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Uncertainty Builds In Black Sea Region

06:37AM Mar 06, 2014

What Traders are Talking About:

Overnight highlights: As of 6:30 a.m. CT, corn futures are trading 1 to 2 cents lower, soybean futures are 3 to 8 cents higher, SRW and HRW wheat futures are mostly 3 to 5 cents lower and HRS wheat futures are steady to 2 cents lower. Live cattle futures are showing light followthrough selling after yesterday's sharp losses, while hog futures are firmer with the April contract sharply higher.


* Crimea votes to join Russia. The Crimean parliament voted unanimously today "to enter into the Russian Federation," a move that could (likely will) heighten tensions in the region. A referendum on the situation will take place on March 16. Grain exporters in the signal they continue to load ships normally, but international trading houses also say they are not writing new export contracts amid the uncertainty in the region. The U.S. Grains Council said Wednesday, "Ports are open and vessels are loading but shipments are becoming increasingly difficult. We're seeing farmers holding grain to hedge against a devaluing currency. We hope for a peaceful and speedy resolution of Ukraine's crisis, but the instability is creating opportunities for additional U.S. exports to North Africa, the Middle East, and China."

The long and short of it: This does not mean Ukraine cannot and will not ship grain. But the flow of grains coming from Ukraine and the Black Sea region is very likely to slow. That creates an opportunity for increased U.S. exports as the U.S. offers stability and timeliness in grain exports.

* Hog market on fire. The most bullish market in the ag sector is hogs. Hog futures are surging amid escalating concerns with porcine epidemic diarrhea virus (PEDV). While losses due to PEDV are a moving target that no one seemingly has a good handle on, pork production is definitely headed lower than previously thought. While attitudes are very bullish in the hog market, it's very likely traders are overdoing the upside. That's typically what happens in situations like this. April hogs have built more than an $11 premium to the cash index. While there's still five weeks until the contract expires and the cash market is pointed higher, the cash market hasn't been close to keeping pace with recent gains in futures. If the futures/cash spread remains wide as the April contract draws closer to expiration, that will force futures to come down, which likely puts at least a temporary top in the market. I say temporary because hog numbers will tighten seasonally into summer -- even without a PEDV influence -- and the cash market typically peaks between mid-June and early August.

The long and short of it: The biggest threat to the hog market is that the cash index is not keeping pace with surging futures. That's not a major concern now, but it will be a market factor if it persists. In an explosive situation like this, you should be thinking about ways to lock in historical prices being posted in lean hog futures.


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