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Market Plus: Nov 05, 2010: Elaine Kub, Market Analyst

posted on November 5, 2010

Market Plus: Nov 05, 2010: Elaine Kub, Market Analyst Pearson: This is the Friday, November 5, 2010 version of Market Plus. Thanks for joining us here at our Market to Market Web site. With us this week we call her the prodigal because she's gone for a couple of years, she's back, it's Elaine Kub. Good to have you with us. A lot of things are happening right now. These commodity markets are wild. You talked about cotton being frothy. You could make a case that corn and beans and wheat are a little frothy too can't you, Elaine?

Kub: You could. I actually think that as long as beef and ethanol and everything are coming up too that these are not unreasonable prices. If you look at inflation adjusted dollars 1996 highs is equal to $7.72 in 2010 dollars. So, I don't think the prices themselves are unreasonable but I don't want to count on that. I think a producer should definitely have a strategy to lock this in cheaply.

Pearson: And that strategy the cheapest would be what?

Kub: Well, what I like, one example I like is to buy some $5.50 puts and that gives you a floor and then you finance this by selling ...

Pearson: What are they running, a $5.50 put, what is that going to cost you?

Kub: 50 some cents and then if you finance this by selling a $6.50 call and that brings your total cost down ...

Pearson: And you're going to get, what, a dime on the call probably?

Kub: Well, it brings your total cost down to 27 cents so your floor is now $5.23. You've got $1.00 of up side and, sure, if it goes to $8.00 which I guess could happen you're still covered. And if you do this on a chunk of your 2011 production, we're talking about December 2011 puts and calls here, so that you're going to average this out and get a good plan throughout the year.

Pearson: All right. You mentioned wheat. We've got to lose the wheat crop at least five times. So, we're in the process of doing that right now. These dry conditions, lack of cover, the usual issues that we find challenging with wheat. What are you telling those people? They're trying to make decisions about 2011 too. A lot of them have sold wheat, I mean, that's why this corn market has been so strong is a lot of people dumped their corn early because they thought we were looking at a huge crop and we're going to see pressure and instead the opposite has occurred. Same thing really happened on wheat. We moved a lot of it - the drought in the Soviet Union really didn't come to light until harvest was mostly passed.

Kub: Well, the thing that is actually kind of exciting about this La Nina pattern or this dry pattern is that if it persists through the spring and summer you get protein. You know, for the past couple of years nobody has had protein. So, again, I think a futures and options strategy is a much better idea for hedging than a cash forward sale because you're not going to know what your best protein market is until that shakes out.

Pearson: Absolutely. We talked on the show about the lousy basis levels on wheat and this has been a problem really since 2008. We've got big prices -- we've got $1.00, $1.20 difference in some of these markets. And that option strategy solves a lot of that. You're not worried so much about that market and you're able to take advantage of it when it does tighten up.

Kub: Yes, you are and that's true at any time. You kind of want to have your hedge on the futures or options so that you can see a seasonal appreciation in basis or that you can get the carry throughout, you can roll and get the carry throughout each month. So, that's definitely important. I think it's a much better idea than just cash forward sales.

Pearson: All right, I want to talk real quick about livestock because we ran out of time. The fed cattle market you're fairly optimistic on prices.

Kub: Yeah.

Pearson: I mean, 96, 98, maybe a buck on fat cattle.

Kub: Yeah, I think they'll hang in there.

Pearson: You're not optimistic on any herd expansion.

Kub: No. If I was a lender I wouldn't be giving anybody money to build up a herd right now.

Pearson: Just because of the lack of cow calf profitability?

Kub: Yeah. And particularly when you get into the southern plains, I mean, this is getting into the feeder cattle market more but the pasture conditions are really declining. We're starting to see drought conditions down there in Texas and Oklahoma and Colorado. So, I think it's going to struggle more than expand.

Pearson: All right. And obviously we still don't have those really -- we haven't been able to really secure back enough equity that we lost during the disaster we had really from '08, '09 and certainly a portion of 2010 as well. So, but if we don't expand the factory eventually that economy is going to strengthen and eventually these guys are going to be in good shape again.

Kub: Absolutely. Long-term I think there's definitely chances for higher prices.

Pearson: Elaine, always good to see you. Thank you so much for being with us on Market to Market and, of course, right here on Market Plus. Thank all of you for joining us as well and be sure to join us here again next week. By the way, if you enjoy watching us on the Internet and our numbers are extremely stout, you know what you should do, you should contact your local public television programmer and say, hey, I'd like to watch this show live on our local public television station. I'll tell you what, those program directors will be thrilled for the phone call, they'll be glad that you took the time to make the phone call and I'll bet they'll endeavor to get Market to Market on your local public television station. Thanks for being with us. Thanks to Elaine Kub. From all of us here on Market to Market, I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news