Market Plus: Elaine Kub
Elaine Kub discusses the commodity markets in a special web-only feature.
Yeager: Welcome into the Friday, January 28, 2022 Market Plus. Ladies and gentlemen, I present to you Elaine Kub. We flew through a lot of things in that discussion.
Kub: Lots to talk about.
Yeager: I felt a little amped up but there was a lot to talk about one thing we skipped and I hate to start off this podcast always with cotton but it does have a story to tell. It still is in an acreage competition battle. I always ask that question because it always seems to be the answer. Is it part of the story?
Kub: It was part of the story but I don't think it's even the headline of the story because it's a very hot market but it's hot in the nearby, $1.20 per pound, that is higher than it has been since 2011 when the United States effectively ran out of cotton and that is not the situation right now. Actually stocks to use ratio or ending stocks it's pretty much comparable to last year at this same time. So it's not like we're running out of cotton, it's not a supply story, it's just a demand story, which is sort of the global economy at large and the whole buy commodities as an inflation hedge sort of idea.
Yeager: Sweatpants take a lot of cotton.
Kub: But the new crop is more like 98 cents, so it's not as hot as the nearby, it is very much inverted. But to the acreage battle point yes, new crop at 98 cents is also motivating to plant cotton.
Yeager: We have a couple of acreage-ish questions but a lot of South America. Thank you everybody who submitted via Twitter or Facebook and we had a couple from Instagram and we always do that shout out on Wednesday and Thursday and we put them together here on Friday. So we're going to start with Gary in Franksville, Wisconsin. He asked you, Elaine, via Twitter, at what point when the Fed starts raising rates does money leave stocks and move to commodities in ag?
Kub: Already happening.
Kub: I think it has been happening for the past year. The expectation that interest rates could only go up and that inflation would occur during the massive fiscal and monetary stimulus that we have experienced over the past decade, but last year in particular, the investment community has been looking for inflation hedges for at least the past year.
Yeager: Do they put that money into Bitcoin?
Kub: They did up until about three months ago.
Yeager: We asked it on the way up, now on the way down with Bitcoin what is that impact on commodities?
Kub: It just makes me feel -- I think it makes all commodity producers feel nice when Bitcoin collapses.
Yeager: Really? Why?
Kub: Doesn't it make --
Yeager: But there's people who took some of their farms and took some of the open areas and put some mines up, right? You don't know anybody?
Kub: I don't know anybody and yeah, it's not nice of me to dance on the grave of somebody who is suffering. But my perspective is commodity producers do real work and bring a real product to the economy that is used by real people in a real way and Bitcoin has been, in my opinion, more of a pyramid scheme. It's nothing, it's an imaginary token that has no value. So it's only ever worth what you can convince the next sucker to pay for it. So when it starts to collapse I don't feel too bad for those people.
Yeager: Are you going to answer my question or just dance around the issue?
Kub: What's the question?
Yeager: You didn't sound like you actually gave me your opinion on it. There was no question, she had a strong opinion on that one and I wanted to make sure we got it in. All right, let's go to Phil in Dresden, Ontario. He wants to know, with the U.S. dollar bouncing higher and more moisture in the U.S. Southern Plains, is wheat set to drop further if peace breaks out? With the U.S. Fed signaling interest rate hikes coming, likely spurring the greenback, is it more bad news for wheat?
Kub: Yeah, all of these things could weigh down wheat prices. And other bad news that could come is not necessarily even from prices but from production prospects for U.S. producers who don't really have a sense of how well or poorly the Kansas wheat crop for instance or anything out in the Southern Plains or in Colorado where it has been so dry during a cold winter, we don't know yet how bad the production prospects may be.
Yeager: A couple of weeks ago on the roundtable we asked if anybody had pictures and we did get a few that came in via Twitter. I posted a photo yesterday on the Facebook page of where the snow cover is, it's a lot of wheat acres not with any cover on it.
Yeager: And that doesn't help matters.
Kub: No, but it will help prices I guess, but not in a good way.
Yeager: Not in a good way. Okay. Let's move to Robert in Garwin, Iowa. This one came in via Facebook. Robert, thank you. How long before our acreage battle here overtakes the South American weather story that is playing out now?
Kub: Yeah, and I kind of mentioned it on the show, the South American weather story was largely ignored by the market. We even saw the Buenos Aires Grain Exchange increased their good to excellent ratings of their corn and soybeans this week. They actually had a bounce and yet the markets did not fall. They're sort of immune to the idea of the South American weather story. But anyway, the traditional timeframe for this acreage battle is going to be February. February starts on Tuesday, so that is when we start to do the averages for this crop insurance reference prices, so that is when it matters.
Yeager: Any reason to think that down the middle average guesses are going to be in play this year?
Kub: I very much think, yeah, soybeans are slightly underpriced from a historical perspective but there is some folks will be slightly motivated to plan soybeans if they don't want to spend more money on fertilizer this year. So yeah, I think honestly that's exactly what we're looking at is a pretty normal split.
Yeager: And if beans continue on the train that they're on and as you said during the show undervalued there might be some people who look at that and say yeah.
Kub: Yeah, and by the end of February they may not be undervalued anymore.
Yeager: True. Okay. Mark in Humphrey, Nebraska. You mentioned this just a tiny bit and you can keep showing this video because it fits. How long will Malaysian palm drive soybean prices?
Yeager: First explain Malaysian palm and its relevance to us.
Kub: Yeah, so everybody in the world if they fry something needs some sort of edible oil and actually the world’s largest proportion of the global edible oil market is palm oil grown in Indonesia, Malaysia, various Asian countries, that's something like 37% of the global edible oils market. Soybeans is maybe more like 25%, something like that. So Malaysian palm oil is number one, soybeans is number two and is taking a larger market share lately, especially because China in particular as part of the westernization of their diets is starting to have more of a preference for soybean oil over Malaysian palm oil, which is new. And maybe that has contributed to the reason why when you look at the domestic U.S. soybean crush in October there were moments when actually the soybean oil coming out of a bushel of soybeans was worth more than the soybean meal coming out of a bushel of soybeans, which has never happened before. Throughout history the soybean oil has been worth about a third of the overall soybean crush and now all of a sudden it was the leader for a brief period of time. It's not right now but it's a much bigger proportion of the soybean crush value that it used to be.
Yeager: So how long -- does it continue? The way you describe it and answer that question --
Kub: It's not a fleeting thing, no, I think it's an ongoing phenomenon that the edible oil is a driver, the Asian preference is a driver.
Yeager: Well, and that western influence on the Asian diet has helped us in a number of ways and here's another one with the soybean especially. Okay. Paul in Macon, Illinois, a couple of Pauls asking questions here. How much risk do we have between now and crop insurance price date? Is it worth protecting?
Kub: Yeah, you know what would be an interesting way to protect it though, a sort of a subtlety in the crop insurance pricing is that the premiums get determined by how volatile the markets are during February. So if you started to see wild shifts because of a geopolitical selloff or South American weather or something --
Yeager: End of the Olympics.
Kub: Whatever, yeah, if you have higher volatility in corn and soybean prices and spring wheat prices during February that itself causes higher premiums. So how can you hedge that? You could use some kind of option strategy where you would benefit from higher volatility, long option strategies. But it would probably start to get expensive.
Yeager: I'm listening to you, don't think that I'm not, but we had a question come in from our group that is watching us remotely tonight in the studio. They want to know, what is driving the strong local basis levels? And is that tied into anything that you've been saying here?
Kub: I think this has been the case for the past 18 months or so. Honestly I think it's just a hangover from the derecho, that we just don't have enough supply in the United States countryside for end users to feel comfortable and so they have just been competing, very competitive in these basis bids. And as I mentioned in the show, we might start to see some seasonal weakness here in February or March, especially because of the rail rates. But yeah, they're strong.
Yeager: And changing our shopping patterns, grocery store versus restaurants and the food companies trying to figure out what we're going to want or what the virus is going to allow us to go and get.
Yeager: We hear the grocery store stories and you just don't know where it goes next. But I do know where I'm going next and that is another Paul question. This one is from Paul in Danvers, Minnesota. Should a person be looking at pricing any 2023 crop? He said he's asking for a friend.
Kub: Yeah, no I very much, I like selling 2023 better than I like selling new crop 2022 right now just because there's so much fundamental support for the 2022 marketing year right now. But the 2023 prices it's like $5.40 for corn, $12 something for beans. You cannot go wrong. And eventually you've got to think the world is going to sort of catch up to supply. It's very uncommon for commodities, grain, agriculture commodities specifically to have these sort of levels for many years in a row.
Yeager: Many years in a row sounds a little bit like history. We started with a little history, we're going to end with history in this last question. Roger in Hancock, Iowa asked, how does Russia/Ukraine production now compare to their days as part of the USSR?
Kub: I don't have specifics. But I did -- with concern of the Russia scenario, like I mentioned on the show, Russia is a really big wheat exporter, Ukraine is also a big wheat exporter, bigger than the United States in fact by a couple of million metric tons. So Ukraine is big in the wheat market but I don't think that they're as big as they used to be. To my understanding there is still a lot of efficiency that could go in and still arable acres there that are not in production that they have potential to grow, which is probably, all that grain is probably headed towards China. But yeah, there is potential there.
Yeager: Elaine Kub, as always, thank you so very much for going with any weird wild questions that we might have.
Kub: Well, thanks for the invitation.
Yeager: Appreciate it, good to see you. That will do it for Market Plus. Next week we're going to look at the cost of expanding the use of medical marijuana and Mark Gold will analyze the markets. Thank you for watching. Have a great week.
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