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Market Plus: Dan Huber - Duration: 16:00.
Pearson: This is the Friday, December 30, 2016
version of the Market Plus segment.
Joining us now is Dan Hueber.
Dan, welcome back.
Hueber: Thanks very much, great to be here.
Pearson: And we are excited to have you.
We've been talking quite a bit about what all is
happening in the ag sector and your view that you are
broadly commodity positive looking out into the
future.
Hueber: Correct, correct.
But, Mike, before we get started there, kind of
keeping with the spirit of the season, would you mind
if I related a little story?
Pearson: Please.
Hueber: Okay, very good.
In the last week I was looking at my Twitter feed
and of course I know you enjoy Twitter and like to
post, a great place for picking up news and what
not.
But there was this story that came across and
almost kind of a Dickenesque type of story,
Christmas Carol type of thing.
And, again, seemed fitting with the season but it was
heart wrenching, literally brought tears to my eyes.
And, again, kind of keeping with the Christmas
story but an ag version of it.
But the individual here is kind of like a Bob
Cratchit, barely enough coal to keep him warm, but
it turned out in the story I heard it was about this
individual who I guess for years and years and years
has been wishing, hoping, requesting a heated shop.
And Santa doesn't seem to deliver.
Again, it was just a crushing story.
It's particularly that time of year your heart
goes out to the guy.
And I started thinking, what can I do?
Is there something I could do to bring a little joy
into this man's heart?
Could it be like the ghost of Christmas future,
giving him an idea what could be potentially in
the future?
And I thought, I know what I can do.
I can bring him a gift to get this started.
So for this young man on Twitter I brought a
starter kit to get a heated shop for this next
year.
Pearson: This is a heated shop starter kit.
Can we share it with the viewers?
Hueber: Absolutely, yes.
Pearson: Alright, everybody, I have been
wanting a heated shop for years.
(laughter) Pearson: The starter kit.
Hueber: Just add match and you start that warmth.
I can feel the warm glow already.
Pearson: Yes, I could set that up and if I put it
near a piece of equipment it's almost like having a
heated shop.
Hueber: Absolutely, that tractor will kick over
much quicker next Christmas morning.
Pearson: This and a bag of charcoal under the tractor
and she'll start anytime.
Hueber: Absolutely, yes.
Pearson: Well thank you very much, Dan Hueber.
Hueber: I'm glad I could do a little something to
help out.
Pearson: Deeply appreciative.
This is a man who understands the holiday
spirit, giving and so on.
Thank you, sir.
I'll burn it with pride.
But we probably ought to talk markets as well
because I'm not going to get a heated shop unless
we get these feeder calves back up north of $250.
So I might be a couple of years away.
But you're broadly positive.
And we talked about on the show how that did kind of
roll over, at least long-term, to the
livestock markets.
Our first question here is from Dan in Prairie City.
He's looking out at the October live cattle
contract.
Should he be shorting the board here or buy an at
the money put for $5 a hundredweight or wait for
something else?
Hueber: Here again if he can lock in profitability
by buying that put I think that's probably the avenue
to work with at this point in time.
I do think, again, when you look at the advance
we've seen in cattle over the last two and a half
months basically at this point in time you should
reward that, there's no two ways about it.
And, again, none of us know exactly what's going
to happen next year.
If you can lock in profitability at this
point by all means go ahead and take care of
that.
That said, if it's a hedge don't necessarily remain
married to that ad even if you buy a put if it starts
moving back in your favor roll that put down, let
the market work to your advantage.
Yes when I look out into next spring, next summer I
can see particularly if some of the other pieces
fall into place like a weaker dollar, a little
boost in the export side of it -- Pearson: China
actually comes in and buys.
Hueber: China starts to be a little more active in
it, even something that hasn't really been
discussed, here you've got a little scare on the
Asian flu again, you're probably going to kill
quite a few chickens over in South Korea at least,
so all those things can add into kind of
redeveloping a little bit more demand out in the red
meat sector.
Pearson: Part of Dan's other question is futures
outright versus options, particularly in the
livestock sector.
Have we bled enough of the volatility out?
Do you have a preference one way or the other?
When we're looking out that far, last year it was
so frustrating for producers to try and hedge
in the futures when we get $3 swings twice a week.
Do you think we're done with that kind of crazy
volatility?
Hueber: I think the volatility is going to be
less than it was certainly in 2016.
Granted, when you look back at 2016 and the
cattle market it just looks like a long, drawn
out slide.
That said, we should have some more up and down
opportunities in there.
I am always a little bit reluctant to flat out just
buy options, particularly puts that far out because
one of the things that works against you in puts
is when markets go down you tend to lose
volatility so you're not only, it's kind of working
against you and that premium you paid up front.
So I tend to want to look at using some type of an
option spread, maybe I buy an at the money, but then
I would say alright, what kind of risk do we really
think we can accept on the downside and maybe you're
selling an out of the money put, or maybe you're
willing to cap it off on the upside at a higher
level, sell some out of the money calls to keep
that premium because you're going to give it
up.
We always say one of the guarantees of an option is
you're not going to lose anything more than your
premium, the other guarantee is you're
probably going to lose your premium.
So if you can mitigate that and still stay in the
realm of where you want to be price wise take
advantage of what's available out there.
Pearson: So looking at this cattle market, we've
put on $22 roughly, up here trading around $115,
$116, would you if you're going to sell a put on the
downside would you look to sell it $10 lower?
Hueber: Again, I would probably have to,
personally the way I look at it, I'll look at an
October chart, see what parameters have been
there.
If I can sell outside of the range all the better,
but if I can do it within retracement ranges I feel
comfortable with and to make sure the value is
there.
But with that much time if we're talking about
October of '17 there's going to be a fair amount
of premium there unless you're going deep, deep,
deep out of the money at that point.
Pearson: Our second question comes from Kenny
in Neligh, Nebraska.
Kenny is asking, is it worth the risk to wait and
see how the acreage battle shakes out in March to
price new crop corn?
Hueber: New crop corn I say so, yes.
I really think -- now soybeans, granted, I'm
jumping ahead maybe on another thought there, but
soybeans could be a different story.
We're already seeing numbers or thoughts that
we're going to see 3 to 4 million acres additional
soybeans, possibly that much less in the corn.
Granted, cotton could come into play there to maybe
mitigate that somewhat on the soybeans.
But yes, when I look at the picture of corn over
the last couple of years and I think we've got new
crop corn $3.80ish right now, $3.75, $3.80,
somewhere in that neck of the woods, we traded $4 to
$4.50 each over the last two years, just a spoof on
higher acreage than we're probably going to look at
last year.
So I would tend to think if I can't be to the point
where I'm coming close to locking in a $4 bushel I'm
not going to get overly anxious on selling new
crop corn.
Pearson: But you're going to be looking at the
futures locking in $4 a bushel probably knowing
that you're going to have some basis in addition.
Hueber: Correct.
Pearson: You talk to a lot of farmers, a lot of
producers, a lot of seed folks, do you think we're
going to hear, from the chatter you're hearing in
the countryside, are we going to get 3 or 4
million more acres of soybeans?
Hueber: Again, I don't discount it by any stretch
of the imagination.
I think a lot more people are attune today of really
adapting, adjusting their acres to the economics and
I think the economics are there.
And, again, what we of curse said with
individuals, if you are really thinking of moving,
shifting more acreage out there, and I think there's
a lot of people who want to get back to maybe a
little stronger rotation in some areas that have
been very corn heavy, if you're doing that I think
that's a slam dunk.
If you're doing it because economics say that I
should be planting soybeans because they are
$10.20 or wherever they're at, in that neck of the
woods, go ahead and sell them.
Don't put that at risk.
If you're going to make that change go ahead and
take advantage of that right now, lock in that
guarantee and you can play with the rest if you want
because then you're just back to point one.
But if you're expanding acreage take advantage and
lock in those values now.
Pearson: If the economics work right now, make sure
those are the economics you're going to be dealing
with when the combines roll.
Hueber: Right.
Pearson: Our next question is from Glen in Bryan,
Ohio.
It's a big picture question.
He's asking, in retrospect to 2016, which fundamental
news event is going to have the biggest impact on
marketing all commodities in 2017?
Is there anything out there that's going to
really drive this market?
Hueber: Of course comes to mind initially has got to
be weather, that's still going to be the million
dollar, billion dollar question I guess in
agriculture this year.
I think the numbers continue to stack up
against us a bit.
We've had really four great crops in a row.
That's, I don't want to say it's unprecedented,
but it's pretty close.
When you look at the severe, severe drought
that was suffered in the South and Southeast this
last year, and it's not really going away, there's
been some improvements here and there, and
according to some long-term weather people
that begins to move north and west the following
year, I think that could be the one that really
would take us over the edge.
We spoke initially in the program I think we tend to
overlook demand and we have record demand.
We have to produce record crops because we need that
at this point in time.
And it's still a very tight balance over, yes we
have more than we've had for the last couple of
years, but by historical standards is it
burdensome?
Not by any stretch of the imagination.
Pearson: But also by historical standards $3.50
is looking historically over the last 80 years of
crop prices we're still in the top 10%.
Hueber: And, again, I think you have to kind of
adjust that, not for inflation per se, but if
you look at -- one of my favorite charts I had
constructed 20 years ago is a 100 year chart of
corn, it goes back to 1899, really visually puts
in front of you the 30 year commodity cycle and
about every 30 years we have this demand driven
acceleration into new moves.
Of course the last one happened in 2012.
That was your final blow off peak.
But you always pull back and you find your new
range but you don't go back and truly revisit
where you had been previously.
And if you look, using corn again as an example,
1973 through 1999, 2000, $4, $2, back and forth,
back and forth.
If you go to the previous period it was $1.75 to $1.
We tend to expand by about 150% each time on average
which would tend to say right now that if you
really want to round it off$3 to $6, that is I
believe our new trading range on the corn.
So when you're at $3.50 you're certainly much
closer to the low side of that range than you are
the upper side.
And, granted, we have to prove that we're going to
see $6.
Bu here again I don't think it would take much
of a weather blip and we're visiting $6 corn
again.
Pearson: Alright.
Speaking of demand, part of that demand puzzle,
especially on the corn side, has been ethanol.
And on the bean side we've seen tremendous demand
from bean oil and a lot of that of course is going
into biodiesel.
President Trump, now our President-elect, he has
backed ethanol but now he has named Scott Pruitt
from Oklahoma to be the head of the EPA.
Luke in Nebraska wants to know, does Trump's EPA
pick, is that a real threat to the RFS?
Hueber: It is a point of caution certainly.
Again, ethanol, I think we have to go back to 2008
when we were having the food issues globally at
that point and food versus fuel became the topic, it
was the hot button issue in Washington and
everybody ran away from ethanol, no matter how
long they had supported it outside of the actual farm
state representatives.
I think we're beyond that period.
That's less of an issue now.
Quality of food, I should say nutrition, becomes a
bigger topic than quantity of food.
So I think you have people who are willing to embrace
that it is still a vibrant industry in this country,
it's one that continues to show growth, plus I think
here's another element I think that comes into play
particularly if we see the dollar exhaust this year
is the export side.
There is where you could really see growth in the
ethanol industry is if we can start moving those
exports out stronger than they are today.
Pearson: There's China and all these other developing
countries have massive problems with air quality,
ethanol might be a helper there.
Hueber: Probably one of our biggest disadvantages
of having question marks at the EPA and exactly how
strong they'll be on the blending standards is who
really, if there's still uncertainty are we going
to get backing in Washington?
Who is going to spend a lot of money investing in
new structures?
That's going to be the tough one to answer until
we see exactly how they start supporting or not
supporting.
Pearson: We'll have to wait until January 20th.
Before we let you go, Dan, our question that we like
every analyst to define terms we use a lot in the
ag media.
We've talked quite a bit about selling cash and
then reowning on paper.
Can you tell us what is a paper ownership?
What does that mean?
Hueber: Well, paper ownership could come in a
number of different ways.
Ultimately they are all derived from futures, a
futures contract or an options contract.
Recognize you can technically do this with a
cash contract as well.
But when we -- this is a more familiar term to a
lot of individuals, but a basis contract.
A basis contract is really nothing more than giving
the ownership of your grain to somebody else,
you're fixing the basis, so you sold the basis, but
you are still long the paper value.
So, granted, when you do a basis contract normally
the cash grain facility will front you 70%, 80% of
the value of the contract at delivery.
Of course if you as an individual want to take
the total responsibility you would physically sell
your cash grain, you've sold your basis, you've
sold your spreads, you name it and you buy
futures or you buy options.
Of course you get 100% of your money at this point,
but you still have the right to enjoy ownership
or profit from the upside.
The caveat in all this is to really make this
effective you need to understand basis and you
need to understand spreads because you could be
selling away a lot of profitability.
There's some times of the year you ought to do this,
some times you don't.
Pearson: Dan Hueber, thank you so much for joining
us.
Hueber: My pleasure to be here.
Pearson: Join us again next week when Ted
Seifried joins me at the Market to Market table.
And watch the broadcast portion of our show where
we'll sort out the complicated world of the
nation's visa program for seasonal ag workers.
And if you find value in our work, please consider
clicking the donate now button on our website.
So until then, thanks for watching or listening.
I'm Mike Pearson.
Happy Holidays and have a great week!
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Market.
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