Market Plus: Elaine Kub

Nov 30, 2018  | 11 min  | Ep4415 | Podcast


Howell: This is the Friday, November 30, 2018 version of the Market Plus segment. Joining us now is Elaine Kub. Elaine, welcome back.

Kub: Good to be here.

Howell: All right, Elaine, we've got a lot of questions about the G20 Summit. So let's just start here with Steve in Findlay, Ohio. He said, will the China deal be buy the rumor, sell the fact announcement?

Kub: Not necessarily. If there is a real honest to goodness deal or a real reason to believe that talks will continue because that's sort of the tentative plan right now is if they come to an agreement at this dinner, or after this dinner, then there will be more talks in Washington D.C. in December. So if that was actually the path coming out of that there wouldn't be just one burst and then a selloff in response. I think there would be a reason for the soybean market in particular to have a sustained recovery in prices perhaps towards $9.50. Perhaps it could gain another dollar if you think of the comparative prices between Brazilian prices and FOB U.S. prices, there's about a dollar of difference. So it could recover that much in the same way that it fell the $2 when the 25% tariff was announced. So no I'm not looking for one big burst and then a selloff. If there was something to react to I think it would be a sustained reaction.

Howell: Okay. The Brazilian FOB and the U.S. FOB, that kind of sparked a scenario in my head. Let me try and walk it through with you and then see what you think. Let's say we get a deal in place or we have some positive rhetoric or whatever and China says okay we're done putting tariffs on U.S. soybeans. If we don’t get back up to the same level of premium that Brazil's soybeans are at how bullish is that for U.S. soybeans then?

Kub: If we would have a discount? Yeah, that would be great news. We'd sell a whole lot, it would start to move. But this is a caution that the futures prices would react much faster than the physical market would, especially that market that goes to the P&W because the physical scheduling of the shuttle trains has gone haywire this year, they just haven't been physically moving to the west as you would expect them to so it would take some time for the actual basis market to recover for some of those FOB prices. But the futures market could recover very quickly.

Howell: Okay, I'm going to skip down here and take a question about acreage because we touched on it during the main program but I think this is a key time producers are starting to look ahead. I think that this G20 Summit meeting could have an effect on acreage. And Elaine, we're interested here, Luke in Nebraska would like to know 2019 acre battle starts now, who wins, corn or beans?

Kub: Yeah, at this point in time very much corn. I think the last time I looked the price ratio of soybeans to corn was 2.3 to 1 which is historically very weak and it would favor more planting of corn. And it has been going on for the past month or so, two months or whenever the seed specials that the seed salesmen try to give you, this is the prime time for that. But I will say that a decision coming out of this weekend the only thing you might see is if there was no deal or there was an increase in the combatitiveness between these two countries. Then you might see farmers say okay, I'm going to buy some more fertilizer and put it out there because I'm going to plant corn. But if it starts a little bit hopeful that maybe soybeans might recover then everything is still up in play.

Howell: I have mixed feelings about that. So let's say we get some sort of positive rhetoric. Should producers still be looking to switch or keep acres in soybeans because we don't know if anything's going to happen? We could say something is going to happen in 2019 but we really don't know. Is it smart I guess as a producer to say okay, we've got positive trade rhetoric, I'm going to go ahead and plant X number of acres in soybeans?

Kub: Well, the good news is that in December you don't have to lock in that decision. Seed can be returned. The only thing that you would do at this point that would lock in your decision is if you put fertilizer down for corn. So you could keep that open until March or whenever, the decision, like I mentioned, would still be in play unless you felt very confident that it was going to be bad news through 2019.

Howell: Okay. We talked a little bit about this on the main program. We've got a question about how the G20 Summit will affect the cattle markets. Paul in Northeast Iowa said if positive news comes out of the G20 meetings will that benefit the cattle market as well?

Kub: Hello, Paul. And yeah, I think exactly, that all of those ag markets would get pulled together and the beef, this is the season where we do try to see a little more domestic better beef prices and we have not seen that lately in the beef cutout numbers or in the boxed beef results. But I think we would expect to see that especially if you did start to see more hopefulness that we would get more growth in the export sector.

Howell: Okay. Elaine, we've got another question here and you and I kind of talked about it a little bit before the show started, just so you weren't completely thrown off. We have Steve in Ward, South Dakota. When looking at our grain exports how much movement would it take in the U.S. dollar index to significant change where soybean are bought from globally by China?

Kub: Yeah, I can't do the calculation off the top of my head of what percentage would we have to change the dollar index to change the corn price, or soybean prices, by that dollar that we were talking about. That is the price differential between the Brazilian soybeans and the U.S. soybeans. We're going to need to get that dollar. So if you could drop the U.S. dollar currency rate that much instantaneously sure that would be one way to do it but that's not the direction that the dollar has been going. Fortunately it doesn't seem like the dollar index is going to continue going higher especially after it has been announced there probably maybe won't be another interest rate rise in the very near future. So hopefully the dollar remains relatively stable. But I don't think that's going to be the way that we're going to get more soybeans sold.

Howell: So is the high in for the U.S. dollar?

Kub: Maybe. I don't know. Hard to say. But I will say one more thing about this is that the question from Steve got me thinking that the other thing that could happen is the Chinese currency is very, is going to be very responsive to whatever happens this weekend and it is very weak right now, it is as weak as it has been in the past decade since the financial crisis. So there is certainly the possibility that you come out of this weekend G20 meeting with bad news for the global trade scenario and the Chinese would continue to weaken which would not be helpful for them buying anything from us but it would be helpful for them continuing to run up their good trade surpluses with other countries.

Howell: Tell me little bit more about that. Good trade surpluses.

Kub: So they have a cheap currency, that means they can sell their stuff to other countries cheaply and sell lots of it and keep on building up their positive trade surpluses.

Howell: And increase trade deficits then with other countries?

Kub: Yes, specifically the United States.

Howell: Of course. All right, Elaine, we've got kind of one more softball question here for you. We've got Lexi in Iowa. With trade being on the forefront of our minds and the markets what expectations are currently factored into each commodity market?

Kub: Yeah, you kind of look at the options markets to give you a sense of what people are anticipating. If you look at the historical volatility through the month of November these grain markets and even the livestock markets have not been terribly volatile from day to day except recently. But it has been fairly quiet through this month. But you look ahead to the implied volatilities, let's say for soybeans, and they're suggesting that there will be much more volatility in the next couple of months. That is the expectation for them to go up or down quite a bit. But it's hard to say -- and there is actually the put-call parody that you would expect to see is definitely favoring the calls. There seems to be more buying interest in those call options than the put options which would suggest that maybe the option traders are more leaning towards seeing a good positive trade result out of this weekend than a bad result but that's really hard to say.

Howell: Is it the options then that are showing us there's going to be more volatility in the soybean markets?

Kub: They're suggesting that, absolutely. That is baked into these option prices is the expectation for more volatility. And like I mentioned, slightly greater demand for the call options than the put options, which suggest that perhaps the option trader population is expecting to see something good come out of this weekend.

Howell: All right, Elaine, the last thing I want to touch on here, oil has also been very volatile. We talked about it in the main program. Demand and supply is the main reason we've been seeing this volatility in the oil markets?

Kub: Yeah, we better hope that it's supply because if oil dropped 33% in a month because of a global demand scare that's not good news. That would suggest, one hates to use the recession word, right? But one hopes that this bearishness in oil is just because of the supply push that has been coming out of OPEC and we have just brought it down to these, like I mentioned, just barely profitable prices here in some of the U.S. formations. And grain farmers can tell the oil industry that just because it's below the cost of production doesn't mean that the market has to stop there. So I'm not saying this is necessarily the bottom of the oil drop but it has been remarkable.

Howell: I want to go off your recession comment here. It's good and bad, right? But the Fed's announcement that they're probably not going to hike interest rates in 2019. Does that indicate that we're heading into a recession or a stagnant time in the economy?

Kub: Not necessarily, no. It just indicates that perhaps there's not as much inflation or as much growth. Obviously we've seen that in the stock prices. It has not continued growing here in these last couple of months. So there isn't, there is no reason or the Fed does not see a reason to try and tighten things down or dampen things down. It's just pulling off of the breaks.

Howell: Okay. Elaine Kub, great discussion, thank you so much.

Kub: Thanks, Delaney.

Howell: Join us again next week when we'll have Ted Seifried on. We're going to talk about some other stuff, we're going to talk about the markets. We're going to talk about a fraud case. Be sure to tune in. So until then, thanks for watching, listening or reading. I'm Delaney Howell. Have a great week.

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