Pearson: This is the Friday, February 17, 2017
version of the Market Plus segment.
Joining us now is Elaine Kub.
Elaine, welcome back.
Kub: Delighted to be here.
Pearson: We're delighted to have you.
This is always a great discussion when you're on.
We look at things from a 10,000 foot view or a
50,000 foot view.
Kub: I can't deal with details, yeah.
Pearson: Well, details, kind of are interesting at
times.
We've seen the cotton market put on a heck of a
rally, really looking to buy acres.
Now we step back this week.
Talk to us about cotton and more specifically how
did cotton close on Friday?
What did that look like?
Kub: It really, really collapsed on Friday.
And I guess I don't know exactly the final price
that it closed on but I think that was another one
of these markets alongside a lot of commodity markets
that just received a lot of profit taking I think
here right at the end.
There was not a lot of justification, I guess we
can go back whenever the latest WASDE report came
out that they trimmed their stocks to use ratio.
So now the global stocks to use ratio is only 80%.
So that's not really -- Pearson: But of that 80%
how much is China's stockpile where quality
and condition is truly unknown?
Kub: That's a really good point is when you go down
to individual, the spreads between certain quality
factors, that there might be certainly opportunities
for U.S.
merchandisers.
But we're not going to see that specifically played
out on the benchmark futures price.
Pearson: Okay.
So that wouldn't really be an issue in why we had
this rally.
Kub: Yeah, why on Friday it just fell apart.
Pearson: Okay, but it did.
From a fundamental standpoint, when a market
falls apart like that do we typically see funds
back away?
Do they get scared or do they look at that as a
buying opportunity if it's still in an uptrend?
I know we're getting more technical here.
Kub: That's actually really, that's a real
possibility certainly because we haven't
necessarily seen the same, it's not tied to a broader
all of a sudden a fear about the entire economy
falling apart.
I think this was just sort of a one day profit taking
scenario.
So certainly it could be a buying opportunity for
somebody.
But for a farmer perhaps who is owning cotton and
looking for a selling opportunity, your selling
opportunity was a couple of days ago but it still
might be here.
Pearson: And really we're still, 75 and change is
where we closed on Friday, that's almost $10 higher
than where we were six weeks ago.
So you don't look a gift horse in the mouth
necessarily.
Kub: This is a gift, yep.
Pearson: So, now we've got to turn to the other
markets.
We've got a series of question from our Twitter
followers and Facebook friends and we appreciate
all of those.
I want to turn first to Rodney up in Edgar,
Wisconsin.
Rodney is asking, which outlook is better in both
fat and feeders?
Is the short-term better or the long-term outlook
better?
Kub: Well, I want to say, for the feeders I want to
say the long-term because the process of getting the
profits distributed through the industry is
going to take some time and I think the cow-calf
operators do have the power here, they are the
ones still at the very start of the chain,
whatever limited supply we have, they are the ones
who are going to have the power to negotiate any new
sales to the feedlots.
So I'm going to say the longer term.
It's going to take some time.
Pearson: Okay.
On the feeder side, the fat cattle maybe look a
little bit better in the short-term?
Kub: Yeah, if I was right about the idea -- there's
certainly profits being made.
The packers are making profits.
So yeah, I think there's certainly opportunities
that those markets should catch up urgently.
They have been behind, even the pork cutout
retail wise -- so I guess that's not specifically a
live cattle argument.
It takes a couple of steps to get from here to there.
But yeah I think that's a more urgent correction
that needs to be made price ratio wise.
Pearson: Okay.
And hopefully we'll continue to see lighter
weight cattle, we'll continue to see this
market stay current.
Do you have any concerns in your contacts out in
cattle feeding country that we might go back to
aggressively adding weight to these animals?
Or do you think we're going to try to stay
current at these price levels?
Kub: I don't know.
And maybe the corn price rally, the feed price
rally hasn't been extreme but it might put the
breaks on some of the temptation to do that.
So we might still coast along here, yeah.
Pearson: Alright.
So now you touched on something interesting, you
talked about the demand looking at the U.S., the
demand for beef just isn't quite as strong as we
would have hoped it would be.
Kub: The willingness to pay.
I don't know about demand, but the prices.
Pearson: Okay.
Prices haven't climbed as we hoped they would given
the other factors involved.
One of the components of that on a global scale of
course is what is happening in the rest of
the world.
So as we go to our next couple of questions we
take a bend to policy.
Elaine Kub, in your mind is policy a fundamental
factor that affects markets?
Kub: Yes and no.
I remember a decade ago or something China made a
policy that their farmers couldn't sell wheat to
Mongolia, I don't know, this is an example.
Policy says you can't do this and yet people were
putting bags of wheat on their back and walking
across the border.
Markets will always find a way.
They will always find a way to get where people
want to buy the stuff.
But it can certainly bring challenges and it can
certainly spook prices.
I talked about that in the show with the Malaysian
palm oil.
There you have a government raising an
export tax, being more trade protectionist and
all of a sudden you really do have a response in
prices.
So yes, absolutely it can make prices more volatile,
it can absolutely change things.
It probably doesn't ultimately change global
supply and demand of a crop but it can certainly
-- Pearson: Change sources.
Kub: Yeah, totally.
Pearson: So trade protection, we've got a
question here from Brian in Storm Lake, Iowa.
He's asking, how will the Trump administration's
policies impact agriculture on the corn,
soybeans and beef side of things?
And before we get to that, our next question from
Nathan in Cumberland, Wisconsin is asking, what
is the Mexico scuffle going to do for corn
prices?
The Mexican Senator came out and said he's going to
write a bill, I don't think as of Friday it had
been proposed yet, but they were going to source
corn from South America.
Kub: Yeah, and Paul did a great piece at the top of
your show if folks haven't listened to it, that was
really well laid out, both of those questions are
talking about what will they do and I am not going
to sit here and look in a crystal ball and try and
predict what sort of unstable, temperamental
person may or may not do.
I'm not going to do that.
But here is what I will say is that it has already
affected, it is already affecting the market.
The ship has already sailed.
Free market loving ag economists spent the past
administration wringing our hands about how more
regulation in businesses makes businesses uncertain
and it makes them less likely to take on new
projects and that's bad for economic growth.
We are already seeing that in our ag trade.
Uncertainty is bad, it makes people look around
and try and gain some certainty and that is
already happening.
We have Brazilian grain companies that are
actively pursuing customers in Mexico.
We have the Mexican Ag Secretary actively
planning within the next three weeks to do a trade
mission down to Brazil and Argentina.
So we had this, have and we will still have a
beautiful logistic scenario for U.S.
corn to go to Mexico, a couple of bucks on the
rail, even down the river you're there and that will
still be the case.
It's not going to suddenly get shut off that we know
of.
But nevertheless already the customers that were
just a captive audience for us, they're searching
around and so we're probably going to lose
market share out of this even if nothing ever
happens just because we have antagonized our
closest neighbor, this great $2.5 billion corn
customer per year, just from an antagonistic
relationship the damage has already been done.
Pearson: And so once damage like this starts to
be done, once they start importing just a couple of
trial boats from Brazil -- Kub: We're not talking
about changing the major pattern but yeah.
Pearson: We see some cancellations in orders,
we see that spill out, we see prices begin to trend
down.
So here's the question.
I'm a producer.
I'm in Iowa.
I see these things happening in DC, I hear
about these things happening in Mexico City.
I want to know how do I manage that risk that I
have no control over?
What do I do?
How do I continue to produce a crop -- Kub: I
don't know.
I think the people that are most concerned right
now are the grain companies themselves who
are trying to put some plan B's in place so that
if they wake up one morning and a law has
changed in Mexico that they'll be able to
scramble and get something changed.
Farmers, I don't know that there's anything they can
do, and I don't know there's anything they need
to do because where it will come back to us is
through basis.
If it got shut off tomorrow we would lose a
very important direction for our corn to go.
The global supply and demand of feed grains
would still be the same, it would just be going in
different directions.
We would just lose one source of competition in
the United States and it would change the basis
particularly in the southern United States.
What a farmer can do about that is I guess you could
write a year's worth of basis contracts with your
elevator but I wouldn't recommend it.
Basically nothing.
Sorry.
Pearson: Keep an eye on the situation and be
nimble so when things are turning, as things come
out of Washington, DC, as they come out of Mexico
City you can act on them.
Kub: You can write your senator, write your
congressman and cultivate local competition, local
sources, local demand for your grain.
Pearson: Right, that's the key.
We see that up in North and South Dakota when
these trains get shut down by the snow.
Basis takes a hit.
So, we've got a lot of uncertainty in the ag
world today.
Our next question is from Gary.
He's on Twitter @gary_haer.
He wants to know, what is the outlook for farmland
values and trends in the next three to five years?
How does this uncertainty carry through onto the
farm level?
Kub: Probably, so the outlook would be interest
rates are probably going to rise, so that's
negative.
Profits are not going to be what they were in the
mid-2010's.
So that's negative.
You do have a feedback loop from farmers who are
making less money now than they were a few years ago,
they can negotiate rents, they can be less willing
to buy that land at auctions, but they're
going to still be bidding against outside investors
and those are the people who this uncertainty they
probably are more likely to be steered toward land
as something that is real, that's probably something
they would see as favorable in their
portfolios is real estate.
Pearson: So even as farmer buyers maybe step back
from the land market we could see that investor
level take up a bigger share and maybe not see
prices change all that much.
Kub: I think that's a possibility.
But I would like to see certainly rents come down.
Pearson: Are they?
Kub: Yeah, I think costs have come down because
that's one of the few places where the farmer
really has an opportunity to change it from one year
to the next.
We've seen fertilizer prices come down this year
compared to last year.
So I think everybody is feeling a little more
optimistic about their profit scenario in 2017
than they were a year ago at this time.
Pearson: Speaking of optimistic about profit
scenarios this is the time of the year where we are
calculating spring price.
Elaine Kub, where do we sit right now?
month of February.
So far the December corn contract average is $3.97
and the November Kub: Yeah so February they take an
average of all the trading closes in the soybean
average is $10.22.
Pearson: So we're probably $2 higher than last year's
number in soybeans?
$1.70?
Kub: Yeah, soybeans is nice.
You can make money at that for sure.
And price ratio wise that is 2.6 to 1 which is
historically quite favorable to soybeans
obviously.
Pearson: Do you want to sell that spread, that
2.61 spread, sell the beans, buy the corn?
Kub: I would have.
I would have a year ago but it has been this way
for so long.
I don't know -- and you look at the relative
stocks, the relative inventories of those two
markets and that is everything that is going
on with global oil seeds, not just soybeans, but all
the other global oil seeds, it may continue
longer.
If you're willing to sit on that spread trade for
the next five years eventually we'll
absolutely have to snap back but I don't know how
long it will take.
Pearson: Okay.
Elaine Kub, final question before we let you go.
We talked a lot in this program or on the show
about the large scale investors that have made
purchases here in the commodity complex and we
call them fund buyers.
What are fund buyers?
That is our commodity question of the week.
Kub: Yeah, so where this comes from is you have to
categorize, well you don't have to, but the CFTC does
every week release a report that categorizes
who has been buying and selling and what positions
they have.
And they have bonafide hedgers, which is any sort
of farmer, processor, merchant.
Pearson: Somebody who is going to touch the grain
at one point.
Kub: Yes, somebody who needs to actually hedge a
physical position in the market.
And then they have swap dealers, which are
probably banks that are doing this as a hedge for
someone else's position.
And then sort of anybody else that doesn't have any
physical need in the market who is just doing
this as a speculation, who wants to take on the risk.
So bonafide hedgers use the futures markets to
offlay their risk in the cash market and funds and
speculators take on that risk because they see it
as an opportunity to make money down the road.
So who are they?
It could be anybody.
It could be a retail investor, it could be just
a guy on the street who just wants to dabble in
some commodity futures and options trading.
Technically on a CFTC report he would probably
be included in the fund buying category.
But I suppose meaning wise if an analyst is writing
about this when we say fund buyers we're probably
talking about hedge funds because the index funds,
that's another category, index funds are typically
just long only and they're not really motivated from
day-to-day to move in and out of the markets.
The fund buyers that we think of are hedge funds
that are either running algorithmic trading, so
they have got a mathematical calculation
to go long or short in commodity futures, or
there is a human being sitting at a desk in
Chicago with discretionary ability to decide I think
corn prices are going to go up, I'm going to put
some of my money that my investors have given me to
make them money, I'm going to put that into corn
futures.
Pearson: Okay.
It's people with pools of money who are kind of
disinterested, they are disinterested, in the
physical aspect of the trade.
They're just looking for a return.
Kub: Exactly.
Pearson: Well, Elaine Kub, thank you so much for
taking the time to join us this week.
Kub: It has been my pleasure.
Pearson: Ours as well.
And we ask all of you to join us next week when
Mark Gold joins me at the Market to Market table
we'll explore how a key ingredient in a growing
market is hard to price.
So until then, thanks for watching.
I'm Mike Pearson.
Have a great week!
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So until then, thanks for watching OR listening.
I'm Mike Pearson.
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