Market Analysis: Elaine Kub

Market Analysis: Elaine Kub

Feb 19, 2021  | Ep4627 | Podcast

Podcast

Weather caused different problems domestically and globally this week impacting the trade. March wheat improved 14 cents while the nearby corn contract added four cents. The Chinese returned from holiday, but the full buying spree did not. Nearby soybeans gained a nickel.  March soybean meal dropped $2.90 per ton. May cotton expanded by $1.82 per hundredweight. Over in the dairy parlor, March Class III milk futures declined 19 cents. Red in the livestock sector, April cattle shed $1.50. March feeders fell $1.72. And the April lean hog contract lost 70 cents. In the currency markets, the U.S. Dollar index dropped by 8 ticks. April crude oil decreased 45 cents per barrel. COMEX Gold fell $40.70 per ounce. And the Goldman Sachs Commodity Index added more than 10 points to finish at 468.55.

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

Kub: Hello, Paul.

Yeager: I'm so used to seeing you on the screen. To see you in person is, just give me a moment okay?

Kub: I am not a cat.

Yeager: Is your dog around that might come in like it did the one time?

Kub: No, not today.

Yeager: Not today, all right. But you were one of the more memorable guests we had. That was great. How is it when you make the trip south, you have made this trip to see us for years, how often is it that you in the middle of winter had to go south because Mother Nature didn't leave any snow for you in South Dakota but there's a whole bunch of it here in Iowa?

Kub: That’s right. The difference between the snow in the west and the north versus the center of the Corn Belt is actually a market story. I heard that there is more snow cover in Austin, Texas right now than there is in Aberdeen, South Dakota. So that is influential to the markets, especially when you think sort of longer term or the outlook for the weather as we get into planting season.

Yeager: And that is something a lot of people have asked. We have a lot of weather questions. But the reason I bring up the weather first is because of wheat. You can kill wheat six times in an off season. But when it's cold with no snow cover that has got to make a difference. What are they talking about in some of those high plains areas where there's no snow cover?

Kub: Yes, the western high plains. The hard red winter wheat market is in sort of a liminal space right now because you mentioned the price changes, kind of nothing really happened this week for wheat price wise. But as far as the fundamental scenario of the weather, actually it did make a difference. That extended period of cold across the western high plains did make a difference. Yes, soil can be an insulator, snow can be an insulator. But Central Kansas didn't have the snow to be an insulator. Eastern Colorado where they have severe drought of course doesn't have snow as an insulator. Northwestern Kansas had those extended low temperatures. So yes, the soil is freezing and it is certain there will be some winter kill to the hard red winter wheat crop. But that liminality as I mentioned is because we won't know exactly how much for a while. It could be months. Obviously it will be months before you really have an assessment of how much winter kill there was. The good news is Kansas farmers or anyone in that geography will be able to plant milo in the spring to replace it and see very favorable prices.

Yeager: Oh, milo. See I had a question about sorghum later that we'll talk about.

Kub: Same difference.

Yeager: Same thing, yes. So given what we know about winter kill might or long range problems with drought, we haven't really even gotten into the drought conditions in some of those same areas, does this wheat market have any more rally to it or are we just beginning a rally?

Kub: Yeah, price wise I don't know that we're going to see wheat prices take off immediately because we can't observe, we cannot observe these facts yet, it will take until the spring. However, you did notice a response from the commercial side of the market to the Kansas City wheat futures, their structure. They are still in a carry spread structure but that July to September carry spread got trimmed down to about 2 cents this week. So the market did respond to the concerns that there will be less of it. But there's still, let's say, enough. The long-term expectation for the 2021 marketing year is for still to have 30% stocks to use ratio. So this is not like a corn or a soybean story where you're talking about hugely bullish prices.

Yeager: To a point, until this week in corn, moderate gains, 4 cents. We've seen at least this week when you look at a week-over-week factor, are the high, wild times behind us?

Kub: No. And actually I'm glad you mentioned volatility because the volatility is really interesting this next week. For the next 5 days the volatility will make a difference to the crop insurance premiums. Obviously during February we know that the crop insurance reference prices will be set for the new crop. But not just the reference prices, the premium prices too are dependent on the volatility of the prices. So having more volatility we haven't seen in recent years is going to be a big deal when we get to the end of the month.

Yeager: I was trying not to say the V word this week but you know it's coming, it's out there. So I guess if you're sitting with corn right now, if I'm one of those few that still have old crop am I selling right now?

Kub: It might not be so few. I think farmers are bullish and optimistic. But weather wise, yes, the basis market has been strong, has continued to strengthen because of the weather. We're trying to motivate these bushels to come into town. Yeah, I don't think it's a bad idea to be selling. These are obviously very favorable prices to be selling and at some point you've got South America coming in and relieving the global market to feed grains to some extent. So right now in the past we've had the China buying story. Obviously the export sales this week came down. Lunar New Year sort of timeframe, that's not totally unexpected. But that big buying spree in feed grains might be behind us, China might now be comfortable with their strategy of stockpiling some of those feed grains. So most of that bullishness may be behind us and we may have to worry about bearishness in the future.

Yeager: What about in soybeans? Are the Chinese coming back to that market? Or is that in the rearview?

Kub: I don't want to say that it's -- I guess let's say neutral. I'm net neutral for price wise because there is still tightness obviously in the supply and demand scenario. The outlook that the USDA economists have mentioned this week at their outlook meeting, it's very strong for soybeans because of the past usage from China and others for feed grains, soybean meal but also for the oil. You look at any sort of oil seeds, the Malaysian palm oil futures are also churning higher, canola prices $25. There's just bullishness everywhere for soybeans and I don't want to say that the party is over.

Yeager: So if the party is not over what is the target for getting into the next round of the party? Let's go on the November contract.

Kub: The 2021 contract, that is at $11.70. So in a new crop scenario that soybean price to corn ratio is about 2.6 to 1. In that sense soybeans are overpriced actually. I wouldn't necessarily expect to see that 2021 market be churning higher above $12, $13 that we've seen in the old crop market.

Yeager: In livestock, again, back to the weather. That has been a major thing. Cattle on feed came out today. It's in one of my many stacks of papers here, Elaine. On feed $101, placed $103, marketed $94. These numbers compiled prior to this week. But what did the weather do to this cattle market?

Kub: Yeah, I wouldn't make too much of the cattle on feed report because, yeah, it is within expectations. That marketing number was lower but weights have been higher. There's a lot of nuance. I wouldn't worry about that. But the weather you're right to point out. We could say that this past week is maybe like a mini Holcomb in the sense that there were plants that were shut down, there were shifts that were canceled because of the weather. You couldn't get people into plants in Texas and Mississippi. So you've got a scenario where the boxed beef prices are still very strong, the profitability of making beef is still very strong -- 238 for choice I think in the boxed beef -- but meanwhile packers are not going to be paying up for the live cattle. The live cattle traded at about $114 this week in Texas. There will be that advantage to the packers again because of that shutdown and that makes that structure unfavorable to the feedlots, but hopefully just in the short-term scenario this time.

Yeager: I was also trying not to say advantage packer on the show this week too but there we go with that, it seems to be a common theme. In the feeder cattle market they have been hanged with higher feed costs but it's also hard to, you have to feed extra now because of those cold conditions.

Kub: Well, again, that's sort of behind us. But feeder cattle, the demand for that market is very strong in terms of the quantity that people want to buy. People are still, even at these feed prices the feedlots are still eager to be out there buying, they just only at a price, there's only so much that they can do price wise. And you see that on the futures chart specifically. There's resistance and you don't really want to expect to see that recover much more above $145.

Yeager: In the hog market, again, hanging on several things as well. What is the biggest driver do you think?

Kub: I think this past week, we haven't really had a lot of new highs this past week, it sort of pulled back a little bit. I honestly think it is related to the fact that the daily and futures weren't trading. You had those five days where they were shut down for the Lunar New Year holiday. So if you don't have that arbitrage and new information each day about how expensive pork is in China because their herd recovery has not been as extensive as maybe they planned or they wanted it to be, pork production is expected to be up 14% in 2021, but that's not a huge enough recovery. So pork prices are still very strong in China but we just didn't have that news this week and I think that is why prices had one less thing to drive them higher.

Yeager: All right, in the last 60 seconds I have a question from Zach in Lawrence, Nebraska. And this is about strategy for everything. He says, the marketing plan for the last 5 years has been 25% before southern harvest, 25% around planting, 25% before July 15th and then hold 25% for after harvest. Is that still a good plan as we move into '21?

Kub: It's okay but there's a lot of nuance there, especially because he's from Nebraska. Is he in irrigated Nebraska or is he in dry land Nebraska? Because if you're a dry land farmer in the Western Corn belt this spring yes there is an expectation that La Nina might let up the May, June, July timeframe, that we might very well make USDA's expectations for 175 bushels per acre. It's possible. But I wouldn't be as eager to sell early if you're in the Western Corn Belt where it is so dry.

Yeager: Okay, we'll flush that question a little more on Plus because I know that's a big curveball to throw in the final 60 seconds but I wanted to hear it. Thanks, Elaine Kub. Good to see you.

Kub: Good to see you.

Yeager: That will do it for this installment of Market to Market the TV show. We will talk more in Market Plus so you can join us there. Find that on our website of MarketToMarket.org. And here's the thing, algorithms are nearly impossible to figure out but we know one way that you won't miss what we post on Facebook. Just dial us up on our page directly at facebook.com/MarketToMarketShow. Like the page if you haven't and check out our content. The more you like, the more of us you'll see. Next week we'll look at the energy debates sparked by the Texas storms. Thank you so very much for watching. Have a great week.

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