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Market Analysis: Elaine Kub

posted on September 16, 2011


Market Analysis: Elaine Kub

Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Elaine Kub. Elaine, welcome back

Kub: Thanks for having me.

Pearson: Well, it was interesting. We had a big -- well, we didn't talk that much about it earlier in the show, but we had a big frost that hit a big chunk of the upper Midwest. Some very cold temperatures and definitely some damage. And here's what the commodities market did.

Kub: Yeah, precisely. It dropped, in fact.

Pearson: Although we're sharply lower for the week. I want to talk about wheat first, but I want to talk generally about pricing. They figure everything is in at this point, or with strengthening dollar, what was driving the big market move this week?

Kub: I think you're right to point out the dollar. It was really rallying through the early part of this month. Outside markets weren't really encouraging these funds to get more involved and risky, things like commodities. And that's why everybody was able to ignore all of the bullish news. On Monday there was, you know, quite a bullish report from the government, from USDA. Their supply and demand numbers for corn were certainly bullish. We had this bullish frost. We had such tight ending stocks, you know, any small loss of overall production is a very bullish thing for the markets. Like you say, the traders just largely ignored it. So really what we had in these past two weeks really is that the commercial users of the futures markets were the ones that have been moving the prices, not so much the funds. The funds really have not been participating. And when the commercials are in, it's actually been farmer selling that has been pressuring these markets and the end users have not stepped up. They're waiting for more of a bargain before they're really willing to come into this.

Pearson: Well, these big funds buyers and these big fund managers have been a big factor in all of this. So where are they going right now?

Kub: The dollar, obviously, they're parking their money there. The stock market is so wild; it's hard to even put a trend on this with all the gaps and changes in direction. It gained this week so there seems to be some money flowing into there. Crude oil has stabilized. It's at a level -- actually if you look at that crude oil market, we're back at a level pre Libya, pre the Arab spring. We're at the level that was strong, this $90 level. To me it doesn't look like there would be a lot of upside to that now, but it certainly recommends some strength to this economy. There seems to be more confidence, really.

Pearson: What do you think of Goldman's prediction for $130 barrel of oil?

Kub: Well, it doesn't seem to be something that I would really be putting my faith in at this point when we no longer have as much concern about the production areas of the world as we did a few months ago.

Pearson: Yeah, it's counterintuitive. We'll see what happens on that front. Let's get down to some specifics. You mentioned the USDA Report. Let's talk first about wheat and what you see happening in the wheat market. Again, it was a softer week for wheat prices.

Kub: Yeah, and one thing that you kind of look for at this time of year when people should be seeding their winter wheat acres is I've been wash watching that Kansas wheat spread over corn for 2012. And you kind of like to see wheat trying to buy some acres, but they don't seem very concerned about. At this point, I mean, it's somewhat premature to say for sure that there's going to be another La Niña in 2012 that it will be just as dry and just as drought stricken in the south. But my understanding is it would actually take El Niño conditions to break up that drought. And we certainly don't have those. We certainly have more of a La Niña type situation according to all the weather services. So at this point, you know, the market does not seem concerned about winter wheat getting seeded, but I feel that farmers are probably concerned about their, you know, their yield prospects for this upcoming year.

Pearson: Well, they want the market to give it some direction. Obviously we're getting softer in the face of extreme drought conditions if we're getting a big chunk of the wheat crop out of there.

Kub: Yeah, it's very, like you say, counterintuitive that we have bullish fundamentals and yet the money is just not there.

Pearson: What are you telling wheat farmers these days?

Kub: There is carry in the wheat market. If you have your futures hedged for wheat, corn, and soybeans, the one to store against these futures would be wheat. You've got about 17 cents a carry to get you through March. But I'm thinking if you don't have either one sold right now in the futures and you needed some cash and you need some space and you need to clear out some space for your fall harvest, I'd say sell the wheat. I think because of the large world ending stocks in wheat and the potential for bullish news in corn and soybeans, I would say I would prefer that they would sell the wheat rather than the corn and the soybeans at this point in time.

Pearson: All right. Let's move on then. Let's talk about corn. A selloff this week on December which caught people by surprise, particularly in light of the frost question. Certainly reduced supplies, drought issues this summer. What do you tell a corn producer right now?

Kub: First of all, if they're able to harvest now and get that corn to an ethanol plant that still needs some corn in September and it still paying overs on the basis, do it, right? If you can sell $7 off the combine, that's a wonderful, historic thing for your life. But beyond that, if you don't need the cash by the end of the year and if you've got the space to store it -- I mean if you do need the cash and you don't have the space, sell what you can sell. These are fine prices to sell at. I think make another little chunk of sales here. But if you can store it, I think a lot of farmers are intending to just tuck this away, wait for a few months. And the crop really isn't there. I believe the yield numbers are poor, and I think enough farmers are going to tuck it away that the end user is going to have to eventually pay for it come spring.

Pearson: All right. So at this stage of the game, unless you can -- you've got a shorter season number or you don't have corn available at this point, store it, wait, we're going to get paid for it later.

Kub: I think so because I don't think that that 770 level was a big overreaction. I think unless the dollar, you know, continues to streak higher, I think that was a fair price for this crop of corn. I think it's the kind of thing that we could see again.

Pearson: With the tightness in the old crop, are we going to see a traditional bottom here for cash and futures during the harvest?

Kub: You know, the basis has actually been rather strong, unseasonably strong. You know, I anticipate that once we get through the glut of harvest, yes, we will continue to see the end user continue to bid up this basis.

Pearson: All right. What about selling '12 and '13's crop?

Kub: That's trickier because the futures expense and options expense is harder to do. But I would like to see farmers maybe start some incremental sales on 2012 just because during the month of August we had an incredible run up in grain prices and an incredible decline in energy prices. So at this point you can lock in your sales and lock in some input costs and lock in some of the largest profit margins that farmers have ever seen in their lives. I know that locking in input costs can be hard if you're using the futures markets, because we have these large unit sizes, 42,000 bushels of heating oil -- or gallons, I'm sorry. But if you can use over-the-counter contracts, if you can talk to your supplies about locking in those input costs and doing a similar percentage of input costs -- buying as you're doing of production selling, you can really lock in some good profits for 2012.

Pearson: All right. Get the inputs covered, maybe take advantage of that. Let's talk about soybeans and what you see in the soybean market. What's happening on that front?

Kub: This is, once again, still kind of a forgotten market. USDA drops their corn yields to 148, and they raised soybean yields a little bit, which is odd when you consider that the harvest reports that you hear from soybeans now are actually poor. They're not like corn where we see some yields that are okay. You've got the frost situation. Again, I said every tight supply and demand situation; you don't want to lose any bushels at all. So this is the market that has some potential for a bullish surprise yet. It made it through that $14 level, which gives me some hope that if it can stay above there -- if it can get back up there again, we could see it on a longer term trend. So I would wait to make some soybean sales at this point, but I wouldn't wait too long because at this point, the market is still sort of buying South American acres to be planted for 2012. But after October -- late October/November, they won't have to be doing that anymore.

Pearson: And of course, we could be looking at more corn acres in South America, like you say. It's not just soybeans.

Kub: Yes, that seems to be the plan. So at this point you've still got this situation where they kind of have to bid against each other. But, like I said, it's a short period of time where soybeans have an opportunity to get some bullish news from that.

Pearson: So you're not in a hurry to sell soybeans right now.

Kub: Not in a hurry at this point but I will be in a few months.

Pearson: All right. Let's talk real quick about cotton. It trailed off a little bit this week. Disaster crop here in the U.S. big -- what's happened in the world? Are people just not buying cotton clothes, is that part of what is pushing this thing down, or is it just the slow world economy? What do you see?

Kub: Well, it went down this week, but this was after quite a gain last year.

Pearson: And a huge year last year.

Kub: And a huge year last year, yeah. Over the past couple of months, the drought in the U.S. that you mentioned did sort of put a floor in there at $95 for that December cotton contract. But what happened over the past couple of weeks is that India also is having problems. They have had these torrential rains that have affected their cotton crop, not only the quantity of the cotton that they're growing but the quality. So my advice to a cotton farmer would be these are not bad prices. I don't have a problem selling at these prices; particularly futures are struggling to keep up this interest. But I would want to hold onto it for the quality factor. I'd want to make sure that you see how the cash market for quality is going to, you know, arrange itself over these next couple of months as the market digests the news from India.

Pearson: Let's shift gears and talk livestock. Fed cattle market. We've had drought disaster in the central plains. Texas where the bulk of -- the largest individual state. Seen a lot of sales down there. We've shown pictures to people of what's happening as far as the drought's impact. Longer term this has to be friendly to the cattle market.

Kub: Right. I mean it's hard to imagine a way that this would be bearish. It's hard to imagine a situation where we can have the herd expanding at this point. You know, this $120 level for cattle -- fed cattle sounds high in historical terms, but if you look at it in inflation adjusted terms, cattle are still on a very long-term down trend. If you look at it in terms of where you're going to sell it to -- exports have been not that great this week but on a record setting pace this year. So if you have this continued drought, you know, I don't see this herd expanding and seeing a lot of pressure coming onto that fed cattle market, no.

Pearson: And the calf market, which wasn't very strong this week, should I be encouraging at some point to start retaining some heifers?

Kub: Yeah, you know, there's a lot of demand for replacement heifers and there's been a lot of demand this past week for lighter calves certainly. I think a lot of that comes from the fact that some of the southern feeders can put them on some corn stubble at this point, so this is a good time for them to be demanding calves. The hay market is very hot. We've seen even up to $300 a ton going down, depending on your quality and how far you're going to have to ship it. The feed is very expensive, and I think it's true that there's going to be support in both the fed cattle market and the feeder cattle market for some time.

Pearson: You mentioned the hay prices where -- they're going to pay whatever they can to move product down there. It's a very frustrating situation down there, but one man's ceiling is always another man's floor. Let's talk about the hog market and what you see happening as it relates to all this too.

Kub: I think last week on the show Walt Hackney said he expected hog prices were going to start falling.

Pearson: He's thinks there's bigger numbers.

Kub: Exactly, that there was supply. And through most of this week they kept skyrocketing, but here today they really fell part. And I would definitely agree with Walt that it is because of the supply of hogs that's coming onto the market right now. There certainly seems to be a glut of that. Good weights -- good carcass weights. So that's fundamentals -- that's coming in there and pressuring those prices here in the short term, and I expect we'll see some more falling here in the next few weeks. But longer term I would say the seasonal trend for things to head up towards November is probably strength here in the hog market too. All of these meat prices -- if you actually look at a correlation of these meat markets, even crude oil or some other measure of economic strength, they're very tightly correlated. So if we see, you know, this confidence in the economy and confidence in prices -- you know, commodities prices in general, I think there's certainly strength across the board for these livestock futures.

Pearson: All right. Just generally -- a comment about commodities; are we starting to see a shift? I noticed gold pulled back this week. Where do you see that going?

Kub: Yeah, once again, that's another direct measure of economic confidence is gold going down, and we have seen that. If fell below $18 again. And like I said, crude oil seems to be stabilizing. There's a lot of things that make you think that the economy -- if we can make it past either next week when the fed is going to be announcing what it is or isn't going to do as far as economic policy -- if we can make it past that, I think we've got probably a period of stabilization here.

Pearson: All right. Maybe some better markets, at least on the equity side and maybe some reason investments, starting to put some of this cash to work. Elaine Kub, thank you so much for being with us.

Pearson: Elaine Kub, thank you so much. That wraps up this edition of Market to Market. But if you’d like more information from Elaine on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts, streaming video of our program and links to our Twitter feed and Facebook page-- all FREE -- at the Market to Market Web site.
And be sure to join us next week when we'll examine how some farmers are bringing a taste of the wide-open countryside to the narrow canyons of the big city.
Until then, thanks for watching. I'm Mark Pearson. Have a good week...


Tags: agriculture commodity prices economy markets news