Market Analysis: Dan Huber

Market Analysis: Dan Huber

Dec 30, 2016  | Ep4219 | Podcast

Podcast

Weather was the big story this week with wetter conditions in South America and a dry, cold forecast in the Great Plains. For the week, March wheat improved 15 cents and the nearby corn contract added 6 cents.  A big rally Tuesday was mostly erased in the days after as rainy conditions in Argentina may have been overstated. The soybean complex’s March contract finished 7 cents higher. March meal followed suit adding $5 per ton. In the softs, March cotton swelled by 78 cents per hundred weight. Over in the dairy parlor, January Class III milk futures declined 18 cents. The livestock sector finished mixed as the February cattle contract shed a quarter. March feeders dropped $1.60. And the February lean hog contract added $4.88. In the currency markets, the U.S. Dollar index was off 72 basis points. Crude oil expanded 70 cents per barrel. Gold broke its 8 week losing streak to gain $18.10 per ounce. And the Goldman Sachs Commodity Index improved 6 points to finish the week at 397.75.  

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Dan Hueber. Dan, welcome back.   

Hueber: Thanks very much. Glad to be here.

Pearson: Before we get started, you can listen to our market discussion anytime by downloading our Market Analysis podcast on our Web site, iptv.org/mtom.

Pearson: Now, Dan, in your final market commentary for the year, 2016, you sounded a positive tone, or at least not a bearish tone.

Hueber: For looking ahead, absolutely, absolutely. In fact, it's hard to really back it up with a lot of statistics and facts and figures here right now but of course we're all kind of familiar with the old biblical adage that the first will be last and the last will be first and I think to a certain extent you can apply that to some of these markets here right now. I think you can look at the real high flyers we have this year, specifically the dollar, the equity markets really have accelerated on a lot of hype, a lot of anticipation about how great things are going to be and you can turn around and look at some of the markets that have really been depressed, not for invalid reasons. We have a phenomenal amount of wheat around the world, we have great access supplies of corn but we also have a record demand that's out there. And I think everybody tends to overlook that when we're so focused on supply. And I think a great example is if you went back a year ago right now and you probably could not have paid anybody to say anything bullish about crude oil. In fact the talk was, gosh we just broke the $30 mark, we're going to go to $15 a barrel, and here we are over $50 to finish out the year. So, again, not that there's anything magic to that but I think we tend to disregard it's so bearish, why could we ever move. Well, if we knew those things we'd all be multi-millionaires too I guess.

Pearson: Bringing up crude raises a great point. We've got a question here from one of our followers on Twitter. We encourage all of you to send in questions to us on Facebook or on Twitter. You can find us @MarkettoMarket. This ne comes from Alan in Chicago, Illinois @alannasdog. Alan wants to know, what is the trade, as you look out to 2017, that equates to that $29 crude buy? Is there a trade in your eyes that is equal to that today?

Hueber: Of course it would be hard to back it up again with statistics and facts and figures, but I would tend to think when I look at all the markets that are out there, what is the most undervalued in relationship to the other markets, to where money could start flowing into, and I have to come back into the wheat and the corn market. Again, to make something happen there we're going to have to develop a weather issue somewhere around the globe, and that's global certainly. But I think if you look dollar for dollar where we sit in relationship to historical ranges, again, like crude was a year ago when we were $30 and below and nobody could even envision why on Earth crude, we're just producing so much crude, we're never going to get out of this and it's just going to go down and down and down and hence we saw the rally we did.

Pearson: That's right, the market is an active participant, people are going to change things. Speaking of changing things, Dan Hueber, wheat, Chicago wheat up 15 cents on the week. That's probably the biggest one week move we've seen in several months to the upside.

Hueber: Right, right. And now granted I have to take that somewhat with a grain of salt, although it would look like it was trying to set the stage to do a little recovery. But also keep in perspective that when you look at the managed fund money that is the market they are so heavily short in yet and they tend to want to take a little profitability at the end of the year because bonuses are paid out of earnings that are actually closed out. So I think that was primarily shortcoming by those people. But still I don't think by any means did that turn them bullish in the markets, it just means they're a little bit less short than they were here a week ago.

Pearson: Now, we do have another forecast for an arctic blast to come rolling through the Great Plains, and there's very little snow cover, would that combination of factors, should it come to pass, be enough to maybe get some more of these shorts out of the wheat market and light a little fire under it?

Hueber: It could be enough to elevate it some. I don't think it's a market changer. But here again too I don't think there's going to be this massive one event type of thing that really change the picture. It's all going to happen incrementally and maybe it's a little problem with the winter wheat over the winter here and then maybe we have some issues in Russia. Again, not that there's anything happening there, but I think they all just are compounding and piling on each other and, again, that's what makes some of those value buys to look back and say, gee whiz, why wasn't I taking ownership there because it did seem so undervalued compared to everything else at this point in time.

Pearson: So if I'm a speculator would you be buying wheat here? Would you be buying a spring contract of Chicago wheat?

Hueber: I would be looking at ways to get long in some, particularly some of those undervalued commodities. I personally have looked pretty hard at some of the ag related ETFs that are out there that give you a little more of a bread basket of ag products. But yes, I think it is one where if nothing else at this point in time you're saying, I've got a very limited amount of downside risk as compared to so many other markets that if you were thinking about getting long in the S&P 500 or thinking about getting long even in crude oil, these are quite extensive rallies and it would seem like the path of least resistance could easily turn the other direction.

Pearson: Okay. Let's look at this corn market. We're up a little bit, back north of $3.50 here on the nearbys. How aggressive do you anticipate the American farmer to be post-January 1? Are we going to see a wall of corn coming into the market?

Hueber: I don't think it really, has it moved already, I think most people have already done their tax planning. They did a probably very respectable job, maybe even too aggressive in some cases, of selling soybeans this year. Soybeans yielded bushel for bushel, of course, brought back a lot more revenue than the corn did so I think a lot of guys tended to maybe have sold the beans, sat on the corn, used that for the cash flow needs. Granted, that doesn't make it go away by any stretch of the imagination but here again too I think as we move into the New Year we are at, again, as I touched on initially, we are looking at record usage numbers and we're not seeing that back away. And it's, granted, the export side of the corn market maybe has got some good optimistic figures out there at this point in time. But when it comes to the supply side it's a known entity. USDA might make a few adjustments come January but it's not going to be an Earth shattering move I don't believe. So the focus now turns to where is demand? Is that demand growing? Is it staying stable? And now what do we look at in the next year? Are we going to be able to produce successive crops as we have the last couple of years?

Pearson: So with all of those factors in mind, if I'm sitting here with old crop unpriced in the bin and a lot of unpriced new crop, am I just, would you anticipate that person to hold it and just wait and see?

Hueber: That said, granted, can you hold it until July? Is that necessarily the right move? I do think, yes, maintaining ownership in some fashion is probably a good thing. Holding that physical cash, no, it's pretty hard to advise that. I think you play two things, in my estimation, one the ranges. When you look at corn right now we get up towards $3.65, $3.70 in the futures, we tend to kind of price ourselves out, we get below a $3.50, $3.40 you tend to find value. So I think you basically work against that range. Plus in your own local area, here again, watch your basis levels, watch the amount of carry that's in the market, if you have the opportunities move the physical, but if we do see moves back down to the lower side of those trading ranges certainly come back in, use options, futures, whatever you're comfortable with.

Pearson: Book a call or buy a future outright.

Hueber: And take ownership that way.

Pearson: Soybeans, we went back north of $10. We had a little bit of a scare last week. North of $10. Same question, should I be an aggressive seller here when the market is over $10? Or hold on, see how South America shapes out?

Hueber: I tend to want to be more of a seller in there. And, again, we have particularly above this $10 area have certainly recommended people go ahead and part with that. Here again too if something changes, South American production, yes we can come back pretty rapidly and take ownership in a different fashion in there. When you look at South America right now Brazil as a whole looks like it's off to a great start. --- talking about 102 million metric ton crop, record crop down there again. Some touch and go areas in Argentina but certainly not to the point to where you can really get the bull horns on at this point in time. And when you consider soybeans, in fact I was looking at it for my newsletter this morning, year on year we look at the corn market we're down about a dime for the year, pretty insignificant, really a small change. Compared to a year ago beans are about $1.30 higher. So those two are probably going to start to balance out here as we move ahead in time. Plus right now the economists would say we're going to see more bean acres, which some of the privates have already said. So you've got a little more of an uphill push, uphill struggle on the beans than I think you might on the corn market.

Pearson: Yeah, this time last year we were screaming for another $1.30 and here we got it. Real quick, Dan, just because it's the end of the year, what are your thoughts on the cotton market? Do you see continued range bound trade?

Hueber: Of course I am a commodity positive right now, I don't want to say bullish just yet, but I think when you look at the whole commodity sector as a whole, and I guess I've maintained this for some time, but if you look at the chart pattern and the CRB Index, the Goldman Sachs Index or anything that's out there, it's showing this long base-building pattern there. So I am generally friendly to commodities as a whole. Now, when you look at the economics of cotton right now it would tend to say we could see some more acreage in the South, we'll have to see how that unfolds. But it has been just really a six month sideways pattern right now. We seem to be capped around 72.5 cents on the upper side, 67 on the lower side. Now, I don't see us coming out of there any time in the immediate future, but on the same token that is generally a pattern you see at a bottom, not a top. So I think sure, if weather at all comes into play, which I think we're probably setting the stage for some weather excitement this year, it's going to impact cotton just like it would corn and soybeans.

Pearson: Okay. Commodity positive, does that include the cattle market?

Hueber: Now, longer-term yes. Short-term I think we're probably stretching the rubber band out just a bit here. We've really been up since the lows that were set back in October. Here again took when I was looking back over the last year surprisingly the hog market is actually finishing the year higher where cattle I think we're down about 18 cents a hundred compared to a year ago, probably even with that great recovery we're probably a little bit overvalued here right now. But I think the positive I see in the livestock, even though the hog and pig numbers said we're going to have a 3% to 4% bump in the hog numbers next year is that yes, domestically I think people in this country are feeling better about where they are, the unemployment numbers are good, they've got more money in their pocket. I think that translates into greater demand for red meats. I think that could be the one thing -- here again, when we have this supply mentality, which is really what we've had in ag for the last year, we tend to ignore the demand and it's nothing we want to turn our backs on.

Pearson: I knew a lot of people this year that made prime rib at Christmas, more than I've ever heard of in the past. So hopefully, but like you say, we might be getting a little toppy on this bonce, so probably worth looking at some puts here on the live cattle side.

Hueber: Take protection maybe for the first quarter here.

Pearson: Same story on the feeder cattle? Would you be locking in some protection in here?

Hueber: I think so at this point, particularly if you're going to get the fats into any kind of a setback in there, it's got to have an effect on the feeders as well. But, again, as I look out more towards summer months I think we have some upside potential yet left ahead of us.

Pearson: And lean hogs, Dan Hueber, you mentioned we're a little big higher than we were this last year. It's been a crazy year in the lean hog market. We've gained and lost almost 50 points in this market. Are we going to see that kind of volatility next year do you think?

Hueber: Maybe not quite as much volatility. I don't think we have the big washout as we did in that third to fourth quarter as we did in hogs and cattle both this coming year. I think one of the major elements not only in domestic demand could come from the export side of the market and granted, we know we've got this at 14 year highs and at least psychologically that's working against the export side right now. But here again there's one of the markets I think that sometime in this first quarter of 2017 we're going to see a big peak in there. I think if that starts working the other way that really could play well into the livestock sector.

Pearson: So a peak in the U.S. dollar, do you think we're close to that 305 we hit immediately post the Federal Reserve? Is that going to kind of be the top in your mind?

Hueber: Well, it's not really showing any signs just yet that we're ready to turn around immediately. I think you probably have to get kind of post-inauguration. Right now it's hard to define it much more than I think first quarter. I think by the end of March we'll have it in there. I look at it from the index value I think which is around 103, 104, I think it could maybe push up to as high as 108.

Pearson: If the Fed, we need to see consistent Fed interest rate increases to make that happen?

Hueber: Right. If you get to the January meeting and they come back and say it's looking like yes we're going to follow through and probably see three more hikes this year, I think the dollar bulls to hang with it for a while. But they're just, it's a hope. Why haven't we factored this in already if we've been talking about it for --

Pearson: Seven years. So eventually it will turn back down and that could be some opportunity in the livestock.

Hueber: Absolutely. Absolutely.

Pearson: Alright, well Dan, we look forward to the next year and we want to thank you so much for taking the time to join us at the final show of this year.

Hueber: My pleasure to be here. Thanks very much.

Pearson: That wraps up the broadcast portion of Market to Market. But Dan and I will keep the market conversation going including answering more of your questions during "Market Plus" available on our website. While you’re there, check out this week’s M-to-M podcast. Listen to part 2 of a year-end review with the producers of this program.  And join us again next week when we'll sort out the complicated world of the nation's visa program for seasonal agriculture workers. So until then, thanks for watching. I’m Mike Pearson. Happy New Year and have a great week!

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