The commodity markets had a volatile week as dryer weather in Brazil, above average export numbers and rainy conditions in the Grain Belt gave the market something to chew. For the week, December wheat lost a nickel while the nearby corn contract fell five cents. Rainfall below expectations in Brazil and increased Chinese demand made for an 18 cent swing as the November soybean contract put 4 cents back on the board by week’s end. December meal added $3.40 per ton. December cotton grew 39 cents. Over in the dairy parlor, November Class III milk futures increased 36 cents. The livestock complex finished on a higher note as the December cattle contract put on $2.18 and nearby feeders bumped up $1.75. The December lean hog contract rose 98 cents. In the currency markets, the U.S. Dollar rocketed 75 basis points higher. Crude oil plunged $2.38 per barrel. COMEX Gold cut $9.90 per ounce. And the Goldman Sachs Commodity Index dropped more than 8 points to finish the week at 391.05. 

Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Elaine Kub and Walt Hackney. Folks, welcome back.

Hackney: How are you?

Kub: Good to be here.

Pearson: We're fantastic. We're glad you're here. And in case you want to go over things again, you can download or listen to our Market Analysis and Market Plus podcasts anytime at iptv.org/mtom.

Pearson: Elaine, I got distracted there because I'm thinking about this wheat market. We're not yet able to trade up north of that $4.50 mark. We're moving back to the downside. Tell us a little bit about how yields came in. Let's talk spring wheat right off the bat.

Kub: That was the big surprise, at the end of last month the small grains report there was more spring wheat around. But there were, if you really dig into that data the drought areas in Montana, they really did have poor yields so it was just a scenario of Minnesota perhaps having better yields and certainly there is the premiums for the proteins are out there, there is interest still in buying this grain or holding this grain. I think that spring wheat in the hard wheat varieties could have some upside eventually. I don't think spring wheat is going to test below $6. It didn't this week and I don't think it will. But generally speaking for the Chicago benchmark wheat, you're absolutely right, it was dipping lower all week, it's raining, going to rain in the Southern Plains, rain in Australia improved things there. There was improving projections for the European Union and the UK wheat crops. So bearish news pretty much across the board for the feed wheat market.

Pearson: So as you look ahead given those fundamental factors how much more downside is available on the Chicago contract? Are we going to run back do you think over this winter and retest that $4 mark?

Kub: Well, it is bearish and when you have the good yields potentially coming out or better yields coming out of Australia than you were thinking a week ago or two weeks ago I think it is certainly possible to see continued downside in wheat.

Pearson: On the thought of wheat acres, winter wheat acres, what have you been hearing? Are producers scaling back still and rolling more to beans for this next year? Or are you hearing roughly the same number of acres going in?

Kub: The money would be in the beans and I suppose it will also just logistically sort of depend on how the rain shapes up this next week to see where they're going to get in.

Pearson: Okay. Now let's take a look at the corn market, Elaine. We finished Friday December corn at $3.50 on the nose.

Kub: That's the number.

Pearson: What does that tell you? I know you're a fundamental analyst, you like to look at supply and demand factors. Do you care at all about the number that the market closes at on a specific day?

Kub: On an options expiration date maybe, but no, not particularly although that's just, the number that it seems to be just drifting sideways right on that $3.50 number and I think it kind of doesn't matter how much extra corn there is as long as there is extra corn sitting in a back room somewhere. This is just the price at which the end users can pay, this is just sort of the price that we're at, maybe indefinitely.

Pearson: Well, speaking of end users, we're joined here by Walt Hackney. Walt, you work with a lot of cattle feeders. When we're looking at $3.50 on the board, you're able to buy corn out of the fields at $3 to $3.10 cash how are cattle feeders feeling? Is this a time they're locking up a lot of their feed needs?

Hackney: Cattle feeders are cautious to put it mildly. They understand the ramification of cheap corn and they're worried now about extraordinary weight. We have just come out of extraordinary weight cattle due to the heavy cattle that come off of the graze out program of the winter wheat in the Southwest. Now the cattle feeders are worrying that they're starting to receive the fall delivery contract calves out of the West. Those calves are weighing up to 700 pounds.

Pearson: Whereas last year they would have been 600, 650?

Hackney: Most of the calves that have been weighed to date are probably 25 to 35 pounds lighter than a year ago due to the dry conditions this summer and the cows simply didn't milk quite as well and the grass wasn't there quite as well.

Pearson: So they might be looking to buy more corn to get these animals back up on pace, make a little hotter ration for them and put those pounds back on.

Hackney: That's exactly the point right there, Mike. You've got that element of the cattle feeder that insists on making a 1,400 pound fed steer and he gets him in there weighing 650 instead of 700, his idea is to buy more of this cheap corn and get him on up there. It could come back to haunt us in about 200 days of calf feeding, it could come back to haunt us with heavy weight beef.

Pearson: Alright. Things to keep in mind. Elaine, speaking of coming back to haunt us, I've been hearing a lot of reports from producers still thinking corn yields are coming in at or better than expected in a lot of places. Are you hearing the same story?

Kub: Yes. You hear some this way, you hear some the other way, but absolutely and I think that the danger here is we do have another WASDE report coming up next week that could very easily have a boost in yield, we could have more bearish news from that so that's something that could bump you back down from $3.50. But still.

Pearson: Looking on the downside we're going to be watching the $3.40 line has kind of been a low.

Kub: Yeah, it's pretty rangebound although I will point out that you look at 2018, for instance, it's more like $3.95 so there are opportunities here if you're proactive and you believe that this is the world that we're in now of plentiful corn you still just have to look farther out and lock in these prices way farther out and you might have an opportunity.

Pearson: Okay. Now that being said, a lot of producers are finding with yields better or at least where expected, a little bit undersold coming into harvest. How do you handle that as the combine is running? Is this worth putting into storage and capturing that carry?

Kub: Absolutely, absolutely. If you've got storage and it's not still full of old corn, for instance, absolutely use it. You've got I think 13 cents to carry it to March, for instance, and 30 cents if you're willing to carry it all the way to summer. So that storage, putting up elevator ins, putting up bins on the farm bill definitely pay for itself if we live in this world of ample corn and ample beans and ample everything for the next several years.

Pearson: Pays for itself if you sell it, if you put in that sale order for that March contract, the June contract, yeah. Then it makes sense.

Kub: Yes.

Pearson: Now let's talk about soybeans and I want to kick off the soybean market, Elaine, we've got a question, similar story from one of our followers. This one comes from Brent in Kentucky. Thank you, Brent, for sending us a question on Twitter. We encourage all of you to find us on Twitter and Facebook. And Brent is wondering, with an increased carry and a good crop are we headed to lower prices? Or will demand step in and fill that gap?

Kub: Well, Walt had very good news about demand, right? I think there's certainly reasons to be optimistic about that and certainly for soybean exports. We're going to have, we have had sort of logistical problems these past couple of weeks or this past week or so where the barge freight rates were very high and it made it look like basis was very weak and certainly a lot of that old corn coming in, in September, that made basis seem very weak. But fundamentally the demand is there so yeah, I'm not at all worried about it falling too far. I feel like we've found this price range.

Pearson: Okay. Same story on beans then, this range is where we're at, that $9.50 to $10? Is that the range you're keeping an eye on?

Kub: Yes, you can sell $10 beans through the end of July contract I believe is $9.99, I don't know, it was over $10. So the opportunities are there. And again, we mentioned a little bit about the dry weather in Brazil, so I think in the very short-term there is a possibility of a boost in beans. But longer term the forecast is a better than 50% chance of La Nina. So if you see this boost from dry weather in the next 10 days or so, if that happens there is maybe opportunities to be selling because I think longer term the South American forecast could turn wet through the winter and we could see another very large South American soybean crop.

Pearson: Alright. So take advantage of those selling opportunities when they come. Now, Elaine, we've got another question for you. This time we're going to talk the cotton market. And this question comes to us from Texas, so thank you very much. This is from Donna in Amarillo, Texas. Donna wants to know, is there more cotton damage from the hurricanes forthcoming, Hurricane Nate warnings have already been issued across Louisiana and Mississippi. What are your thoughts?

Kub: It's really hard to say on Friday what's going to happen. So the last path that I saw for Hurricane Nate was sort of eastward bound hitting Mississippi more than Louisiana and Texas, let's say. But who knows. So the problem is that it will definitely take place on Sunday, that's when the damage will occur, and by the time the market is up on Monday it will be too late to really do much about it unless there is a lot of damage and you have a big boost and futures go bump up above 70 cents, for instance. There could certainly be an opportunity there that if you are one of the cotton producers who didn't get damage you have an opportunity to sell.

Pearson: Okay. And you would take that. We're still looking at decent demand for cotton but still a very large crop if we listen to the USDA.

Kub: Large stocks to use domestically, globally you're talking about increasing production 10% this year. So yeah, it's generally a bearish market but you might get a pop on Monday.

Pearson: Alright. Now, Walt, we've got to talk about this livestock market. You hit on one of the major concerns that overhangs this live cattle market, the idea that we are going to pack pounds onto these cattle. We're seeing it already. Is it going to intensify? Is that where guys are going to try to make their margin up like we did in 2015 and start walking elephants out of these feed yards?

Hackney: I don't think they will. I don't foresee a barrage of 1,600 pound fat cattle coming into the market within the next 30, 45 days, maybe 60 as a result of this overfeeding syndrome that we're talking about now. I think that the cattle feeder himself has realized that his efforts, if you will, were wasted when he went from a 1,400, 1,450 steer and fed him cheap corn on into 1,550, maybe 1,600 in some cases. I think the idea there behind all of that is the added tonnage got picked up and was unexpectedly acceptable by the beef industry and they took that tonnage even though there was some slippage, even though it was a little bit -- there was not a huge drop in the market. The packer industry has went through a phenomenal profitable year as we speak and much of that was due to the sale of these heavy cattle going into this fall.

Pearson: Well now that speaks to a lot of the other concern that I'm hearing about which is how much longer can domestic demand carry this market forward? And you talk to folks all over the country. Is there still ample demand for beef in America?

Hackney: There seems to be ample demand, as you put it. I think that the idea behind it is they may have underestimated the acceptance of good quality luxury cut beef going into the domestic market as far as consumers go. And I think that the general idea of it, they got a taste of what this added finished condition of these big steers did to the quality of the beef and they liked it. I heard Elaine make a comment earlier about briskets and briskets tastier than maybe they were a year ago. Well, point being there it was the marbling effect in the briskets of the bigger cattle caused a higher degree of taste in that product. The consumer loves that, that's what they're after and that is what they expect us to provide. On the same token, the heavy cuts are not as acceptable. And if we could hit some kind of a medium in there we'll be in much better shape and control the output of the tonnage.

Pearson: Alright. Now, you talked earlier some lighter weight calves coming out of the West. As you look at this feeder cattle market, Walt, there is a little bit of uncertainty when guys are going to the sale barns today about bidding up for these calves given where the futures are at in January and early spring. What are your thoughts? Is there some weakness ahead in feeder cattle values?

Hackney: In the perfect world if we had the ability to offset our risk exposure by going to an option program or into the futures that would be very good in the case of most cattle feeders. The problem we have is in too often the case the futures do not reflect the fundamental issues of the cattle production industry. And what is on feed in the feedlot if it's 3%, 4%, whatever percentage of extra cattle on feed, that is not going to necessarily trigger a wild desire to hedge the cattle because of the fact that the fund money is controlling the movement of that Mercantile and the volatility is making it prohibitive for the average cattle feeder to step in and cover his own risk exposure.

Pearson: Now, that being said, in the cash market and coming back to live cattle here we heard trade this week of $108 in Kansas on a live basis and futures are $110 to $116 if you look out to December. Is that what you're talking about, there's just that big break between cash and futures?

Hackney: Some people would call that the basis and in regard to that, Mike, that packer, for instance, you couldn't I don't believe to get a packer today to hedge your cattle on a deferred futures contract at a par basis. I don't think you could get him to do that. That would mean exactly what you referred, that would mean a $5 or $6, maybe $7 premium over the current cash trade. And I don't think that the futures, or the packers are going to recognize the future price. I think maybe a $2 premium or something to that effect is potentially there.

Pearson: Okay. Well now, before we let you go we've got to talk the hog market. We've seen this thing take a big ride to the downside and now it seems like we found some value. You've seen strong demand on the beef side. Is there similar demand on the hog side to work with all these new plants that are opening up?

Hackney: Well, there within lies probably the solution to the hog prices that we're going to be receiving. We're increasing wonderfully the demand for live hogs and different types of contract programs. You're going to see many more contract programs in the hog units this coming year than we've seen in the past for quite some time. And cheap corn is going to trigger some of that. But the hog producer has more or less learned his lesson and he's going to try his best to continue, he doesn't mind a 2.35 to 2.38 million head a week kill, he doesn't mind that. He doesn't mind a little bit of instability in the cash market. But what he minds is extraordinary added weight to the hog going into the marketplace and destroying the ability to make them a viable purchase for the consumer.

Pearson: Makes sense, we're selling too much heavy weight in the meat case we're not going to be bidding up for those hogs.

Hackney: Exactly.

Pearson: A lot of stuff to think about this week, a lot of things happening in the markets as always. And Elaine, just real quick, before we let you go, oil down $2 plus this week. Is that going to continue?

Kub: No, we might actually see a hurricane effect in oil too. They have shut down the platforms in the Gulf for at least a little while so there will be some slight blip in U.S. production here from that.

Pearson: Alright. Well, thank you both so much. Walt and Elaine, thanks for taking the time to join us.

Hackney: Thank you, Mike.

Kub: Thanks.

Pearson: That wraps up the broadcast portion of Market to Market. However, we will keep the conversation going, including answering more of your questions, during Market Plus available in podcast and video form on our website. We've also launched our own YouTube channel. Check us out at youtube.com/markettomarket and subscribe today. You'll get notified when Market Plus and our feature stories are posted. Join us again next week when we'll examine the debate over antibiotic free labeling. So until then, thanks for watching. I'm Mike Pearson. Have a great week.


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