Market Plus: Elaine Kub

Dec 25, 2015  | 00:07:56  | Ep4118 | Podcast


Pearson: This is the Friday, December 25, 2015 version of the Market Plus segment. Joining us now is Elaine Kub. Elaine, thanks for joining us on this Christmas.

Kub: Always a pleasure.

Pearson: We are excited to have you. We want to discuss the cotton markets before we get into some of our questions. We've seen a lot of stability in that market, not a very exciting price. What are your thoughts going forward?

Kub: Status quo. I mean, I think they're going to be stuck in that range just because there's nothing at this point fundamentally that can really bump them out of that range. We have surplus global inventories and the U.S. market faces the same head winds as all the rest of the commodities with the stronger dollar. So I think it's stuck there between 60 and 65 and the futures spreads, they're very normal, very normal for this time of year, it's a normal, ample, agricultural market.

Pearson: Want to have a conversation here with Roger Cooper, sent us a question on Twitter. He's worried about corn demand. And his question is, wouldn't more corn ethanol fix low price corn and breathe economic life into rural America long-term? Probably yes.

Kub: Probably yes. But Roger gets, he's hinting at something kind of in a subtle way here is that actually there is hope for getting more ethanol. Just because there is hope for spurring fuel demand at these prices -- initially when fuel prices went down my first thought is that's great news for farmers because farmers buy a lot of fuel. But various clients of mine have pointed out that many farmers are shareholders of ethanol plants and so if it starts to be unprofitable that's not so great. But if it spurs overall demand, if this is a way that we can get the American consumer buying more energy, that is long-term great news for ethanol and, as Roger points out, good news for the industry. Yes, we've got to have places, especially value-added places to sell our products.

Pearson: You bet. We've talked a lot about the blend wall this past year and the blend wall is a component of both demand and blending percentage. So if we get E-10, 10% ethanol, in a lot more gallons of gasoline as people are driving, demand has gone up. But it still would be nice to get E-15.

Kub: It would be.

Pearson: For a lot of ethanol producers and corn growers.

Kub: And globally also, to the extent that fuel prices might spur global demand for energy, we can bypass the blend wall to some extent if we can export more of this ethanol, which we have been doing year over year.

Pearson: Now typically when we export ethanol we're exporting it unblended, just denatured ethanol, is that how we typically do it?

Kub: That's my understanding, yes.

Pearson: So a tanker full of ethanol is just ethanol.

Kub: I think so.

Pearson: Okay. All right. Now there has been a lot going on in the markets this past year. It has been a busy year, we've seen, it has not been a very exciting year from the producer's perspective in a lot of ways. As you look out to this next year, what to you is the most interesting trade from an analyst's perspective?

Kub: And this sort of just happened this week, that the WTI crude oil contract traded here for U.S. American oil reached parity, so it's a zero dollar spread to the Brent crude oil that is trading over in Europe and that's unusual. Previously Brent tends to be more expensive but immediately you worry, is this the new ability for the United States to export oil? Has this all of a sudden raised our oil prices already? And I don't think that's what is happening, I think it is legitimately a domestic story of us consuming more oil because of better economic conditions or because of the price has spurred more demand. So that's good news and I think we can document that because there hasn't really been enough time since they have opened up those exports, there hasn't been enough time for the industry to change the kinds of oil that they're putting into their facilities.

Pearson: Because it has been literally a week since they have opened up the export spigot.

Kub: Yeah. The better question there -- this goes to your question about is this a good trade? Can we get through 2016 going into 2017? Then do we have both the domestic demand drawing and being bullish for U.S. oil prices as well as global demand, which maybe, maybe not, but longer-term this may be an entirely new relationship between WTI and Brent prices. We may no longer be able to look back historically at what that spread should be.

Pearson: So you're intrigued buying WTI, selling Brent and seeing where the spread goes?

Kub: It would be kind of risky because you're trading without any sort of historical, statistical arbitrage, there's no expectation if I'm correct that this is a new relationship.

Pearson: Interesting. Now you mentioned we've seen WTI come to parity with Brent in the past week, in the same time we've seen almost a 10% increase in the price of RBOB gasoline prices. Would that be connected?

Kub: I think that this is just more of the blending industry, the cracking industry. I don't know. We'd really have to look at what is coming out of the companies of what they're really putting on the market. I don't know exactly what is going on in the RBOB market as far as why it's not completely following crude oil. It never does and I don't know this week --

Pearson: But it's interesting to see it completely diverge so strongly. On the ag side, in the ag markets is there any trade out there that is compelling to you?

Kub: To some extent you can say I believe it will be a low volatility environment for the foreseeable future. So does that tempt you to perhaps sell far out options, trades like that, that if you feel very confident that you're not going to get called out on these options, that sort of a thing. But I don't see any major trend trade that I'm going to point to at this point in time for ag, it's pretty boring.

Pearson: See now I'm longer-term as we look through '16 and '17. I'm very nervous about this feeder cattle market.

Kub: Oh well the livestock market, yes.

Pearson: Hedging in here at these prices, I don't know if I'd do it today, but longer term the idea of getting short feeder cattle I find to be intriguing just watching this herd expand over the next several years I think it could happen fairly quickly. What are your thoughts?

Kub: I am in disagreement just because -- so I looked back at how much expansion can we really hope to see in the cattle herd. And in the '70s they were able to expand 7% for year, for instance. I don't think that's going to happen because I don't think -- I know you are a young man who can go out and produce more cattle or is willing to do that, put in the physical labor to do that. It's not pleasant to be out when it's below zero and feeding cattle in the winter. So that's what happened in the '70s is you got more producers and that is how the herd expanded. But now I don't think that we're going to get any new large number of people willing to go out and do that anymore. So I don't think the herd is going to be able to expand that fast.

Pearson: See, and I'm wondering if we look from the '70s to today we've seen so many gains in efficiency and in comfort, you can look at what one man or woman can do on a farm today, realistically most cattle producers could handle 50 more cows without drastically disrupting their operations. And so I wonder if growth could come from within that existing cattle population?

Kub: Yeah, absolutely. And the heifers, the breeding heifers that are being retained this year, absolutely you can see this trend happening but I don't know if it's going to happen this 7% per year. I am still neutral to bullish on feeder cattle. I think that this is a high value product that very few people, relatively few producers are out there producing and they're still in the catbird seat.

Pearson: All right. Well we'll have to have Elaine back next year at the end and we'll discuss and see how well things went.

Kub: Bet $5 or something.

Pearson: Sure. All right. Elaine, thanks so much for joining us.

Kub: Thank you.

Pearson: Thanks to all of you for sending in your questions via Facebook and Twitter. We wish you a very Merry Christmas and a Happy New Year. Thanks for watching and have a great week.

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