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Market Analysis: Elaine Kub

posted on January 13, 2012


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.

Pearson: Let's talk about something that happened at the end of the week that was the S&P downgrade of nine European zone countries. Obviously that's going to be strength for the dollar.

Kub: Yes, absolutely. I mean whether or not one rating agency, Standard and Poors, thinks Slovenia is no longer a triple rated does not specifically affect the supply and demand of world grain, obviously but, like you said, it affects the dollar and that obviously hurts the euro. If we're going to do this, the timing is convenient for us here in the U.S., because we have a three-day weekend coming up. The U.S. Stock Market won't be trading on Monday for Martin Luther King Junior Day. So that means that all the DACs and all the European Indexes are going to have an opportunity to react or overreact as the case may be to that downgrade. And then by the time we come back on Tuesday, maybe things will have settled down because, like I said, you know, when the U.S. was downgraded, that doesn't necessarily spell the end of our economic recovery. It was just a statement from one rating agency.

Pearson: And France was included in that.

Kub: Yes.

Pearson: Finland remains Triple A. All right. Let's move on from that. The other big thing this week was this long-awaited USDA Crop Report. It was bearish, to say the least, as far as the feed grains and wheat were concerned.

Kub: Well, it was a bearish surprise. If you look at the overall supply and demand situation for corn, let's say, or for world feed grains, you still couldn't characterize that market as a bearish market.

Pearson: It's still tight.

Kub: Yes, it's still a tight market, but for wheat, the confirmation of bearish wheat supplies, things like that, and the surprise in increased U.S. yield and, you know, increased world-ending stocks, when we know that there are certainly challenges going on in South America --I think just the surprise of that and the surprise that we use less feed grains in the last quarter of 2011, then I think traders were expecting those surprises are what brought about that reaction.

Pearson: I was in Florida this last week, and I was talking to a guy who is involved in a lot of fertilizer operations throughout Argentina, and he's from the area where most of the drought is and saying that we're still overestimating what that crop is going to do down there. So we still may still get some surprises.

Kub: Yeah, I mean this is certainly the critical timeframe. Let's say that we hadn't had that report at all and the market was still just trading its own weather. We probably still would have had a drawdown this past week just because they did get some rain. It's still very much up for debate of how bad it's going to be, but I think we know that the USDA's in this most recent report was conservative, as they tend to be in these cuts for foreign numbers. But they really only dropped Argentina's corn less than 3 percent of their previous estimation. And I think we all know that if they had hot weather like we experienced in the U.S. this past summer, probably the yield is going to be cut significantly more than 3 percent. It could be up to 20 percent.

Pearson: So we'll see how that all shakes out. Let's talk about specifics. Let's start with the wheat market and what you see happening there. Where are we headed? Now with wheat, like you say, no shortage globally.

Kub: Right. There is not a whole lot that you can say bullish for the wheat market right now. Globally you're talking 30-percent stocks-to-use ratio. In the U.S., you're talking a 41-percent stocks-to-use ratio. We have no shortage of wheat. The future spreads are very wide. Between March and may contract in Chicago, it's 21 cents. That's effectively 10.5 cents of carry per month for the next months in spring. Basis is very wide. The spread between corn and wheat is also --you know, wheat is actually trading at a discount to corn, which you would never expect in a feeding world where protein should be worth something. So there is really no magic about wheat having to maintain any sort of a premium over corn right now. So even if corn comes up, there's nothing saying that wheat couldn't keep from falling. There's just not a lot that we can say -- the acreage was up for 2012 winter wheat. So there's just nothing really bullish to say about wheat at this point in time.

Pearson: And they're saying the U.S. crop looks okay.

Kub: Yeah. I mean actually if you look at the drought monitor in the Southern Plains, there are certainly areas that have been receiving some beneficial rains. That's helping them come out there. And you could start to develop some optimism about production here in the U.S.

Pearson: All right. So from a sales standpoint, what do we need to do?

Kub: Yeah, like I said, I mean you could have a bullish outlook in the feed grains in general and still want to be taking risk off the table for wheat. So if you're in an area that you feel confident is going to be producing winter wheat, I think I would definitely be looking at making sales. Not today, not on Tuesday, necessarily, but on the next rally, you know, at a 625 for Chicago, $7 for Kansas City futures, 8.50 for spring wheat futures. But I think it would really hurt me - I'm really hesitant to say selling spring wheat right now just because that market is actually inverted and is actually a very different beast than the winter wheat.

Pearson: All right. Let's talk corn market, which is where all the action was and where all the concern was. Obviously, the carryout, larger. We heard from so many people that had high test weights on corn, so maybe we shouldn't have been as surprised on that higher production number. But where do we go from here now? We're going to have to wait a while before we get some news except for, like I say, what happened in South America.

Kub: Yeah, well, there is certainly the news of the dollar coming in. I think the dollar reached a new high today on Friday, and we could certainly see that continue next week with Europe having this reaction to the downgrading news that you mentioned. So that's something that is going to work against corn. Actually, for the past couple of weeks, that relationship between commodities and the dollar has sort of fallen apart, which has been beneficial for corn and grains to be trading their own fundamentals at this point. But now that their fundamental are having a bearish reaction, you know, that higher dollar could exacerbate matters.

Pearson: What do we do from a sales standpoint? I hear from all of these people that are out in the Corn Belt that there's a lot of unpriced corn, unsold corn. What are we going to do?

Kub: I wouldn't want to be in that situation with old crop right now. The situation I'd want to be in old crop is to have most of my sales made. If I'm going to have some bushels around for gambling bushels into the summer, I think it makes sense even to find a good price, wait for a rally, and find a good price to hedge them on the futures because we do have a very tight supply situation. We have 9.6 billion bushels to get us through until the next harvest comes up, and that's less than we had last year at this time. You remember what happened last summer.

Pearson: The last two summers really. I think that's why we're in this mode and nobody else sold anything, because it's paid to wait.

Kub: Yes, and when we really look into the summer and expect to have another incredible basis fight come out from all the end users when we get to July and August. If you expect that sort of a movement in basis, I think you might still want to have the futures hedged here at some point for the old crop. So like I said, I'm not looking at hanging onto old crop as anything more than a gamble at this point for the futures market. For the new crop, I haven't started making any sales yet. I think we still have opportunity for that to come up. There's so much uncertainty left here in the U.S. For 2012 I don't think that we know that there's going to be enough seed, necessarily, to optimally get the right hybrids where they need to go to produce great yields in 2012. And there's also the fact that there's a lot of acres that are still under a drought situation in Texas and throughout the Southern Plains. For 2012, you know, there's still a lot of potential that some better marketing opportunities will come up, and when those come up, I would also be looking very long and hard at having a plan for 2013, because by the time we ever get some normal weather or normal seed production, we could easily raise 14 billion bushels of corn in this country.

Pearson: About 94 plus million acres, no question about it. Bracket me real quick, lows and highs for corn for 2012, what do you think?

Kub: That's a hard question to answer because a lot of it will depend on the dollar. That's a global, geo-political, what are we going to predict there. But all things remaining equal, I think, you know, $6 futures would be the least - the least that I would accept, and it certainly could go back up to $8 in the summer.

Pearson: All right. Let's talk about soybeans real quick. Soybeans have just been kind of been beleaguered here, following corn, being defensive. What's ahead for beans?

Kub: Again I'm looking - again, that was an overreaction. We already knew a lot of the bearish news - the so-called bearish news that USDA released this week. So to have it rally, to have it some sort of a bounce back above $12 I don't think is unreasonable to expect. I wouldn't start making new-crop sales until it got back above there again also. But so much here is depending on Brazil's weather, so all of these opinions are continent to change very quickly if it does turn out in the next couple of weeks that Brazil does get adequate rainfall.

Pearson: All right. Let's switch over to livestock. Fed-cattle market, a good week on the board this week on fed cattle. Cash seems to be moving okay. In this cattle market, are we set up again to run in 2012?

Kub: Very possibly throughout 2012, certainly. This is the time frame where would seasonally you expect to see the market sort of fall back, but in think that $120 level on the futures board I think has been demonstrated, that there is enough buying support to keep the market above that. And we always talk about the supply shortage of beef in the U.S. right now. The herd is very small right now, smaller than it's been since the 1970s. But what's been interesting recently is that it's not just the number of animals, it's the carcass weights that are also coming in shorter than we would expect, and so that is also a very bullish supply argument to keep live cattle prices higher.

Pearson: Absolutely. Small herd but more meat per animal.

Kub: Less meat. Less meat per carcass.

Pearson: More leaner. Oh, carcasses are coming down.

Kub: Yes.

Pearson: Interesting. I wasn't aware of that. That is fascinating.

Kub: Well, I think, you know, the feed is so expensive. You know, we're feeding these animals less and still bringing them to market.

Pearson: I've seen some awful big carcasses go by lately. Tell me about the hogs. What do you see there?

Kub: I think the hog market is in a better situation to respond to the higher prices by bringing in more supply, which is what we've seen. Between 2010 and 2011, the U.S. hog population has grown 2 percent, actually USDA remarked. So by bringing on more supply, by not being affected by the drought to the degree that the beef market is, that has actually sort of put a lid on those prices. I think it would not be surprising to see these levels we're at now, this 85 now and into the summer $95 coming down actually, that lower trend to sort of be a continuation.

Pearson: I want to ask you energy and gold, what's your thoughts?

Kub: Well, energy is certainly a wild card right now. we've seen that come down quite nicely in the next couple of days but, again, this is a geopolitical thing that if you could tell me what Iran or Israel or anyone is going to do, you know, we might have a better chance of knowing what energy prices are going to do. But with regard to ethanol, let's say, there's still only room for ethanol to come in and close the gap between it and RBOB. So there's good news for our end users.

Pearson: All right. We've got about fifteen seconds. The gold market, is confidence being restored, or are we going to see gold making a jump, maybe, after what happened this week?

Kub: Well, after what happened in Europe this week, you know, you might see gold continue in its bounce higher, but other than that, you know, I think it's sort of lost flavor. People have started to realize that actually the U.S. dollar is a strong bet for being concerned about the economy.

Pearson: Very good. Elaine Kub, thank you so much. That will wrap 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 website. 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” website. And of course, we want you to join us again next week when we'll examine the economic outlook for Rural America. Until then, thanks for watching. I'm Mark Pearson. Have a good week.


Tags: agriculture cattle commodity prices corn economy feeders hogs markets news soybeans wheat