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Market Analysis: Walt Hackney, Elaine Kub, Market Analysts

posted on July 1, 2011

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The carnage continued on Friday as the threat of increased supplies hammered corn prices, dragging wheat along for the ride...

For the week, September wheat lost 48 cents, while the September corn contract moved 50 cents lower.

Despite USDA estimates of DECREASED acreage, soybeans were pressured by the coarse grain sell-off as the September contract declined a little more than a penny. Nearby meal prices, however, bucked the trend with a gain of nearly $4 per ton.

In the softs, cotton's days above $200 seem like a distant memory now as the December contract settled Friday with a weekly loss of more than $4 per hundredweight.

In the dairy market, August Class III Milk futures lost 22 cents, and the deferred contract was unchanged.

Over in livestock, the August cattle contract was down 65 cents. Nearby feeders rose nearly $2. And the October lean hog contract settled Friday with a weekly loss of $1.90.

In the currency markets, the Euro gained 340 basis points against the dollar. Crude oil rallied back from last week's correction with a weekly gain of $3.78 per barrel. Comex Gold settled below $1,500 with a weekly loss of $18.30 per ounce. And the Goldman Sachs Commodity Index gained about 13 points to close at 664.20.


Pearson: Here now to lend us their insight on these and other trends, two of our regular market analysts, Walt Hackney and Elaine Kub. Welcome back.

Hackney: Thanks, Mark, thank you.

Pearson: And good to see you too Elaine.

Kub: Good to be here.

Pearson: Elaine, let's start with kind of the general commodity cycle. We're seeing some big changes. We've had this situation in Greece that has been causing a stronger dollar, weaker dollar and impacting our commodity markets as well. Now it looks like they have passed the bailout. We'll see if Greece continues the austerity movement but we've been watching all the instability, there's concern it may go into other parts of Europe. Some of the air has come out of this commodity market in a big way and we saw it come back certainly into equities and other areas. So, with all that as a background, and obviously a big report from the USDA, overall the dollar, all the ancillary issues, energy and those, give us your take on commodity markets right now and the big money's interest in being in them.

Kub: Right. Well, you mentioned Greece and I think that is probably priced into the market and maybe has been even before this commodity sort of selloff started to happen. But that was the thing that really triggered this, not only Greece but the idea that other countries could do this too and there's just so much risk involved in a global economic recovery. There's too much risk that that won't happen and that the economy won't be able to afford these high priced goods. And so that is why we've been seeing these funds just frantically selling out of the commodity sector, especially in the ag sector we've definitely seen them adding to their short positions and definitely selling out of large chunks of their long positions.

Pearson: Take us forward with that kind of a backdrop and we'll get into specifics here momentarily on our ag futures but it seems like we're being buffeted by all of these non-ag and non-fundamental events. Let's go forward to the next couple of quarters. Do you think there's going to be another surprise from Europe and that's going to be impacting us? Is the dollar going to stay where it is or is it going to start to strengthen relative to all of those problems overseas in Europe?

Kub: Right. That's the fundamental risk to add commodity prices. It's not necessarily -- I mentioned about the economic recovery and the world not being able to spend as much money for these goods, it's more the fact that these goods that are dollar denominated are really going to struggle to be afforded by the world if the dollar goes up which happens if the Euro goes down, if we lose faith in the Euro or basically any other country. Japan is struggling to recover. Any other country that makes up part of the dollar index, if they start to struggle that brings dollars up and things become more expensive.

Pearson: All right, well we're going to deal with that and Walt is going to address that too because obviously with the beef and pork exports that we've been seeing at a bolstering pace could be a factor on what happens on that front. But let's talk first about the wheat market and what's happening there. Obviously there's a selloff this week. There seems to be plenty of wheat in the world and it looks like some of the pressure has come off that.

Kub: Right, there's a couple of real fundamental reasons why wheat prices are really going to struggle here in the near-term. First of all, Russia is now exporting their wheat. Their export ban has lifted and for a while there wheat sort of got some bullish interest whenever Russian weather started to be a problem. But at this point the Russian wheat crop is doing reasonably well, it's pretty well made, it's at a stage in its production that this weather isn't going to be as much of an issue there. So, that is bearish for wheat. Russian wheat backed up to the U.S. front door at the port is about $6.00 and low and behold that's where we see Chicago futures at that $6.00 level. That and the fact that our hard red winter wheat harvest is progressing now and as it is moving north it is within striking distance of getting to Nebraska where it's going to continue to see good yields and those harvest stories coming out of the harvest are also going to keep bearish pressure on there. So, the one thing that could save the wheat market or be bullish to the wheat market is the spring wheat and their acreage starting.

Pearson: That's right. There are some issues certainly up there. Getting back to this plentiful wheat scenario -- we knew we had plentiful wheat in the world to begin with and wheat has kind of ridden along with all of the other commodities and then obviously when we had the situation with Russia and now they have opened it up why are they selling wheat so cheap? Do we know why?

Kub: Why they're selling Russian wheat so cheap? My understanding is that their infrastructure in certain areas they need to get rid of it before this harvest comes on and so that's why they need to make sure that it moves to the right areas, to the right ports and just gets it out the door so that they have space to store their infrastructure, their storage is not the way that the U.S., that kind of infrastructure.

Pearson: All right. The wheat harvest is on the way or just passed through my neighborhood. What should I do with that product?

Kub: In the near-term, as a cash crop I think there's still a lot of issues that can come in and keep pressure on these prices. But if you could wait until past August, you know, past the timeframe when we really start to get a better understanding of the North Dakota and Canadian spring wheat acres and that sort of bullish story gets adjusted and gets known by the market there are probably opportunities after August into September and we'll see these come up and particularly if you have spring wheat or hard red winter wheat I predict those spreads will stay strong over the Chicago contract.

Pearson: Talk about the corn market too. It has obviously been buffeted some by the acreage number which was a huge surprise, saw the Informa numbers, there's a lot of good private analysts out there. Are they really off that much? Is there really 92 plus million acres out there?

Kub: Well, the thing I'll say about the 92 million acres is that's larger than farmers were intending on the March 31st planting intentions and I will say that since March 31st economically farmers were very motivated to plant that many acres. I'm sure they wanted to plant 92 million acres or more but I don't necessarily think it was possible for them to do so and I think a lot of market observers and people in the agriculture industry don't think that that 92 million acre number was possible. And I think that the USDA doesn't necessarily even think that was possible and that's why they're going to re-survey these states, North Dakota, South Dakota and Minnesota and get a different number to include in their August crop production report. But in the meantime, you know, are you going to catch a falling knife, will the funds trade that 92 million acre number?


Pearson: Right. And it's going to be yet again another revision from USDA. I grew up to be a man and never saw a revision for a USDA report and in the last five years we've seen constant revisions. Interesting because we've got Google Earth today, we can take a picture of this whole thing and add it up.

Kub: Satellite images, yeah.

Pearson: All right. I don't understand that. I've tried to get some answers from the government and they're all kind of tight-lipped about it. I don't know what the deal is.

Kub: Well, some of the private estimators that are using satellite technology they see a good crop right now and in much of the Corn Belt there's a good crop with a lot of moisture but it's been stunted. This has been a hard spring with not a lot of heat units in a lot of areas so that's the next big question is whether we have this many acres or not and whether these trend line yields will actually lead to a second largest corn crop in five years, you know, I think there's a lot of weather to get through before we start predicting trend line yields.

Pearson: What would you tell a corn producer right now who maybe hasn't done much in the way of selling new crop corn?

Kub: Right, I mean, this kind of put the fear of God into me as far as making sure that you have a very good risk management plan that maybe leaves you some up side because I'm personally still bullish in this market but I feel that we could have some very sleepless nights here for the next couple of months until we get a better sense of what the yield and the acreage would be where this could just keep following. There's a lot of fund selling pressure and I think there's some buying, there's a huge buy from China today and they're getting a steal on it. Corn in China is about $8.70 and if you back that up to the U.S. door it takes maybe $2.00 to get there so China buying corn at under $6.00, new crop corn under $6.00 is a very good deal for them and it's a good deal perhaps for some cattle feeders and ethanol plants to be hedging their 2012 corn at this point. But whether or not that kind of buying, that kind of commercial buying is enough to counteract all of the fund selling in the near-term in these next couple of months, I don't think so. So, I think in the near-term we're going to see some pain here and if you have a rally that you can sell into, get a good option strategy in there and be $6.50 puts backed up with some calls to make it cheaper I think that's the way to go.

Pearson: And there's the ethanol thing floating around out there, I think the traders interpret that as being bad news. Most people we've talked to from the oil patch said, we're still going to use ethanol, we're built to do it.

Kub: Right, and they're making profits on this. Yeah, that sort of struck me in the stocks report that we haven't used so much between March and May as we did between December and March and yet there are great ethanol profits and I'm not really sure why we didn't use as much as was predicted.

Pearson: It's going to be interesting to see. Let's talk about soybeans then. What is your scenario there for beans? Obviously a little bit better numbers from the USDA.

Kub: Yeah, acreage wise and I think that those still could be adjusted too because the states that we don't have final acreage numbers, North Dakota doesn't have to report their final insurance numbers until July 15th so I think that's another number that could be adjusted and is just as tight a supply and demand situation as corn. But they definitely have been the leader here on Friday and I suspect they will continue to be the leader. So, while corn has dropped 10% in the last two days soybeans have not and I think that has done good things to bring the soybean to corn spread ratio back into line of where it should be. Soybeans are now more than double the price of corn which is where historically you'd expect it to be when they are both in tight supply and demand situations.

Pearson: A big crop down in South America, now they're picking up some business seasonally which is normal. As you go forward in terms of making sales on soybeans what is your advice to somebody out there trying to do that?

Kub: Well, I think just like there's a floor with some commercial buying in corn I think there's also a floor somewhere around $13.00 or slightly below it for soybeans. I think there's probably also a ceiling on that at $14.00, $14.05 let's say would be a good place to sell soybeans just because you mentioned this Brazil story and that does seem to be the thing that is keeping the cap on soybeans. Brazil has been buying 25% more fertilizer this year than they did last year at this time so it looks like they're gearing up to plant another record large crop. However, we don't even know what our own weather is going to be like here in late summer so how can we start to feel confident about fall and winter weather in the southern hemisphere? So, I wouldn't be too bearish on soybeans for that argument alone.

Pearson: All right. So you're still friendly to corn and beans longer term. Real quick, cotton, what is your outlook there? We've certainly seen the top come off as many people expected. What is ahead for cotton?

Kub: Well, they have struggled too because of this non-commercial speculative selling out of those futures. But they get some commercial buying coming in there and they've also got the fact that there's a drought in the south that will continue to support those prices maybe on a neutral trend here between that $116 and $125 level for the new crop contracts.

Pearson: All right. Let's shift gears, let's talk livestock. I was out in Denver yesterday, Walter, with a bunch of cattle feeders and by and large the spirits were good, they were relatively upbeat, they feel pretty good about this second half of the year. They were curious about what you were thinking. What's your thoughts here near-term? This cash market has recovered well. What is ahead, Walt?

Hackney: Well, there's so many factors right now that are probably contributive to a little more optimism for the second half of this year and the first quarter of next year than we've seen for a long time. One of them is availability of product in feeder cattle. We're going to be down probably eight percent on our calf crop this year compared to 2010. We're probably going to see some restriction in market rates due to high-priced game costs. Now, with that being said, last week in the packing industry our average weights were up nearly three pounds. Now, that is monumental when you develop a trend and I hope we're not developing a trend by holding some cattle back that should have been in the market. I'd rather believe that those extra weight cattle may have been some long weight yearlings that came in versus the calf crop that we're currently marketing. Our winter feeding was phenomenal in the performance of all cattle, calves and yearlings. Many cattle being marketed today, Mark, are gaining four to four and a half pounds a day and that includes a lot of the calves that came in last October and have been on feed. A lot of calves are being sold at 1500 pounds today. That is too big and that is one of the contributors to this extra weight. So, you've got some pros and cons to deal with.

Hackney: But on the other hand, we are looking at a shortage generally of dressed beef coming out for sure the fourth quarter and particularly into the first quarter of 2011. And with that, that hasn't a thing to do with restrictive feeding and that type of thing, what it is, Mark, is just the simple fact the cattle are not there. You heard the southwest had a phenomenal exodus of cattle due to the spring drought in the wheat country. They had to come out of that winter wheat pasture way premature, weighing in the sixes instead of 800 pounds. Now, those cattle had nowhere to go but straight to the feedlot. Right behind that those that have a little optimism left were buying light calves to go to spring grass. You know what the drought is like in the southwest today, there is no grass. You can walk across those pastures and you can hear it crunch under your feet and you can see your footprints in the grass pastures. They're moving those cows and pairs out of that country as fast as the market will allow them. TAG says there's going to be destitute for replacement cattle. They're going to have to move north. They're going to have to get more into the Colorado, Wyoming, Montana, the Dakotas as Elaine is from, they're going to have to get into that market. What's that going to do to our feeder market? Well, it's going to accelerate it. There's no question about it. Those cattle feeders are still down there. Those 100,000 head feedlots are still sitting there and they need to run at a minimum of 65% capacity to even break even.

Hackney: So, they're going to make sure that they're at least breaking even in them feedlots. They're going to have to come north to buy their yearlings and calves and we're not at all able to keep that supply up for that outside market. So, the outlook in regard is fat cattle have got a good opportunity to go a little beyond the $111 that we're selling cattle at this day of this week and they've got a chance of going on up to $113 to $115. We have got to continue marketing though and particularly those calf weight cattle to keep the weight down. We don't need the extraordinary pounds regardless of what your comment about export, Mark, it isn't phenomenal enough. We need more work out of the federation to get more export business going in the beef. Our domestic trade won't support $1.15 a pound fat cattle domestically, it won't take it. It will take the commodity end of the beef, it will take the economy cuts of the beef but the blue collar shopper won't be buying these luxury cuts, it's got to go export and it will if the federation can get those exports up to a phenomenal level and that's where they need to be.

Pearson: Phenomenal compared to where we were in December of '03, Walter, when that Mad Cow disaster hit. We're way above that. Talk about the hog market in the time we've got left. What is your take now, we've got a strong cattle market, strong beef market. Pork has had good exports. What is ahead in the hog business?

Hackney: We've got an opportunity to appreciate the cash price of hogs. We have a good opportunity for the producer, particularly with this last recession in the cost of grain going into the rations. We've got a good opportunity for the producers to finally be able to program into their management style a profit. They haven't had too good a luck. The packers are not having very good luck either in profits. But we have a chance now of some restriction in the market herd, that 400,000 a day or that 2 million a week may need to go down to 1.85 million or something similar. Our carcass or live weight hog needs to drop off of the 268 pounds and maybe get down to 255 or 260. At that point our live hog inventory if the packer insists on continuing to run their train speeds as they are our market has a good chance of appreciating $4.00 to $6.00 a hundred weight within the next two months.

Pearson: Very bullish.

Hackney: I sure am.

Pearson: This is the happiest you've been, Walt, in a while.

Hackney: Well, I had a good drink of whiskey before I got here.

Pearson: Whatever it takes. Well, all right, stronger beef prices longer term, second half so you agree with those guys, you're on that team. Same thing with the hog market also picking up. Elaine is also telling us right now, Elaine if I haven't got this right, you'll be taking advantage of this grain market, if you're feeding cattle and you're feeding hogs get some stuff bought.

Kub: Yeah, I think it might take some cash to do it, you have to be willing to have that strategy but I think in the long-term it might pay out if we do have any sort of struggle with this crop.

Pearson: All right. Walt, final comment, we didn't mention feeder cattle prices. I know you buy a lot of them. Where do you think we're going to be?

Hackney: I could have told you a week ago we'd be at $130 at 650 pounds in the western ranch country and this week those calves are bringing $140 something.

Pearson: There it is. Walt Hackney and Elaine thank you so much. That's going to wrap up this edition of Market to Market. If you'd like more information from Elaine and Walter on where these markets may be headed be sure to visit the Market Plus page at our Web site. You'll find expanded market analysis, audio podcasts and streaming video of our program and it's all free at the Market to Market Web site. Of course, join us again next week when we'll examine efforts to create an oasis in the middle of a food desert. Until then, thanks for watching. I'm Mark Pearson wishing you a safe and happy Independence Day.

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Tags: agriculture commodity prices corn crops economy Elaine Kub markets news USDA Walt Hackney wheat