Market Analysis:Elaine Kub

Market Analysis:Elaine Kub

Jun 7, 2019  | Ep4442 | Podcast

Podcast

Trade talks, planting progress and private acreage estimates pushed the markets lower. For the week, July wheat slipped 2 cents while the nearby corn contract declined 11 cents. Improving weather conditions for planting pressured the soy complex. The July soybean contract dropped 22 cents. July meal dropped $9 per ton. July cotton shrank $2.49 per hundredweight. Over in the dairy parlor, July Class III milk futures fell a penny. Another mixed week in the livestock market. August cattle gained 22 cents. August feeders improved $4.12. And the July lean hog contract cut $2.58. In the currency markets, the U.S. Dollar index plummeted 118 ticks. July crude oil strengthened by 45 cents per barrel. COMEX Gold bumped up $34.10 per ounce. And the Goldman Sachs Commodity Index was even to finish at 406.35. Joining us now to offer insight on these and other trends is one of our regular market analysts Elaine Kub. Elaine, welcome back.

Kub: I'm happy to be here at this interesting time for the grain markets.

Howell: It is an interesting time, Elaine. Let's talk about that starting off here with what happened in the wheat markets this week. They really felt like they were kind of pushing everything else forward and then maybe had pulled back there because of corn and soybeans this week.

Kub: You're right. There was a day, I think it was Thursday, when wheat was in the lead. And I think if wheat was trading on its own it would have a bullish story to trade with dryness in Russia, there was some dryness in parts of Europe that were relieved actually by some rain this week, dryness in Australia which kind of doesn't matter but they're planting in the dust, which some U.S. farmers would have liked to have done. So there is enough of a bullish story for wheat to take the lead on certain days. But you're right, how much of the movement over the past two or three weeks, the upward movement in wheat, how much of that is due to its own story versus how much of it is following along with the U.S. row crops? It's really hard to judge at this point.

Howell: So, Elaine, we hit the $5 mark or is hovering right in there. How much higher do you think we can chug along here over the next couple of weeks, especially if we continue to see maybe unfavorable weather?

Kub: Yeah, in the U.S. wheat market I don't believe that it would be justified to go much above that $5 level because look at the condition ratings, they're actually really beautiful everywhere except Ohio where that soft red winter wheat has experienced some of the same flooding and wet problems that the row crops have. So that is why we see this interesting price differential between the hard red winter wheat and the soft red winter wheat. That's not completely unusual over the past five years. But generally speaking, especially for the hard red winter wheat, the condition ratings are beautiful, this rain makes grain sort of thing that I hate to say, but it does work for the winter wheat this year.

Howell: Okay, it does work for the winter wheat, not so much when we talk about the corn and soybean markets. Let's talk corn first here, Elaine. They pulled back very drastically this week. We still didn't have extremely favorable planting progress report on Monday. Why did we have this spark down in the corn market?

Kub: Yeah, that's a very important question. Rain makes grain but only if you can get it planted, if the rain doesn't stop the grain from getting planted, and that has been what has happened in corn. Why we don't have continued bullishness through this week I think is perhaps related to the fact that there is a WASDE report coming up next week and that shouldn’t matter because those numbers, there's no way the USDA will be able to fully incorporate any sort of acreage projection or reality because nobody knows what the reality is or will be until we get another week or so of weather forecasts. We just don't know. But it may be the timing of that report is such that if anybody, any speculators or funds would otherwise be willing to start making bullish bets, they have pulled back all of their bearish short bets, but we haven't seen that we know of yet any big build of bullish bets. They may be waiting for that report to get out of the way and then the timing of it would allow that to move forward again next week.

Howell: So we've got the WASDE report coming out. As you mentioned they're probably not going to touch acreage at this point. But do you think they will adjust yields?

Kub: They would have a justification to adjust either one of them and they do take weather into account as they make these numbers. I'm just saying that there is no real number yet, even individual farmers couldn't give you an exact number of acres of corn or soybeans that they will have planted at the end of this planting season because the end of this planting season is July, this goes on and on until people get too scared about fall weather, about hot weather in the summer. This late planting makes it impossible for us to know any acreage number right now even if you wanted to put it on a supply and demand table.

Howell: Okay, it makes it impossible to know it, but I'm going to ask you an acreage question because we've been asking every analyst kind of as they've been coming back to the show. We've got another planting progress report on Monday. We've had a pretty good week in most of the Corn Belt this past week. So coming Monday what do you think we're going to see for the planting progress report? And what do you think we're going to see as your final estimates here for corn and soybean acres?

Kub: Okay. So over the past seven days there have been some pockets of the Corn Belt that weren't completely flooded with new precipitation. There is more precipitation in the forecast for this weekend for Illinois and Indiana which are very wet. And I've taken a pretty extensive road trip through the western Corn Belt myself and where it is dry everybody is going like crazy, spraying and doing everything else. So in those pockets there will be I think some progress to take us above that 45% number, or 67% number, take us up maybe towards 80%. I'm not real confident about that. And I'm not of course real confident about an acreage number either. But we knew even at the end of May that 33% of the corn acres were still unplanted effectively. Not all of those have come in there. So my number has always been somewhere between 3 and 33 million acres left unplanted to corn by the time this is all done. But that's a pretty big range. But the point is that it's going to be much bigger than anything we've ever seen before in the history of the U.S. growing corn. It's not going to be a normal 3 million acres just from a slightly wet year with some flooding in some river bottom ground. This is widespread problems in big swaths of the Corn Belt just from not being able to get it into the fields. So you're looking at something more like the 6 to 10 million acres lost in corn.

Howell: And is that a conservative estimate?

Kub: I don't think that's conservative. I think that is sort of the conventional wisdom at the moment and I don't take any quibble with that.

Howell: Okay. Let's talk about the soybean markets. They also pulled back this week. I believe they still have two gaps left to fill. Will they fill those two?

Kub: That is something that these markets like to do. But if you start to get really bullish about corn prices because of lost planting, then you look at the forecast and this upcoming prevented planting date for soybeans is now coming up, now the same story that we've been saying about corn hasn't suddenly been solved by really good, dry, sunny weather everywhere. So Illinois, for instance, only had 21% of their soybeans planted last Sunday. Like I mentioned, they've got more rain in the forecast this weekend. So if you lost 80% of Illinois soybean acres now you start to get just as bullish about soybeans as you were about corn and the market hasn't yet, obviously the market has not, but I think fundamentally that argument could be made.

Howell: Do you still make that argument even with, I know it's kind of like a broken record here, the huge carryout that we have and the production that is going on in Argentina and Brazil? Does it still create a bullish fundamental?

Kub: I think more bullish than is currently being reflected. We still see wide carry spreads in the soybean market all the way out to 2020. The commercial side of the market still feels very, very comfortable about soybean supplies, which made sense in the world when we had the trade war and we weren't selling very many of them to China. But we're selling some, we do see sales being made to China in the export sales report, so it's not nothing. And we still have a domestic soybean industry, a livestock industry that needs to eat soybean meal. So I feel, in my opinion, that the market has lots of room to reflect more bullishness than it is reflecting right now.

Howell: Okay, let's continue this discussion, we'll table it for Market Plus. We've got to talk about the livestock markets, especially I want to start here with feeders because sometimes it gets the short end of the stick. But have August feeders put in a bottom?

Kub: They might have. Now, you look at the chart, they could still get drug down by the general bearishness of the livestock sector. But the feeder chart itself does, like you mentioned, they have a little bounce there and it looks kind of like a bottom. The other beautiful thing that is working in the favor of the feeder cattle market is all this rain that's not good for planting has been very good for pasture conditions and hay conditions if you're not so wet you can't get the hay created. So the feeder market I would be a little more neutral to favorable that they might have put in a bottom.

Howell: Okay. If they have put in a bottom are they going to see some uptrend here or trade in maybe a rangebound?

Kub: It depends on what is driving the whole cattle sector downwards. And I don't honestly know if it's an economic thing or if it's a worry about the cost of corn. So if the feed grain prices continue going up I wouldn't expect to see a bounce in the feeder cattle where you'd see October much above $140.

Howell: Okay. What about in the live cattle markets? They're having similar issues I'd say.

Kub: Yeah, they've been on a pretty serious downtrend here through the last half of May, down about 15% in the futures. Now, the cash market hasn't fallen as much but it has also pulled back. And as you look forward to the next couple of weeks or through June and July I feel the packers are pretty comfortable about the supplies that they know are going to be coming into them. So that pullback that we've had, that 10% to 15% pullback, is probably going to be maintained for the next six weeks let's say.

Howell: Okay. Let's talk to round out our discussion about the hog markets. We've seen China come in, they have been making pretty substantial export sales each week now for a couple of weeks, but we've got this looming potential tariff thing happening on Monday with Mexico, who is of course one of our big pork trading partners. What happens when we open on Monday, Elaine?

Kub: Well, the bearishness and the gloom in the hog market is of course somewhat related to the Mexico problem but that's just guessing about what sort of retaliatory tariffs they might take on us. You wouldn't even have to have that gloom. You could have gloom in the hog market just from the domestic side alone because the industry tried to get so ramped up on this idea that there would be these huge exports to China this summer and that hasn't happened yet. And we talked about this, every time I come on here we think maybe six months down the line, six months down the line, it just doesn't happen and it just doesn't happen. So domestically you have these very high prices that have depressed the consumer when they go to the grocery store and you've got lots of supply, high prices and lots of supply is not a winning formula and so that is why we've seen hogs have such a downtrend.

Howell: And will we continue with this downtrend?

Kub: There may still need to be room for that to come off, especially if the Mexico story becomes worse.

Howell: Opening up the trade here on Monday, we don't know yet what the retaliation will be, but let's say Mexico next week issues and says pork is going to be part of the retaliation against the U.S.. Then what is the new scenario for downwards?

Kub: It continues downwards. I wouldn't have a price target for you. But I will point this out, is that currently the front month lean hog contract is still higher than it was when we started this year. So it's not like we're at some bottom level of support on the chart. There's still lots of room on the chart for it to keep going down.

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

Kub: Thanks.

Howell: That wraps up the broadcast portion of Market to Market. But we will keep this conversation going on Market Plus where we’ll answer more of your questions. You can find it on our website at Market-to-Market.org. Using Twitter allows you to keep in the loop with just a few characters. We share news, pictures and behind-the-scenes information on our feed of @MarkettoMarket. Join us again next week when we’ll explore how one Midwestern state is trying to help small towns revitalize their local economies.  So until then, thanks for watching. I’m Delaney Howell. Have a great week!

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