Market Analysis: Elaine Kub

Market Analysis: Elaine Kub

Jan 31, 2020  | Ep4524 | Podcast


To say the commodity markets took it on the chin this week would be an understatement. The Coronavirus and good harvest weather ran the bulls out of LaSalle Street. For the week, March wheat dropped 20 cents and the nearby corn contract lost 6 cents. The Wuhan Coronavirus combined with reports of good weather in Brazil slashed the March soybean contract by 30 cents. March meal fell $7.30 per ton. Cotton dropped $1.90 per hundredweight. Over in the dairy parlor, March Class III milk futures declined 42 cents. The livestock sector suffered the most this week, as April cattle shed $4.62, March feeders cut $2.93 and the April lean hog contract lost 16 percent of its value, plummeting $11.85. In the currency markets, the U.S. Dollar index declined 42 ticks. March crude oil fell $2.66 per barrel. COMEX Gold added $13 per ounce. And the Goldman Sachs Commodity Index plunged more than 18 points to finish at 387.35. Joining us now to offer insight on these and other trends is one of our regular market analysts Elaine Kub. Elaine, welcome back.

Kub: Thanks for having me.

Howell: Elaine, it was definitely a rough week this week for the commodity markets. Wheat especially had a step back this week. Was it following the corn and soybean markets? Or was there something else that pulled it down this week?

Kub: Well, I think in that benchmark Chicago contract I think we could make the argument that it was due for a correction anyway. That has been such a high flying rally that has been going on and when you look at the intermarket wheat spreads it's a little bit nuts how high the Chicago prices have really gone. At the height there Chicago had a 5% premium over Minneapolis hard red spring wheat, for instance, and historically it should have a 15% discount. So you could say that benchmark Chicago contract was just pulling back for other reasons, statistical arbitrage reasons, and certainly just the overall commodities, everything getting sold this week.

Howell: And corn definitely sold off this week as well. We saw it test some key supports around that $3.75 mark in the contract here, futures contract. Do you anticipate it to break below that number?

Kub: Not really. And actually we've seen corn be pretty resilient. And that $3.75 that you mentioned is a notable number. I think it should continue perhaps to continue bouncing along between $3.75 and $3.90. And there's reasons for that. Whereas soybeans and hogs and a lot of crude oil certainly, stock markets, a lot of these markets really have legitimate reasons to be worried about a global economic slowdown or a slowdown in Chinese consumption patterns. Corn is not that market necessarily. Domestic demand of U.S. corn is not going to be as affected as some of these other markets so I think it makes sense for corn to be a little more resilient.

Howell: I suppose because China doesn't import a lot of U.S. corn would be the factor behind that?

Kub: Right. We did see one good export sale announcement on Friday here to South Korea. That was good news and there's certainly not going to be price wise competition from Brazilian corn going forward. So export sales can only really improve for U.S. corn but it's not a China story, no.

Howell: Elaine, usually this time of year seasonally we see corn and soybeans have a little bit of a rally or have some strength here. Is that going to be the case at least for the corn market?

Kub: Well, I know that producers are certainly interested in what happens in February to these new crop prices for corn and soybeans because this is when we start to set reference prices for crop insurance. Whether or not a rally can happen this is not good timing for this global economic, fears of a global economic slowdown. To have that happen in February is really rough for our timing and it could certainly persist because you've got certainly until February 3rd, perhaps until February 9th until the Chinese economy even starts to pretend to get back to normal after the Lunar New Year holiday. So the timing of how long the information flow of trying to figure out how long this epidemic lasts or when the epidemic, the Coronavirus epidemic would peak, we've certainly got at least two more weeks of worrying about it and keeping that worry priced in the markets.

Howell: And speaking of headlines I know the USDA, there's been rumors that perhaps they would adjust the February 11th WASDE report to show Phase One trade deal whatever purchases that China is going to buy. Do you think that will happen?

Kub: Well, I don't know and I honestly think some of that trade optimism was already in the January round of reports. They lifted their expectations for average cash prices, farm level prices for soybeans to $9 even in the January report without a lot of justification in the actual tables. So I think some of that optimism was already in there in January and certainly it's within their purview to continue to price more of that in there but I couldn't point to specifically where on the table that would come from, no.

Howell: Okay. Elaine, as Brazil continues to be a strong competitor of the U.S., I know this is a question you wanted to make sure we answered during the main program today coming to us from Doug in Iowa. What is the bean price equivalent here to the Brazilian bean price?

Kub: Well, and the reason we wanted to talk about it is because it's so important to the day-to-day futures prices is what is going on in Brazilian soybean prices. So all of the soybean markets, including the daily and futures markets in China, have come down since the Lunar New Year began and since this Coronavirus epidemic --

Howell: And they haven't been open, right?

Kub: No, they haven't. But the U.S. futures and Brazilian FOB cash level prices have fallen about 6% so you've got an equivalent price in Paranaguá of about $9.38 per bushel. In New Orleans, Louisiana you're talking more like $9.28 per bushel. So price wise you could make the argument that the U.S. wins but it can't, it has to follow along with what the Brazilian price does and I think that is exactly what we saw on Thursday when soybean prices dropped double digits, 16 cent losses, that was certainly a continuation of the selling and the lower trend that we saw all week because of the Coronavirus. But why that day specifically I think it's due to the Brazilian currency. That currency lost almost 1% in that day alone, down to almost its record low of as low as it has ever been. And any time that value of Brazilian soybeans keeps on going lower the U.S. futures have to follow along because of that tight price relationship between the two cash prices.

Howell: So do you anticipate seeing prices continue to fall?

Kub: That drop in the Brazilian real didn't really have a good justification. There's some thought of them lowering interest rates next week but I think it's more just the currency traders, the Forex traders being very bearish on Latin American markets and in emerging markets in general this entire week through this Coronavirus thing. So I think there's a lot of potential for that Brazilian currency to snap back up, to maybe hit a low and snap back up. So if anything we might say that it would be a reason to see some suddenly bullish movement in soybeans. But not to say that I'm suddenly bullish in soybean prices generally until we see this Coronavirus thing pass through.

Howell: Which could take quite a while. I mean, bullish prices, is it going to take a couple of months until we see some sort of snap back from that?

Kub: I think we'd want, the global markets would want to see some evidence that the epidemic has peaked and I don't know how long that would take. Like I mentioned, certainly we need to get everybody in the Chinese economy back from the Lunar New Year holiday and back to work and see how the epidemic plays out that way.

Howell: Elaine, let's transition our attention to the livestock markets. They had a rough week this week as well. Looking at the live cattle markets we've seen April now drop below the front month contract here in February. What's going on there?

Kub: Live cattle didn't have a really high volume of trade going on. I think the feeder cattle and the hogs contracts there was a lot of speculative selling, short selling going on. But I didn't see that happen so much this week in the live cattle. So some of that was actually just speculators just stepping back and allowing strange things to happen. The cash market too was weak I think based on when you have everything else in the economy, all of these other commodities being weak in a week, you'll have the cash cattle traders taking that excuse to push things back. We saw Nebraska prices about $2 lower than last week, dressed prices about $4 lower than last week. So there was certainly weakness in the real cash market that sort of followed along with that weakness that you see in the futures market you mentioned.

Howell: Elaine, the USDA cattle inventory report also came out today. Did that add any clarity to the cattle complex?

Kub: It was pretty close to expectations, 94.4 million head, which is lower than last year at this time but that's more of a dairy story, I think the liquidation of the dairy story. When you go and look back at the cattle on feed report honestly you're looking more at an expansion. We saw slightly higher numbers on last Friday's cattle on feed report. So I think numbers wise or supply wise you're looking at a fairly stable picture overall and instead you just need to stabilize demand or at least the perception of demand in the global economy.

Howell: And rounding things out today, the lean hog market was unfortunately the sore loser this week dropping 16% week over week, all Coronavirus related?

Kub: Yes I think so. I mean, it was a series of limit down days and expanded limits and I mentioned that the total open interest in that was actually growing a little bit day-to-day, which suggests to me that this wasn't traders thinking oh no, I need to get out of my positions. I think this was folks coming in here and short-selling those prices just based on the Coronavirus headlines. And I know how the livestock industry feels about speculative short-sellers, but I honestly think that is what the evidence is pointing to. The good news from that is of course that then it could be a fairly quick recovery once you discover or once the market steps back and realizes that the Chinese people will continue to eat. They may not be as big of economic participators, they may not be going out to the movies, they may not be having their Lunar New Year fairs, but they will still be purchasing food to eat. The grocery stores are still open, the soybean crushing plants are still open and the appetite for pork, which of course is huge in China, and all other foodstuffs, that is still in place.

Howell: Okay, I'm going to push you a little further, I know you said it could be a fairly quick recovery, but will it be?

Kub: No, I wouldn't necessarily step in and start buying hog futures on Monday. I wouldn't do that right now. I would wait for this epidemic of short-selling to work its way out. At some point we will run out of people who are willing to sell at these prices.

Howell: And, Elaine, I think the last question I want to end with here is on Sunday we see the Dalian futures re-open. China is going to be the big factor here to watch especially for our U.S. ag commodities. What do you anticipate to happen at the beginning of that time?

Kub: I honestly suspect it will be a little bit brutal. They've had a week of fearful attitudes throughout that country and that will have to get priced in, like you say, immediately on the open for their stock markets, for iron ore prices, copper prices, all of the commodities that reflect economic activity in that country I suspect will have a hit on Monday.

Howell: All right. Elaine, we'll continue this discussion on Market Plus. 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 Facebook allows you to keep track of your favorites including those from rural America. You can find our links and photos under MarketToMarketShow. Join us next week when we’ll look at what’s being done to help with the truck driver shortage. So until then, thanks for watching and have a great week!


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