Market Plus: Elaine Kub

Mar 8, 2019  | 12 min  | Ep4429 | Podcast

Podcast

Howell: This is the Friday, March 8, 2019 version of the Market Plus segment. Joining us now is Elaine Kub. Elaine, welcome back.

Kub: Good to be here.

Howell: Elaine, first of all, Happy International Women's Day.

Kub: Happy International Women's Day.

Howell: You mentioned there right at the end of the show the dollar skyrocketing this week, not having a trickle effect into the grains. Can we expect to see that here within the next week or so?

Kub: The level or the extremity of the dollar's movement, especially on Thursday and Friday is the sort of thing that typically gets a reaction from commodities and dollar denominated commodities should respond bearishly if the price of the nominal dollar goes up. So it felt like we should have had more bearishness in the commodity prices on Friday that we didn't see.

Howell: Like it was a delayed reaction?

Kub: That's what may happen on Monday is it may eventually filter on down. And the reason behind the dollar going up I suspect is because of geopolitical uncertainty, perhaps even Brexit. Anything that is making people feel nervous or antsy about the stability of the global economy will send them flooding into the dollar as a safe haven asset and that is about the only thing I could suggest is why the dollar went up. So all of that would tend to be a little bit bearish towards commodities.

Howell: And assuming that we see the dollar remain at these levels or even continue upward are we going to see exports affected here specifically within the next couple of weeks?

Kub: Oh, I suppose it depends on the market. If we're talking about wheat where the exports are so dismal to begin with, I don't know --

Howell: But I guess soybeans are affected by China -- maybe corn, is it going to affect the corn market?

Kub: Potentially sure.

Howell: But not so much wheat and soybeans.

Kub: They have their own problems regardless of the price.

Howell: Elaine, let's take a couple of quick questions here. Brian in Marseilles, Illinois. What is going on with these grain markets? Is the bottom near? Or is there just too much inventory out there?

Kub: I don't feel like there's too much inventory and especially if we talk about the corn market as a benchmark. It's at an 11.8 stocks to use ratio. I guess that probably slightly changed here in today's WASDE report. But for it to be too much that doesn't really exist. As long as there is enough in the system, the industry doesn't start freaking out and having a supply related price spike. So we're not seeing that happen. There is definitely enough left in inventory. But if there continues to be additional leftover inventory that doesn't have a linear relationship with prices. We don't expect to see prices go to $2 just because the stocks to use ratio rises to 12% or 13% so I think we're okay.

Howell: When we talk about the corn market story here from the WASDE report I think the ethanol wasn't really a shocker that they reduced the ethanol production. But exports, that really surprised me at least and I know we were talking a little before the show today why the sudden decrease in exports?

Kub: I don't know. Yeah, it does surprise me especially if you look at the weekly export sales report performances, they have been positive for corn, they've been quite friendly. So I don't know what justification USDA was using to make that reduction in the corn export projection. If I was going to be a conspiracy theorist I would say that maybe they were just doing that so they didn't have to put 200 million bushels less on ethanol. Perhaps they really felt that the ethanol usage would be that bearish but they'd just spread it across two different categories to make it look a little less scary. I doubt they work that way. I don't know. Who knows.

Howell: We don't know. So let's talk a little bit about crop insurance, planting decisions coming up here. We had the crop insurance numbers come out last week. First of all, share those with our viewers. And secondly, how do you think those are going to impact planting decisions if at all this year?

Kub: Yeah, so if you're making an economic decision about what can you really rely on for income, what income is backed up by a crop insurance policy, is really part of a farmer's marketing plan so these crop insurance reference price levels, they absolutely are part of a decision making process. And those are based on the February, the average closes during the month of February. So yeah, at the end of February we knew that they were, it's a $4 average for corn, which is a few cents better than last year and the year before. And the average for soybeans was $9.54, which doesn't sound great, but it's not the worst we've seen in recent history. In 2016 it was $8.90 something, so $9.54 isn't horrible. And as a price ratio, that soybean to corn price ratio is now 2.38 to 1 based on those crop insurance policy prices. So it definitely economically motivates more corn acres and that has been the conventional wisdom all going through the winter is that there would be more corn acres because of these kind of lackluster soybean prices.

Howell: Right, because of what is going on in China. Let's say we don't get a deal here for a couple more months, we've had a couple of people write in, what is the long-term impact? I know we're kind of beating a dead horse there but we keep getting told March and then now we find out it's probably not going to happen, another meeting here at the end of March. What are prices going to look like here in a couple of months, let's say mid-summer, if we don’t have those worked out?

Kub: Well, let's say that it did get normalized and we had a fairly normal trading pattern in the 2019-2020 marketing year. That's fine. You still have 900 million bushels leftover from this past marketing year that didn't get bought and didn't get shipped. So there will probably be this large inventory that just has to slowly get blended off over the next two or three years. Some of that could become a quality problem even. So the implications for the market would be particularly noticeable in basis and particularly in the western Corn Belt versus the eastern Corn Belt where there is more domestic crushing and that has been quite positively actually. The crush margins this week and this months have been good.

Howell: And I think they increased crush on today's report, a little bit.

Kub: Justifiably because the economics are there. But in the western Corn Belt where these soybeans are sitting there and they're not going by rail to the P&W yet because we just haven't got that business that just never appeared there at the end of 2018 it could be years before that disappears and if you want really long-term implications I guess we either need to grow fewer soybean acres long-term, find something else to grow, or really boost more domestic production or more domestic use.

Howell: Or find new export markets potentially.

Kub: Potentially.

Howell: So I hate to even bring this up because obviously we all want to see something get done with China, obviously all the growers watching want to see something get done with China, but let's say long-term we don't, I'm just going to say there's been rumors or conspiracy theories that we're going to wait until the next presidential election before we see China really come to the table, they're just going to punt it off for political reasons. Okay, let's say that happens, totally talking in hypotheticals here, let's say it happens, we wait another two years, we don’t see normal exports to China, we don't see any new or expanding markets, I'm talking total worst case scenario here, what do we see those ending stocks get up to if we're almost at a billion now?

Kub: Yeah, it could certainly go above a billion and folks can store it, just like you mentioned, get blended off slowly. But I don't know that it is such a hypothetical that you're talking about. I think even in the best headlines that we see about the trade suggested that they weren't going to have one big final document that everybody signs and everybody is happy again, it was going to be an ongoing process, they're going to meet every six months and renegotiate things and renegotiate things. So I think absolutely this is something we're going to be dealing with for the next two years.

Howell: You don't think that's such a hypothetical?

Kub: I don't think it's a hypothetical at all. I think that's the stated intention.

Howell: So let me ask you this, and this is probably not going to be exciting for a lot of viewers, but do you expect us to see trading ranges continue to be at these levels if we're still dealing with the Chinese trade stuff?

Kub: Oh yes, yes. I think $9.50 soybeans is not a terrible, given the scenarios that we could envision for the next 12, 24 months, $9.50 soybeans is underpriced compared to corn, we talked about that ratio, but it may not be underpriced compared to the future disasters that could be down the line.

Howell: Okay, let's talk about the good here. We've got the bad scenario out of the way, let's talk about the good. Let's say we do see a trade deal here within the next couple of months. Who's got the best chance to jump into the field and take advantage of that potential market again?

Kub: You mean versus the U.S. or Brazil?

Howell: Sorry, in the U.S, who's got the best chance of jumping in the field and taking the lion's share maybe or take advantage of that newfound trade deal?

Kub: Oh, which market?

Howell: Which state, I'm sorry.

Kub: Oh, which state. The benefit has always been here in the eastern Corn Belt where they can ship the soybeans by barge down to the Gulf, that can go in any direction, or the domestic processing industry there. I feel like us poor farmers in the western Corn Belt, let's say anybody west of I-29 where those soybeans typically go by rail to the P&W, it is really ugly. You've still got basis prices there at 1.50 under, 1.70 under, anywhere western Nebraska, western Kansas, any of that rail market is sort of stuck.

Howell: Stuck.

Kub: Stuck.

Howell: Okay. Elaine, we've got a good question here talking about seasonality of prices. Phil in Dresden, Ontario. He's been watching you. He said, December corn currently at $3.87, you called it in 2016 on June 18th, he's got the exact date for you, last year about May 29th in 2017, early July. When can we expect Dec corn to top out this year?

Kub: Well, this is a piece of analysis I've done that if you have a year of normal supply, normal inventories in the corn market the date of the year when you have the highest probability of seeing the new crop corn market hit its one annual high, the highest date of the year, the most likely date is June 18th or it has been over the past 18 years of data. So that's fine. But I think what Phil is asking here is if I anticipate that to be the case in 2019. I don't know. I think in 2019 we might see the high come a little earlier because I feel like there's going to be a lot of corn acres because nobody wants to plant these lackluster soybean prices. So we might be seeing the highs now, we might have already seen that high at $4.02 or whatever, that might have been it and it might just dwindle all the way towards harvest.

Howell: Are there any signals either technically or fundamentally that indicate to us that is the high?

Kub: No. Just an expectation of what the inventories are going to look like as you go forward. And that June 18th is sort of a reflection of when is there weather risk premium put into the market and it's when the corn crop is at the most risk. But if we have a scenario of just many, many acres, 92 million acres, even larger corn acres, which is still a possibility, despite the snow that is on the ground now I think it's still a possibility that folks will be able to plant as many corn acres as they want to, logistically it will be a possibility, then that means there will just be a steady drip of bearish news through the year 2019 because you'd have the drip of bearish acreage news and then almost certainly pretty good yields this year. We're not looking at any drought scenarios here at the start. So I think just a drip of bearish news throughout the growing season.

Howell: All right, Elaine Kub, maybe not the happiest note to end on but thank you so much for your analysis.

Kub: Well, it's always a pleasure.

Howell: Join us again next week when we visit a family making the move from the city to the country in the name of keeping the family farm operational and Don Roose will sit across from me at the Market to Market table. Until then, thanks for watching, listening or reading. I'm Delaney Howell. Have a great week.

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