Market Analysis: Elaine Kub

Market Analysis: Elaine Kub

Jul 3, 2020  | Ep4546 | Podcast

Podcast

USDA says 92 million acres were planted to corn this spring, down 5 million from the March intentions. The report gave the market a jolt in the trade-shortened holiday week. For the week, September wheat gained 16 cents while the nearby corn contract skyrocketed 25 cents despite a lower close Thursday. More acres turned to soybeans as the crop of choice and hotter weather started to weigh on the trade. The August soybean contract improved 32 cents. August soybean meal added $11 per ton. December cotton increased $3.44 per hundredweight. Over in the dairy parlor, August Class III milk futures zoomed higher by 11 percent or $2.05. A green week in the livestock sector. August cattle jumped up $4.02, August feeders advanced $3.30 and the August lean hog contract reversed the down cycle with a 92 cent gain. In the currency markets, the U.S. Dollar index declined 11 ticks. August crude increased $2.12 per barrel. COMEX Gold expanded $7.60 per ounce. And the Goldman Sachs Commodity Index improved 12 points to finish at 330.80. Joining us now to give us some insight is market analyst, Elaine Kub. Elaine, welcome back to the program.

Kub: Hello, Paul.

Kub: I don't know, I always thought that 97 million acre number was the surprise or the really questionable number, the number that made you think we're not really going to be able to do that. So the 92 million acre number that we have now seems fairly reasonble. It's just very unusual for the USDA to make such a big change and that's why the market was caught by surprise and why we did see corn prices go up 26 cents in 2 days. That's the knid of response you get to big new changes in government numbers like that.

Yeager: Well, farmers all of a sudden were cheering a government report, that doesn't happen very often. No, that's a snarky joke I saw this week on Twitter I enjoyed. We do have a question that did come from social media and you can always hit up up @MarketToMarket. We love to hear from you. This one came from Miller Farm in Nebraska, Elaine. Is thereany concern that even with lower acreage and a possible lower than trendline yield we could still have a very large carryout?

Kub: Oh yes, so we saw this jump in corn prices here today, this week, and I don't want to say that's the end of it, that it couldn't still continue to churn higher another 10 cents, another 15 cents, but I feel like everyone's bullishness needs to be tempered quite a bit because let's think this through, if you drop that 5 million acres off of the supply and demand table then you're lopping off 894 million bushels from the ending stocks if you change absolutely nothing else and it's really unlikely that we're not going to also be dropping demand. But let's just say that demand stays stable and all we do is lose those acres, you're still talking ending stocks numbers of 2.4 billion bushels and that is enough, that's plenty, that is a 16% stocks to use ratio. And honestly, historically in the commodity markets if you really want to see a rally, ifyou want to see grain prices start to go up, you need to have some kind of a shortage, the industry needs to feel that there's not going to be enough of it around. And I think right now this math, as the Twitter question was pointing out, shows that there will still be enough.

Yeager: And the carryout was a question that did come up from people who looked at the acreage as one story. But the weather story becomes a little bit, we're in a small window here, maybe 10 days, like I said, 95 for you,it's low 90s in Iowa, it's dry in Indiana, it's starting to dry out in Illinois. How long does this weather story last in corn?

Kub: Well, through the growing season. But the really interesting part is it's a 3-day weekend and you can absolutely get volatile reactions after you come back from a 3-da weekend because that's so much time for the weather models, the actual inputs, to change. It's very possible that you could see a double digit move when the market opens up Sunday night, Monday morning, one way or the other. It could be either rain showing up in places where it hadn't been before or it could be an extreme extension of that hot and dry weather that is affecting portions of Iowa and portions of Illinois and almost all of Indiana. So you've got all three of the I states in some kind of dry, hot concern for that corn just as it's starting to tassel.

Yeager: And there's also a concern for the soybean crop in those same states that's mentioned. Are they more susceptible for weather right now? We know we're in pollination for corn but what's the story in soybeans?

Kub: Right, you need another two weeks or so to your height of soybean production concern will follow corn a couple of weeks later. But nevertheless, it's not great. Those pockets where it has been dry, you do see less development of the soybeans and it's not ideal.

Yeager: Okay. What are you doing right now when it comes to sales? I guess I should have followed up with you on corn. Are you making any sales of what you've got on hand, some of that old crop? And are you doing the same thing with soybeans? Are you getting rid of some old crop in both of these right now?

Kub: Yeah, absolutely, sell into the rally and also ask yourself if you would have liked these prices back in February and March. We had all of those could have been, would have been, should have been's during April and May when the market was falling apart and now we have received that gift of having those prices back and even though they're not great, in a lot of cases they will be profitable for efficient farmers, they might be just above the cost of production, so this is an opportunity.

Yeager: And that November contract jumped. We already know that the Chinese have put intentions to buy in that. How much more upside does that November contract have?

Kub: I don't think that we should feel very bullish about soybeans because, again, a lot of the news that came this past week in those government reports was not bullish for soybeans. We actually saw disappearance numbers were down 8% compared to a year ago and the acreage number were actually higher compared to last year. All of that makes sense given what the markets were during planting season but there's not any big new bullish story that is going to continue to carry that market.

Yeager: Wheat wise we talk about weather, we look at Texas, Oklahoma, parts of Kansas extremely dry, a lot of the harvest is done in wheat in those areas, it's heading north, Nebraska, South Dakota, North Dakota. It's rainy in some of these other parts. What is weighing on the wheat market right now?

Kub: Well, again, what's always weighing on the wheat market is there's just too much of the stuff. You've got a stocks to use ratio above 40% in the United States and globally. So yes even though that High Plains region, you didn't mention Colorado, Colorado is really the hot spot where you get that D3 extreme drought and that's where you see the really poor winter wheat ratings in the conditions report. Even though you do see that and I know farmers would like to see prices respond upward when conditions are poor, but given the fact that there is so much wheat here and everywhere it's going to be really hard I think for that Kansas City contract to get any momentum above that $4.20 level where it's kind of bouncing around.

Yeager: Minneapolis did have a little bit of a rally this week. Is there any more legs to that?

Kub: Could be and I think that's tied to some fund activity which may not be very long-term.

Yeager: We were talking before the program, there's a connection here with wheat and cotton and we did get a good cotton question from Matt, what do you foresee in the cotton market? He's doing my job for me, thank you.

Kub: Well, we have seen a very nice bounce in cotton and I think it is tied to that drought that we were just talking about for wheat. So there's areas of cotton production, Missouri specifically, Oklahoma and Texas, where you are seeing the cotton condition ratings really start to fall while the plants are squaring. And so as we see prices rise I think it could continue upwards towards the 72 cent level but it may take some time and it would take continued drought through the rest of this summer.

Yeager: If you look at the chart, which we have on the screen right now, Elaine, it is tied to a pretty small region. This kind of broke out. Is there concern that that's going to reverse course and go back down on a technical standpoint? Or is this more of a fundamental market with cotton?

Kub: Well, I think it's also partly tied to the recovery, the overall sort of V shaped recovery or almost V shaped recovery in a lot of the commodity markets once you got past the height of the COVID panic in the April, May timeframe, globally you're talking about cotton production perhaps normalizing. So I'm mostly bullish for cotton but you're right to point out that there are certainly other areas of cotton production in the Southeast and in the Delta where they do not have these production concerns.

Yeager: And somebody's misfortune is another one's fortune. The dairy market, we're just throwing the format out the window this holiday weekend. Dairy, we've been watching this thing run. I think the run is, it was at $14 on the 22nd of April when we closed the show that weekend. Since then in 10 weeks we've gone up almost $6, this week $2 alone. What's going on?

Kub: Wow, yeah. This is the trope that the cure for low commodity prices is low commodity prices. So because of those low prices the government stepped in and starting buying and the coops themselves have pushed back on production schedules and that is all it takes to really tighten up that supply and demand scenario. But I do think there's a limit to how much more this can go. We're already in 2014 price levels, the high from 2014 is only a couple of dollars away from where we are now. So I would be surprised if that tighter supply and demand scenario hasn't already been priced in.

Yeager: The cure for higher prices is higher prices, maybe in the live cattle market too, starting to see a fall there too. Is that a downward trend? It was up for the week though.

Kub: It was up for the week and I think you're right, if you just look at a chart basis it doesn't seem like there's a whole lot of momentum there for it to continue above that $100 level that we do see in the October contract. So there's the expectation for triple digits here sometime. But if you think about it just sort of from a logical standpoint, yes there is room for more of that bullishness in the beef sector overall to continue into the live cattle market. You've got hamburger prices that are 15% higher than they were a year ago, all fresh beef $7 a pound now versus $6 a pound a year ago. And the slaughter numbers are pretty much normal, since mid-June they have maintained a pretty normal 120,000 head per day. Yes, they're slower. Yes, the cost of preventing COVID-19 among slaughterhouse workers makes it more expensive for the slaughterhouses to be in operation. But nevertheless it does feel like there's room for more of that profitability to continue to get passed back to the live cattle themselves.

Yeager: Do you think that the fat, fat, fat cattle have moved through? We talked about this heavier amount. There was a report this week that maybe they are through the system and that was part of the reason for a rally.

Kub: Probably those slaughter weights, the fat, fat, fats you're talking about maybe. But the number of them, the ones that went out on pasture, those probably still have to come through the system.

Yeager: On the feeder side that are still in the pasture there's a concern that maybe this, part of the reason that the corn demand didn't get eaten through when we had a stronger carryout is because there's less corn being fed because we're trying to slow the weight of those feeders. Do you buy that theory?

Kub: Absolutely, I would be very surprised when that WASDE report comes out on July 10th, I would be very surprised if we don't see that feed and residual number have to come down below 6 billion bushels because we did see evidence of that in the quarterly grain stocks. The disappearance of corn was down 20% from a year ago during that March to May timeframe. And that's not going to persist into the next few quarters, it was maybe just a one quarter off but it was going to be that far down. But nevertheless, that feed number is almost certainly going to be a bearish change to that WASDE table.

Yeager: Do you have a strategy on feeders that you like right now, what you should be doing?

Kub: Well, honestly these prices are not terrible. When you look at sort of what an average was from 2016 onward, put out of your mind those really fun prices from 2015 and just think of what would be normal over the past four years or so, we're just about there at $135 for October feeder cattle. This is not a terrible area to be locking in some prices if you see a bounce, if you sell into a rally.

Yeager: Are you buying hogs right now?

Kub: You have to be, it looks like the funds are honestly, they've turned neutral. They used to be pretty bearish on hog prices but now that we have gone down to these prices and bounced up maybe 6% from the April low the funds have turned more neutral and I think that's fair.

Yeager: So what are you doing here on a strategy? We're below 50 still. What do you do?

Kub: I think the more interesting strategy is how many of these hogs you want to produce. And in last week's hogs and pigs report we saw a lot of shifting in the inventory, the breeding herd going down in the farrowing intentions for the next couple of quarters, certainly going down and we also evidence of some of that euthanizing and culling of very small pigs. So even though you had farrowing numbers up a little bit, the actual number of small hogs under 50 pounds went down.

Yeager: All right, we'll talk about hogs in Market Plus. Elaine, thank you so much. Good to see you. That will do it for this installment of Market to Market. We will talk more in Market Plus so join us there. You can find it on our website at MarketToMarket.org. Now, there is an old saying, knee high before the 4th of July, and it happens this weekend. We want to see your farm's progress. Snap a pic on Saturday and tag them #kneehigh4th. That's the number 4th on Twitter and Instagram or post them on our comments section of our Facebook page. Join us next week when we'll look at the weather's impact at a key time in the crop cycle. Thanks for watching. Have a great week.

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