Pearson: This is the Friday, July 26, 2013 version of Market Plus. Joining us now is Elaine Kub. Elaine, welcome back.
Kub: Thanks for having me.
Pearson: We had a chance a little bit during the show to touch on what happened with basis levels this past week. And surprise, surprise, we have a lot of questions from people following us on Facebook and Twitter and basically we've got Eric in Beaver Creek, Minnesota, Bryce in Storm Lake and Mitch in Albert City, they're all asking questions pertaining to, are we going to expect a recovery in basis? What are your thoughts there? Do you think we're going to see a pick up? Was this just a spook this week and we'll see things turn around?
Kub: Well, I have three points to make on that. First of all is that I want to first point out that the basis collapse did not really happen in the new crop market. So for folks that were already out of the old crop or who only had a few bushels of old crop left, this was alarming but not an actual problem for them. And then furthermore, on a fundamental standpoint, you know, could the old crop market recover just on a price standpoint? Could you have more than $5.00 corn or more than $13.00 beans? I would say yes, looking at the ethanol market's profitability, sure. They have proven that they can make a profit at $7.00 corn. So sure, why couldn’t they be able, be able to bid more? But whether or not they're going to have to after they have sort of shaken everybody loose and scared people into kind of pushing the panic button this week with the folks who did have remaining old crop soybeans and corn, it sounds like there really was quite a lot of panic selling, they may not have to, you know, push that basis back over the next couple of days. So I don't want to be a false prophet of hope and tell anybody not to sell any old crop now. I haven't been telling people not to sell old crop for months. You know, I think that we had some great opportunities and at some point in time we're going to have a big crop ahead of us so, you know.
Pearson: And that's the next question. At some point in time we will have a big crop ahead of us. But as you touched on during the show, we have planting dates spread out really all over the spring, we've got beans you can still drive down the road and row then just like it was end of May, early June. So now thinking of that, and Mitch in Albert City, this is what his question comes back to -- how concerned should we be about an early frost that is predicted? What are the weather models telling us? Can we trust them this far out? And how early of an early frost could be disastrous this year?
Kub: Well, I mean, that's the point is that even a normal frost or an early frost could be very disastrous because everything is so darn late. Like it is not just a little late, it didn't recover. I mean, we had a late planting and I think if you have a late planting then normal weather you could recover if you get some heat units. But we had a late planting and then a cool summer so it never recovered. So it's been late, late, late all the way through so even a normal frost date would be pretty disastrous. But you don't know that that's going to happen. We could have a late frost and it could still be fine, it could absolutely still be fine.
Pearson: Certainly. Is there any way for producers to hedge that risk? I mean, how do you deal with weather issues?
Kub: Yeah, so in this brave new world of trading, swaps trading, you can trade over-the-counter weather contracts. You can look and find a counterparty willing to do that and they would function just like a put or a call except your strike price is based on the frost date, they can do that, or on the cumulative temperature. So these are available. The regulatory environment for over-the-counter swaps and making sure that you're a qualified hedger is really something to look into. I'm not endorsing this across-the-board or anything but it is something to look into and even if you don't do it this year it's something to keep in mind for the next 15, 5, 10, 15 years is that this is the direction we're going.
Pearson: There's an option out there for nearly everything.
Pearson: Now, one of the things we didn't get to cover during the show was the cotton market. We did see -- we've been trading sideways here if you look week on week for the past about a month. What are your thoughts on cotton? Where do you see us headed?
Kub: Cotton has been pretty wild because, you know, the world market again is fairly stable but the futures market has been reacting to the weather over the past couple of weeks, particularly in Texas. And you guys showed the drought monitor and the drought is still rampant in Texas. So the dry land fields have been basically zeroed out. But when we received rain the market sort of fell. So it has been really uncertain just based on these rains in Texas. But it kind of feels to me like the worst of that news has passed. Like I said, the dry land fields that were really struggling, they have pretty much been zeroed out, you see it in the condition ratings that they come up I think basically because the dead fields have been filled up, you know, they're gone and they're no longer in the condition ratings. So in my opinion I would say that the worst of the news is over. I wouldn't look for new highs in cotton, more consolidation there between 82 and 92.
Pearson: Okay. So if we're hovering in this and I think this week we're right around 87, 86.50, would this be a time to be selling knowing that that 82 might be on the downside?
Kub: Right. You know, I think that would be a pretty good idea if you don't have much coverage now is that yeah, I think -- I wouldn't be looking for new highs at this point.
Pearson: Okay, just be aware, be cautious because the upside is --
Kub: I think it's limited unless, I mean I guess I should make --
Pearson: Global demand picture might be the spike?
Kub: Right. If you get into the idea of the commodities why haven't we been seeing a lot of money coming into the commodities yet? So if cotton were to participate in some very larger commodity rally that would be the one chance you'd get for new highs in cotton in my opinion.
Pearson: Now what are your thoughts on the possibility of a larger commodity rally? I mean, are we presenting an attractive picture to managed money, to draw people away from the stock market do you think? Where do you see us headed there?
Kub: Well, I'm puzzled why we have not seen it already because the dollar really has been on a straight slide down ever since the beginning of July. So that should ordinarily bring money into commodities. And we do see the precious metals recovering a little bit. But I think most of that money has been going into the stock market which has been pretty steady and pretty strong all week. And yeah, if a fund came to me today I could make a pretty bullish case for grains, cotton, a lot of agriculture commodities. So I don't know why they have not glommed onto that idea and become bulls in the commodity markets or the grain markets yet. And that makes me suspicious that they may never want to be again. You know, maybe they were out of it in 2012. So I don't know why we haven't seen that already and I don't really know when or if they might come back in.
Pearson: Might it be related to QE as we've seen, you know, it seems like weekly all new highs on Wall Street, as the rest of this year wears on and quantitative easing, potentially, gets rolled back. Chairman Bernanke is kind of hard to read sometimes as to when that might happen. Would that help create a more compelling picture to maybe provide a spark to the markets? Or probably going to stay in the equities?
Kub: Well, if you --
Pearson: I'm asking you to gaze into your crystal ball here.
Kub: Well, that may be a good point and they said that about the stock market for the past couple of years is the uncertainty, the uncertainty of policy kept people from wanting to put money into it and maybe that may be what is keeping funds from wanting to put money into commodities is that you don't know that this idea of the lower dollar isn't going to just be erased in one announcement from the Fed.
Pearson: Alright. Now before we let you go, Elaine, is there anything out there as you look at the commodities market, any trades that really seem like a great deal to be making here in this next week or so? Anything really jumping out at you?
Kub: Well, I like the idea of going long in new crop grains or feed grains in general. I feel these are buying opportunities that they are underpriced but I would want to time it correctly. And how do you know when the bottom has been hit? And it's sort of when all the bears are done making their case, when everybody has finally turned bearish and I don't think we've hit that point yet. I think there's probably still some more panic to be done.
Pearson: So would you let it floor and then see a rally before you'd look to get in?
Kub: Right. I'd look for a five or ten percent rally and then particularly if that was accompanied by some sort of fundamental event like cooler, continued cool weather through August or a real exacerbation of the drought here in Iowa in August or an early frost. Yeah, those would be things that I would be very willing to get back into these markets.
Pearson: The pair of those issues would cause you to jump right back in.
Kub: Yes, sir.
Pearson: Alright, well thank you so much for being with us, Elaine, really appreciate your commentary.
Pearson: And thanks to all of you for sending in your questions via Facebook and Twitter. Please continue to do so and we will continue to get expert answers for you. Have a great week and we'll see you next time. Take care.