Market Analysis with Elaine Kub

Market Analysis: Elaine Kub

Mar 2, 2018  | Ep4328 | Podcast

Podcast

Weather in South America captured more attention from commodity traders than the threat of a trade war. For the week, May wheat jumped 36 cents while the nearby corn contract moved 11 cents higher. Continued hot and dry conditions in Argentina combined with rain in Brazil to push the May soybean contract 24 cents higher. The price has risen nearly $1.00 since February 5th. May meal climbed $14.60 per ton. May cotton added 75 cents per hundred weight. Over in the dairy parlor, April Class III milk futures gained 18 cents. The livestock sector remained mixed as the April live cattle contract shed $2.67. Nearby feeders lost $3.22. And the April lean hog contract gained $3.20. The U.S. dollar index bumped up 15 points. April crude oil was able to stay above $60 even with a $2.30 loss per barrel. And COMEX Gold fell $6.90 per ounce. The Goldman Sachs Commodity Index faded nearly 11 points to close at 441.40. Here now to lend us her insight on these and other trends is one of our regular market analysts, Elaine Kub. In case you want to go over things again, you can download or listen to our Market Analysis and Market Plus podcasts online anytime at iptv.org/mtom. Elaine Kub, welcome back.

Kub: It is a delight to be across this table from you, Delaney.

Howell: I'm very excited and I'm glad to have you here. We talked a little bit before the program today about this recent news with the President's imposement of tariffs on aluminum and steel. What does that mean for the commodity markets?

Kub: Listen, we already have a case study of how China, for instance, will respond to this kind of movement. In the weekly export sales report this week we saw absolutely zero export sales for milo or grain sorghum and the only shipment destination is China for there and when they don't want it that's really hurtful to that particular market. It used to be the case for a few years there that milo was trading at a premium to corn and now that has gone away. And that was this past week's export sales report so that was not a reaction to this steel tariff, that was a reaction just to the import restrictions on solar panels. So the steel thing is bigger and it's not just China. In fact, Canada, Mexico, Brazil, other big major trading partners of ours --

Howell: Our NAFTA trading partners.

Kub: Yes, exactly. This is a huge deal and it's not just China. But like I mentioned, we already have seen what can happen. This is not great news for the agriculture sector if something doesn't change, if someone can't convince the administration to pursue a different path.

Howell: Is that part of this retaliatory effort or the possibility of retaliatory efforts? Is that why we saw the wheat market pull back substantially today?

Kub: That is a possibility. I think that could be related to any number of things, just speculators closing out positions or perhaps weather, a forecast for wetter weather in the Southern Plains. But honestly it would be justified if wheat did pull back based on export expectations. This old crop market, there is no good reason for U.S. wheat to be rallying or moving higher when there is so much of it here in this country. We could make an argument for putting in a risk premium for the new crop wheat market because there is drought. And I hate to be the person who is ringing a bullish bell about wheat in March, at the beginning of March, however when you look at the broad extent of that drought it's in American wheat growing regions absolutely, hard red winter wheat growing regions especially, but also spring wheat growing regions and all the way up in to Canada. So all of the North American wheat growing regions are facing some kind of drought right now and if the weather doesn't change in the next couple of months, yes there would be some bullish justification in the new crop contracts, but those old crop contracts, yeah export wise there is no reason to get bullish about that.

Howell: There's no reason?

Kub: Absolutely not, no, especially not with these pressures you mentioned just globally, these trade wars that could develop.

Howell: Let's talk a little bit more about weather. We're expecting maybe some drought relief over the weekend here in the western plains and some of the plain regions up into Canada. Will that be enough relief to provide some more support for the markets?

Kub: Yeah, that could be, like I mentioned, a very good reason why we saw some of that washed off here right on Friday. So if that develops, great. And it needs to be over the next couple of months. It needs to be severe relief in those really extreme areas in the panhandle of Texas and Oklahoma.

Howell: So with winter wheat do you expect winter wheat to pull up spring wheat prices with it?

Kub: Absolutely. So those, if the majority of the bullishness is for that hard red winter wheat contract that will affect all of the milling wheat in North America, including Canadian spring wheat, including Durham wheat. If we really had a shortage in production in that in 2018 then yes the continent would have to start importing milling wheat. So absolutely these markets will move together.

Howell: Elaine, the last thing I wanted to talk about here as we talk about wheat was this issue that they've been having in Canada with railway. They haven't been able to get shipments of their grain, specifically wheat, to the export ports. You were at a conference this week. Can you tell us a little bit about the tension that is going on there and what you see that doing for the markets?

Kub: Yeah, I have heard -- so they have struggled this winter from weather reasons and the U.S. experienced something like that in 2013, 2014 where you get just sort of a plugging up of the supply chain and it's not great for end users who need to get that and you can have strange spikes in prices that don't really reflect the underlying supply and demand. But it tends to be a temporary thing that gets washed out pretty quickly.

Howell: Okay. Elaine, let's talk corn and soybeans here. When we look at issues affecting these markets, South American weather is still a hot topic. Is there a point of no return, so to speak, when we know yes or no we are going to have to fill that void that they can't fill?

Kub: I think that this week was really the come to Jesus moment for the soybean market and soybean meal market. I guess I didn't even realize to what extent that had really affected the conditions particularly of the late planted soybeans in Argentina. But the Buenos Aires grain exchange this week said that 76% of their soybean crop, and their corn crop, is either poor or very poor. So that's huge. We experienced dry weather in the U.S. and soybeans bounced back because soybeans are a pretty resilient crop. But if that large, that extensive of a proportion of their crop is doing that poorly then yes I think that is why we continued to see the soybean meal rally, starting to pause, but why we saw that rally continue through this week.

Howell: A question I have when we look at domestic soybean production. Let's say that Argentina has a big void and we need to fill that meal void, how much more can we increase domestic soybean capacity?

Kub: I don't have specific numbers for you but that's absolutely where we would want to go is exporting our value added processed products, the soybean meal, absolutely.

Howell: And we're still seeing soybean meal be the leader here in the soybean complex?

Kub: Well, through most of this week we did. Here on Thursday and Friday the meal kind of moved lower and soybeans moved higher independently. So I don't know if that is just a function of where the speculators are pulling out short positions or adding on new long positions. That's hard for me to say but I guess that's where we need to continue to watch is for the meal to be the leader.

Howell: Elaine, when we look at a price point, $11 in the deferred months are still a long ways away, but do you have bullish optimism that we'll hit near those levels?

Kub: I don't know. If we're already, we are at a point in the Argentinean crop that it's either made or not made and possibly there is not going to be new news, this story may have already played out. So for the new crop, you mentioned $11 for the new crop, we saw insurance prices being set, the February references were set at $10.16, which is pretty good, about 3 cents less than last year. So that is a long ways from $11. And if we have already seen that weather from Argentina, if that is the one ace in the hole that we had, that may have already been played.

Howell: Okay. Elaine, let's transition here into corn. We touched a little bit on it, talking weather in South America, but the bulk of Brazil's corn crop, the safrinha corn crop, is in this second corn planting. What are your thoughts about where we're headed with the weather?

Kub: Yeah, weather wise they're obviously, Brazil is not in as bad a shape as Argentina and they may be continued to be the favored market for people who are going to the global export market looking for places to buy feed grains or to buy soybean meal or to buy soybeans. The U.S. needs to remain competitive with them absolutely.

Howell: Absolutely. Elaine, let's take a Twitter question here, I'm sorry it's a Facebook question, social media here. We have Roger in Kokomo, Indiana says, will China's increase in ethanol usage have the same paradigm shifting effect on the corn industry that the U.S. boom had?

Kub: This is the one big piece of optimism I think the corn market has and it is tempered a little bit this week again by the U.S. administration deciding or not deciding or negotiating what to do about RIN's or E15 sold through the year. That will be interesting to see. But it kind of doesn't matter, right? There's not really a blend wall if we can find these export markets to send ethanol to. And not just China but lots of smaller Asian countries, lots of countries in South America, that need to meet their Paris Climate Accord agreements, they're really looking for ethanol to be a way to reduce their carbon and U.S. ethanol really has an opportunity and that is maybe the one demand factor that we can see growing in the U.S. corn supply and demand table.

Howell: That's a little bit bullish news then.

Kub: That is. I think the numbers are something like an extra 500 million bushels worth of corn going into the ethanol grind, ultimately being shipped out the door as ethanol.

Howell: Okay. Elaine, one final question before we transition to meat. New crop corn hit their resistance mark of $4. Do we see it staying there or are we going to move ahead a little?

Kub: You know, Delaney, I looked at this past week about how similar the corn market this year has been moving compared to the way it moved last year. Last year it had a low of about $3.85 somewhere in the beginning of February and then it hit about $4 right here at about the beginning of March. It did the exact same thing this year, it has been creepy the degree to which the prices have matched exactly. So if it followed 2017's path the yes we would just see things dwindle downward and downward until you had a summer rally and then dwindle downward towards harvest. I don't know that, I think it would be odd to see that do the exact same thing one year after another but it's certainly a possibility seasonally that you would see corn prices decrease.

Howell: Okay. Elaine, let's talk cattle. We had the cattle on feed report come out last Friday. How did we see those numbers reflected in this week's markets?

Kub: Well, this week was not a great week in the cattle futures. They continued lower. The cash trade was okay. And I think it's just, again, I think going forward this is another market that is going to be extremely sensitive to export problems or the interpretation or the appearance of export problems that will really make cattle traders nervous I believe and pork traders.

Howell: Definitely. Any concern over the big placement numbers we saw in that report?

Kub: I think yeah, so particularly going into those summer months I think we need to start thinking about risk protection for the June contracts for both feeders and lives because we know there is going to be a large supply. I think it could be another scenario where we repeat 2017 where we have all of these wheat fields that may not be harvested for grain. If that weather scenario doesn't change the next couple of months we've got another scenario where the cattle will be put onto the wheat fields and that would just push back that marketing and bringing out of the feedlots or onto the open market.

Howell: Okay. Over the last week, week and a half, we've seen the April live cattle contract give up quite a bit, it sank to its lowest levels since January. Do you see further downside risk?

Kub: I absolutely do. I think that the trend in this market is lower, as you point out, Delaney, and I think there is absolutely that risk of looking at $115 in that April contract. I think that's the direction it seems to be heading and if folks need to get something marketed here is an opportunity to be putting in risk management.

Howell: With some weather that might happen in the Plains over the weekend will that give relief to the cattle markets or will we see a further downside risk there?

Kub: No I think if you did see rain come in that tends to make actual cash buyers a little more willing to go out there and spend money and buy the animals. So I don't see that being a big threat to these prices necessarily in the near-term from one week to the next.

Howell: Okay. Elaine, let's wrap up our conversation with pork. Last week we saw the third largest weekly export sales in the history of export sales. Where do we go from here?

Kub: We better hope that that continues. That is extremely important to the pork market. We see on the cut per cut, it's the lower priced cuts that we're starting to shave off some value this past week. The high priced cuts, the bacon, the things that Americans are going to buy, our domestic demand is going to be okay, but we need to keep shipping the lower value cuts out otherwise I think you're looking at that June value, $80 is an incredible danger of not seeing the usual seasonal pattern go up. If we're increasing our supply and increasing our production here domestically but we're not going to be able to ship it out I think it's entirely dependent on what the international consumer does and feels about U.S. pork to answer that question.

Howell: Really quick before I let you go, do you see any possibilities on retaliatory tariffs when we look at hogs or beef?

Kub: Absolutely. This is why I'm beating the dead horse here is that yeah, absolutely. For pork is probably the biggest part of the meat market that is most dependent on these exports and if that doesn't happen or if something threatens that, if we antagonize our trading partners, that is a huge threat in a market where we are increasing 2% to 3% per year in our supply. We've got to have some place to push that out the door.

Howell: We definitely do. Elaine, let's keep this discussion going in Market Plus. But again a big thank you for being here today.

Kub: It's been a pleasure.

Howell: That wraps up the broadcast portion of Market to Market. You can watch more discussions in Market Plus available in podcast and video form on our website. Before we go, this week marked the passing of Dan Miller, a previous Executive Producer of Market to Market and former General Manager of Iowa Public Television. Market to Market is produced at IPTV's studios. Dan had a deep commitment to both editorial integrity and the purpose of public television. Neither waivered during his 37 years with Iowa Public Television. He will be missed.

Trading in futures and options involves substantial risk. No warranty is given or implied by Iowa Public Television or the analysts who appear on Market to Market. Past performance is not necessarily indicative of future results.

Market to Market is a production of Iowa Public Television which is solely responsible for its content.

More from this show

Grinnell Mutual Insurance
Sukup
Accu-Steel
ICN