Pearson: This is the Friday, June 6th, 2008 version of Market Plus. Welcome to our Market to Market Web site. I'm Mark Pearson. With us this week Elaine Kub, one of our market analysts. And Elaine, we opened the show talking about these spiraling commodity prices. You can't talk about corn, you can't talk about beans, you can't talk about livestock and not talk about crude oil. And we hit a big record again on Friday.
Kub: Yeah, and what happens on those days, especially when the new records are established is that these speculators see a very broad macroeconomic picture and they just buy anything that is dollar denominated, you know, any product that is in the U.S. that's dollar denominated and that means cotton generally but definitely livestock, grains, everything just moves up. And the longer trend based picture isn't necessarily behaving that way but if you're in there for a day and you're subject to margin calls it will absolutely, that would be the days to expect it is when crude oil is at a new record high.
Pearson: We had people predicting $150, we could see spikes above that. It seems to behave like a bubble to me. Are we getting everybody on the train?
Kub: It is kind of frothy and especially -- so, yeah, somebody comes out and says $150 today but that number has been out there before. Goldman Sachs has said $150 before so they were just looking for an excuse. It was an excuse to just go up and drive up prices and why not? If most participants are long, why not? The market bulls, nobody is willing to see against that trend. And, exactly, who knows how high it could go? Who knows where you're ever going to find any resistance? So, the supply and demand picture actually there are reasons to believe as different supply comes on, more production comes out of these developing economies, oil production honestly, that actually the supply and demand picture could become more bearish. So, yeah, I'd say there is a potential for a bubble to be built in. But as long as people are paying these prices, and they are, then the technical definition of a bubble is that it's out of line with the actual price of the product. For stocks that means looking at your discounted cash flow, for commodities it means looking at the actual price for the physical product and people will pay it. So, I wouldn't say it's a bubble yet.
Pearson: In 1637 a tulip bulb could buy a house. I don't know where I was going but that's something we always have to keep in mind. So, we look at this and how that relates to corn and soybeans. And you mentioned soybeans having a very strong week along with crude oil and yet soybean oil as a diesel additive, soy based biodiesel is in some trouble. The demand there has slowed dramatically because of the prices being out of whack. But as we look at the other products and we look at food prices going up your take on the corn market is $7 is a dime away, maybe $8, who knows.
Kub: Who knows, exactly. What was kind of interesting when you mentioned the biofuels idea is that this week ethanol prices went up too. I mean, corn went up and that made ethanol go up because people will pay so much for gasoline that this actually gives the ethanol corn buyers, the ethanol plant corn buyers some market power and they are able to raise their asking prices. So, that's good news for anybody who has invested in an ethanol plant at this point in time. But as far as, yeah, food prices -- well, we know that the actual prices of raw commodity isn't contributing all that much to what you pay in the grocery store but it is somewhat and so there is some concern there. But how high could it go? There's no way to really look at where that would stop.
Pearson: Alright, of course, Mother Nature really is in the driver's seat in terms of this corn and soybean crop at this point.
Kub: I don't know if it's in the driver's seat but it can come in and finally remind people to look at the fundamentals which are bullish at this point in time. But it's a little surprising how traders have been able to ignore it really. But they get reminders, they did on Thursday, they did the end of this week with really stormy weather. And you definitely expect to see more of that as we go forth into July, definitely you'll be looking at weather.
Pearson: Yep, we'll be looking at a whole different scenario and, of course, pulling this wheat harvest in as it moves up from the south through these wet fields. Elaine, as usual, some great comments, we appreciate your insight. Thanks for being with us here on Market Plus. And from all of us here on Market to Market, I'm Mark Pearson. Have a great week.