Market Analysis: Elaine Kub

The market appeared to put war headlines in the rearview mirror and turn attention to weather patterns ahead of next week’s two big government reports. For the week, the nearby wheat contract added 39 cents, while May corn gained 12 cents. Seed oils and profit taking faced off for traders this week in the soy complex. The soybean contract expanded 42 cents. May meal strengthened by $10.90 per ton. May cotton jumped $9.04 per hundredweight. Over in the dairy parlor, May Class III milk futures gained 86 cents. The livestock sector was higher as well. June cattle improved $4.43. May feeders expanded $1.60. And the April lean hog contract moved $7.67 higher. In the currency markets, the U.S. Dollar index rose 55 ticks. May crude oil skyrocketed up $10.33 or 10 percent. COMEX Gold lost $30.30 per ounce. And the Goldman Sachs Commodity Index added more than 45 points to finish at 766.10.

Yeager: Joining us now to provide some insight is Elaine Kub. Elaine, we could just discuss numbers and make everybody's jaw drop.

Kub: Those are exciting numbers.

Yeager: Well, they're exciting but they have to be tempered. When you look at wheat, we easily could discuss Ukraine but it looks like weather. But let's start with when the mainstream press starts writing about wheat does that mean that the rally is over?

Kub: Not, not necessarily because you're right, I've been noticing that more headlines, more stories suggesting that investors get into commodities, which they should have been doing six months ago as sort of an inflation hedge. But if you continue to attract more of that money you could continue to attract more long interest and higher prices. It's not a politically popular thing to do when you get speculators driving up the prices of food for people in the grocery store. But it's something I'm sure a story we're going to continue to hear about.

Yeager: We mentioned the drought monitor earlier. It is still dry. There was some relief in the wheat areas of the United States. Too little too late?

Kub: Not enough. It's not too late. In Kansas where there's something like 25% good to excellent ratings and 36% poor or very poor ratings as the wheat is coming out of dormancy, all of western Kansas is in drought. 70 some percent of the entire United States' winter wheat crop is in some sort of drought and some of it is exceptional drought. So yes they had some precipitation but they need more. And I don't know -- the long-term outlook doesn't necessarily provide it. There's still the ongoing La Nina and the ongoing chances of continued dryness.

Yeager: So given that there doesn't appear to be any end in sight with Russia and Ukraine and this dry story here and I know we're not the only three areas that produce wheat but that story doesn't appear to be going away any time soon, how do you take advantage of positioning yourself?

Kub: Yeah, let it ride. If you're a United States wheat producer we have not seen the export business come to the United States yet. The last weekly export sales report was not super exciting for any of the grains. We haven't seen tenders come from the Middle East or North Africa to the United States yet. But yeah, if the Ukraine and Russia thing continues to go on we're not going to make it all the way to 2023 without having to get some new customers here in the United States.

Yeager: Is the market done buying acres? Let's talk corn.

Kub: Oh no, it's not done. We're just getting started.

Yeager: We have a week to go before the report anyway.

Kub: Right, the prospective plantings report coming up on Thursday. And corn is the favored winner here, you're talking 92 million acres is what they last said in the February outlook, could be more by the time this prospective plantings report comes out because the market prices for new crop prices have continued to favor corn over soybeans, even over some of the other crops, but not necessarily the specialty crops. You mentioned sunflowers earlier in the show, your canola 2 million acres or more of canola could be in play, cotton is very profitable, you mentioned how big the jump in cotton was this week. That's old crop, but even the new crop at 110, that is going to buy some acres of cotton. There's a lot of things that are coming in that could pull some of those acres away from the corn and the soybeans, but corn is still the winner.

Yeager: So even though a report might say something on Thursday there's still the I have to actually put that seed into the ground and we won't know for a while?

Kub: I have to put that seed in the ground and I have to fertilizer it. Now, I hope that most farmers have locked in some fertilizer prices and are not just waiting to see how much higher fertilizer prices go because they're about five times what they would have been a year ago. But that plays into the decision of what you're going to plant. Is it going to be a high fertilizer intensive crop like corn? Or are you going to try and skimp on some other crop that may be able to get by with less fertilizer? So it's very much still in play.

Yeager: And that was a story we did a couple of weeks ago talking about maybe this is the year you don't put that extra 10% safety net on your field. Let's go to soybeans for a moment, Elaine, because you mentioned sunflowers and that seed oil debate. Is the soybean producer paying enough attention to the global seed oil picture? And how does that help make a decision?

Kub: Yeah, and I think we've talked about it on this show is that ordinarily the soybean crush is led by the meal prices, by the feed prices. But lately as of about October of 2021 and onwards the oil part of it is a bigger proportion. It's about 40% of the soybean crush comes from the value of the oil itself. So as you continue to see Malaysian palm oil hit new record highs that is sort of the benchmark of global edible oil prices but soybean oil in the United States and in Chinese futures follows right along, sunflower oil, canola oil, every kind of oil, they are all highly correlated and tightly related. So when you have sunflower oil, 50% of it ordinarily comes out of Ukraine to the global export markets and without that things are very tight, things are very expensive, very motivating.

Yeager: Very expensive when it comes to the Brazilian real. The currency level there I believe it's at one point this week the highest in 21 months. So we haven't even mentioned South America yet. We're five minutes into this discussion. Again, as a soybean producer if I'm holding any old crop do I keep holding?

Kub: Yeah, I think you can, especially you mentioned the Brazilian real and that doesn't automatically plan to higher U.S. prices but it allows U.S. prices to go higher in competition. If China has to pay more for Brazilian soybeans they can then afford to pay more for United States soybeans. Everything coming out of South America continues to be pretty bullish. They've had some precipitation but the ongoing La Nina means that they don't have enough precipitation. Argentina cut their corn projections again. So it all continues to be bullish. I can't come up with a bearish thing to sort of temper this yet.

Yeager: And not in cotton either.

Kub: Right. China continues to buy.

Yeager: You mentioned the old crop and the new crop. So what is the big story? Is there a difference between the two?

Kub: Yeah, so the old crop is $130, something like that, and the new crop is maybe $110, still a highly motivating price to get more than 13 million acres of cotton planted. But what you'll notice there is that is an inversion. It's like every other agricultural commodity crop if you look at the futures board it is inverted, which means higher nearby prices than deferred prices, always a signal that the market desperately wants this stuff, the end users want to buy it, they want to get it in their hands.

Yeager: Let's play an end of commodity quiz with Tom in Wisconsin's question here, Elaine. He asks us via Twitter, as risk grows with price inflation, are there any new or different signals to look for when marketing commodities?

Kub: Not necessarily, I wouldn't say there's new signals. But what he may want to consider is that as you have higher prices, you mentioned the percentages that each of these markets have gone up in the past week, if you're talking about $17 soybeans a 1% move on $17 soybeans is a lot bigger than a 1% move on $9 soybeans. That's just arithmetic, it's geometric Brownian in motion as you get larger numbers, you get larger movements. So it just is more expensive for people to hold their hedges and pay margin calls and it's just more stressful to participate in these markets. I don't know that there's different signals, but it's a different experience for folks.

Yeager: So is understanding geometric Brownian. That's a good one. Let's go to feeders. Cattle on feed today I believe the headline was 1%, up 1%. What is the big story in feeder cattle? You want to talk about this.

Kub: Yeah, so that sounds like it could be sort of a bearish number and I think some of the packers have sort of been playing for time, steady cash prices that you saw this week, in the expectation of a neutral sort of cattle on feed report because this was right in line with expectations. That was the highest March feeders number on record ever. But the reason we have so much cattle on feed now is because those are heifers that are not going to be in the breeding herd next year. So it's just kicking the bullishness down the road for ensuing years. So, why then -- you think about the reason why feeder cattle right now are pretty pressured at $160 or thereabouts. It's because of the high feed prices. But if you look into the October or November contract for the babies that are on the ground now that are going to be marketed this fall, those prices on the futures board are more like $185. So what is the difference between feeder cattle on the nearby versus feeder cattle in October and November? The feeder cattle trader, the futures trader are the only people who seem to think that corn is going to be cheaper in the fall. The market itself doesn't even think that. It is still highly inverted even into the 2022 crop. So to me that suggests that there is a market inefficiency there and that is an opportunity for folks to be selling. If you've got babies on the ground right now I would certainly be considering selling those futures at $185 using an LRP contract, insurance policy, whatever or a futures contracts, however you want to do it. I think that is a market opportunity to lock in that price.

Yeager: We need to discuss hogs. We didn't even really mention the big story. Mexico is having some health issues with a lot of their herds, they are buying up a lot of U.S. pork. Does this run impact this price move higher? Again this week up -- we're at $125, 6.5%.

Kub: Yeah, it's a contract high now and I did look at, if you look in the July 2014 contract that is the highest and that got up to $134. So just from a chart perspective there is room for that to move but that's not necessarily your limit. Folks may continue to be willing to buy pork at these high prices, the pork cutout continued to rise this week. The U.S. consumer, the grocery shopper is not even needing features to bring them into the grocery store and buy pork. Folks want to buy this meat. The world wants to buy the meat. China wants to buy the meat. I mean, there's just not a lot that we can say to sort of pull that back at this point.

Yeager: Except add inventory somewhere but it's going to take months to get through.

Kub: Yeah and we haven't seen, the herd really had not been building when you look at the March 1st numbers.

Yeager: We will save cattle, live cattle because there's a couple of parts there we need to talk about, a specific story out of Kansas City last week that was talking about don't buy beef at the barbeque place. That's our tease we'll mention in Plus. Elaine Kub, thank you so much.

Kub: Thanks, Paul.

Yeager: All right. That will do it for this installment of Market to Market. We will talk more in Market Plus so join us there. Find that free on our website of MarketToMarket.org. Your loyalty on YouTube is amazing. We keep reaching milestones as more of you keep subscribing and ringing that bell for notifications of new content. Don't miss out and head to youtube.com/markettomarket. Next week it is panel discussion time as we talk stocks and acres. Thank you for watching. Have a great week.

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