Market Plus: Elaine Kub

Dec 23, 2020  | 12 min  | Ep4619 | Podcast


Yeager: This is the Friday, December 25, 2020 version of the Market Plus segment. Joining us now, Elaine Kub. Elaine, I always put you in a tough spot for as long as I've been booking guests on this show I usually put you in this time on Christmas Eve. There have been many nights I have sent you home and you have made it in time, just in time to sing in the church choir. It's going to be a little easier commute this year.

Kub: That's right. It's going to be nice. There are advantages to this coronavirus virtual sort of thing.

Yeager: It's not as hard to convince you to come and join us on the 23rd of December right before Christmas because you don't have to travel very far.

Kub: Always happy to be here.

Yeager: You have been on throughout the year as we have tried to sort out what has happened in 2020 in agriculture and the food industry. We have talked at length about livestock. We've seen these commodity prices. I mentioned real briefly seasonality. I want to start with that in the grains. We're going to get into some questions that cover this. Why is it that nothing makes sense right now when it comes to seasonality? Why did we rally in October? Why are we rallying in December? Why are we getting these reports -- is there any way to tell why some of this stuff is happening?

Kub: Yeah, it really feels like seasonality just went out the window and I think the danger is going forward that farmers after years like 2020 or years like 2012 and 2013 when you have a harvest rally, you start to get gun shy about doing the normal seasonal thing and the pre-harvest hedging and locking in prices in spring when they do typically tend to be higher. But there are patterns of seasonality in the grain markets, it just sort of depends on what kind of year you had. If you had a normal year then you see those prices high in the spring. But if you have a year of shortage where you suddenly have tighter supplies than you did the previous marketing year, it's not unheard of, of course, to see a harvest time rally, which like I mentioned in 2012, 2013, etcetera.

Yeager: We're going to talk about sorghum, we're going to talk about dairy and a couple of other things, acreage. I want to get to a question here from Roger. He wrote us on Facebook and he wants to know, how much more grain in China -- how much more grain is China going to buy this year and next? And will our drought affect how much we're willing to sell to China? Because rationing has been a word that was maybe used a month ago, I haven't heard it as much lately. But I'll let you answer the question first.

Kub: Well, yeah. I don't know that we're in a world of price rationing just yet. I mentioned on the show that Brazil is effectively out of soybeans. They have none to sell. So it's not a matter of price rationing, they just ran out of it. And I would imagine that might be how it works in the United States too because I don't think we're going to shut off sales to anybody. If somebody wants to buy our grain, we're happy to sell it to them. However, the direct amount, the first part of that question is how much does China still need to buy? I think the bulk of that activity has already taken place strategically at lower prices than where it is now. And if you look at the supply, the stocks to usage ratio of soybeans in China it's about 20%. They have a pretty comfortable level of supply in their borders compared to the United States where it is tight at about 4% and in Brazil where it's effectively zero. So they are relatively more comfortable with their supplies, especially at the prices at which they bought them.

Yeager: That makes sense. And this is a question, it's a follow up that I was going to ask, but I'm just going to let Phil in Dresden ask it. He does get to the report that the USDA will have in January. He's asking, with December '21 corn near $4.20 and November beans near $10.90, how much 2021 production is prudent to lock in now? We talked about that on the show a little bit. Or will this January USDA report offer a huge bullish surprise? Or will June 15, 2021 offer the best traditional new crop pricing opportunity? And Phil wants to say Merry Christmas to you.

Kub: Merry Christmas to Phil. Will the WASDE report have a huge bullish surprise? I couldn't say for sure. But I would be looking for it in those world supply and demand numbers rather than the United States numbers. There is some potential for exports to be boosted. But mostly I would think that the bullishness that we've seen in the U.S. supply and demand table, especially for soybeans, that has already happened. And for corn of course you don't really have that same mechanism particularly when you think about ethanol, which has been disappointing. So sure, the world supply and demand table could get a little bit tighter. But I think the bigger question in 2021 is, is it going to be that seasonality that we talked about before, that typical pattern where you do have that sort of June high that Phil mentions in this question. That I think all depends on whether this La Nina persists. And if I knew that I would be a millionaire. Talk to me again in a year and we'll see. But that's really the big question is weather and that is always the classic thing about grains markets is whether you're going to get the rain or not, that will tell you about your supply. But we are certainly going into 2021 with enough shortage that if you did have sort of a drought pattern persisting in the Corn Belt, moving into the center of the Corn Belt, that could be hugely bullish.

Yeager: That was a story that we talked about in July and August about the Corn Belt states is they were pretty well charged up, subsoil was in good shape, and it was dry. If it would have been as dry as it was in June, July, August, that crop would have been a whole lot worse. We're going into the whole lot worse of the not as well charges oil. So yes, La Nina is going to be -- I talked about a couple of levels and you said maybe a 10%. At what point do you maybe figure out about going larger than that to go, my gosh, I'm a dollar over what I would normally expect to be profitable? I like to say Walt Hackney's old statement, how much damn money do you want to make, right?

Yeager: Darn money. Darn money.

Kub: Right, exactly. If you are somebody who is going to be happy with making a profit, sell it all, not all, but sell as much, sell to your crop insurance levels, sell to what you're comfortable selling. But I'll just tell you, Paul, behaviorally speaking a lot of grain producers do not like to do that. And there's reasons of course. Especially when you're thinking about the threat of a La Nina. The biggest fear of selling that much ahead of time is that you won't be able to produce it and you have to buy back out of those contracts. And if you have a serious potential threat of a drought that is a legitimate fear and a legitimate reason not to pull the trigger on everything.

Yeager: Ben in Jesup, Iowa, recent guest on the MtoM podcast is asking us via Twitter, the futures market for corn and soy shows no carry saying sell now, but the basis has paid handsomely to hand onto cash grains since mid-summer. If the government offers another round of farm payments, won't that factor into cash flow, reduce farmer sales and drive another round of basis improvements?

Kub: Okay, let me break this into a couple of segments. So he mentions in the past tense that basis levels have been tightened, we have reached great basis opportunities. You're talking about 4 over at Cedar Rapids or sort of around the countryside if you're looking in the center of the Corn Belt anywhere from 10 under to 20 under for selling corn right now. Now, historically from that level what is going to be the most likely thing to have happen is that basis would weaken from there, particularly when there's no really strong reason for basis to remain that strong, when we have ethanol that again has not ever really fully recovered from its COVID dip, when we have exports that are slowing down rather than speeding back up. So I think the threat is that basis would in fact weaken. Now to his point about the government stimulus payments. I don't know what they're doing in Washington, D.C. or not. But there has always been two schools of thought about that. If the government gives farmers a round of cash, does that make them say oh, now I have this cash I don't have to sell any grain, I can just lock it tight in the bin? Some people believe that. I sort of tend to believe that. But I have also had a lot of farmers tell me that when the government gives them those money, those checks, this is effectively an extra 20 cents on my soybean sales so I might as well just sell it and pretend that I'm making 20 cents more. I've had a lot of people behaviorally think about those government payments in that way. So I think it really washes out of how it actually affects farmer marketing patterns.

Yeager: Good points. And thank you for breaking that down. We always appreciate those questions that we get on Twitter, Facebook and Instagram. I do have two things that I need to close with. One quickly is the dairy market. That has continued to, 2020 is going to be a good year for dairy. Does this party continue into 2021?

Kub: Historically it doesn't tend to last forever, the dairy market tends to be sort of in a boom or bust cycle. But when I've been looking at dairy prices lately and in the past few weeks it's alongside prices for meat, for instance, where you've got retail prices for people going to a grocery are experiencing food inflation effectively, 6%, 7% higher than it was a year ago in an economic timeframe when that's really not going to be welcome for household budgets. So at some point you do start to get worried that things are getting too rich at the grocery store shelves.

Yeager: Okay. And I want to finish off with one more thing that you said, sorghum. Why does sorghum matter right now?

Kub: Sorghum matters because of the exports. I was mostly looking at that disappointing export sales report for corn and soybeans, but then you looked on there and sorghum is still churning along and it's China buying the sorghum, milo, so you've got cash prices out in North Central Kansas at $5.50, $5.60. That's a very tempting market, especially when you start thinking about 2021 acreage of what you can do. And there's always some gun shy, there's always the threat that China would pull back and no longer be the big buyer that they have been. That is what happened the last time that sorghum prices got real hot. However, I don't think that's as much of a threat in 2021. Politically there is just the sense that the China trade situation is going to continue to improve or to heal a little bit. So I think there's less of that threat going into 2021 and it will be a big player in the acreage scenario, certainly for certain regions of the Corn Belt.

Yeager: Acreage battle. I guess we'll have you back in January. How about I convene you with three others and we'll talk about acreage and all that fun stuff.

Kub: Perfect.

Yeager: Elaine Kub, thank you so very much. Merry Christmas.

Kub: Merry Christmas.

Yeager: That will do it for Market Plus. Next week we'll look at the stories of the year that was 2020 and we'll have the market analysis of Jeff French who will be with us. I'm Paul Yeager. Thank you so very much for watching, listening or reading. Have yourself a great holiday.

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