Market Analysis with Elaine Kub

Market Analysis: Elaine Kub

Dec 29, 2017  | Ep4319 | Podcast

Podcast

The saying rain makes grain isn’t limited to the U.S. as timely moisture arrived in South America, improving the crop’s outlook. For the week, March wheat improved 2 cents while the nearby corn contract lost a penny. China’s soybean impurity requirements on imports limited gains in the soy complex as the March contract added two cents. March meal advanced a dime per ton. March cotton went higher another 82 cents per hundred weight. Over in the dairy parlor, January Class III milk futures sweetened 6 cents. The livestock sector celebrated the New Year early. The February cattle contract put on $2.97 and nearby feeders expanded $4.45. The February lean hog contract went up $1.80. The U.S. dollar index continued its slide plummeting 109 points. January Crude stayed above $60 and jumped up $1.95 per barrel. COMEX Gold poured on $30.50 per ounce. And the Goldman Sachs Commodity Index ticked 13 points higher to close at 441.95.

Yeager: Here now to lend us her insight on these and other trends is one of our regular market analysts, Elaine Kub. Elaine, welcome back.   

Kub: Always good to be here.

Yeager: And in case you want to go over things again, you can download or listen to our Market Analysis and Market Plus podcasts online anytime at iptv.org/mtom.

Yeager: Alright, Elaine, we've got snow in a lot of places, we've got cold that extends many places including the wheat region. Do you buy that the wheat kill is because of the cold, the reason for the wheat market improving is because of winter kill? Do you buy that theory?

Kub: I think it's really hard to get any sort of a fundamental rally in wheat in December based on worries about the U.S. crop. No, I don't think that is what is motivating it. But when you look behind the scenes at what the structure of the market was going into late December you had the managed money, the hedge funds and such, they were very net short in wheat, I think 2.6 times as many short positions as long positions. So when you get to this typical time of year when funds and traders and speculators want to close out positions, take their profits in wheat, and we did see this, we've seen this for weeks now, they have been liquidating positions but in wheat that means shortcovering and I think that's why you would see some positions coming off in day-to-day upward movement.

Yeager: So Tuesday morning when the markets reopen if you still want to be making sales you better be picking up the phone because do you see that momentum going higher?

Kub: It's, yeah, here's the thing about marketing wheat ahead of time, there's no particular time of year, it's not like the row crops where you really are looking for high opportunities in the spring and summer. In wheat it could happen any time so this very well could be the moment for this marketing year to be selling wheat.

Yeager: Alright. Long-term what do you think? We talk nearby but on that deferred part do you see the trend moving upward on the chart?

Kub: Not necessarily no. Feed grains in general and wheat, when we're talking about the feed wheat, is part of that problem is that we just have huge inventories all across the globe, there's lots of crops from lots of different countries that are going to come in and keep replenishing those inventories month after month. There's just not a lot of bullish anticipation for wheat. I'm sorry.

Yeager: Alright, well good to know, that's why we ask. You don't know unless you ask. Alright, in the corn market we finally have pushed above that 20 day moving average ever so slightly. What is moving this market?

Kub: Again, this could be short liquidation, same story here the funds were short going into the end of December and here at the end of December we did see liquidation and that could be helping it. That's really about the only story you've got because, again, the supply and demand situation for corn has been absolutely neutral. You look at the spreads and the commercial sides of the market, the elevators and the end users, the bonafide hedgers, have no reason to worry about inventories. They have pushed basis a little bit stronger but I'm sure that they probably were able to get some of the physical supply into their hands this past week because you've got farmers who need to make equipment payments and farm payments and that will almost certainly continue as we go into the first part of the year, that first week of the year there tends to be a lot of cash sales.

Yeager: What about the fact that in the U.S. right now our corn is the cheapest in the globe? Is that playing into this as well?

Kub: That probably helps. Like I mentioned, I don't necessarily think that basis is going to fall apart immediately on January 2nd. But just typically we will tend to see that get weaker.

Yeager: In January 2nd, that's 2018, let's look ahead to 2018. Where do you see, this big question, Elaine, crystal ball, long-term where are we headed?

Kub: Same place we've been for the past year. I think honestly this is the struggle for the grains, the row crops is we just have enough of them, this is the price that the inventory is sort of plugging along at. And there could be sparks in the outer markets, certainly in the stock markets, there's money coming in from the trillions of dollars of new wealth has been created and that could come into commodities. But the commodities also sort of need a story, they need a headline to bring that money into one specific market or the other and corn is just not the one that's going to have that story.

Yeager: Nothing there but you still see farmers holding onto a lot of corn. Should they be looking to maybe liquidate some of that here early January?

Kub: At some point some folks are going to need cash so I suspect it will happen whether it's a great idea or not. Longer term I don't know that we should have very ambitious plans for any old crop, the grain that is in the bins. But longer term we should definitely be looking at marketing that new crop earlier than usual because this long-term story is going to be known and understood by all of the market participants for months and months and months.

Yeager: Is the story any different in soybeans?

Kub: Yeah, there's a little more interesting things going on this time of year. This is the time of year that we watch the weather in South America obviously and that is pressuring, we have a very clear downward trend in the soybean markets and in the chart. This past week this is, again, the time of year where we typically have lower volumes and weird spooky trade and we did have the weird spooky trade but it wasn't because of low volumes. Honestly the actual daily trading volumes were there and it's because computers don't take vacation, right. If you have discretionary traders, speculators, that would otherwise be taking this vacation week between Christmas and New Year's, that doesn't happen. But there's nobody in there to step in and then say, when the computers get spooked and get on a tear there's nobody to really act against that. So we did see weird days, perhaps again liquidation, long liquidation or short liquidation. But the general trend in soybeans is going to be lower and I'm almost certain that that will continue as we see that New Year come on and the forecast in South America is for continued rain, which is obviously beneficial to yields.

Yeager: Now you have to hope for maybe some, and I hate to say hope against another group of farmers, but a rust type thing or some type of mold. I mentioned it in the leading into the markets here, China is now reducing its 2% impurity of their grain going into the country on imported soybeans, they're reducing that to 1% now. There's a theory that that's going to cost us 15 cents per bushel to clean the grain. Do you see that factoring into any of this decline here because Wednesday we had a nice run-up.

Kub: Yeah, and I think, like I mentioned, I think that may just be a fluke of the season. The 15 cents to clean the grain, I'm sure that's true for individual cargoes or for individual bins. I don't think it's true for the market as a whole that the entire U.S. soybean crop needs to take off 15 cents in that regard. I'd be more worried about the fact that our competitors, South America, Brazilian soybeans have higher protein than ours do. So the U.S. soybeans at the U.S. Gulf are cheaper but we have, sure, impurities, protein, this is not the primary product that China perhaps wants to come and buy so we're going to have to maintain that discount. I don't know that it's 15 cents but certainly we will need to maintain that discount to Brazil.

Yeager: Okay. You can see we had a little bit of correction but then back down on that chart. Alright, Elaine, I didn't ask you what you got for Christmas, but I don't know, did you get anything made with cotton? We have a Twitter question about cotton that we need to look at right now. And we appreciate everybody who does respond to us @MarkettoMarket on Twitter or Iowa PBSMarket on Facebook or Instagram. Richard in Belle Eagle, Tennessee, he's @belleagle1. He says, cotton futures are in uptrends while the grains are flat to down. So he wants to know, let's talk cotton specifically, can it be sustained in 2018 if we keep buying gifts?

Kub: Yeah, isn't that incredible. I bought gifts with cotton, didn't receive them, but isn't that incredible? I think it's 17% rally since October, since late October, almost 80 cents. Certainly I believe it could hit 80 cents and continue higher because this rally could be sustained. It's supply and demand both working there especially for the domestic higher quality stuff. And, again, there is like the one shining example in an agriculture commodity market where you've got a headline and it brings in those traders, those speculative traders, that new money that is looking for a place to go. We are seeing new money coming in from the speculative side of the market piling on long positions and sustaining that rally. That's the pattern that the rest of the ag markets would hope to find something like that. You spark the interest and you get that investment money that builds the rally.

Yeager: The news helps push the market, not just always the signals is what you're saying. Okay. Is it time to make a sale in cotton or do you hold it for a little longer?

Kub: I think you can afford to wait here. I don't think that rally is in danger of falling apart in a volatile way so give it some time.

Yeager: Let's move onto the livestock sector here. Again, didn't ask you what you had for dinner on Christmas but there's a lot of people who had beef whether it's that prime rib or something like that. It looks like we had a lot of beef served at Christmas. The market is moving higher.

Kub: Yes, the economy loves it. I will do a quick shout out to the American lamb industry, we had lamb roast. But the beef industry, I think they're both doing well and yeah, everybody is happy here that there is money to be made in that industry and it's optimistic going into 2018, as the economy continues to improve, the global economy continues to improve we should continue our strong exports. It's all looking up for beef, not I don't think to the extent that we're going to re-see the highs that we saw a couple of months ago on the futures charts necessarily, but I feel profitability wise and stability wise prices should remain strong in the beef industry.

Yeager: Well, and that's cattle, feeders were up $4.45, 3% on the week. There's a lot of them out on pasture, they haven't come back into the feedlot yet have they? Or have they now? Has that changed?

Kub: There's a lot of feeder cattle out there, that's the danger here is the calves that came in, in October, or are coming in now, coming in off of the stocks now, the danger is that as they are fed and brought to market as fed cattle in the spring, there's going to be a lot of them. So, and I hesitate to even advise this in a world where the cash market and the futures markets do tend to disassociate so much, but this I believe is really an opportunity to be hedging if you're feeding cattle and expecting to put those fed cattle on the market in the spring there is the opportunity now to be locking in that $144 or that $120 level in the fed cattle market rather than waiting for that to fall apart.

Yeager: A specific point there, very good, like to hear that. Do you buy into the we might slow some of that growth and some of that weight because of the cold in cattle country?

Kub: And in the near-term sure we should probably see some lower weights as we're coming in. But yeah, so I don't know that I would hit the button on making that hedge just yet. You wanted a specific price, if you were doing this as a technical speculation you would wait until it gets above $124 and it's not there just yet. But if you're doing this as a marketing hedge, right, the risk of it falling apart before June maybe you don't need to wait that long.

Yeager: Okay. What about the hog market? That one, again, normally it might move different, $1.82 and a half percent up. Is demand the story in this market?

Kub: Yeah, absolutely. We have seen the inventories in cold storage are declining month over month, year over year, so this is not a matter of just processing these hogs and not having any place for that mea to go, it's going, it has been consumed and the market is expecting to see that demand continue for the next several months, not necessarily fall apart after the Christmas season. So things are looking up for hogs. On the chart they may hit resistance here at 73 cents, but again, stability wise, strong demand wise, things are good.

Yeager: And when you're pulling out of cold storage, does that cause a little I won't say panic, but a little more immediacy in maybe pulling the trigger?

Kub: No, I think all it does is give you some confidence that the huge supplies that are coming to the slaughterhouses week after week, huge, 2.6 million head per week, is that what is happening these days?

Yeager: Somewhere in there.

Kub: So the fact that the cold storage is getting drawn down, that just gives us confidence that there will be a place for the new slaughter products to go.

Yeager: 15 seconds on this one, the dollar. It has had two weeks of declines. Is there a third week coming?

Kub: I think my outlook on the dollar would be neutral. In a normal world where you're expecting higher interest rates several times, three more times in 2018, the expectation would be for the dollar to continue to turn up, so given the trend I'd say the outlook is neutral.

Yeager: Alright. Thank you, Elaine, I appreciate it.

Kub: Thank you, Paul.

Yeager: That will wrap up the broadcast portion of Market to Market. However, we will keep the conversation going including answering more of your questions during Market Plus available in podcast and video form on our website. We know rural America is full of great moments and photos. We publish some of the best images we have taken and share them on our Instagram page. Give us a follow at Iowa PBSMarket and be sure to check out the frequently updated stories section. Always a lot of fun there. Join us again next week when we’ll see how researchers are combating a devastating citrus disease. So until then, thanks for watching. I’m Paul Yeager. Happy New Year!

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