Market Analysis - Dan Hueber

Market Analysis - Dan Hueber

Jul 15, 2016  | Ep4147 | Podcast

Podcast

It's possible commodity traders were mimicking the latest Pokémon craze this week looking at their smartphones and bumping into unseen passersby. However, it is less likely they were trying to catch them all and more likely they were after elusive profits. For the week, September wheat feel a dime. The nearby corn contract continued its losing streak falling 3 cents. Weather markets and quarterly stocks had little effect on the nearby market as the August soybean contract fell 11 cents. August meal followed the trend going $6.90 per ton lower. In the softs, July cotton added to last week's gains leaping p $8.47 per hundredweight. Over in the dairy parlor, August Class III milk futures gained 54 cents. The livestock sector was down as the August cattle contract fell $1.30. August feeders dropped $3.88. And the July lean hog contract shed 90 cents. In the currency markets, the U.S. Dollar Index moved 85 points higher. Crude oil gained 54 cents per barrel. Gold retreated $31 per ounce. And the Goldman Sachs Commodity Index picked up almost 3 points to finish the week at 360.25.

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Dan Hueber. Dan, welcome back.

Hueber: Thanks very much, glad to be here.

Pearson: We are excited to have you. I want to start off this discussion with a question from one of our Twitter followers. This one comes from Nathan in Inwood, Iowa. Nathan says, after months of trading sideways this winter, is the more recent volatility in grains the new normal?

Hueber: Well I think it's summer normal certainly. And, again, you always associate your most volatile periods during that June, July, August period in corn and soybeans. So it's nice to see us have a pickup in activity. And of course with volatility comes opportunity. But I would say it's probably not much outside of the norm. Again, look at option contracts, options have your highest volatility in the summer months. It's because the greatest risk of producing the crop is out there so the two are hand-in-hand.

Pearson: Weather, weather, weather and the crop is in the field.

Hueber: Absolutely.

Pearson: Alright. Well let's talk this wheat market. We have a lot of winter wheat piling up out there. How do producers manage that wheat, especially when they're producing in some cases double expected production, when basis is collapsing and these futures markets aren't doing any favors?

Hueber: Well the futures markets aren't really doing any favors. Granted, always you're going to have, at the gut slot of harvest you're going to have some of the worst basis levels out there, assuming there's going to be a normal crop, even extend that out this could create some problems down the road for corn, for utilizing some of this space to store wheat in. But that said, I think you have to look at where the carry is in the market. Move your hedges, move your sales out to the furthest you can as far as what is going to capitalize on the carry. We're going to get basis improvements, there's no two ways about it. Demand is not certainly phenomenal, export sales were not great again this week on wheat. But on the same token once that kind of cleans up, we get the excesses off the front end of it here, we'll tend to see the basis improve. Granted, there's not much in the price picture right now that would say we have a lot of encouragement to the upside. So if you think you're going to go for a price rally don't do it with the cash, maybe turn around and have your cash sold, try to do it with a hedge to pick up a little basis and if you want to be a bull do it with a futures or options contract so you can limit the risk.

Pearson: Alright. Are you hearing some more wheat feeding happening out in the Plains states?

Hueber: You know, I honestly have not heard of that. I cannot imagine it's not happening though. With the bushels out there, granted, corn is relatively cheap as well, but with the extra protein in the wheat I just have to imagine we're going to see a nice pick up in feeding this year. Granted, versus the last USDA report, billion bushels of wheat, we have a lot of wheat to get rid of, same thing on a worldwide basis. But that said, this market seems to have found value down here. We just need a reason to kind of come out of the hole at some point.

Pearson: Okay. So hopefully not a whole lot of downside left.

Hueber: Exactly, exactly.

Pearson: Taking a look at this corn market, USDA report on Tuesday. Any surprises in there that jumped out at you?

Hueber: Nothing huge by any stretch of the imagination. It was nice to finally have a little positive surprise instead of a negative surprise. Regardless we tend to month-by-month we get some kind of a shocker out there. Nothing was huge but I think the trade really anticipated we would see the old, the carry-in bumped up a little bit more after that grain stocks number. Of course that wasn't the case, it was actually reduced just a little bit so we did mop up some of the domestic usage a little bit. Honestly I look at the corn market and I think moving ahead we're probably even a little bit understated on some of the export numbers. We're battling higher dollars and things. But when you look around the world right now we're seeing a nice increase in the pickup in demand from some key areas, China particularly. The last two months they have imported record quantities of corn. We know there's issues in Brazil, they're probably going to be a buyer of corn this year. So right now yes, ultimately you're going to have Ukraine and Eastern Europe with corn but we're kind of the only game in town. So it's a good position to be in at this point.

Pearson: Alright. Now in the corn market and in the soybean market there's been a lot of chatter about this perceived dome of doom, this hot spell that could be coming over the Corn Belt over the next ten to fourteen days. Absent that, or if it doesn't manifest as predicted, can we see $4 December futures?

Hueber: I think that's about the upper limit of December corn. Without some kind of a spoof in there, I'll retract that a bit, that would certainly bring us there quickly and I think that possibility is there. Granted, 24 hours ago dome of doom, six hours ago maybe not so much dome of doom. So corn in less than 24 hours we've had a 30 cent range, we've gone from $3.80 back to $3.50. I'm glad we bounced off of there for the weekly close. Now I do think it doesn't necessarily have to happen in corn pollination, the beans are the ones that really kind of have the pump primed, if we could get a little excitement here in early August, maybe worry about weather there or see another little surprise in the bean demand, it may be beans tugging corn up to those levels but we're getting late enough in the game right now to think we're going to get back above $4 corn looks a little bit questionable.

Pearson: Let's talk about beans since you mentioned it. We did have the WASDE report on Tuesday. On the soybean side it appeared to be relatively neutral on the face and we saw soybeans shoot like a rocket up to the upside.

Hueber: Well of course step back to the June 30th stocks and acreage report, those numbers were not bullish by any stretch of the imagination and being shot to the upside. So, here again I think beans very sensitive to the news. They recognize, and I think you can apply this same story to corn as well, that a very small change in the yield and acreage numbers are meaningless. Two bushels less, a bushel less on the soybean yield nationwide and we could be back talking about 150 million bushel carryout instead of 290 for next year. So there is still very little room for error. Again, this August period and we know we associate August weather and how that bean is going to yield and it's just a lot of things up in the air yet, literally, to see how this yield is going to be this year.

Pearson: The shining star this week in the futures market was a market that we often don't get time to cover but this week we have to here on Market to Market, the cotton market. $8 a hundredweight to the upside. What happened?

Hueber: A long, long overdue move I guess you'd probably say. Really on the USDA reports domestically if anything maybe neutral to a little bit negative. World stocks though, world stocks were I believe 9 million tons versus a year ago, not that quite a big reduction on the individual report. Plus you're seeing, again, China being the 800-pound gorilla in the room, the Chinese interest in cotton is outstripping what anybody had anticipated. So when you look at the cotton market over the last two, two and a half years we have been stuck in this range basically trading 66, 68 cents to the upside, 62, 63 cents on the low side and we've just ranged back and forth. When you get into those long, extended periods like that I think traders will often become complacent, this is easy, you get 67, 68 cents, you sell it, you get to the low side, you buy it back and we can just play that game and they've been very successful doing that since 2014. Well this week once you pushed through the upper side it's not unlike a pressure cooker where the lid blows off, there's a rush for the exits, all these people who have been very comfortable shorting at the 66 to 68 cent range all of a sudden this is not so much fun anymore so they all rush out and it just fed on itself right through the close here today. Probably a long-term signal that the bottom is in is the new pattern, not that you can sustain this move necessarily for extended periods, but it has at least broken us out of that commodity doldrums.

Pearson: Are you aggressively selling bushels you're confident in up in these levels? Or do you wait to see if we can run it a little farther?

Hueber: I think you certainly have to reward it for the crop that is out there this year. This really kind of comes back to that whole macro picture as well though that I'm still a firm believer that the major commodity lows are behind us, they were put back in, in December/January of last year and the thing, the definition of an up market or a bull market is you're going to consistently put in higher highs and lower lows over time. Now granted, the whole commodity sector right now is maybe a little bit overdone. Of course you wouldn't know it by the ags but gold and crude, we've had some very substantial moves, looks like we need to back that down a little bit. Now cotton is probably going to fit in that same thing. But, when you have turned the tide into a longer-term up cycle you tend to find buyers on the breaks, you just don't get into these extended bear markets like you did say 2011 to 2015.

Pearson: Let's test that theory. Major lows are behind us. Live cattle down another $1.30. Where is the bottom in that market?

Hueber: And I guess I'm a little stunned that we have spent as much time or as much defensive action. The cattle, you can't say anything good happened here recently, but that move has been slowing down, it's almost like we're trying to curve out this long-term major flat bottom. Cattle often times when they get to the lows just get very volatile, it looks like you're going to improve and they slap it back down again. It's kind of this little game that goes back and forth until we ultimately realize that we've gotten it cheap enough that we're going to start developing demand again. Certainly the dollar being as strong as it has been and this whole Brexit almost nonsense but it is an impact on the dollar. We know there is this inverse correlation between the dollar and the commodity markets so I think psychologically that has of course worked against not only cattle and hogs but the grain markets as well with the exception of soybeans. So that's just a battle that we have to confront.

Pearson: Now you would think conventional wisdom would say new highs in the stock market, we should see some additional strength here in these beef markets, but we're not seeing it on the board.

Hueber: I think unfortunately when you look over at the indexes, the equity indexes, is it really a rally because we think the economy is performing all that well or is it because it's the only game in town? You can't go out and earn anything on fixed interest, you've got to go to higher corporate bonds or higher risk corporate bonds. Here I think in the last week 20 year Japanese bonds went negative territory first time ever, 20 years. We keep stretching it out.

Pearson: A Swiss bond went negative a week, ten days ago.

Hueber: Right. So realistically what are you going to do with your money? So commodities aren't -- commodities have helped. That has been one of the star performers as a whole, as a group this year if you look at that Goldman Sachs Index. But that said, there's not anything really in the traditional investment realm that offers a great alternative so money just keeps flowing back into the equities.

Pearson: So on cattle, feeders and live, do you expect to be putting in a long-term graceful bottom?

Hueber: Yes. Yes.

Pearson: Where do you see hogs going from here?

Hueber: Hogs have really been very much the same kind of struggle. I'm a little surprised we have remained down here as long as we have. I know the fall months especially got into a little bit of extra pressure here this week. I truly believe, yes, the numbers have expanded some but we are seeing some pretty good interest on overseas business once again, particularly here again China seems to be the person, our number one customer, and thankfully their economy came in at 6.7% again on their last GDP number which, a little better than expected, so hopefully that nation as a whole has stabilized. Interestingly enough what they're really thinking they're going to see growth on is in consumer spending and services, sounds kind of familiar to the U.S. economy, but yes, absolutely if the consumers are spending that would ultimately have to be a good thing for our commodities as well.

Pearson: Making that transition from a manufacturing exporting to a service-based economy.

Hueber: Correct.

Pearson: Interesting. Dollar on this next week, higher or lower?

Hueber: We did sneak out a little bit of a gain this week. I tend to think -- I'm going to favor the upside, not because I'm necessarily a big dollar bull per se but here again just enough uncertainty with what's going to happen with all the turmoil in Europe, not to mention the disaster down in France here this weekend which, when people are scared they want to tend to come back to the dollar so it would tend to favor it right now.

Pearson: Trend is our friend in the dollar.

Hueber: Yes.

Pearson: Dan Hueber, thank you so much for joining us.

Hueber: My pleasure, thank you.

Pearson: That wraps up the broadcast portion of Market to Market. But Dan and I will keep the market conversation going including answering more of your questions during Market Plus available on our website. And like us on Facebook. You'll find links to some of our videos and you never know when we might go live for a behind-the-scenes report, like we did this week with a series of special announcements. And joining us again next week when we examine one man's legacy that stretched from High Plains ranchlands to the packing house floor. So until then, thanks for watching. I'm Mike Pearson. Have a great week.

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