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Market Analysis: Elaine Kub and Walt Hackney

posted on September 14, 2012

Market Analysis: Elaine Kub and Walt Hackney

The Agriculture Department’s reports released on Wednesday generally were viewed as bullish for soybeans and bearish for wheat and corn. 

For the week, December wheat gained 20 cents, while the nearby corn contract moved 18 cents lower.

USDA’s supply and demand estimates proved to be bullish for soybeans, and the November contract settled Friday with a weekly gain of nearly 3 cents while nearby meal prices moved $3.70 lower.

In the softs, cotton moved in a sideways fashion gaining 18 cents per hundredweight.           

In the dairy market, October Class III Milk futures gained 4 cents, while the deferred contract moved 37 cents higher.

Over in Livestock, October cattle gained 58 cents, nearby feeders gained 47 cents, and the October lean hog contract gained $2.67.       

In the financials, the Euro gained 320 basis points against the dollar.  Crude oil rose nearly $2.60 per barrel.  Comex Gold advanced more than $31.80 per ounce, and the Goldman Sachs Commodity Index gained nearly 20 points to close at 694.30.    

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

Hackney: Thank you.

Pearson: Let's start off the discussion with the big news from the Fed yesterday, launching into QE3, quantitative easing. What does that mean for these commodity markets going forward? Elaine?

Kub: Well, the takeaway from QE3 is that it makes the dollar cheaper, and that has been the effect of QE1 and QE2. The difference of QE3 is that it's basically unending. You know, it's going to go on every month until they get whatever result they want. They didn't really put an official goal on that, which means that they could just be pumping $40 billion of money to cheapen the dollar every month for the foreseeable future. A cheaper dollar is good news for farmers and any sort of commodity producer on the world scale, but you have to consider that each of those dollars now is worth relatively less, or it takes more of them for a consumer, for our customer, and our customers' customers to buy our products. So it's a little bit of a twoedged sword as far as the ag markets go, but for the time being  and this was the trend of the dollar going into this is the dollar is cheaper, which is a bullish argument for commodities.

Pearson: And they see the dollar being cheaper for the foreseeable future? As long as this continues?

Kub: Yeah, that was a surprise. The trend going into this was the expectation that the Fed would do something. I think the large jump that we've seen  or the large drop that we've seen in the dollar these last couple sessions and the large jump in gold suggests that this was a surprise, that the market was a little bit stunned by the size and the scope and the length of this program, not just that they did the program but that the program was this aggressive.

Pearson: All right. Anything else on the outside markets really driving the commodities this week?

Kub: I would say that's the number one thing, a cheaper dollar.

Pearson: All right. Let's talk wheat a little bit, where do you see where do you see wheat headed?

Kub: Wheat might be running into some technical resistance up here. It might be running out of some steam just on a chart basis. It has enjoyed a lot of support. It's been a leader of the grain market simply because of the export news, but the export benefit is really going towards Russia and France right now. The U.S. wheat is not really getting a lot of these new 

Pearson: So going forward, what do we see there?

Kub: I would expect to see wheat continue to be a leader from daytoday, but the fundamental stories of wheat is that they are not going to be the leaders. I am not looking at them creating new highs here in the next month.

Pearson: Okay. So what's your news to producers out there?

Kub: Well, my news to producers would be  the question is are we buying acres, is this a bullish story for many months in time. That might be something that is more of a world story. The U.S. is obviously still in this drought, and we're running out of  there's not as much motivation for U.S. wheat farmers to be planting, so that's a question that we might come into six months down the road, but for now if you're looking at marketing in the near future, you've got this mildly bullish commodity story, but other than that, we might be near the highs.

Pearson: All right. All right. Moving on to corn, we have the USDA report come out on the 12th. We saw some movement in the market, but not that much. What does that tell you, Elaine?

Kub: Again, humans and traders in general respond more to surprises, so the idea of the USDA increasing carryover from 2011 was not as much of a surprise to them as the news for the soybean market was a surprise, so that's why we have seen soybeans be the leader this week rather than corn. The corn market in general has not enjoyed we have not really been able to attract a lot of new speculative money. So again, it seems like it's running out of steam, and if you look at it from a fundamental standpoint from the harvest reports, most of the worst fields in the U.S. Corn Belt have already been harvested. So the worse news, the most bullish news from a harvest yield standpoint has probably already been considered and thought about by the market.

Pearson: With that in mind, looking at where prices are today, what's should producers be thinking as they're harvesting? What are they going to do with their corn? What do you suggest?

Kub: Well, at this point, you're going to now have a good sense of whether or not you've got enough corn, you've got enough grain to cover your cash contracts. So now you might be in a position again where you'd be willing to sell some more. There's basically no motivation in the market in the carry, in the future spreads for anyone to store it past the end of the year. So particularly to pay your bills  and you've got to sell them. These are perfectly fine profitable prices to sell if you've got the grain. So I think you're going to see a lot of corn and soybeans also being sold right off the combine for these prices. You know, I saw someone in the market considering that farmers wouldn't be willing to sell at these prices, and that might be a remaining bullish fundamental story, but I don't see that being the case. There's not a lot of motivation from a risk management standpoint to gamble on this. You might have Northern Brazil continue to be a little drier going into the next few months of planting, but that's really the last remaining big bullish story that could come in before we have South American supplies come on and be very bearish.

Pearson: Walt, now, you work with a lot of guys looking to buy corn. What are they  are they out there buying in this environment, do you know?

Hackney: Well, the availability is one of the challenges if they were inclined to buy. The feedlots are in an extreme dilemma for two reasons. One is this availability of anything like old crop or new crop. It's just not being available. The other side of the challenge is the price. Should they buy at the 750 level or should they wait and anticipate a better yield than what's been projected by the USDA, and hopefully get it more toward $7. They're hung up on that. The inventory for feeding at the feedlot levels are very low right now. They've got plenty to get by, that's not the point. But they have no reserves because they can't get it, or if they can get it, they're not sure about what the future of that current corn trade is going to make it.

Pearson: Okay. It could get tight if we end up with a shorter yield than projected.

Hackney: Probably, Mike. Probably what could happen easy enough, there's enough of the large feedlots that are just barely manageable on their corn inventory for their rationing. If they hold off of buying at the price in fear of the market regressing later, then at the time when reality sets in, they're going to have to buy corn. They can't buy, as Elaine is indicating on the wheat, they can't buy wheat. You can't put 41 percent of protein into a ration and have any number of bushel or any higher percentage of wheat in a grain  in a feeding ration. So they're going to have to step in and own a considerable amount. Now, what will be their competitor? It could be the ethanol. It could be  it could be that we have a dead cat bounce out here in regard to the bad news that's being circulated in the ethanol industry. And it could be that if corn would happen to drop to a level making it more attractive to the livestock sector, then over here the ethanol plants would find it very attractive also.

Pearson: All right. A couple buyers out there. Let's talk soybeans a little bit. Elaine, we did see some bullishness there. What do you see going forward? How long is this going to continue?

Kub: Well, and to Walt's point of the feed substitutabilities, the soybean meal is really the leader. If you look whether soybean and soymeal are both going up, but the Malaysian, the palm oil, the soy oil market is not really the leader. We saw that with the Crush Report this week. We really aren't crushing as much. The oil is not the driver. It's the feed ingredients, the soybean meal, the DDGs that are still available that are still bringing profits for the ethanol plants. As long as people are looking for feed, that will support soybeans and soybean meal.

Pearson: For how long again, for producers out there, they're getting in their fields and they've got a little bit of a better yield than they were expecting. What should they be doing?

Kub: Well, again, this is a situation where you're kind of  you're racing the clock on the South American crop coming on or what the market sees for the South American crop. To some extent right now, we have a battle for acres for the main contract, the May contracts and forward for the South American, should they be planting more corn or more soybeans. And that ratio is sticking right in with where you would expect it to be with these tight feed ingredient ending stocks. So you've got some time here before we really know what the prospects are going to be for South America, if they're going to get good planting, whether they've got some good prospects for soybean production going into 2013. But at this point, yes, appreciate the bullishness for commodities in the dollar, but be ready to sell off the combine if you just want to manage your price risk.

Pearson: All right. All right. Let's move to livestock a little bit. Walt, we'll come back to you. We've seen a little bit of a rise in feeder cattle prices over the past week. Is that going to continue?

Hackney: It has got every good reason to continue. The extraordinary ensilage chopping that has gone on in this questionable corn crop, particularly across the interior of the Midwest. You know, there's areas, Mike, where the destruction of the drought is not as personified as it is right through the heart of our Corn Belt. You can go to West Central Nebraska, Western Nebraska in the valley area out there, they're picking corn, and some of it is yielding in the high 70s to just under 200 bushel an acre. You can go over here into the interior of Iowa, and it's from 030 bushel to the acre. So the drought and the affects of it is more in the Corn Belt center, and that's where the masses of the ensilage has been chopped in these fields that have absolutely no chance for corn production. In that case, that's where the real demand for feeder cattle has caused this market to raise as you suggested. We've got a real demand starting with those producers that put up this ensilage, because when you look at an ensilage pile, there's one thing that can eat it, and that's cattle. You can't feed it to hogs. You can't feed it to chickens. You've got to be able to put it through cattle. Light cattle, calves are the best utilizes of that ensilage at the onset of a good growing program. Now, later on is when then the blade gets sharper because eventually you've got to add corn and more corn to your feeding ration. That's where the feedlot operators are really in limbo. The farmer feeder doesn't have it on hand. The ability to buy it is very limited. The other third issue is what's it going to cost me. And so $8 corn, heaven forbid if you're a cattle feeder, if we get $8 corn, our feed costs go $1, $1.35 on a finished ration, compared to a growing ration of 80 to $1 a pound. So the potential of cheapening these highpriced feeder cattle to a breakeven level that is workable for a person buying them is practically not there. It just simply is hardly there. You've got about $1.30 breakeven at 1350 on a finished steer today at the feeder cattle prices. You can't do it when you're putting $1.30 or better in the gain cost.

Pearson: All right. Looking also at consumers of corn, let's talk hogs a little bit. We've got just a little bit of time left. Where do you see the hog market going?

Hackney: That's an interesting point. There's been so much antagonism on the hog industry for the last probably three months at a minimum, and we've seen the crescendo developing in the volume of sows being liquidated out in the hog units. We've seen that mount and mount and mount. We were killing nearly 7 percent more hogs  sows than we were a year ago, for instance. The tonnage kept going up and going up, and our average market weight on market hogs, not sows, held at 269 pounds a head week after week after week. It was hard to realize that a 2.2, 2.3millionaweek hog kill was made up of that high a percentage of hogs that created the tonnage. Now we're seeing a turnaround.

Pearson: All right. Thank you, Walt. Thank you, Elaine. Appreciate you being here. That wraps up this edition of "Market to Market." But if you’d like more information from Elaine and Walt on where these lofty markets just may be headed, visit the Market Plus page at our website. You'll find expanded market analysis, audio podcasts, and streaming video of our program, as well as links to our Twitter Feed and Facebook account all free at the “Market to Market” website. Be sure to join us next week when we’ll examine the market impact of USDA’s Cattle on Feed Report. Until then, thanks for watching. I'm Mike Pearson. Have a great week.

Tags: agriculture cattle commodity prices corn drought economy Elaine Kub feeders hogs markets Mike Pearson Walt Hackney wheat