Hello market watchers. Rain makes grain. We are grateful for the break from the status quo weather pattern with the necessary moisture gracing the plains.
Temperatures will rise again next week, but will remain below 90 degrees, and the chance of rain will also return. This cooler, cloudy and wet weather likely saved later planting of soybeans as the August heat caused crop insurance losses for some producers.
The USDA released the highly anticipated crop production and WASDE estimates last Tuesday. Reports were mixed, with yield declines for both corn (from 175.1 bpa to 173.8 bpa) and soybeans (from 50.9 bpa to 50.1 bpa), but general increases in harvested area. That put total corn production at 15.134 billion bushels, higher than USDA forecasts last month and above trade estimates that called for a reduction to 14.986 billion bushels. What’s interesting is that this increase coincided with good to excellent ratings falling by a further 1% to 52%.
Conversely, soybean production was lower than the previous month at 4.146 billion bushels, as were below-average trade estimates of 4.152 billion bushels, more in line with the G/E ratings, which also fell another percentage point to 52%.
Based on these production revisions, 2023-24 U.S. ending corn stocks were increased above last month’s USDA figures, while soybean trade estimates fell below last month’s average trade estimates. Conclusion: more corn, fewer beans. At the global level, the USDA increased soy exports for Brazil and corn production for China and Ukraine. Chinese corn imports remained unchanged, but soybean imports increased by one million tons to 100 MMT, slightly less than last year’s 102 MMT.
The corn and soybean charts were both weaker on the day, while the US dollar continued to hold its ground and cattle set the stage for further advances. In fact, it seems there is nothing that can stop this cattle market on its way to the moon, as they say.
It was another week of new all-time highs in the feed and feeder cattle futures markets. Thursday and Friday sessions were extremely strong, with all contracts closing near session highs heading into the weekend. Cash fed cattle performed as usual late in the week but with considerable strength. Remember that southern packers tried to keep cash prices at or below the $180 per hundredweight level. Well, Friday’s high cash trade in Texas was $183 per hundredweight.
With the UAW’s three largest auto unions on strike, could this trigger an end to the exuberant consumer demand that continues to drive up livestock prices? It’s difficult to say. While many are calling for a soft landing of Fed rate hikes, national headlines about labor strikes in key infrastructure sectors across the US may dampen those expectations. While such strikes are typically short-lived, these are unprecedented times at the start of an election year when inflation has risen sharply in a relatively short period of time and is likely nearing its end.
The time for unions to take a stand is now or never. However, automotive companies are fighting back hard given the prospect of weaker consumer demand. Next week will be crucial and the stock market will be watching developments closely, with what appears to be a slowdown rather than a recovery. The August Consumer Price Index was reported hotter than expected this week ahead of next week’s FOMC rate decision. The increase in crude oil and gasoline prices was the largest contributor.
While some expect this energy rally could be short-lived, that is far from certain. I am not at all convinced that those in the world who “control” the price level of petroleum-based fuels have any desire to help the USA or any other Western country curb rampant inflation in the interests of their own economy through energy exports at higher prices . Higher energy prices also impact agricultural commodity markets. Just as we saw with the biofuel boom of years past, the increasing shift toward food as a fuel feedstock is increasingly matching agricultural feedstocks with their fuel equivalents.
This time it’s more oilseeds than starch. While there are calls for a weakening of corn until harvest, a sustained rise in crude oil prices will cause the spread between crude oil and corn to widen to unprecedented levels, which will likely be short-lived. There are many calls for a sell-off in the corn market with the crop now at just 5% completion, but there is broad consensus that wheat has finally bottomed out. The numbers in the WASDE report brought supportive news for the bulls as global wheat final stocks slipped 7.0 MMT in 2023-24, while the average trading estimates predicted just 1.3 MMT. All in all, this is a big deal, especially after the excessive liquidation in wheat futures. Wheat long positions are exhausted assuming any rally will be met with selling. I believe we are at a turning point.
Chicago wheat closed above the descending trend line that began in early August. Kansas City wheat hit right at its downtrend line but traded higher after an intraday on Thursday. This suggests that the uptrend will continue in the next session starting on Sunday evening. If you are looking for an impulsive market with lots of frustrations and reasons not to trade, wheat is your market and now is the time to do it. The USDA decline in global ending stocks is due to declines in production and exports in Argentina, Australia, Canada and the EU, primarily due to shortages in France. While the USDA has increased Russian exports and Ukrainian wheat production and exports, I think trade is beginning to overlook the ability of Black Sea region exports to flow efficiently and consistently to global markets. Drought conditions are also developing in this region, with one of the five driest 30-day periods in the last 45 years. All in all, it appears that most, if not all, of the bearish news in the wheat market has been factored in.
If there is a weakening of the US dollar and demand for wheat from the US arises, this wheat market will multiply. If you need cash flow and need to sell your wheat, do so, but buy a call option to lock in an upside. If you sell 5,000 bushels of wheat, a futures contract equivalent, at $8.00 per bushel, the elevator will pay you $40,000. To purchase an at-the-money call option on March 2024 futures, the total investment is approximately $0.48 per bushel, or $2,400 for upside risk at 5,000 bushels. This means that in this example you can access $37,600 while still maintaining a 5,000 bushel position if the market rises. If you were to hold the same bushels in physical storage with storage fees and interest, it would cost you at least $0.30 per bushel, assuming both the basis and futures markets do not weaken.
Cash flow is tight for everyone in this market and it’s getting tighter. It’s time to sharpen your pencil and use the tools at your disposal.
I wish everyone a successful trading week.
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