Yeager: Here now to lend us her insight on these and other trends is one of our regular market analysts, Elaine Kub. Elaine, welcome back to the program.
Kub: Thanks for having me.
Yeager: I've got to ask you -- let's talk about this weather. It's all about the weather in every market.
Kub: Absolutely. Every agricultural market including the livestock markets, obviously, are very affected by the fact that if you look at the drought map, every signal state, with the exception of Minnesota and Wisconsin are basically entirely in some sort of drought, so you've got bad pasture conditions and bad crop conditions. This is obviously very bullish.
Yeager: That's something, when I was out in Kansas and I talked to the extension folks from Colby, it was 116 last time, and crispy pasture areas. They're talking forage and the one upside in some parts is they maybe will be able to have some bailing opportunities to feed those animals for a little bit. So you saw liquidation of herds. We'll get to that in a little bit. But let's start with wheat, that is in wheat country. They are done with that harvest. Kansas had a really good year, and so did other places, but the market keeps going up. Why?
Kub: The wheat market is following corn and soybeans higher at this point because, like you say, the winter wheat harvest is pretty much three-quarter ways done and you still have to get into the Dakotas and the spring wheat harvest will be getting started here soon and the condition ratings for spring wheat are also fine. I think that we are going to have adequate wheat crops in the U.S. this year, it sounds like. And yet the futures prices continue to follow the row crops higher, so what we do see is a weakening of the basis from about a month ago, we see about 10 cents weaker basis in both of those markets. So there is some resistance in the cash markets from following the other grains up quite this much. There's some substitutability between wheat and corn as the feed ingredient, so it makes some sense that wheat has benefited from this rally.
Yeager: So wheat, we're up 40 cents over the week, and 847.how much higher can this go?
Kub: You know, that's a really good question. I think that there is some reasons to be a little bullish down the line for commodities in general. We could have a situation where more quantitative easing could come in. The dollar could come off of its high that it made this week and just kind of juice up these commodity markets more. So I think that it's possible that we could keep going, but if I was a wheat producer and I had benefited from this rally and I know that basis is getting weaker and you look at the future spread in the spring wheat, there's no benefit in the future spread to holding on and waiting to later on. That's an inverted market. The signals to me say that you should lock in these prices that sell off the combine.
Yeager: Sell it off right now and don't hold onto anything --
Kub: In my opinion.
Yeager: In your spot. So any range of price, were you thinking?
Kub: Well, you know, the prices now are perfectly fine. You've got $9 spring wheat in the cash market effectively. There's nothing wrong with that.
Yeager: Let's talk about corn. The production, that was the big story on Tuesday, USDA lowing what seemed to be a reality. It was all that had to happen. There was no way that crop was there. But the market really didn't respond to that like you thought it would, did it?
Kub: It had a wild day. It did respond to that bullishly and went up and then went down. Simultaneously to lowering the production, they also make cuts to a bunch of demand factors just to kind of make the math work out that we still have some kind of inventory at the end of the year, but some of those cuts to demand are a little artificial, in my opinion. We have not seen any evidence in the export trajectory that would suggest that we need to be cutting that. In fact, the exports to Asia are probably going to continue to be strong through this marketing year. So there's still a lot of play I think in the inventory, and I think --so they did cut the production. Like you said, they cut it to 146 bushels per acre, which is a bushel less than the 2011 projection level nationwide. I think it's fairly safe to say that with the footage that you show of the drought-stricken acres all across this country that we are not going to be close to 2011 production levels, in my opinion. So you see some private estimators -- Informa came out with the 132 number this week. I think that's getting closer. I think we're going to need to cut more than 2 billion bushels off the total 2012 production.
Yeager: Especially if it doesn't rain and we get back to the triple-digit heat. We bought some time this week with 90s, only 90s and low 80s.
Kub: Heat wise, you're right, this wasn't a bad week heat wise, but precipitation wise, you can get a half-inch rain here and there, but a half inch of rain in a given week doesn't do much for corn crop that's using up an inch and a half or 2 inches per week. So that has not done enough precipitation. There's not much in the forecaster here towards the end of the month, so we are really looking at dead and dying crops.
Yeager: In Southern Illinois, Illinois corn growers met this week, and there was doom and gloom if you're south of I70.
Kub: Yeah, it's absolutely terrible conditions there. They're talking about mowing down the fields, and it's certainly going to be an early harvest there. The market will have an opportunity to see what kind of yields they will have earlier than usual this year.
Yeager: Let's talk about that market. If you have some old crop, what do you do? Old crop, like I said, the harvest is going to be early, so if you're going to try to hit the high when the end-users are most desperate to get the remaining bushels of the old crop, you have a limited timeframe to do that, in my opinion. I think we've only got a couple of weeks before we start to see serious new crop come onto the market again. So, you know, risk management wise, take the money and run, in my opinion.
Yeager: You don't see $8 as a possibility?
Kub: I do see it as a possibility, but is it a possibility --if that's a possibility that you're willing to gamble on, then there you go.
Yeager: What about new crop?
Kub: New crop, you know, I don't see a whole lot of downside in the very near term, so I wouldn't --myself personally I wouldn't spend a bunch of money on risk management tools right now. I wouldn't be putting a bunch of money into something like that when we still -- the market has still got some potential to keep going here. Technically there's nothing really keeping that market from going higher. So I think I'm waiting to see how far it will go before I'm starting to lock in 2012 bushels, and at the same time I'll be looking at 2013 and possibly even 2014, because if we ever get a normal year, we're going to have a lot of grain to sell.
Yeager: There is no normal there. That's out the window. Let's talk soybeans. That's a crop that can hold on for a little bit longer for drought. How much is weather in that market right now?
Kub: I think that the soybeans is more of a weather market than corn. Corn is -- I think a lot of corn is done, where soybeans still have the chance to respond to rain if we get rain in early August. You might see a lot of volatility in that market as the market reacts to rain and rain forecasts. Also, I think that it's going to take -- like usual with soybeans, it's hard to tell yields before you actually harvest them, so it might be a while before we really see what the damage has done. But I think some damage has already been done to soybeans just agronomic speaking. They're short. They're uneven. They're not really doing well right now either.
Yeager: If you have some old crop, do like corn, get rid of it?
Kub: I have the same opinion for both of these crops as far as marketing: wait and see how far it will go. Chinese future prices, by the way, are about 1890 -- the equivalent of $18.90 per bushel, so there's certainly money in that for China to continue buying soybeans, and we haven't really seen a rationing level from them yet.
Yeager: Let's get to cotton quickly. What do you see happening there?
Kub: Conditions wise, they look fine except for Missouri, and that's the reflection of the irrigated acres in cotton. So there's no real bullish --it's not as bullish of a story for them production wise or condition wise, so that market has been fairly flat. I think from day to day you see it respond to the outside market, so I am again mildly bullish about the commodity sector in general, so you might continue to see some benefit from that.
Yeager: Live cattle fell a little bit this week.
Kub: Yeah, cattle have really suffered. The entire livestock market, especially the futures have been really punished this week while feed prices have been going up. There's some legitimate bearishness, the live cattle market, also the cash cattle market, because exports are dying. Per capita demand in the U.S. is down, obviously, but exports are also down. There is some legitimate, like I said, some legitimate bearishness but, on the other hand, we are seeing the herb being reduced, there are --people are slaughtering cows while the pastures are this poor. At some point I am expecting to see these cattle markets correct to reflect the fact that they still don't have a supply and demand situation that is anything like we've seen since the '70s.
Yeager: That story that was out of Springfield was talking about that that market had seen some buyers coming in from Oklahoma and Texas, and so maybe is there a little restocking going on down there?
Kub: I think there's certainly opportunities for guys. I think that the prices are opportunities, if you've got the feed or you've got the pasture to put them on. You know, hay wise, feed wise, it's already record-breaking prices, faster than it was last year at this time because the drought is more widespread Last year you could maybe get some hay from Wyoming down to Texas, but this year everybody is dry so we're already seeing alfalfa could be $200 a ton in Iowa even here by the end of the month, so who knows what it will be like for the Southern Plains.
Yeager: You touched a little bit on feeders. They really fell off.
Kub: They really got punished today. The August contract went below 140. That's the first time we've seen in a while. And again, that's just the reflection of feed prices but supply and demand wise, the supply of feeders is short and we're losing --we're not building up the cow herd yet. We're actually diminishing it. So it is bullish long term, in my opinion.
Yeager: Any range of price you see there?
Kub: You know, I don't think that 160 was unreasonable from the cash calf aspect itself, if you can lock in some feed prices. If you ever get an opportunity to feed them and make that profitable, I think the supply and demand of calves themselves justify a 160 price long-term.
Yeager: Hogs also lost. A bad week for livestock all around.
Kub: They got punished also, but they've had quite a rally. It's sort of seasonal. We've got the situation of hot weather and poor carcass weights. But when you look farther out, if you look at the October contract, that's a lot cheaper than these nearby contracts for hogs, which sort of reflects the fact that they have more bearish supply and demand. They really have been expanding that herd. I expect that we will see the expansion of the herd slowed down because of these feed costs, but it is still --they have increased exports so you have more bullish factors than beef does.
Yeager: Quickly on ethanol, that was another thing that could influence that corn market or just the energy market in general. What's happening there?
Kub: Yeah, they're getting --they're suffering from a lot of different angles because the corn is expensive. Rail rates are expensive. On the other hand, they can turn around and sell their DDGs for about 90 percent for the cost of corn. Crude oil might start to recover and certainly we're starting to see the ethanol price itself narrow that spread between ethanol and gasoline because the market needs ethanol to blend with gasoline, so they're probably going to be able to make it.
Yeager: All right. Elaine Kub, thank you so very much for your analysis. That will wrap up this edition of "Market to Market." Before we go, we want to make good on a promise from last week, to name the next host of "Market to Market." Longtime viewers of this program know that in our thirty-seven year history there have only been two permanent hosts: Chet Randolph, who anchored the program for its first seventeen years, and Mark Pearson, who passed away in June. And just as farmers often pass their operations down to the next generation, “Market to Market” will do the same. Grinnell, Iowa, businessman and farmer Mike Pearson will follow in the footsteps of his father as the new host of "Market to Market.”
Pearson: When I was asked there was a long pause, and I could just hear dad say, say yes. Never turn down an opportunity. And in a lot of ways that's what this is. It's something he built up, he and Chet Randolph spent nearly forty years building up the “Market to Market” brand for farmers and ag professionals to trust and to turn to. And here's an opportunity for me, as a young person, to continue building that trust for the future. And I'm thrilled and I'm honored and I'm humbled.
Yeager: Mike brings substantial knowledge of farming and a clear understanding of rural issues to the table. Representing the sixth generation of Pearsons rooted in Midwestern agriculture; Mike grew up on a family farm in Iowa. His family instilled in him a strong work ethic and an appreciation for the rural experience. After graduating from high school in 2003, Pearson managed his family’s diversified grain and livestock operation and provided market updates and news reports for WOI Radio in Ames, Iowa. Upon graduation from Simpson College, Pearson entered the banking industry in Grinnell, Iowa. His financial experience includes personal, commercial and agricultural lending. Pearson and his wife, Heidi, live in Grinnell, Iowa, where they continue to build the genuine Pearson Cattle Company brand. Mike succeeds his father, Mark Pearson, who hosted the program for the past twenty years until his death last month. Mike will begin his hosting duties on "Market to Market" next week.
Yeager: First off welcome Mike.
Pearson: Thank you, Paul.
Yeager: Time to jump into this seat. There's a lot going on. It's a volatile time out there.
Pearson: It is a volatile time. It's even more than that. Wherever prices go this year or next year, on the production side, producers are going to see more complexity in marketing choices, in the outside markets, all of that stuff is getting more complex on their side. And on the consumer side, we are seeing an explosion of choices, whether they are feed consumers, food consumers or fuel consumers, and a show like "Market to Market" for thirty-seven years has helped people navigate those markets and make those decisions. And I'm really honored to have the opportunity to continue that tradition into the future and it's thrilling and I'm really looking forward to it.
Yeager: Mike Pearson, best wishes to you as you take over as host of "Market to Market." I'm Paul Yeager. Have a good week.