Market Analysis: Elaine Kub

Market Analysis: Elaine Kub

Dec 23, 2020  | Ep4619 | Podcast

Podcast

We are producing this program on Wednesday and the grains were lifted by an extension of the run up in soybeans in this holiday-shortened week. March wheat gained 22 cents while the nearby corn contract added a dime. Until further notice, it appears the soy complex is stuck in a loop of South American weather and Chinese buying fundamentals. Nearby soybeans improved 39 cents.  January soybean meal went up $15.70 per ton. March cotton shrank 90 cents per hundredweight. Over in the dairy parlor, January Class III milk futures increased $1.40. A mixed week in the livestock sector. February cattle lost 7 cents. January feeders shed 12 cents. And the February lean hog contract gained $1.95. In the currency markets, the U.S. Dollar index strengthened 36 ticks. February crude oil declined $1.17 per barrel. COMEX Gold fell $8.10 per ounce. And the Goldman Sachs Commodity Index decreased nearly 3 points to finish at 404.15.

Yeager: Here now to provide insight is one of our regular market analysts, Elaine Kub. Hello, Elaine.

Kub: Hello, Paul.

Yeager: I asked for the weather report. As we record this the blizzard came through but none of the snow stuck, it just blew right through, right?

Kub: Well, there's some still on the ground. And I don't know if you can still hear the wind howling. But we definitely have finally gotten some winter, some white winter for Christmas.

Yeager: What we're in need of to the south of you and in the rest of wheat country in the Plains there is some rain. That is impacting the domestic crop. Is that pulling this entire trade higher?

Kub: Well, I don't know that the wheat boost this week or the general rally that we've seen in wheat prices is really a weather thing at all. If you look Northern Hemisphere, Southern Hemisphere, there are no major weather problems that are going to be boosting prices at this time of year. I think instead you're looking at wheat prices churning higher alongside the higher prices in corn and soybeans and commodities in general because as you mentioned there at the start of the segment the U.S. dollar has typically been moving lower, it bounced this week, but last week it hit a low, as low as it has ever been since 2018 when they ended that last round of quantitative easing.

Yeager: In this wheat market there is a thought that being pulled higher by corn and soybeans. But there is also a thought that wheat is just kind of waiting its turn to strike higher. So if you're sitting on any, pick any of the contracts, Minneapolis, Chicago, Kansas City, whichever one, would you be sitting right now that that strike is coming? And if it is coming, where is that higher price headed?

Kub: Yeah, I don't think you can just pick any random one. I think there's the major difference in the structure of these various varieties. The Chicago wheat market you're seeing a totally inverted futures structure and of course the higher prices above $6 and the excitement is in that millable soft wheat category and this is true globally of where the exports are, where the milling industry really needs to find that wheat. So the Chicago wheat market is the one that should continue to have the fundamentals and the expectation from the commercial traders that there is bullishness there versus the hard wheat varieties haven't had that yet, but of course it could at some point snap back to historical norms.

Yeager: In this fight for acreage wheat is going to be caught up in it, at least in the spring contract, corn, soybeans, cotton all something that we've been talking about for weeks. As you shift towards the corn market, is that a sympathetic move this week related to soybeans over the last three weeks really? Or does corn have its own maestro directing it higher?

Kub:  I think corn is moving higher because the dollar is moving lower, etcetera. I think this is true for all of the grains. But for corn and soybeans moving together they are not really to the degree that they should. If you look at the nearby contracts for the old crop that price ratio is far out of line to historical norms. Soybeans are worth about 2.8 times as much as corn in these nearby contracts. In the 2021 contracts when you start looking at pre-harvest hedging for next year's crop those are a little more normal but still favoring soybeans at 2.57 to 1, which is above the normal average. So yes, corn is moving higher with soybeans, but not enough to stay in a normal relationship.

Yeager: The question has become a little bit, you talk about contract differences and if you're looking at new crop are you willing to pull and maybe forward contract some of these acres for '21 yet, or some of this crop?

Kub: Yes I am, Paul. But I'm also the one who told your viewers all summer to be selling the 2020 crop, which I think folks didn't like that bearish then. But I think it depends on your marketing strategy. If you're somebody who is willing to sell at these profitable prices, lock in these prices, which are indeed profitable for 2021 and be comfortable with that, even if we do have a continued La Nina, if you're going to be comfortable with these sales then yes, it's never wrong to sell at a profit. But if you are somebody who would be frustrated by that, there is of course like I mentioned this La Nina threat that could last into the spring and summer and into 2021. We don't know that, but if it did it would be bullish.

Yeager: Okay. So if you had to put a percentage on a '21 crop to sell at say, we're at $4.47 on this Wednesday. Say we get to $4.50, maybe $4.80. What is your percentage of '21 that you'd be selling of that '21 crop?

Kub: Yeah, at these prices, these are comfortable prices. You shouldn't feel bad about that. So maybe something seasonally normal where you might have 10% sold before the end of the year.

Yeager: Okay. Soybeans, there's a simple question that we got via Twitter and it is a simple question. We talk about it's dry in South America, China dipping their toe, dipping their head, whatever, into buying our product. Is there anything more -- oil has had a run, meal has had a run, a lot of factors working to eat at this soybean crop, right? Or am I missing something?

Kub: Yeah, and it is a global story. Talking about exports here they were actually very disappointing this week for U.S. exports, that sales report, and yet the soybean market went up another 15 cents anyway. So I think you look at the broader trend where we're finally starting to see the shipment pace, the actually inspections at the port, start to meet expectations, so that keeps that moving, it keeps the domestic, physical market strong. But the timing of it is you have to worry about Brazil is out of soybeans now, but sometime in the next six weeks, before the end of February let's say, they will again be able to be selling something. Now, you mentioned the weather there is not perfect, and it's definitely not. You've seen scattered showers, but that is really hard to say how that is going to affect yields. You've got private estimators on the ground in Brazil looking at 127 million metric tons, that is their estimate for their 2021 crop versus the USDA's last stab at it in the last WASDE was 133 million metric tons. So there is definitely room for the world supply and demand table to tighten up. Whether that goes to China or whether more of it really even needs to go to China at this point, I think most of that buying activity is behind us domestically and will continue to move into our rearview mirror especially once we get into February.

Yeager: Last week Arlan Suderman said that beans don't like to stay and hang in that $11 range. We're in $12. We seem to be steaming towards $13. Are we steaming towards $14, $15? Where does this train run out of steam?

Kub: I'm not terribly bullish. I think that these prices have reflected the bullishness, the weather that we've seen in the United States the last growing season, the lower dollar, the export buying activity that China displayed in September and October. All of that has been priced in effectively and I don't know that there is very much more of it to go. I would expect the market to be neutral going into February. But you're right, Paul, that this has been the momentum, of course, you look at a chart and the trend says we go up. But I don't know that it might not already be in our past.

Yeager: We found that seasonality is out the window. You already said it just a couple of minutes ago about bad, I'm sorry you didn't say bad export news, disappointing export news, and we still rallied 15 cents. So this leads to a question as we look to 2021 that came in via our social media channels and it's kind of talking about grains and the livestock. It comes from Tim in Manilla, Iowa and he's asking, considering current price levels of grains and livestock, will Santa leave a nice present for 2021 or just a big lump of coal?

Kub: Well, we have a nice present for 2020. These are very satisfying prices, these are profitable prices for most producers. So you can unwrap your present and you can take advantage of it. Strong basis prices, lots of opportunities here for the old crop. And opportunities to lock in things for 2021. So the present is already here. I don't know that in 2021 we should be looking for more presents.

Yeager: Okay. Fair enough. Real quick I want to slip in cotton just for the sake of I talked about acreage battle. Do you see cotton at the prices, it is off this week but it has been on an upward trend, do you see it losing acres in 2021?

Kub: Very much so, yes. When you look at the profitability that is penciled out for corn and soybeans, that is the expectation. And so if I was going to look at any of these crops for a new bullish boost in addition to the rally they’ve already had cotton would be the one that I would pick not only because of that when you look at the 2021 table, but also the 2020 table, supply and demand table, would perhaps merit a tighter adjustment, some cuts in production after the drought that was seen in the South, continues in the South, and of course better export activity has been in cotton as well.

Yeager: The drought has also impacted the livestock market, cattle, feeders. Do you see, is the cattle market impacted more by drought right now? Or is this a supply situation? A consumer how much we're going to buy in the store, not buy in the store, already have in the freezer? What is the biggest pull on cattle prices as we end the year?

Kub: Well, there is great demand at the sale barns in the country. And so you see those calf prices at about $140 and then you back that into a live fed cattle market at $110. That's the futures price and also the cash price that is probably trading this week. So, you look at these prices, let's say $4 cash corn, if you were going to pick any sort of stable price level for these markets you'd want $4 cash corn, $110 live cattle, $140 feeder cattle. So we are there where pretty much everybody is making a profit. The packers are making quite a big profit. But where are you going to tweak? I would say you'd need slightly higher live cattle prices and have some of that profit from the packers go back to a more normal level as far as what they're getting from the boxed beef prices, which have also been incredibly strong going into this Christmas season.

Yeager: The feeder market though, this ridiculously, for them, high price of corn and soybeans when you're looking at an input cost, how is that impacting some of their decision? And I mean ridiculous just because if you're thinking about that's a big expense I've got to deal with.

Kub: Yeah, high prices of corn and DDGs because of the ethanol market sort of slumped but have never fully recovered from the coronavirus. We do have higher DDG prices than last year at this time. So prices are going up and the profitability is challenged when you go and try to pencil out feeding the calves. But the demand is still there. You go to a sale barn and folks are really hungry to put more cattle into the feed yards because the feed yards have finally gotten themselves pretty current.

Yeager: Real quick, is this both a pause both in cattle and feeders, are we headed higher? Or where are we at right now going forward?

Kub: I think there would be potential for the fed cattle, the live cattle to move slightly higher. But like I said, these are good prices, good neutral prices.

Yeager: Hogs, a report right after the close today that was I believe you said lower, is that right?

Kub: Yeah, 1% lower in the total hog inventory. So that suggests that you look at that June contract or out into the summer where prices are much higher, that makes sense because the market is looking for, the inventory is no longer expanding. It's not that terribly bearish pressure that we had. However, there is subtlety in that, in that the numbers of market hogs that are above 180 pounds, the really heavier ones, that number actually went up. So in the near-term you're seeing the nearby contracts more like $67 and that makes sense to the whole structure of course sort of seasonal, but it makes sense from a perspective of which hogs are out there in inventory and when.

Yeager: In the last 10 seconds, is $70 in hogs a thing of the past for the next month?

Kub: For the next month I think so, especially after that hogs and pigs report showing those heavier hogs, yes.

Yeager: Elaine Kub, appreciate your time, thank you so very much. Merry Christmas to you.

Kub: Merry Christmas to you.

Yeager: That will do it for this installment of Market to Market on Christmas Day. We will talk more in Market Plus so you can join us there. You can find that on our website of MarketToMarket.org. Our Facebook debate this week was on the preferred color of the poinsettia. Which or what will it be next week? Well, head to MarketToMarketShow on Facebook to see what we're talking about each day. Next week we'll talk and look at the stories of 2020 and their impact on rural America. Thank you so very much for watching. Have a great week. 

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