Pearson: This is the Friday, June 13, 2014 version of the Market Plus segment. Joining us now is Elaine Kub and Walt Hackney. Folks, welcome back.
Hackney: Thank you.
Pearson: We had an interesting discussion on the show. And Elaine, we've got a lot of questions for you curious about this corn market and where it's going to go. Ben in West Union, Iowa and then another Ben are both curious, new crop corn, hold or sell now?
Kub: I don't like the concept of selling now. These are not very attractive prices. And I don't think that there's a lot of down side. I mean, I think there's certainly some down side and there's certainly always the possibility that some disastrous global thing could happen to pull the rug out from our tenuous recovery, economic recovery. But generally speaking I think there's maybe 20 or 30 cents of down side on this and there's any number of things that could happen through the growing season to put some sort of little bounce in it or even to wait longer and if you can store it and hope that maybe you get some sort of El Nino bullishness down from South America. There's lots of things that could happen and these aren't very attractive prices.
Pearson: Okay. Now, flip side of that same question, Josh and Amanda down in Eddyville, Iowa are folks that perhaps might be more in Walt's camp, they are cattle feeders or at least livestock producers down in southern Iowa. And they're curious, how low can this corn go? You mentioned 20 to 30 cents on the show. Is the door open for perhaps a bigger falloff even short-term?
Kub: Sure. I base that 20 to 30 cent number on the fact that the national average cash price for corn right now is $4.23. And it felt like last, you know, in January, the last time we hit a low, there was really some bulking when the cash price hit $4. There was really like a psychological floor at that $4 level. So, that is where I got my 25 or 30 cent drop on that. But there are certainly areas in the northwestern Corn Belt where the rail market has fallen apart where they are buying corn at $3.50. So, it's not a hard and fast floor. But I think certainly this would be a good time to be buying feed needs, let it fall another 20 cents and continue buying. Would you agree with that, Walt, to be buying?
Hackney: I sure do. I sure do.
Pearson: Alright. And now, you mentioned the northwestern plains where the rail market has fallen apart. Ethanol plants we know are buying up there at that $3.50 you say. When do we see this changing? What have you heard from the railroads? What does the trade think?
Kub: Well, actually the railroads, they were short on cars for a long time and now they have the cars and they're delivering the cars in abundance. So it's really quite chaotic, there's a lot of empty cars sitting around and guys are scrambling to get them filled now, which is not particularly helpful to basis either yet at this point. I think it's a long, slow road and I think it really depends on getting an oil pipeline to get the entire rail picture fixed. But that's a very long-term thing. And in the short-term there's really no solution.
Pearson: Well, and you mentioned oil and that’s another market that had a very exciting week as we look at the developments in the Middle East was crude oil. This pop we had, $4 and some change pop this week, short-term, I mean, at the end of the day are we going to kind of peak out and curve back down?
Kub: Well, it was really funny, we started the week with everybody thinking that markets are really boring and that we were going to go through a summer with zero volatility in stocks or any of the commodities and then all of a sudden the Sunni insurgency in Iraq is I think what is causing this risk premium to be built into the oil market. So, from what I can read in the news they have a plan, they've got some air strikes going on against the insurgence so they're trying to keep Baghdad away from the bad guys, shall we call them. If that succeeds then fine, this was a short-term thing. But if the Sunni insurgency continues for a long time and takes control of Baghdad then you've got more serious problems. And they may not really come into the U.S. oil or gasoline fuel market because really we're not importing oil at this point. But just global oil prices, yes, could be subject to more volatility.
Pearson: Alright. Now, as we're talking volatility everything -- you guys are providing great segways tonight -- as we're talking volatility and we look at these cattle markets, Walt, and something you mentioned on the show, we expect to see the fat cattle trading in that $145 to $150 range is kind of where the market looks like it's holding. And for a long time this spring we have seen the futures down in the $130s, cash with a $7, $8 to $10 basis, now the basis seems to be eroding. Do we expect the cash to pretty well full trade along with futures here in the next little bit?
Hackney: I don't think we expect it. Now, it could happen obviously. But I don’t' think we expect that to happen. What we expect to happen is that this cash due to the availability of fed cattle in the feedlots and the possibility, in spite of cheap corn, of cattle actually being marketed lighter than where they are now simply due to the fact of the dollars involved and the hundred weight profits that they're making on selling these fat cattle, right now it would appear that we're wondering if this market could go on into the mid-50s or even higher. You know, Mike, I think the last time I was here or so I mentioned a cattle feeder in Hubbard, Iowa that was projecting $165 fed cattle, that's when I'm going to sell my cattle I think he said. Well, the fact is he in fact sold cattle well into the $150 range and just totally hit a home run on those cattle. The industry in general feels that the potential is there for another run-up in the fed cattle markets. It's not necessarily on commodity cattle, it's on the grid cattle, if you will, that are going into the premium, primal market area and there just isn't that many of them available.
Pearson: And consumer demand appears to be fairly strong. We've seen restaurant demand pick up and folks are grilling and they're paying the prices.
Hackney: That's true.
Pearson: Now, another thing I wanted to follow up on before we let you go, at the end of the show we were talking the hog market and you mentioned third quarter could be tight. Heading into the fourth quarter, though, we expect to see a rebound in hog numbers?
Hackney: That is basically an unknown right at the moment. The market analysts that seriously study the availability prospects of product in livestock don't quite know how to handle the fourth quarter. They feel we're going to have a certain limitation available hogs going into the third quarter and through the third quarter. But they don't know about the fourth quarter. What is bothering them is exactly what Elaine alluded to as a potential is there for cheaper grains. If the cheaper grains materialize then what will happen is that the extra weight they will put on these hogs, even though we have a limitation in the supply, is going to create a tonnage issue at the marketplace.
Pearson: Alright. Now, Walt, final question. We didn't get a recommendation from you on the show. As you're looking at these prices, are you a buyer or a seller? What is your, what does your heart tell you here in these prices?
Hackney: My profession and my heart is two different things.
Hackney: My profession indicates that our business is to sell into a market if it is available and that's what we're doing. The price, my heart tells me, could be a mistake and the cattle feeder could be making an error. But, who knows that for sure. We don't know that and there are abilities that he has today at his disposal like options and that type of thing that can help protect his cash flow needs. His risk exposure is terribly high but he's got ways to offset part of that.
Pearson: Alright. Now, one of the things that we have been doing recently on the show, we have been asking our analysts and our experts how they came to be experts and what they do to prepare before coming on Market to Market. So, Elaine, I'd like to start with you. As somebody who is a new speculator or a new trader getting into the industry, what commodity would you recommend as the starter trade?
Kub: I think you should look for a market that has good, available information. So, not necessarily whatever is the most exciting move. For instance, this year coffee has been wild, it has doubled in price in 2014 already. But to be able to understand that or to get very timely information on that is rare. So it would make more sense to me to start in something that just your average news source would cover. Oil is a good example, it's a good proxy of the entire economic situation. So, anything that would affect the American consumer can affect the oil price or global consumer can affect the oil price. They have mini contracts so you can start at a lower price. So that is one example. Or in the grains if you feel like you have a good understanding of supply and demand of grain or what market factors would impact that you could start in let's say corn has very good open interest and they have mini contracts so they're cheaper. If you understood the spreads, the corn spread trades between the calendar, between each calendar month contract, that would be the best low risk, low price way to get started and you'd really have to understand what is going on in the markets so you could become an expert.
Pearson: Alright. Now, Walt, you're sitting next to a guy at a restaurant, he says, I'm interested in the protein market, what should I be doing to get started? What would you say?
Hackney: If the guy is talking in terms of livestock I could be fairly fundamentally good assistance to him. If he is talking in general, which would then overflow into Elaine's field, I would be of little value to him. But in my case, he has got to be prepared to go back to the education factor of understanding breeds. He's got to, if it's in the hogs, if it's in cattle, if it's in sheep, it's immaterial. He has got to understand the cutability and the sheer tests that are involved in these products. At that point then he's got to make an intensive study of genetics. And if he has access to that, well where would you find that, Mike? You would find that at your animal science industry, which would be your, I'll call it land grant colleges. That is where I came from, that is where most of your more modern-day buyer group that are in that respect referred as traders, they have to come out of that environment. You can't get an old beat up pickup truck and go around picking up cold cows and become an expert. You've got to have a fundamental background and expertise. And that has been a challenge for me. I came from the other era and I have been forced the last 10 years specifically, maybe 15, because the packing industry has become more and more and more specialized in what they will pay premium prices for in the beef industry. The pork industry, as you well know, have done the same thing through the genetics. PIC out of England proved that in the hog industry in the United States. They come into Iowa with large units of the PIC pigs and they proved that the yield, the lean cut in those PIC hogs, they proved it's possibly genetically to get a 57%, 58% yield out of these hogs. As far as lean dressing percentage, instead of the old 70%, 72% dressing percentage, they have proven that you can genetically bring that hog into a 75% to a 78% yield, carcass weight.
Pearson: And that’s going to continue to change as we go forward.
Pearson: Alright. Well, Walt and Elaine, thanks for taking the time to be with us today. And thanks to all the viewers for sending in their questions via Facebook and Twitter. We really appreciate it. And please continue to do so and we'll continue to get expert analysis straight to you. Thanks for watching and have a great week.