futures this week it was, actually the story was in the bellies and this is, again, what I was talking about how the meat trade has really been driving the livestock board and the bellies were really taking off and part of it was speculative interest but part of it was just that the fundamentals, the fundamental demand has really risen. They got a little overbought, they reached a high of $99.50 on Tuesday and fell back from there but really that's been a strong market.

Pearson: Alright, Elaine Kub, 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 just where these markets might be headed why not visit our market plus page, it's right there at our Web site. You'll also find streaming video of our program. By the way, you can download audio podcasts of our market analysis and our market plus segments absolutely free at the Web site. And be sure to join us again next week when we'll examine a western water war that is betting crops against casinos. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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