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Market Analysis: Market Analyst Elaine Kub

posted on October 28, 2011

Market Analysis: Market Analyst 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: We talked about harvest getting wrapped up for corn and soybeans in the upper Midwest. Cotton getting close. We're getting to that point where we start to see the seasonality of some price pressure. But on the board, we did finish stronger. Let's talk first about what you see in the wheat market were globally there seems to be plenty of supply, a little concern about this U.S. crop getting started. But what do you see ahead for wheat?

Kub: Like you mentioned, the grain charts, if you were just looking at grain futures charts this week and they were actually kind of boring. They just kind of bounced around. They didn't have the excitement as the stock markets and things like that. You mentioned the global supply of wheat has been very strong, Mostly because Russia and Ukraine, who are getting cheap into the world market, they were really trying to get that so that they didn't have to store it in their limited infrastructure, but now farmers seem to have gotten that out of the way so those prices are sort of coming back up. And here in the United States it also looks steady. But when you look at these wheat markets, it really is three very different things. Minneapolis, that spring wheat, people just can't find enough of it. The December contract is 60 cents inverted over the March contract. And so that is definitely spilling over into the Kansas City wheat contract because Kansas City wheat this past summer had very good protein, so it's a very good substitute for the spring wheat and millers are able to do that and it brings up the basis, if nothing else, on that Kansas City wheat contract. So frankly, with the dollar down as much as it is, I don't see any reason why the July 2012, contract, let's say, for Kansas City wheat couldn't get back up to $9 where it was, where it was in August.

Pearson: All right. So some possibilities there. So obviously you're not in a big hurry to sell wheat.

Kub: Actually not. Not for 2012, if for no another reason being oversold on anything is really trouble when the time comes and you can't fulfill your contracts. So with things as dry as they are in the Southern Plains and people really very uncertain about what you could even produce if we have a similar year like this, a similar summer, a similar drought all for the next 12 months, I would not be in a hurry to oversell myself on 2012 wheat.

Pearson: Absolutely. And of course, we could have some production challenges there maybe in this country, who knows elsewhere in the world. It's a long time, like we say, so not be in a hurry to make sales. Let's talk about what you see as far as the corn market. We are looking at the corn market and people are kind of thinking it's been a great year. There's been a lot of sales made earlier. A lot of producers really hit their numbers early and were able to make sales. Now we are into that harvest time period, and basis has remained fairly strong.

Kub: Very strong. It's unseasonably strong. That partly suggests that farmers are bulled up. They start at $7 before the summer and they would like to see that level again. And so whatever corn they don't have sold, they are willing to bin and keep off the market, and that is keeping merchandisers really scrambling for corn right now and keeping basis very strong. And the basis - that strength of the basis is coming up out of the Southern Plains, the feed yards and The Gulf are struggling for the corn. So you do see the stronger basis even in Nebraska than you do in Iowa or Minnesota, for instance. But it's strong everywhere. The point I’d like to make is that it's strong right now, and it's weaker in March, actually. So by the time you take off the basis in March, you give up basically all of the carry that the corn market is offering. So basically the market is telling you if you're going to sell corn, you might as well sell it now. There's very little motivation to wait until after the first of the year to market corn unless you have a very strong opinion that prices are going to go up, futures prices are going to go up or that the carry would improve, which I don't necessarily expect. You could make the argument that if merchandisers are scrambling for corn so hard now, they might scramble for corn again when summer comes around. That's certainly what happened last year, so it's not an unreasonable bet to make.

Pearson: There's also that feeling that we're going to put this crop away, and then they're really going to have to -

Kub: Exactly. The difference would be – The one caveat I would make to the idea of stronger basis in the future would be if the futures market does seem to get more investment coming in and futures prices do start to rise. I don't think merchandisers will struggle as much to get farmers to let go of their grain. If we make it above 675 or make it near to that $7 level that I think a lot of farmers are looking for.

Pearson: And what about on the 2012 crop and making sales there? We've had this issue of what are inputs going to be. We are starting to get a feel for where imports are going to be and maybe getting some of those covered. So should we look at those numbers out there in 2012?

Kub: Yeah, I wouldn't feel bad about any previous sales I made about 2012. Obviously, they are a good price to sell them now and lock in these profits. But that being said, again, I would never want to get oversold, certainly not oversold past my injured bushels because, again, it already looks like we are in this La Nina and this is a very long?term projection and I’m not a meteorologist, but let's say we had a third straight year of poor yield - below trendline yield of corn in the United States. We are very short ending stocks right now, and three years of that would just keep us in the same situation. So you would expect to see prices in March always be higher than they were the October previously. So just seasonally, you'd expect to see higher prices later.

Pearson: And, of course, corn producers are out there saying, boy, we've got decent prices now, we made some pre-sales, maybe we should take advantage of this. We are also looking at this higher input cost, particularly on the cash rent side, where I hear one story after another about cash rents literally going to the moon. Somehow we have to cover all that.

Kub: Yes. I would - You know, for input costs for energy, for instance, even OPEC is talking about hedging their sales for next year. They're concerned about the world economy, the Chinese economy falling apart, so they are concerned about energy costs being lower in 2012. Otherwise, I would be a very aggressive booking of my input costs for 2012. As it is, though, I would not book a larger portion of my input costs than I have of my production sold at this point.

Pearson: The weaker dollar against the euro, against other currencies in general, we had this nice move up. It didn't seem to impact the corn exports here. Or was that - or are there some other issues there in terms of her usual buyers for our product.

Kub: I think that's certainly part of it because as you look at the South America currency, the Brazilian currency has certainly come way up. The government may try to keep A lid on it, but there's only so much they can do with their own internal inflation in Brazil right now, so as far as international competition for our exports, I would say the dollar going up these past couple of months probably was kept exports - kept a lid on it. But now it's fallen way back down this week. It's only 3 percent off of its low from earlier this year. So I’d say the dollar is actually a very bullish factor, and you'd imagine that if grain - if they're ever going to bullish based on the dollar alone, they should be as bullish now as they ever were.

Pearson: How bullish are they on soybeans?

Kub: Not terribly. Again, I want to mention South America. That's been the fundamental reason why the soybean chart has stayed fairly bearish. Technical traders were looking for that soybean chart to come up again over it's thirty day moving average this week, which it never was able to do. It never closed above 1240, for instance, on the November chart. The only real fundamental reason behind that would be the excellent planting progress in South America. And I know that should affect those deferred contracts more than the nearby ones. But it seems to be a story that's affecting that soybean market as a whole.

Pearson: And the soybean market again, what are you telling people? Should we be selling off the combine on beans, or should we be holding?

Kub: Again, we've had pretty good basis here. It's strong now. There's really not enough carry to motivate anyone to surpass the first of the year. So it's the same sort of situation. If you're going to sell them, you might as well sell them now, take these prices, take the money and run. On the other hand, seasonally, you know, if you've got the bushels but you can hold back and you are willing to make that gamble, let's say, that's the sort of thing that could happen.

Pearson: Again, these are not horrific prices, by any means, so take advantage of it. People would see a slackening basis this time of year, so there may be some reason to do that. Same question, 2012 next year, are we doing anything yet on beans?

Kub: No, you know, the price ratio, let's look at this, in beans to corn. It hasn't been at its high for the past 12 months, and it's not likely to be again. But it would have to be if we didn't have such large world ending stocks of beans. Brazil is able to produce a lot of beans. There's plenty of beans in the world. So that's why beans don't have to bid up very much. But in order to get people to plant them, they would have to be very extreme, just because farmers aren't inclined – They don't have a preference planting beans because of the profitability of corn.

Pearson: That's right. And the yield issue of beans in many cases. Let's talk real quick, the cotton market. It started to wrap up - Getting closer to the wrap up on cotton harvest of there. Prices back over a hundred. But what's your take on cotton?

Kub: Cotton was bouncing along in a very up and down and mostly sideways pattern, for a long time. This week was pretty much the first time they got a lot of interest in it. The total open interest in cotton futures did rise. And that's remarkable because honestly, the money - a lot of money that came out of the cotton market was European investors, European hedge funds. And they're the ones that are really getting squeezed by their own lenders. European banks don't want to be giving this hedge fund money to go play around in the commodity markets. So to see the money coming into cotton, maybe a bellwether of money coming into the commodity markets as a whole here through the end of the year.

Pearson: Let's talk about livestock, the fed cattle market. Soft week on the futures.

Kub: Soft week in the cash too. It hardly made it above 120. That's a reflection of the weaker packer margins. But going forward, there's not a whole lot of reasons to turn suddenly bearish on this market. Beef prices, the consumer has really been able to keep up on that, particularly in the prime and the choice markets. There's been a very wide spread opening up between the choice and the select markets, which suggests to me that we have a situation in the United States, certainly, where some people are able to afford beef, even high - priced beef, as high prices as you can get it; whereas, others are not. So it's certainly interesting to watch how that turns out. And if you look at the consumer ability to pay, if we have the smallest cow crop in the United States, as we've had since 1973, which should have consumers as willing to pay for beef now, as they were in 1973, which would suggest in 2011, inflation is just a dollar, live cattle prices could be as much as double as they are now. Rather than 120, they could be 240, if we were going to have 1973 equivalent prices.

Pearson: I would be interesting. There's a lot of cattlemen that would like that. I talked to some packers when I was in Arizona a week ago, and they're very concerned about numbers going forward and the lack of heifer protection and the lack of expansion in the domestic U.S. cow herd.

Kub: That's been known for a while, and that's a reason to feel that these prices are likely to remain strong through the next year, because until you have the drought released in Texas, which who knows when or if that'll ever happen, there's no reason to turn suddenly bearish on cow prices. You know, in 1973, for instance, those prices collapsed very suddenly, I was reminded. But this is not the same situation. We have a drought and then there's really hardly any way that that cowherd that you are talking about can really expand quickly.

Pearson: All right. Cheaper dollar, of course. We're getting a lot of exports in the beef front, which is a positive, and also on pork. What do you see ahead for the hog business?

Kub: You know, that's obviously a very bearish market on the near term right now. Those future prices have really come off, and that's a reflection of the larger supply that's coming in right now.

Pearson: Bigger numbers, you were talking the last time you were here.

Kub: Exactly, yeah. But something to keep in mind is that the pork prices at the retail market have not risen as much as the prices that farmers have received for their hogs. So it's no wonder the packers are getting squeezed and they're willing to pass that along to the actual hog market as much as they can in a situation right now you've got a lot of hogs. But looking forward into the spring, those prices have not suffered as much. So there's expectations that things will improve there.

Pearson: Let's step outside the agricultural realm indirectly because we are certainly big users of it. Crude oil this week. Very interesting trade. What's going on with crude oil?

Kub: Well, what happened for a while there, particularly when Libya was struggling to produce and they still are struggling to produce, but when that was a big market consideration, is that traders were very bullish on the Brent Crude Oil that comes out of Europe, and not so much on the United States crude oil, which there's no good reason to be particularly bullish on U.S. crude oil right now because of the inventory. Now, they're unwinding that spread, and we're seeing very strange things happening to U.S. crude prices coming way up this week, which may be a reflection of the better U.S. economy or it may just be a technical trade going on.

Pearson: Or like you said, a lot of paper moving as that spread unwinds. As usual, Elaine, appreciate your insights very much.

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 again next week when we'll examine the economic impact of last summer's floods in North Dakota. Until then, thanks for watching. I'm Mark Pearson. Have a good week...

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