Market Analysis:Elaine Kub

Market Analysis: Elaine Kub

Nov 29, 2019  | Ep4515 | Podcast

Podcast

We are producing this episode ahead of Thanksgiving to allow our production staff a chance to enjoy the holiday with friends and family. For the shortened week, March wheat increased 8 cents, while the nearby corn contract dropped a nickel. Limited sales to China helped keep soy complex in two-month lows as the January contract fell another 15 cents. January meal declined $5 per ton. March cotton improved 96 per hundredweight. Over in the dairy parlor, December Class III milk futures expanded 52 cents. The livestock sector was mixed. The February cattle contract rose $2.85 and January feeders jumped $4.05. The February lean hog contract dropped 50 cents. In the currency markets, the U.S. Dollar index gained 14 ticks. January crude oil expanded 7 cents per barrel. COMEX Gold fell $10 per ounce. And the Goldman Sachs Commodity Index declined nearly 2 points to finish at 419.50. Joining us now to offer insight on these and other trends is one of our regular market analysts, Elaine Kub. Elaine, welcome back.

Kub: Happy Thanksgiving.

Howell: Happy Thanksgiving, Elaine. In the spirit of Thanksgiving theme, I wanted to ask you what do you think that producers have to be thankful for this year when they look at the commodity markets?

Kub: Well, if they're done with harvest they can be thankful that they're done with harvest eventually. And the folks that aren't done with harvest can be thankful that someday they will be. Eventually this will end. Eventually 2019 will be over and in fact it's only like five, six weeks from now that we'll be in 2020.

Howell: That indeed. But I think one of the markets that has been probably happy with the way that the markets have been trading is the wheat market. We had another big trading session on Monday. Why do they continue to see such strength right now?

Kub: It's the cash market that is leading it. It's the actual physical fundamentals of people needing the SRW variety of wheat, the soft red winter wheat. That's where we're seeing these incredibly strong basis values like along the Illinois River. It's kind of all over the map but anywhere from 20 over to 35 over and 10 over in Ohio. So it's the cash market that we're seeing people really needing to get that variety of wheat. You've already got Chicago, the futures markets already inverted from the July timeframe. So it's really strong, that market is screaming for it, but we're really not seeing the futures responding very much to those bullish signals. You've still got a futures price of about $5.30. Big deal. Compared to how bullish those cash market signals are, the futures market isn't really responding.

Howell: And is it just because of the global wheat supply that we continue to sit on?

Kub: That seems to be it is that there must be draw from people who could otherwise have been going to Russia or Europe. But it's complex and it's confounding to not see the same reaction in the hard wheat varieties because there you've got a bullish story from Australia. They still have this very widespread drought and so there's concern six months down the line that Australia won't be much of a wheat market and yet we don't really see any response from that in the Kansas City or the Minneapolis wheat markets.

Howell: Elaine, turning to look at the corn markets, this week as we mentioned there earlier in the program we've seen a lot of inclement weather for folks trying to travel, but that also has an effect on harvest. Is the corn market factoring any of this weather storms that are coming this way into the market? And if not, why?

Kub: Well, the futures market doesn't seem to be. But again, and this will sound like a broken record, but the cash market is reflecting the fundamental bullishness of these supply problems. So the latest crop progress report said that 70% of North Dakota's corn wasn't even harvested yet. Nationwide this all calculates to approximately over 2 billion bushels of corn that still wasn't harvested as of last weekend. And a lot of that will have been harvested in these few nice days that folks have had, but a lot of it won't because in North Dakota, for instance, folks might be waiting for the ground to actually freeze before they can get to the really wet areas. So a lot of this is still going to be waiting. And by the time the USDA goes and resurveys people in the first two weeks of December there's still going to be unharvested grain that we won't have yield numbers for and there still will be incredible uncertainty about what is actually there.

Howell: And we've been focusing so much of our attention on the U.S. corn crop, we haven't been really paying as much attention about what is going on in South America. It sounds like they're gearing up here for a really large corn harvest. How will that put a cap in the corn rally here domestically?

Kub: I think it is related. We did see the Brazilian currency reach a fresh 20 year low on Tuesday. It has collapsed about four and a quarter Brazilian per U.S. dollar. So that is typically associated with bearishness in the soybean market. But you're right to the extent that South America, Brazil and Argentina, are going to be coming onto the global corn export market too. That wheat currency from Brazil puts them in a good position there to not only be planting as much as they obviously can this fall and to be putting in as much inputs as they can and really boost yields as well as they can this year, it adds bearishness to the global corn prices too.

Howell: Elaine, switching tracks to talk about the soybean prices. As we just said there they lost 15 cents. Compared to last week we're still at that subpar, or sub-$9 level. What is your new area of support for the January soybean contract?

Kub: I don't think that there is necessarily a chart level that I'm looking at. I think it just continues day-by-day. When you see that Brazilian currency movement I think that has been the number one mover for soybeans this week. There are some supportive bits of news. You have bullishness in the edible oils market, the Malaysian palm oil market has continued to be strong. You see noise about some sort of trade agreement reaching its final throws here. Who knows what that means or what the timeline would be on that. But there is some potential for soybeans to be supported but not as long as that Brazilian story continues to be bearish.

Howell: Elaine, we obviously know that corn is still continuing to be harvested, especially up there in the Dakota areas, but soybean harvest has pretty much wrapped up for the year. Do you think that there is the possibility we're still going to see some sort of post-harvest rally? Or is really any sort of weather or condition problem in the soybean market already factored in?

Kub: If we were in a scenario where the speculators were caring about harvest headlines, if we were in an area where that kind of fundamental news was boosting the markets, then there would still be an argument for soybeans to go up too because it's not just North Dakota, it was Illinois and Missouri also that had soybean acres left unharvested. And you're talking about that math works out to something like 200 million bushels of soybeans that were still unharvested as of last weekend. So there is still certainly fundamental bullishness about soybean harvest. I think we're just in a scenario where the futures markets are not responding to reality, let's say, out in the cash markets.

Howell: So, Elaine, we talked about wheat, corn and soybeans. I've got a question that I think sums up the grain markets nicely looking again into that 2020 lens if you will. We've got a question from Scott in Wisconsin wanting to know, which commodity do you believe is the most undervalued and has the most upside potential in 2020?

Kub: Sorry that you set that up as a grains question, but he asked for commodities in general. So I'm going to go for feeder cattle actually. When you look at the price relationship between them and the fat cattle there is some bullishness there and certainly just the bullishness of feeding that market right now because of the grain, the cheap feed that is available. The corn that is being harvested right now there's a lot of low test weight corn, a lot of wet corn, so there's a lot of potential for folks to go into the market and buy damaged corn, buy sample grade corn, buy number four corn where you can get a lot of discounts on that and it still feeds well, the feed value is still there, the nutrients are still there in the matter. So I think there is opportunities for folks in the cattle feeding business to be making money just on a feed arbitrage.

Howell: And so feeder cattle aside, what about the live cattle market? Are you as bullish about that market heading into 2020?

Kub: I'm not as bullish on that in the near-term just because I feel like they've already had their recovery. But I do think that the strength will remain in there. We saw cash prices this week at $117 live basis which is about a dollar higher than last week, so the strength is still there. The packers are still making a lot of money, somewhere in the range of $500 a head. So that is still there for them to pass that along down the line to the feeders that are coming to the market and I think the strength will remain but I'm not super bullish in the near-term.

Howell: We saw that the April live cattle contract finished on Monday the highest point at $125 I think which was the highest in seven months. Do you think they can stay sustained at that level? You said you did. But how long do you think they can stay at those levels?

Kub: Yeah, when you've got that April contract at $126 it does start to make you think of locking in a price there because if you just think historically where live cattle, what is a price level where they tend to roam around it tends to be about $120. So to see that April contract at $126 I think there is potential for that to pull back between now and spring. So if you've got those calves and you've got the cheap feed or cheap feed opportunities you can look forward to after this terrible harvest I think it's a good idea to be looking at locking in some of those April prices.

Howell: Elaine, final question, as you look at the cattle complex this week they were all over the board. Was it just because of the aftermath of the cattle on feed report and those large estimates by traders?

Kub: It could have been that. Traditionally in a week like this you think it's just low volume and you get streaky trade any time there is low volume. But you're right that the cattle on feed report was a lot for people to chew over and it wasn't necessarily bearish. We knew that these large numbers were going to be coming in after the light September report and then you have to sort of calculate all these 800 pounders or 900 pounders that did come in, in October. What timeframe are they going to be hitting the actual slaughter market? So I think there was a lot for traders and there could have been some of that coming in. What volume you did see that ended up being streaky prices.

Howell: And we've finally got to talk about what is going on in the hog market. Is it time for them to put in a seasonal cash low?

Kub: Not necessarily. You think this Thanksgiving was coming up here and nobody likes turkey, I hate to say it. Do you like turkey?

Howell: Well, so I read a statistic that said 88% of the average American households eat turkey on Thanksgiving so I don't think it's a matter of if I like it, I think it's a traditional staple so you eat it.

Kub: And I think more and more families also have ham. We saw that in the past couple of weeks, we saw really hot ham prices and that was holding up that pork cutout, ham prices like $95 a hundredweight. So that translates, I bought some ham today at Costco and it was more like $3 or $4 a pound at the retail level. But I think that is what has been holding up any sort of support there has been for the lean hog contracts right now has been that cutout value. But I think that moment has passed, seasonally that Thanksgiving push for ham has certainly passed. So that last bit of bullish support for the lean hog futures contracts I think has now passed away and I don't necessarily think that we'll find support here at these levels.

Howell: So with that being said, Elaine, where do we head from here?

Kub: In these two closest futures contracts they have gone down about 7% through the month of November. Could they fall below 70? Absolutely. I think that there's no magic number that folks are going to step in and support that.

Howell: Elaine, I want to turn our attention to one thing we didn't get to mention during today's program and that is what is going on in the biofuel industry. The EPA said they are not going to release the biofuel mandates until after Thanksgiving, we don't know when that is going to be. But is that going to have any impact you see here short-term or long-term for ethanol or biofuels?

Kub: I suppose it depends on what they release. But we did see ethanol futures really pop on Tuesday this week, Monday or Tuesday. So obviously the market is anticipating a bullish boost from that.

Howell: All right. Elaine, we've got Thanksgiving here. I wanted to ask what is your favorite Thanksgiving food before we wrap up today's show?

Kub: Brussel sprouts.

Howell: That's an interesting one, not a traditional Thanksgiving food.

Kub: And I should back up what I said about turkey. Obviously we love the turkey industry and the soybean meal that they consume. Folks love that too.

Howell: Elaine Kub, thank you so much.

Kub: Thanks, Delaney.

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. Also on our website, links to our YouTube page are there so you can see all our videos in one location. Or just search YouTube.com/Market to Market. Join us next week when we head east in search of farmland. So until then, thanks for watching. I’m Delaney Howell. Happy Thanksgiving and have a great week!

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