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Market Analysis: Jan 04, 2008: Elaine Kub, DTN Analyst

posted on January 4, 2008


Traders braced for a sell off this week, fearing the index funds would rebalance their portfolios with a substantial sell-off, but wheat prices moved sharply higher.

For the holiday-shortened week, March wheat gained more than 45 cents, while the nearby corn contract moved nearly 15 cents higher.

Soybean prices also rallied. For the week, January beans gained 41 cents, while soybean meal advanced $16.00 per ton.

In the softs, cotton continued its winning ways, with the March contract gaining 80 cents.

In livestock, February cattle declined $1.50. Nearby feeders were off $4.00. And the February lean hog contract lost 90 cents.

In other markets of interest, the Euro advanced 4 basis points against the dollar. Crude oil surpassed $100.00 per barrel before closing the week just shy of 98.00. Comex gold advanced $23.00 per ounce. And the Goldman Sachs Commodity Index gained more than 15 points to close at 624.80.

Market Analysis: Jan 04, 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: Happy New Year, Mark.

Pearson: Happy New Year to you. How happy is it going to be for these wheat producers? This rally, is this a short crop with a long tail? Should we be making some sales in here? What is your attitude?

Kub: If there was any grain crop that I would be concerned isn't going to follow the entire commodity complex higher I'd say it might be wheat just because it was so enthusiastically purchased throughout 2007. And what we saw in the last high is that we saw some of it come back down in the idea of price rationing from foreign buyers. So, for that reason I wouldn't be too surprised to see those new crop highs be the highs for new crop when we're talking less than $10 for spring wheat and less than $9 for soft red winter wheat. And what we saw recently is that we haven't been able to get a read on this market at all. Everything has been so fluctuation, it dropped down 15% and then has just been trading within that range throughout the past month. In these last two weeks I'm inclined to just throw them out entirely just because the volumes have been so low that all it has been is just been positioning, you know, the bookkeeping at the end of the year and then the following of the other markets higher in these last few sessions.

Pearson: Well, and we need to produce a wheat crop somewhere around the world. Are we going to get that done do you think?

Kub: Well, that's definitely a weather question but barring any major weather concerns again this year I think it should be more than able to attract the kind of acres that people have been looking for for the last three years out of Australia and the U.S.

Pearson: Alright, and hopefully we'll start to see that production cycle start to turn. Obviously spring wheat has got its own momentum going, the hard red wheat down in Kansas City. The soft wheat in Chicago has been phenomenally strong and we had a report earlier in the show about the potential for increased double cropping, planting wheat and we've heard of a lot of wheat acres in the ground and then coming back and planting soybeans as a way to kind of reduce some of those acreage battles we've had to deal with.

Kub: Right, well I think profitability wise if you're north of I-70 they say corn is still your most profitable option. But if you can double crop wheat down south of I-70 with soybeans then you will be looking at higher profits than just corn and definitely lower input costs.

Pearson: Alright, and now as we go forward here and people have made those decisions input costs are extremely high for all of these. In your mind what would be the best strategy for a wheat grower to lock in some of these gains for 2008?

Kub: Right, I'd say wait. Right now there is not a good signal from the market in one direction or another and there is definitely the potential that a trend will build in those new crop contracts and the trend could be higher as they follow the rest of commodities. You mentioned the entire commodity complex is on this rally. So, there is that potential but if you don't see that happen within the next few weeks and if we do start to get a new read on what the speculative sentiment is for new crop wheat and that read is lower then yeah, you're looking at an opportunity where the high may be in.

Pearson: Okay, let's talk about what's going on in the corn market. And, again, as we go into 2008 and you mentioned the profitability is still there for corn and corn is playing a little bit of defense against the soybeans at this point and obviously near record prices, in fact, technically a record price for beans this week. But as we look at the corn market going forward, again, with input costs the way we have them structured right now and I'm hearing some tremendously high prices on nitrogen fertilizer, seed costs are up, chemical costs are up dramatically, again, what should we be doing? And those folks out there who are raising corn what would you recommend a strategy for getting that corn sold, maybe taking some of these profits off the table?

Kub: Right, profitability you mentioned and that's a field by field decision. That has to be made producer by producer especially when you talk about the variable rent rates throughout the country. But you mentioned these record setting prices. I would like to point out that next week -- this week December 2008 corn was within 11 cents of five dollars. And, you know, if that happens next week it would be pretty hard not to make a profit on five dollar corn. However, if you wanted to book those kind of risk protection via the options it's about 44 cents to get a put on December corn. So, it's really not a friendly environment for options or for futures looking at margin calls. And that's why I'd say if you were going to start pricing the corn for next year already I'd want to be really conservative about it because you've got the risk of the market and you've also got production risk. Your worst case scenario is that you've got some insurance on there, you've sold more than you produced because we have some kind of La Nina event. I would not forward contract any more than you would be very confident of delivering because if the price rallies more than $1.50 over what the insurance rate is here at the end of February then you're totally unprotected to deliver on that contract.

Pearson: Right and, of course, the dollars are so much larger when we're dealing with $5 plus. And we had this talk at the end of the year that we could see a blow off top happen in corn. Any kind of a weather issue this thing is a powder keg.

Kub: Right, I say $5, you know, and the top will probably come in somewhere here in February. But if you see some kind of weather, like I talked La Nina, there is a potential -- La Nina is forming right now. It's very likely that it won't follow through in the summer. We have a ridge over the southeast. Their long-term meteorological forecasts are not for a La Nina to have dry weather west of the Mississippi when we come into summer. But if that does happen you're definitely looking at $6.50 corn and there's no reason to stop there.

Pearson: Yeah and, of course, a lot of people are seeing a lot of ramifications to all that if we do, in this period of time we have to have all this production. If somehow we can't deliver then there's going to be problems longer term for us. But '08, again, with the high priced options you should be very conservative. You cash forward contract. Would that be the best way to go?

Kub: That's certainly one thing to look at. There is also just the idea of waiting. Like I said, you know, we've got a couple of months before you can expect to see this trend die down. So, you might as well just let the trend take it where it will and see if you can get a better read on what the weather might be like, what your production costs are going to be and just wait and let the market, you know, not pay too much to the market right now.

Pearson: I don't want to overemphasize this but the La Nina, like you say, not uncommon for that to form up a little bit at this stage of the game. So, not a key factor?

Kub: Right, last year at this time I think we were talking about the same thing, this La Nina idea, and it never really turned out in most of the country that corn production was damaged too much except in Michigan and places like that.

Pearson: And, of course, the high genetics corn, you know, that we hopefully can continue to produce a crop regardless. We'll see, hopefully we won't need to pull all those factors into play for 2008 but, like you say, conservative strategies usually win the day. Let's talk about what you see happening in soybeans. The soybean market has been so volatile this year. We're really drawing down supplies, 2007-2008 the government reported that. Everything we hear out of South America seems pretty good, a pretty decent crop down there.

Kub: Right, I forgot to mention this for corn that the weather factor has turned pretty bullish for corn in South America but the weather factor for soybeans is still pretty neutral. So, they're looking at getting their production off but we won't really see that happen for another couple of months. They have started to harvest in Madagraso but, again, that's not going to hugely affect the market until the height of the South American harvest. So, this trend should also be set to continue higher until we see that harvest come in. However, if you're looking at what you mentioned, the world stocks kind of measures Brazil in 2008 has decided that 5% of all of their diesel needs to contain vegetable oils and soybean oils. So, they will not be exporting as much of the soybean oil as they would have last year. And that is where this whole market is going is the demand driven side of it. USDA, for instance, and others believe that the U.S. will export more than 16 billion dollars worth of soybeans and soybean products in 2008 and that is record setting and most of that is going to China. And if Brazil is not going to be supplying it then the U.S. is and CBOT prices should be well supported by funds and others throughout the year.

Pearson: You mentioned soybean oil, we've got meal and oil, the two products. Oil market has been phenomenal, 50 cents a pound for soybean oil, that's huge. And you'd have to wonder how that's going to play out for the biofuels industry.

Kub: Right, well, 50 cents and within a penny of its all time high was 51 cents. And most likely to see that happen next week unless you see some kind of more serious collapse in the crude oil market. But I think a lot of people are still waiting to get in on that and buy into that. What does it do for energy? Because crude oil is strong also it makes it difficult to be really profitable on a biodiesel factory with the government support but since the government has indicated that it's willing to stay strong with its support for these industries, ethanol and biodiesel, you know, they'll probably still stay profitable throughout the foreseeable future.

Pearson: Alright, you're not in a big rush to price soybeans?

Kub: No, I wouldn't be. I'd say this trend is very strong. It's led by speculative interests, they're willing to build up their positions. You see the idea of index funds wanting to heighten their weights in soybeans throughout this year. So, I'd say let them continue to do so. If you have some to sell of the old crop sell it a little at a time, take advantage of the trend. But I wouldn't be in a hurry to book next year, no.

Pearson: I get a chance to go out and speak to a lot of farm groups and just since the end of the year I've had a lot of people ask me about that last Friday on the Chicago Board of Trade when soybeans took that huge hit and a big sell in there. I talked to traders in Chicago, I was at the Board of Trade on Monday and they said that was a screen trade, you know, had it come through the pit in the normal buy-sell fashion it wouldn't have been a problem. Those are the kinds of things we kind of need to be wary of.

Kub: Yeah, I got caught flat-footed because I assumed that it was some fat fingers and they would ---

Pearson: Somebody made a mistake.

Kub: But they didn't, it was a market on close order, the board said, and they let it stand. But what was interesting to notice is that not only soybeans did it, if it was one order in soybeans it took everything down with it. It took Malaysian palm oil, it took soybean meal, soybean oil and what that suggests is that there is a large number of these computer led algorithmic trading systems that are in there that are tying together all of these inter-market factors and so you know that if crude oil, bean oil, Malaysian palm oil start heading up soybeans will too. They will stay connected.

Pearson: Absolutely, okay, but you're not in a big hurry. We're going to hold off on selling soybeans. Talk about the cotton market. Again, we've had a little bit of a rally going in cotton. Doesn't cotton have to buy some acres in here somehow, I mean, with beans this attractive?

Kub: Right, cotton I kind of compare to corn for its own fundamentals in that its infrastructure, the people who are growing it, it's pretty well set. I mean, we've got a situation where you're looking at somewhere something less than 20 million bales a year is going to be produced and that will be pretty constant. And we might get some acres, regardless of price, this upcoming year just because corn didn't work very well last year in these dry areas and they're not looking to get much more subsoil moisture right now. So, cotton should gain some acres back this year. But nonetheless it's starting to join in and just recently in the last few weeks it's starting to join in this battle for acres. We see that with the higher trend. We see it with more of that inter-market relationship, you see them moving in the same direction as soybeans and corn in the cotton market.

Pearson: You're not in a hurry to sell cotton?

Kub: No, not really. I mean, we saw some lower prices today which makes me a little wary if the trend is wearing out. They went through an old high and is that as high as they're going to go? But if they're tied to the battle for acres then they're set to go higher.

Pearson: Alright, let's move over to the livestock, fed cattle market. Some pressure in this livestock sector, seems to be a lot of product out there.

Kub: Yes sir, that is the idea. Fed cattle is really the issue, what you mentioned is we have a lot of supply and a lot of demand. It was a great situation for the packers and they have built in some good margins. And that's why I think we saw some optimism in the futures market last week, at the end of 2007. Some if it was short covering and some of it may have been the idea that the tone would be changing in this market. But they really backed off on that. This week, you know, it's been very volatile in the futures market and I think the cash market is really leading that. We see these bids collapse a little stronger in the north but really there is no reason to think the packers are going to start giving anything away.

Pearson: No, and as we look forward to the start of this first quarter of 2008 could be a relatively rough quarter for the fed cattle market?

Kub: Yes, I think so. Like I mentioned the industry has shown some resilience, the futures traders try to get their read on that and I think that is why they showed some bullishness in there is that they thought the market would remain more resilient, start to build something in but that just hasn't been playing out.

Pearson: And obviously, as you mentioned, within 11 cents on December corn at $5, that hasn't exactly been good news in the feeder calf business.

Kub: No, and that's really the issue here is that that's been trending lower off of their $120 high since September. It's been a very steady trend. We're down to $101 on the CME index and probably heading lower. There is really no reason to think that it won't. They've got the same issue. And what's interesting is the correlation to the feed market. It's been almost exactly correlated as far as when these moves have happened and how they've moved and each percentage each day. It's really going to follow in the opposite direction of feed and not just corn but soybean meal, as we mentioned, all of these markets are very bullish.

Pearson: Alright, a market that has not been bullish has been the hog market. Been a lot of hogs out there, these hugs kills. Weights are coming down? What is your feeling on this hog market as we go forward?

Kub: My feeling is that, yeah, it's going to be interesting this year to be one of the few futures markets and one of the few ag futures markets and certainly one of the few that actually are showing increasing demand that's actually going to have prices move lower. That is an odd situation. But, again, it's this idea of ample demand and you see it in the retail prices too. They've started to come down this week. So, that shows to me that these packers who here also had built in some good margins they're not going to see those margins build up any more because the retail prices are coming back down and that won't pass anything along to producers at all.

Pearson: We've got about a minute. We mentioned crude oil earlier in the show. You talked about it hitting $100, backing off some, $98 at the close on Friday. We heard about this move would happen. What is your take on this? This is going to continue to be the leader in 2008 and the cheap dollar is the second story?

Kub: I don't know. I think what's interesting about all of these commodity markets is that they are attracting a lot more retail interest. You know, Joe Blow off the street will go and decide that he should be investing in crude oil or in the ag commodities. And crude oil used to be the go to for people who wanted to just dabble in commodities. But now I think agriculture is getting a little sexier, right? I mean, it's the kind of thing that is attracting more interest. Everybody eats Cheerios and everybody drives their car down the street. So, whether they choose to hedge their exposure to the economy via crude oil or via the ag markets that is really the question. I wouldn't necessarily say that crude oil is going to attract more interest or be more bullish or be the leader of commodities any more than wheat or corn.

Pearson: Alright, very good. Elaine, thank you very much, Elaine Kub. That will wrap up this edition of Market to Market. But if you'd like more information from Elaine on where these markets just might be headed visit the market plus page. It's at our Web site. You'll find streaming video of our program. And, by the way, you can 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 examine a cooperative effort in Wisconsin that is providing health insurance for farmers. 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 Hybrid 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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