Market Analysis: Elaine Kub

Market Analysis: Elaine Kub

Jul 9, 2021  | Ep4647 | Podcast

Podcast

Good wheat harvest yields along with rain in the current and extended forecasts sent many bulls to the exits as the corn crop entered pollination. For the holiday-shortened week, September wheat dropped 38 cents while the nearby corn contract plummeted 63 cents or more than 10 percent. If rain makes grain, precipitation ends participation by those looking for long positions in the soy complex. For the week, the August contract dropped 54 cents. August meal decreased $27.40 per ton. December cotton improved 74 cents per hundredweight. Over in the dairy parlor, August Class III milk added 83 cents. A mixed week in the livestock sector as August cattle fell $2.77. August feeders gained $2.13. And the August lean hog contract improved $1.35. In the currency markets, the U.S. Dollar index dropped 11 ticks. August crude oil lost 65 cents per barrel. COMEX Gold added $22 per ounce. And the Goldman Sachs Commodity Index shrank by more than 8 points to finish at 527.15.

Yeager: Now here to provide insight is market analyst Elaine Kub who, like those of us in this building, weathered a storm to get here today. These spot showers are very strange in many areas. There are some getting rain, let's say the wheat area, the southern belt has been getting rain early summer. The northern part is finally getting some but it's too little too late.

Kub: Yeah, absolutely. So you mentioned the wheat prices falling, obviously, and the yields coming in from harvest reports in Kansas. By this time it's probably about three-quarters done there, maybe the nationwide winter wheat harvest is about halfway done, might be at the halfway point. So we'd be pretty confident about winter wheat yields. But yeah, where I'm from up in spring wheat country it is about a month out from harvest time so people feel like these markets are still tied together. You see Minneapolis spring wheat futures fall alongside the Kansas City and Chicago wheat futures, but they shouldn't be, Paul, because I think there's a lot of supply bullishness about the spring wheat right now.

Yeager: Well, that's what I was going to ask because hearing you talk about the weather, looking at those areas, I heard yesterday there are people cutting and baling the wheat in the Dakotas. So why on Earth would Minneapolis be independent of that?

Kub: Well, because all the markets kind of move together at this point and it's just too early for the spring wheat market to really factoring in yield yet, that is more of an August scenario once the elevators and the traders are going to see how little is actually going to be there to be harvested. I think it's something like 16% is rated good to excellent. So there are some good hard red spring wheat fields that are going to have very likely excellent protein, but a lot of them will just be gone because they have been baled. Everything matured so early, we had those heat units so early, so it headed out right when we had that hot weather and it has just been extremely stressful for spring wheat.

Yeager: So what do you do right now?

Kub: Yeah, so I think the spring wheat prices would be definitely justified to move back up towards $8.50. I'm not going to say that they should move back up the record high of $24 a bushel back from 2008. That was a weird sort of demand driven commodity bubble. But think later, like the next 3 years after that through 2011, 2012 spring wheat kind of bounced around between $8 and $11. I think that level is going to be a legitimate expectation for spring wheat. So I wouldn't be selling it now when it has been pressured lower by these outside markets. But I'm not suggesting that folks stick it in a bin and wait for $24.

Yeager: Ah, stick it in a bin. We've got a question about that in a moment. But I want to get into the corn market. Both of us made trips in different directions yesterday. What is your windshield tour telling you about corn crop on your way here?

Kub: Yeah, it's amazing. You look at the drought monitor and most of Iowa is in a severe drought. But yeah, going along I-80 today things look great, looks green, looks luscious. The rain that the state has had lately and this is also true through the eastern Dakotas, what rain we did have really perked things up and it looks fine. But I still think that the yield prospects once we get later into the summer we're going to see that early stress that the crop had has taken away the top side. I don't think we're going to be having record setting yields considering how much of the crop has been stressed.

Yeager: Because rows have already been determined. Is that right? The scientific side of things.

Kub: I'm not an agronomist but yeah, exactly.

Yeager: But you can't add to what isn't there.

Kub: Yeah, exactly. And they just haven't been making, the vegetative matter haven't been making the sugars to produce record high yields. And remember, 15% of the U.S. corn acres are in Iowa. So when you have this severe drought in Iowa that really matters. And 10% of corn acres are in the Dakotas, in North Dakota and South Dakota combined. So even though we don't think North Dakota is that big of a deal from a corn perspective but really it adds up.

Yeager: So southeast Iowa as we record this right now was under a flood watch, the bottom two to three tiers of counties to the southeast part of Iowa. 200 miles to the north and west still in the third stage, most severe of drought. This is a very narrow area so if you are on the wrong side of the fence here what are you doing?

Kub: Yeah, great question, Paul. I find myself in this scenario. You know, I farm a little and I haven't sold anything. I haven't sold any new crop because until about a week ago when we got an inch of rain I legitimately did not think I was going to have a crop to sell. So it has been very difficult for folks in the drought areas to watch these great prices and not feel confident to take advantage of them. You can do some futures hedges or options hedges, those will give you more flexibility to get out of them. But now we may feel a little more confident that there is a crop and not only that, but we're in the time of year when we see the highs and things are going to fade away. If you think back to the summer highs in 2013, 2014 those were in mid-July. You've got the July contract is going to expire on Wednesday. So the fireworks of the old crop market are going to be moving past us past Wednesday and it's probably going to take the new crop market with it.

Yeager: Here's a possibility of making money. Derek in Silver Lake, Kansas asked us on Twitter, do I start printing store and ignore t-shirts now or wait until we drop another 50 cents?

Kub: The t-shirts sound great at any time. But the question of whether you should really plan on selling, I think there is enough threat -- and to completely change the subject, think about how much of the export pace has been the driver of the bullishness in corn and soybeans and we have seen record setting corn exports actually in the second quarter of 2021. But now we have this rumor of ASF coming back up in China in the Sichuan Province and that suggests to me that there is potential for some of this big export bullishness to go away. I think there is enough to be worried about that we should be thinking about selling at these prices now rather than just ignoring them and storing.

Yeager: So is the high in for corn?

Kub: For old crop yeah, I think.

Yeager: New crop?

Kub: Well, it depends if it keeps raining. This is the time of year when you should bring on a meteorologist except that actually we've got a WASDE report coming up on Monday so it kind of doesn't matter even what weather is going to do. I think there will be fireworks in either direction.

Yeager: All right, soybeans. Exports in the United States crop is a little more of a factor than maybe domestic use and an ASF rumor. Is that what has given it a little -- it went positive on Friday.

Kub: It has been highly volatile, super volatile. The actual, the volatility measure is 50% in soybean futures right now.

Yeager: So what does that mean?

Kub: That means, from a statistics standpoint, there is a 5% chance that the soybean prices within a year could drop in half, effectively. That's not going to happen, it's just nonsense numbers at this point because it is so volatile. In real terms that means the absolute value of how much the soybean price goes up or down on any given day over the past month of trading has been 30 cents a day has been the average movement. So it's just outside of any realm. This time of year last year the average daily movement was about 3 cents. So it's just so volatile based on weather and based on rumors and based on anything at this point. I don't know how we're going to get out of this volatile pattern.

Yeager: So Tuesday we dropped more than 90 cents, almost 98 cents at one time, clawed back to only lose 54 cents. And then there was expanded limits. So there's a lot of people who are thinking somebody is getting rich and it's not them.

Kub: Right, well and then the other problem is you sort of have this decision paralysis. You talk about should you be pricing grain right now. It's really hard to do that when you fear that the day after you do it prices are going to move against you by 30 cents, especially if you're doing a futures hedge that you're paying margin calls on. It makes a really challenging hedging environment. But I think grain marketers need to fight against that fear and just be confident that $13 beans are going to make you money.

Yeager: Okay. I asked you in wheat, I could ask you in all of them, but what do you do right now with okay, I got a rain? Do I price something ahead in beans?

Kub: Yeah, I think so because if you feel more confident. Obviously beans are going to need this rain to continue for the next three or four weeks or more. But if you feel more confident that you will have something to sell, yeah now is the time to do it before everything falls apart and heads lower into harvest.

Yeager: Real quick on cotton, that is a market that was opposite the others this week, up 74. Why?

Kub: Well, it's funny to see a lot of these commodities move higher, even as the dollar has been moving higher because cotton really doesn't have a story on its own. The acreage story has played out, exports were pretty lackluster. I think it's just bouncing along sort of with the outside commodities at this point. So to see it at the 85 cents is sort of a gift I think at this point.

Yeager: All right. Livestock, we could spend a whole bunch of time on that. Earlier in the program we had a story about some of these new executive orders and some of them are aimed at the cattle industry. Which one benefits the most from what comes from the government here?

Kub: Yeah, I don't know that these executive orders are going to, certainly not instantly, but maybe long-term affect the competitiveness as feedlots bring their cattle to the packers. The fact sheet that came from the White House said that over the past 5 years the farmers' share of the beef dollar has gone from something like 51% to 37%. And that certainly jives, I haven't independently verified that, but that jives with our experience. We see choice beef at $280 a hundred weight and yet the cattle prices themselves are not following along with the actual wholesale beef prices. Cash cattle this week in Iowa was $125, which is nice, but it's not as nice as it should be when you consider how hot the beef market is. So if we could get more competitiveness when the feedlots come out there with their cash cattle, if this helps that, I'm not really sure the mechanism of how it's going to help it, but let's try it, it can't hurt.

Yeager: The consumer is maybe getting a little gun shy of making purchases of beef in the store and some pork in the store. Is that the swing of high prices cure high prices and all of a sudden we'll have some -- or is there a different factor?

Kub: I don't know. I think that high prices are here to stay for beef. I'm not going to say guaranteed that we're not going to see more volatility in the cattle and cattle futures. But beef prices I think are here to stay, especially when you consider the strength of the export market. We saw more of those export sales going to China even and Mexico and Korea. So there's so much global appetite for U.S. beef and the supply issue, this is maybe more of an argument for the feeder cattle market. But when you consider the liquidation of the beef herd that is happening because of the drought across cattle country, for the next two or three years I think we're going to have a tight supply of feeder calves and cow coming out of feedlots into the packers and packers are going to continue to have to do something competitively to get these prices more fair.

Yeager: Give me some back yard perspective because we heard in Montana that this was happening. Is what you're discussing about liquidation of herds happening in South Dakota?

Kub: Yes, and North Dakota obviously. You see cattle coming through the sale barns there about $70 versus the equivalent kind of cow that would go through a sale barn in central Nebraska would maybe get $80 a hundredweight and that is exactly an argument about the drought. If you're in an area where we can't be feeding these animals they are being liquidated. And in statistics terms we're seeing 10% more beef cow slaughter than normal at this time of year. So that means that we are definitely seeing a reduction in the breeding herd that would be producing feeder calves next spring looking into next fall.

Yeager: Are you expanding a herd right now?

Kub: Well, if you have the grass absolutely, this is a wonderful opportunity for folks in Kansas, Nebraska, some place that has grass, Iowa, to be picking up some great deals.

Yeager: Are you expanding in the hog market right now?

Kub: Well, that is a little more tricky, isn't it, because we really don't know what sort of chaos is going to come for the conventional hog market in 2022 with California's Prop 12 and everything else going on. I think my understanding is that a lot of pork producers would like to be expanding but can't because they can't get a hold of the breeding stock that they would like. It's a really tentative time for the hog market. But as far as actual prices for hogs that are being sent to the packers, packers are slowing things down and really not being very aggressive out in the countryside this week.

Yeager: But at some point that has to change. The hog industry faced some of the same issues of labor challenges with the virus, of the workers, and now they're facing the challenges of finding, like every other business, employees. Is that a bigger factor in the pork market than maybe it is the beef or is it both?

Kub: No, Paul, I think you're really onto something because we saw such hot hog prices in early June. Then the packers weren't really making a whole lot of money when you had hog prices at $120 or thereabouts. And they have come back down about $110 where maybe folks have sort of evened out making some money. But they have slowed down and I think that is probably why we've seen prices come down is maybe they don't have enough workers to be running at capacity. We're looking at daily slaughters of like 470,000 head. That's nowhere near what it could be if the packing plants were running at fuller capacity.

Yeager: Real quick, was this a good week or is this a good time to be taking care of any of my feed needs?

Kub: No, I think it's more of a selling opportunity in the feed market than a buying opportunity. But when you're starting to look farther out maybe even into 2022 there are, you can sort of theoretically pencil out some profits in feeding hogs and cattle and certainly poultry. So it's something to be planning for but not at this moment in my opinion.

Yeager: Elaine Kub, thank you very much. We've got to go.

Kub: Thanks, Paul.

Yeager: Talk to you in a moment. Thank you. That will do it for this installment of Market to Market. We will talk more in Market Plus, so join us. You can find it on our website of MarkettoMarket.org. Thank you for participating in our Knee-high 4th campaign on Instagram. We also post our photos, share some of yours and occasionally go live with mid-day reports. Follow us now at our feed of MarkettoMarketShow. Next week, we take a closer look at drought conditions across the country and we’ll take an in-depth look at the WASDE. Thanks for watching. Have a great week.

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