Market Analysis: Elaine Kub

Easing tensions between Russia and the world let off the pressure valve wheat market. For the week, the nearby wheat contract increased 8 cents while March corn added 20 cents. The soy complex approached May of 2021 highs as South American production numbers moved lower. The March soybean contract jumped 56 cents. March meal strengthened $18.50 per ton. March cotton expanded $3.01 per hundredweight. In the dairy parlor, February Class III milk futures shed 33 cents. A mixed week in the livestock sector. April cattle improved $1. March feeders declined $3.67. And the April lean hog contract lost two cents. In the currency markets, the U.S. Dollar index increased 164 ticks. March crude oil added $1.88 per barrel. COMEX Gold dropped $46 per ounce. And the Goldman Sachs Commodity Index improved more than 13 points to finish at 622.80.

Yeager: Joining us now to provide some insight is Elaine Kub. Hello, Elaine.

Kub: Good to be here on a week when markets are up.

Yeager: Yes, you're not going to be on the Angie Setzer track of sending the markets lower. We'll see how that goes, right?

Kub: Hopefully, fingers crossed.

Yeager: I asked you before the show, biggest commodity and you said oil, we're not going to start with oil, we'll get to it. But oil has an impact on all of these markets. Let's start with wheat. Is oil and crude impacting wheat?

Kub: Let’s say that they are both related by some commonalities, right? All commodities I think are benefiting at this time when there is so much inflation fear, like you mentioned at the top of the show. I think investors are piling into commodities as an inflation hedge and some of the geopolitical stuff that is going on, certainly the global oil markets are sensitive to Russia things and wheat markets are sensitive to Russia things, so they share some common things.

Yeager: Natural gas up 24% on the week, that is all tied to it. But the question though that confuses me is, wheat has now backed off a little bit and the run up was allegedly about the Russia/Ukraine thing. So why has oil and crude, or crude and natural gas not moved in the same direction?

Kub: Well, so the wheat thing actually, when I look at the influence of the Russia situation on wheat, I look at the Russian ruble. So for the longest time over the past couple of months there has been a lot of bearishness towards Russia's financial sector of course, if something happens, nothing has really happened yet, but the fear of that happening kept the ruble going down while the U.S. dollar was going up and both of those things together will put a weight on U.S. domestic wheat prices because Russia is such a dominant exporter. There's something like 35 million metric tons, which is 17% of the global wheat market, export market. So in this environment whereas you mentioned the fear sort of subsided here at the end of the week and the Russian ruble popped up a little bit you did see somewhat of a recovery.

Yeager: Okay. Quickly, do we see a bounce back up or down?

Kub: Well, what is Vladimir Putin going to do next? If we could predict that I think you could make a lot of money on not only wheat but a lot of markets, a lot of bond markets, a lot of markets are really watching those developments.

Yeager: In corn, there's a couple of technical issues going on. If we can break $6.40 on that March contract, we didn't, but if you can break some certain technical things we're poised to go even higher, right?

Kub: Yeah, and it's amazing because honestly you can think of some bearish things that happened in South America, the South America weather story was sort of bearish fundamentally for both corn and soybeans and yet prices did keep going up. And I think it's related to what we talked about at the start of the segment here, just the overall demand or aspiration to get it long in commodities as an inflation hedge.

Yeager: All right. So, what am I doing right now? Am I selling a good percent, a small percent of maybe this new crop?

Kub: Well, I don't feel a lot of urgency for it because I Think these prices are well supported and I don't see major danger in the very near future of them falling apart, especially the South American, we're worried about getting more rain there and things really turning bearish, but the Brazilian second crop of corn, the planting and the weather there really hasn't improved it very much, it's sort of beyond hope in some cases. So all of these bearish news weren't even able to bring prices down. So I don't know, I think you just kind of let it go and see what happens.

Yeager: However, if I have a strong local basis right now how can I say no to something like that?

Kub: Yeah, the basis actually is in danger of weakening just seasonally and also from a transportation aspect. There has been the colder weather and we did see some poor rail service metrics. And so we did see some transportation problems, slow service and that does tend to push back against farm origin prices through the mechanism of weaker basis.

Yeager: Soybeans sound like an auctioneer. I have 14. Can I get 15? Can I get 16? Where does this train stop?

Kub: Well, they're still underpriced in relation to corn, in relation to canola, in relation to palm oil, in relation to basically any other of their comparative markets. You might even say they're still underpriced but it doesn't mean that they're necessarily heading to $16 or whatever crazy number you just threw out there.

Yeager: Right and I'm not saying -- but all of a sudden a dollar in a week, in two weeks. And the chart continues to move higher. So I guess I'll ask you this question, if South America has a smaller crop for the American producer what do I do?

Kub: Yeah, you know, you want to sell these prices before everything collapses in March or April. But I don't think you necessarily want to be pulling the trigger today because there's still the chance for things to churn a little bit higher.

Yeager: But is there a chance I should maybe take advantage of some of this move?

Kub: Sure, and not only that, but think of 2022 when you don't have quite as high soybean prices and 2023 even, $12.40. This La Nina story that has supported not only some dryness in North America but certainly the dryness in South America this winter has been supported by the La Nina phenomenon, which is 67% likely to continue for the next couple of months. But then we'll probably neutralize. That is the latest thinking from the climatologists. So it's not forever. We're not going to have this bullish support forever.

Yeager: All right, we've talked about grains so that means we need to set or help at home. We're going to ask Chris in Wisconsin's question and let's keep the three commodities we just talked about in mind as we talk about this. As we turn to 2022 crop budgets and marketing plans, with the higher input cost, do you feel we need to rally or maintain these levels to calculate higher revenue protection guarantees?

Kub: Not necessarily. There's definitely profit. You can lock in your input costs today, assume that they will be available in the spring and make a dollar and a half, $2 in profit even. And looking at the University of Nebraska put out their crop budgets and even considering the cost, the extra fuel costs which is higher, about twice as much as it was last year, even with the center pivot irrigation, you're looking at maybe for corn an extra 50 cents for bushel on your cost of production. So that sounds like a lot but when you consider how much higher the new crop futures prices are there is profit in there. I don't think necessarily that the markets need to even do anything to make anybody plan corn or there is some narrative that people would avoid corn because of the higher fertilizer costs, it's still more profitable to grow corn.

Yeager: Well, yeah, especially the price. And we have a couple of questions about that we'll get to in Market Plus. But I want to move to livestock. You were commenting about your drive and looking at these animals out there. Let's start with live cattle before we get to feeders. What do you see the underpinnings right now of this live cattle market?

Kub: Yeah, live cattle market sort of is what it is, didn't have great exports but the cash cattle stayed pretty steady this week, $137 for southern live dress deals and that is pretty much right in line with where the futures are and I think it's kind of stuck there when you look at the choice boxed beef sort of topping out here and staying fairly neutral. There's only so much that consumers can ultimately pay for that beef and I think we're sort of finding that neutral level.

Yeager: Because we gapped lower on Monday and there is a thought that the bears have maybe taken over that market.

Kub: Well, you're right and from the week you sort of look at the chart and it looks scary. But as I mentioned, the cash cattle business, the actual profit margins that are there, they continue to be, the same fundamentals continue to be in place.

Yeager: Feeders, we have a couple of things coming up on that. The big story has been it's so dry the feeders are coming off the pasture early, they're going to go into the lots. Is that the narrative you hear?

Kub: So what is really interesting is on Monday the USDA is going to put out their January 1st cattle inventory report and then we will finally get some hard numbers on not just the cattle on feed that are in the thousand plus head feedlots, but also sort of the back yard feeders, the people who are more likely to balk at the $6 corn, who are more likely to be feeding these feeders when the corn is cheaper, when it's $3 and you’re trying to put some value added in there. So I think that the market will finally see some hard numbers to demonstrate, as you mentioned, the supply tightening that has happened in the feeder cattle market and will continue to happen in 2022 and 2023. The breeding herd just isn't there anymore.

Yeager: That is the story, Chris Swift talked about it last week. He's like, the report indicates we don't have those calves coming. And how long does that take to or will it get resolved?

Kub: Yeah, well you look at the futures board and as you mentioned it was not great this week, things really collapsed there in the nearbys. But you look past April, you're still seeing feeder cattle prices at $165 or higher. It's just sort of a seasonal thing here of when the buyers are going to get out there and want to see those calves coming onto the market.

Yeager: We have a group of young farmers that are watching our show that we're going to have question and answers with in a moment and I know that there is an old adage of sometimes the younger farmer gets in and expands with the livestock. If anybody is sitting there watching this right now, should they be looking to buy some calves?

Kub: Yes. Yes. Buy mine.

Yeager: Buy yours. We'll get the number after the show. Okay. Let’s flip over to the hog market. That one didn't look good for a while. Does it look good in the future?

Kub: Yeah, we had actually quite a strong export progress this past week and for the past several weeks. There has been good move, of course obviously moving the product to Asia, the cold storage report was supportive, everything is kind of supportive for hogs and not only that, but like John Torpy's story mentioned, the Prop 12 thing has been delayed so at least that is one axe over the neck of conventional hog production that has been at least delayed six months.

Yeager: Well, and that was a thing I had written down to talk to you about. What was the role of Prop 12 in the market?

Kub: It could have been -- nobody really knew and it could have been a disaster here in January, we would be feeling it now if it was really being enforced in California grocery stores. So for right now it's a reprieve.

Yeager: As we wrap up here, when you discuss all of these things that we just have, which market do I need to be watching the most closely over the next let's go 30 days?

Kub: Well, I want to say oil but I'll shift a little bit and say that Malaysian palm oil, which is really the leader of the global edible oil sector and that is really what has been leading in some of the cases in the past several months the soybean crush and that is sort of the underpinning of the value that is coming out of our fields. So if we can keep consumers able to pay these prices for edible oils and other cereal grains then we can keep on rolling.

Yeager: Is there any influence by the higher U.S. dollar on any of the things you talked about that we need to be concerned about?

Kub: Yeah, and especially the pork exports, the beef exports, I do wonder especially those beef exports that were a little disappointing this past week, I wonder if the stronger dollar wasn't or hasn't been part of that or won't continue to be more of that as we go forward.

Yeager: Okay. Elaine Kub, thank you so much, always appreciate the time.

Kub: Glad to be here.

Yeager: That will do it for this installment of the TV show we call Market to Market. We're going to keep talking in Market Plus so you can join us there. Find that on our website of MarkettoMarket.org. There are no snow days in our Market to Market Classroom. We have modules on the role of government, science and technology and the 1980s Farm Crisis available at MarkettoMarket.org/classroom. I was so excited to say slash. Next week, we look at the cost of expanding the use of medical marijuana. Thank you for watching. Have a great week.

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