Market Plus: Elaine Kub

Jan 31, 2020  | 11 min  | Ep4524 | Podcast

Podcast

Howell: This is the Friday, January 31, 2020 version of the Market Plus segment. Joining us once again is Elaine Kub. Elaine, we've got a big we'll call it American holiday coming up this weekend. Do you know what I'm talking about?

Kub: Yes, yes. The Super Bowl!

Howell: Of course. Are you a Chiefs fan or 49ers?

Kub: Well, I used to be a Chiefs fan when I was a kid, like a big Chiefs fan. I've got a Derrick Thomas jersey that I intend to wear all weekend.

Howell: Hopefully it's good luck. I'm a Chiefs fan as well. But we've got a fun question today coming into us from Tim in Crookston, Minnesota referencing the Super Bowl event. He said, with the recent downturn in the market, what would be the best opportunity? Buy a May soybean call option or taking the under in the Super Bowl?

Kub: Well, you know what I thought we should have done for fans of sports betting, we should have had an over/under on how many times we say the word Coronavirus in the program. How many times can you fit that word into 15 minutes? I don't know, I think the spread is pretty tight. But May soybean calls, I wouldn't do the short-dated ones immediately. I think that this Coronavirus thing, to say it again, has to get worked through. But if you did want a Kansas City related opportunity, we didn't really talk about this on the show, I think of any of the wheat contracts would be worth retesting their highs that they had from last month or January highs, you should perhaps be looking at the July 2020 Kansas City wheat contract as a potential buying opportunity because of lower acreage and unknown winter conditions. There's a bullish case you can make for the hard wheat varieties that I think just doesn't play out for Chicago wheat at its current price level.

Howell: But you think that's enough to give it the opportunity to retest those highs?

Kub: Not necessarily. I think, again, you need to get some of this bearishness worked out here. But if you were going to step in and buy any one of these wheat contracts and if you were going to believe that rally was ever justified for any of the wheat varieties it would be that variety versus the soft red winter wheat variety.

Howell: Okay. I'm going to take the over on the Coronavirus because we have a couple of questions asking about that including one from our good friend Phil in Dresden, Ontario. He said, is Coronavirus the black swan of 2020 affecting agricultural commodity prices?

Kub: Yeah, and not just agricultural commodity prices but all commodity prices. Crude oil was down another 60 some cents today, so $51 a barrel. That's pretty cheap for crude oil and I think that's the one that is most justified to react, the commodity that is the most justified to react to a global economic slowdown. And I mentioned this on the program is that the agriculture commodities certainly are taking a big reaction to the headlines, but the fundamental demand for foodstuffs in China and everywhere isn't going to suddenly change even if there is a slowdown in their economic activity. The Chinese government has even stepped in and specifically called for the soybean crushing facilities to continue crushing and making sure that the soybean meal would continue to be available and making sure that the grocery stores stay open even in Wuhan so that people are still going to be able to continue eating. There won’t' be a panic, that won't be the problem, it will just be the virus itself.

Howell: It's because they're Communists, they've got to feed their people.

Kub: Think of that, in the United States we never would be able to just cancel Christmas and everybody stay home for a week, it wouldn't work. So they do have certainly an advantage in their ability to manage some of this.

Howell: That sets us up nicely here, this question doesn't have Coronavirus in it but I think it's definitely referencing that. Scott in Illinois wants to know, if China finds themselves in need of feed and food do they turn to the U.S. because we have the best transport system?

Kub: We do have the best transport system but I don't think that that's necessarily the deciding factor in where they're buying from. We talked a little bit about the relative prices of soybeans in Brazil versus the United States, that price difference alone is not enough to send China to the United States as a buyer. The Phase One trade deal motivation, perhaps. But you've got a huge crop coming out of Brazil within the next couple of months here, probably record large, maybe 120 million metric tons and it's only 10 cents higher priced than U.S. soybeans at this point in time and perhaps higher protein value in them. So no, I don't think that China is necessarily going to come to the United States first for their soybean needs.

Howell: So it's about 10 cents difference between U.S. and Brazilian soybeans. What do we need to see that price increase to, to see China come back to the U.S.? Phase One trade deal out of the picture let's just say.

Kub: I don't have a calculation for you. I honestly don't have, I don't know what the spread would need to be and I don't think that largely that's necessarily the deciding factor either. If you just look at the historic trend of where China has been buying its soybeans from they have definitely preferred in the past five years and certainly in the past two years for other reasons, they have certainly preferred to go to Brazilian soybeans for reasons.

Howell: Okay, I don't know what those reasons are.

Kub: Well, we know what the reasons are, it's just I don't like to besmirch our own soybean supply and say we have lower oil values or lower protein values or whatever.

Howell: And the trade war obviously has a big impact on that too.

Kub: Yeah, the trade war.

Howell: Okay. Elaine, we've got a question here from Reuben in Wisconsin. He said, what is the approximate trading range for corn and beans now that the good news has come? And what would be the next possible event for the market to go higher?

Kub: Well, the market could certainly go higher tomorrow if somebody announced that there was a Coronavirus vaccine for humans that would suddenly solve this problem and then I think all of that that got shaved off here during the Lunar New Year week, all that could come back quite quickly. But price targets for corn I think, like I mentioned on the program, probably pretty flat here between $3.75 and $3.90 and that number is basically legitimate also for the 2020 new crop contract. So we're going to really be watching through the month of February. So take that, multiply it by 2.45 and you get a soybean price. I think that price relationship for the new crop soybean to corn price ratio as we're going into planting decisions that will be as normal or as relevant as ever this February as it ever was.

Howell: I was reading something earlier this week, and I know you're a big geopolitical junkie too, that said if China doesn't get this Coronavirus issue solved by March their 6% growth in GDP was going to drop pretty substantially. That is what they do year over year is I guess 6% on average. If we don't see something put together, a vaccine or otherwise by March, what does that mean for our Phase One? We put so much positive sentiment on making sure this trade deal was done and if China doesn't need it or --

Kub: I don't know legally if this would apply but they could declare force majeure and say, we had the best of intentions when they signed that deal but the situation has changed and this act of God has occurred and they just wouldn't be able to do it. But again I don't necessarily think that would apply to soybeans specifically or to hog prices or pork prices coming out of the United States because although the Chinese people may not be out and about doing as much economic activity or going to work as much or going to the movies as much or going to KFC as much, they will still be going to the grocery store and the country will still be crushing soybeans and feeding hogs and chickens.

Howell: Okay. Elaine, we've got another question looking at acreage already for 2020 coming to us from Scott in Illinois again wanting to know, he said, the bull corn spreads this week acted very well with the market down for the week. Is the trade looking at both larger acres and also is a 168 yield for 2019 too high due to test weights, moisture, etcetera and what do you expect to see for acres here in this next year?

Kub: That's a many part question.

Howell: Yes it is.

Kub: The one that stuck out at me was the yield because of the test weights. That's a real philosophical question. If you were an economist at the USDA where would you take the test weights off? Would you take it out of yield or would you take it out of just disappearance, your residual number, because the pounds are not there? You could make the argument that the yield was technically X many bushels. But anyway, yeah, I think the total production number could certainly be justified to come down because we don't know how much will yet be harvested. There's a lot of it still sitting out in the fields unharvested in eastern North Dakota, eastern South Dakota, Minnesota.

Howell: Do you have a guess on how much?

Kub: Yeah, I do actually. I've received, well I've driven through North Dakota in early December and I would have said 90% was unharvested. The most recent feedback I have received from folks that are in that region would say 75% is still unharvested throughout eastern North Dakota. In my neck of the woods in eastern South Dakota you're talking maybe 5% or 12%. Minnesota folks say some of those same numbers. Some places will say you're 70%, some places will say you're 10%. But anyway, it's a lot. There's a lot of it and we don't know how much of it will be lost by the time somebody tries to go get it. So there's certainly a lot of potential for the overall 2019 production number to come down but I wouldn't put a bunch of money into a futures contract on the hope that some USDA report is suddenly going to reflect that. It could be until next January before they bother to make those changes or fully make those changes.

Howell: The January reports, why is it -- there was so much sentiment put on this one, now you're saying next year maybe?

Kub: Because this last one is when they finally went back and changed some 2018 numbers. So the precedent has been set that they can wait or they may not have enough information to make those changes until so far down the line.

Howell: Okay. Elaine, I wanted to end with the feeder cattle markets. Hopefully people will be cooking up some steaks this weekend for the Super Bowl celebrating that way. But they had actually a positive day on Friday, green on the screen when the live cattle complex and the lean hog complex did very poorly. What was happening there?

Kub: Well, and this is related to what has been happening in the lean hog contract where I think we had a lot of speculative short-sellers this week and I think that was driving down the futures prices. But the good news is, and this will come around to the Friday upward day, I think the good news is that when you actually looked at sale barn activity or the index, once you finally get that index price out of all that activity, the index was still 142 or something. The cash prices, the real transactions being taken place out in the countryside has not fallen apart yet. And certainly there is the chance that next week the buyers will take this opportunity to suddenly become a little more bearish. But so far that business, the reality did not fall apart and I think perhaps Friday was a reflection of that, that the index is still suggesting that the futures prices have been oversold.

Howell: I hope consumers get out there and eat some beef or pork this weekend.

Kub: Eat beef.

Howell: Elaine Kub, thank you so much.

Kub: Yeah.

Howell: Join us again next week when we'll look at what is being done to handle a semi-truck driver shortage and Tomm Pfitzenmaier 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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