Market Analysis with Elaine Kub

Market Analysis: Elaine Kub

Aug 3, 2018  | Ep4350 | Podcast

Podcast

European drought, strength in the wheat market, and rumors of back room dialog helped move the grain markets higher. For the week, September wheat rose 26 cents, while the nearby corn contract finished 8 cents higher. The soy complex started the week higher as new buyers took over Chinese market share. But by the final session, the September contract fought off rumors of an escalation in the Chinese-U.S. tariff battle to hang on for a 16 cent gain. September meal failed to push-off the news and lost $1.20 per ton. December cotton shrank 22 cents per hundred weight. Over in the dairy parlor, September Class III milk futures were unchanged. The livestock sector finished mixed, as the October cattle contract gained $1.52. September feeders added 85 cents. And the October lean hog contract shed a dime. In the currency markets, the U.S. Dollar index increased 50 ticks. Crude oil dropped 40 cents per barrel. COMEX Gold fell $9.50 per ounce. And the Goldman Sachs Commodity Index lost nearly 2.5 points to settle at 461.90. Joining us now to offer insight on these and other trends is one of our regular market analysts, Elaine Kub. Elaine, welcome back.

Kub: Hello, Delaney:

Howell: Elaine, we had some interesting news happen in the wheat markets this week. An, we're going to say undisclosed news source, mainstream news source, had a headline that sparked an almost near limit up day here in the wheat markets. Is that going to limit our potential moving forward for another rally?

Kub: Well, and it wasn't just this week and it wasn't just that one day. The European wheat prices have been rallying for weeks now based on that exact story, the idea that there is very hot, dry weather in Europe. Earlier in the show you guys mentioned the fires here in the United States, very dry areas in the U.S., but it's really more than that. It's Australia too, some portions of the Australia wheat crop are quite dry and they are paring back their production estimates. But really that spark this week, the thing on Thursday that really caused the top to go into that European wheat chart was the Ukrainian Ag Minister saying that they would restrict sales. And it turns out that's not the truth. That was a false headline. So they had to clarify it but they still will not have as many supplies, wheat supplies to export as usual because they legitimately do have very poor harvest results in Ukraine, in Russia, in Germany, in Poland, in France, pretty much everywhere on that continent. So that is a real thing that is happening on that European wheat chart and it went to a high of, I don't know, 215 Euros per metric ton, which in U.S. dollars and cents that's like $6.96 per bushel. So we would still have room, we have not matched that penny for penny that rally that we've seen in the European wheat prices, but certainly we have seen a rally. The KC wheat contracts have rallied 27% based on that arbitrage of the European to the U.S. wheat prices.

Howell: With that being said, we have all these issues as you just mentioned in the European Union and Russia and Ukraine, what is that going to do for our U.S. wheat market? Does that open the door for more export sales?

Kub: Yes, absolutely. Now, if we saw confirmation of that, already the hard red spring wheat is definitely the star of any weekly export sales report. But if we would see confirmation of more export business, particularly for the hard red winter wheat, that would be very interesting to wheat basis. But so far in the spring wheat where we're just starting to see harvest really heat up the merchandisers have really resisted, not really, but to some extent they have resisted that rally with wider futures spreads and weaker basis because they know they're going to get more bushels, a larger crop this year than last year, obviously for the acreage increase if nothing else.

Howell: Okay. Elaine, I want to move on here to the corn markets. We closed above the 50 day moving average for the first time here. Moving forward are we going to continue to see some strength in the corn markets?

Kub: I think the corn market's potential to continue higher is based not really on any bullishness here in the United States because I think we're about to see this next week there is another WASDE report, a supply and demand report coming up that is very likely to increase the USDA's yield projection for U.S. corn and I think that is legitimate.

Howell: Okay. Let me ask, interject here and ask about that. What do you expect to see on the WASDE report?

Kub: Well, there's private estimates somewhere in the 177 bushels per acre range and I don't think those are necessarily crazy. The condition ratings are very good, higher than 70% rated good or excellent and that's not even as good as was seen in 2014 or 2016. So I think those are real. I think the condition ratings are good despite the little pockets that do have the dry weather or the drowned out spots. But I think supply wise in the United States it's bearish at the moment but there is this matter of the feed grains in Europe, that same hot, dry weather in Europe, China is starting to get some dryness in their corn production. So the global feed grain supply and demand situation could start to get more tight and we could start to see some strength in that corn market.

Howell: Okay. We touched on a couple of important issues here. We got some great social media questions in this week so I want to get to one here from Lexi in Iowa. With a fast maturing corn crop, decreasing corn exports and record breaking yield predictions, will the growing U.S. ethanol industry offset some of those macro issues that are being figured into the market?

Kub: That is the one bright spot, we are seeing that. Over a million barrels a day keeps on being reported for ethanol production in the United States and it is being exported. I can't pull the numbers off the top of my head but our exports to Brazil, other South American countries, have definitely increased year over year, to Canada, there's a lot of potential for ethanol exports to maintain the strength in that ethanol market and in corn demand for ethanol. But price wise the supply here is still the thing that is going to be keeping that from getting crazy.

Howell: Okay. Let's do a quick price point here. December corn contract, what are you expecting it to be at? We've touched above $4 now again? Are we going to see another harvest low? Or do you think we've kind of factored that into the markets already?

Kub: I think it's entirely possible that any upward steps that we see in the futures could be taken away by weaker and weaker basis as harvest gets closer, as this big harvest gets closer.

Howell: Okay. Elaine, let's move on here to the soybean markets. We started the week out really strong, we were putting some cents on the board, then we pulled back here towards the end of the week. What happened?

Kub: Sort of rumors giveth and rumors taketh away. The soybean market just rejoiced when there was even a hint that the U.S. and China might start to talk about normalizing that trade relationship. Soybeans shot up 28 cents. And then when it turns out that might not be the case, it's just sort of give and take on any given day, what is the rumor on that day. So, until something changes I think the soybean market will sort of be stuck in this range. I think it has found a neutral range to trade in, somewhere above $8.22 and somewhere below $9.22 on that new crop November contract. So I think we might just be bouncing along here until and unless something changes.

Howell: Okay. You opened the door on tariff news and I know you follow a lot of geopolitical stuff going on so I want to get your opinion and thoughts on this. President Trump had the ability to put or enact tariffs on August 1st. Now he has threatened potentially to put some more on September 1st. Why didn't he enact them on August 1st as opposed to pushing them off another month?

Kub: I cannot speak to the decision making process behind that. I don't know. But the thing that the market responds to is that China responds with retaliatory tariffs against soybean oil, against liquefied natural gas. Those are things that will affect commodity markets absolutely. So nobody really seems to be winning in this trade war at this point in time.

Howell: I want to talk about liquefied natural gas. In the oil markets, did the oil markets respond to that news since I think it was China's number one importer of gasoline, it said no more, we're not going to take U.S. ethanol and gasoline anymore?

Kub: Yeah, I think the place to watch will really be the oil companies themselves. That will really affect their profitability, their ability to export a byproduct of the oil drilling. So that is the place to watch for that. But again, it's so much up in the air. One hopes that some of this will get resolved.

Howell: Absolutely. Elaine, let's move on here to live cattle because we've had kind of a roller coaster week. Again this week we closed pretty well on the day here on Friday. We've had a decent bounce in export sales as well and after our marketing year low I think what was it two weeks ago, where do we go from here?

Kub: It was a nice boost today in the futures and it again was just that cash business that developed very late here on Friday. So the live cattle market is strong because when those supplies do get offered to the packers they want to make their $300 per head profit margins.

Kub: That's what it pencils out to be roughly at this point in time. So they do want those supplies when they come on market. And fortunately, as you mentioned, this is one market where exports are not bad news, we do not have terrible disasters in beef exports. So I think the line for beef for live cattle anywhere is just good, steady strength.

Howell: Let's talk a little bit about packer margins and boxed beef prices. We’re at the lowest levels since December. Packer margins are getting a little bit thinner. Is cash going to soften with all that being said?

Kub: It could, especially seasonally we're going to start to see that happen. A lot of it really depends on what happens to the supplies, the cattle that have been on feed and have been held on feed longer. As they come to market, let's say in September, a lot will depend on that and a lot will also obviously depend on the strength of the U.S. consumer, whether the retail consumer continues to feel optimistic enough to go and buy those beef prices.

Howell: Is that the reason that futures are trading at such a discount to the cash right now?

Kub: I don't think so. I think that's possibly a reflection of the supplies, the cold storage supplies that people can push off -- well a wall of beef, let's call it that.

Howell: Absolutely. Let's talk about feeder cattle. When we look at weather that is affecting not only the commodity market and the grains, it's also affecting or seems to be affecting the feeder cattle markets. What's going on there? What are your thoughts?

Kub: Yeah, I think there's very strong resistance for the October feeder cattle contract. I don't think we're going to see that be able to break above $155 and it's not there now. But I think that has been built onto the charts and that will certainly be the case if corn prices build any sort of a rally or weather rally as we get through the summer. I think feeder cattle have the potential to move lower.

Howell: Okay. Even with the reversal on Wednesday, do you see us, we're in an upward trending channel right now for feeders, but you're not optimistic that long-term we're going to stay in that channel?

Kub: No because it's a much more neutral outlook I believe for the feeder cattle based on what can people afford to feed given I think the prices of feed, the prices of producing these cattle has been built into that market and we've seen that resistance, like I mentioned, at the $155 level and I just don't think that you're going to be able to find somebody who is going to come in there and want to buy those supplies at a higher price than that.

Howell: Okay. Elaine, let's wrap it up here with the hog markets. Export sales have held up pretty well in the hog markets as well. At what point do we start to see these strong export sales reflected in our futures contracts because they're still just not doing as well as we would anticipate them to?

Kub: They're doing very poorly. What is the word for a nose dive in hogs? Perhaps it's a snout dive. It's just going down and down and down. You see the actual cash market going down 40, 60 cents every day, the index going down a dollar a day and the futures just have to follow that cash news. However, they have pulled back 25% and it could be a scenario like soybeans where the market pulls back because of tariff news or because we have sold very little to Mexico. You mentioned good export news but it doesn't come from Mexico and it doesn't come from China right now. So it could be that the futures market pulls back to a certain price and decides that we have priced in the tariff news and maybe it can form a bottom and bounce back up just like soybeans did.

Howell: Just like soybeans. Elaine, I want to continue the hog discussion in Market Plus, but that's all the time we have today.

Kub: Thank you.

Howell: That wraps up the broadcast portion of Market to Market. But we will keep the conversation going on Market Plus where we’ll answer more of your questions. You can find it on our website at iptv.org/mtom. Market to Market may be airing in different timeslots due to fundraising on PBS. So, if you find value in our program, please consider making an investment in a service that provides you with the news and market analysis you’ve come to know and trust. Join us again next week when we look at a partnership between a Midwest dairy producer and an East Coast dairy giant. So until then, thanks for watching. I’m Delaney Howell. Have a great week!

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