Market Analysis: Elaine Kub

Market Analysis: Elaine Kub

Nov 18, 2016  | Ep4213 | Podcast

Podcast

The highest dollar in more than 13 years kept a lid on commodities this week, even as Mexico went on a buying spree ahead of a President Trump inauguration. For the week, March wheat gained 4 cents and the nearby corn contract added a nickel. Soybeans spent the week trying to find buyers as demand picked up at week’s end. The January contract improved 8 cents. December meal rallied higher by $4.80 per ton. In the softs, March cotton had a major turnaround, jumping higher by $3.29 per hundredweight. Over in the dairy parlor, December Class III milk futures gained 67 cents. The livestock sector moved mostly higher again this week, as the February cattle contract added $2.55. January feeders gained $3.95. And the February lean hog contract dropped 18 cents. In the currency markets, the U.S. Dollar index zoomed to levels not seen since 2003, surging higher by 223 basis points. Crude oil moved higher as OPEC leaders discussed a production reduction, rising $2.21 per barrel. Gold fell again this week, this time by $15.60 per ounce. And the Goldman Sachs Commodity Index gained 9 points to finish the week at 359.20. 

Pearson: Here now to lend us her insight on these and other trends is one of regular market analysts, Elaine Kub. Elaine, welcome back.   

Kub: It is always a delight, Mike.

Pearson: And we are glad you are here. We have a lot of people curious about the U.S. dollar. Last Tuesday we saw President Trump get elected, dollar had a tremendous selloff that evening. Since then we have bounced back like crazy. And Chad in Randalia, Iowa wants to ask you, how significant is the dollar's move to 13 year highs on the ability of the commodity markets to move higher?

Kub: It's extremely significant and not in a good way. This is absolutely putting pressure on grains and all of the commodities. They're going to have a really hard time going back to approaching their previous highs or certainly probably not able to break through any new highs until this dollar thing quiets down. And that’s the thing is this dollar trade is very forward looking, it's looking forward to a December 14th announcement by Janet Yellen, potentially looking forward to activities by Congress or the President-elect in January, so we won't know what's going to happen there for a while. So all of that is going to keep this -- if it would ever be subject to a buy the rumor, sell the fact, that is not down the line until four weeks or more from now. So that's going to continue to put pressure on the grains for the near future.

Pearson: But, are we setting ourselves up for a situation in the dollar like we saw with the last rate hike this past summer where the dollar rallied right up until the Fed said we're going to raise interest rates, and then it sold off pretty substantially in the weeks following.

Kub: Yeah, that's exactly what I think may happen is this expectation, expectation, announcement actually gets made, you can sell off, you know, take your profits. But what I'm saying is we've got four weeks between now and that announcement so I think the grains are going to have a hard time making any new progress in that period of time.

Pearson: Alright. And the wheat market of course is one of the most susceptible to these moves in the dollar. Elaine Kub, we still held on, we're holding at about 4 cents up on the week. Where do we go from here?

Kub: I think we go nowhere. The chart is flatlining. It's going nowhere and I think especially with this higher dollar it's not going to go anywhere. So I think this is it for wheat.

Pearson: Are we hearing basis begin to strengthen in any parts of Kansas, South Dakota, North Dakota?

Kub: No, you're still looking at a scenario where very weak basis in the Kansas wheat market means that cash wheat and cash corn in Kansas is basically the same price.

Pearson: Wow.

Kub: Yeah.

Pearson: All the wheat acres that we had planted to winter wheat that really looked good, we've got this first winter storm rolling into the Midwest, seeing a little bit of price activity based on that. Is most of this wheat going to be grazed off in your opinion?

Kub: I think the acreage of wheat is going to be down 20% or maybe more depending on the weather, particularly if you look at all wheat acres and you're including acres in the southeast where you guys had the coverage about the extreme and exceptional drought that is in the southeast. I think by the time 2017 numbers really get on the books wheat acreage could be down significantly.

Pearson: Okay, which is probably what the market is saying needs to happen.

Kub: That would help bring down some of the ample inventories of wheat, not only here in this country but in the world.

Pearson: Globally. Looking at global supplies here in this corn market, we do have a lot, but we're still seeing some demand for this domestic corn crop. Where does corn move from here now that harvest is for all intents and purposes behind us?

Kub: Yeah, good stuff demand, right? This is record usage projected by the USDA. And so one does wonder if we weren't fighting against the dollar, if it wouldn't be trying to break back above $3.60 and make new progress, I think it might happen but not until after December or January. I've got to get through this timeframe.

Pearson: So in this timeframe if I've sold a lot of corn off the combine do I want to be buying it back right now?

Kub: Oh I guess I'm not that bullish, not necessarily. But I think what we're seeing is that nobody is selling at this point. We are seeing basis quite strong already when you're looking at the December bids are 20 under into your processor level bids and we're seeing very -- and the spreads are getting tighter and they're quite tight, particularly in the cash spreads, they're very tight in the March to May timeframe, which I think is a reflection of the fact that Brazil, for instance, is still importing corn.. Their shortage of corn down in South America is not going to be solved until April, May timeframe. So there is a sweet spot in here that I think we could get some bullish news for corn, it's just not now.

Pearson: Alright. Acre projections, Informa came out and said 88.6 million bean acres. Elaine Kub, are you in the massive bean acre increase for 2017 club?

Kub: Yeah, in light of the fact that I just said I think wheat acres might go down 20%, absolutely I think soybeans would be the ones to take advantage of that.

Pearson: Alright. Speaking of soybeans, we've got a question here from Paul in Iowa, similar question. Paul wants to know, for those of us who sold beans off the combine, what are the price targets to reown in July calls?

Kub: Again I think that once we get past these next couple of months there is the potential for soybeans to get back above the $10 level. Yeah, I think that we're not seeing large increases in the acreage being planted in South America. Brazil maybe a slight increase but not the increase that we've seen in previous years. And I think the Argentinean soybean acres are actually down. So there is some reason to feel that the soybean supply and demand situation will continue to be somewhat favorable or may get some favorable adjustments in 2017.

Pearson: Alright. Given the fact that we are going to be planting more beans, are you aggressively selling any '17 crop in here?

Kub: Not aggressively but it's not a bad idea. If you can make money at it we've certainly witnessed that it is possible to go back to the paradigm of having not profitable prices. So if you know that you can pencil out profit at these prices it's not a bad idea.

Pearson: Alright. Let's take a look at this cotton market, Elaine Kub. Big move to the upside. How much of this is related to dryness or China? What's going on?

Kub: I tell you, this is a really neat one. I think it's artificial scarcity. What has happened is the Indian government has decided to take out their large denomination of currency bills and so the traders and the merchants in India, the agriculture sector is suffering because they really can't buy the stuff, they don't have the bills to buy the stuff.

Pearson: Because they took out the 500 and the 1000 rupee notes.

Kub: Yeah, which is equivalent to like $14 U.S. dollars. So they're not huge hundred dollar bills, but nevertheless, in that agriculture sector where they're making small purchases from small farmers they're struggling to get the actual business done. So this is a short-term sort of artificial scarcity argument. The cotton is there, globally the supply is still pervasive, so I think it may be an opportunity to be selling, maybe not immediately, maybe let this play out a little bit more, but I think this is an artificial rally.

Pearson: And we are right back to the top side of that range we put in after that spike to the high two or three months ago.

Kub: Yeah. So this, like I said, could be an opportunity for folks.

Pearson: Okay. Let's look at livestock, Elaine Kub. The question that everybody is asking out in feedlot country, we have a couple weeks now of positive cash cattle trade, we've seen this market trend higher. Cattle on feed report came out Friday, number of cattle on feed 99% of a year ago. Is the low for this cycle in?

Kub: I'm going to say yes. I'm going to say we can put that behind us, shut the door on that.

Pearson: 99, 98 and change is the low.

Kub: Hopefully, yes. Fingers cross, right? No, but I think that the cattle on feed report will receive somewhat of a bullish interpretation. There were some pre-report estimates that, this isn't going to surprise everybody, but it will receive a bullish interpretation and it will help to sustain this little recovery that we've had absolutely. And it has been cash led, as you mentioned. We had $4 to $5 higher, $7 to $8 higher in the dress trade, so it was cash led, it was in the middle of the week, the packers really wanted those animals. So this is a real recovery or a real rally and I think we can put that low behind us.

Pearson: Do you have some concerns that maybe this was just buy up ahead of a shortened holiday week this next week?

Kub: No, I think these prices will be maintained next week. I don't think that we're going to shoot back to the -- nobody is smiling too much yet. But I think that we're going to maintain these prices.

Pearson: Well, we say nobody is smiling too much yet --

Kub: Except the packers.

Pearson: Well the packers have been smiling all summer. But the cattle, the feeder buyer seems to be willing to open their pocketbook a little bit more and be a little bit more aggressive. These feeder values have been climbing. Corn is cheap, fats are rising in value. How much more room can we move to the upside on feeder calves?

Kub: I think if anything is going to get a bullish interpretation of that cattle on feed report it was the placements. That was the really bullish surprise there. That was down 5% from a year ago levels. And it was even the heavier ones, the 800 pounds, they were down also. So that again some people expected going into it because not only did nobody want to sell at October prices, but coincidentally there was great weather, you can put them out on stocks. So it's a bullish interpretation for now but it's just pushing that problem into next summer where you're going to get the bearishness because those animals are still there, they're just not in the feedlots yet. So yeah, I think that in the short-term, you're right, they're going to open up their pocketbooks, maybe be able to push these prices a little better. But I think we should be worried about July kind of numbers.

Pearson: So on this pop, do you want to be selling out through next summer, get some protection in place?

Kub: I think, it's really hard to say that at the prices that they are, these $120 prices. Again, that doesn't get anybody real excited. But if you saw a rally, if you saw something pop I would be very worried that it would not be sustained between here and then. So yeah, I think you should be ready to get some coverage on, maybe not now but sometime before the summer.

Pearson: Okay, put another $5, $10 on this market and take advantage of it.

Kub: Yes.

Pearson: Lean hogs, Elaine Kub. We have been seeing an exceptional slaughter pace of this lean hog market. Prices have been in here relatively stable. Where do we go once we get through Thanksgiving season?

Kub: Stable and cheap and able to spur demand, not only here but internationally. So we can say that about these prices, that they're cheap. And you look at the contracts going, the deferred contracts going out and there is some expectation to see a $60 level or a $70 level again sometime in 2017. But I don't know that we're ever going to get there because you talk about the slaughter pace, this is all they can do. At 2.45 million head a week that's literally about as much as they can possibly do. So how can you expect the packers to be motivated to pay more than the current prices? I think there's very limited reason to get bullish when there's just not the capacity to slaughter any more hogs.

Pearson: And the capacity, we do have several new plants under construction --

Kub: But they're not there yet.

Pearson: They're still 18, 24 months out as close as I'm aware. Okay, so it might be kind of a struggle to get through this slug of hogs.

Kub: I think so. I think we should be happy with what we have I guess.

Pearson: Alright. Crude oil, we had OPEC meeting, we've got them always talking about reducing production, coming together, reducing production. Elaine Kub, will they ever as a cartel be as effective as they were in the 1970s?

Kub: They'll never be as effective because they can say that, at the same time we're seeing headlines that the largest ever continuous oil discovery in the United States, that was announced this week in the Permian Basin. So this is just, it adds to the decreasing significance of OPEC.

Pearson: So where does crude go from here? Are we in a 35 to 50 range into the future?

Kub: I think that is exactly the take away from our domestic stocks, and not just domestically but globally. I think the supply scenario and the storage scenario of oil means that yeah, this is a long-term story fortunately for our pocketbooks.

Pearson: Alright. Well, Elaine Kub, thank you so much for taking the time to join us.

Kub: It was a pleasure.

Pearson: That wraps up the broadcast portion of Market to Market. But Elaine and I will keep the market conversation going including answering more of your questions during Market Plus available on our website. This week on the M-to-M podcast, we discuss dealing with memory issues in rural America. Search for M-t-o-M wherever you find podcasts. And join us again next week when we see how old iron has created a family-friendly rivalry. So until then, thanks for watching. I’m Mike Pearson. Have a great week!

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