Grain and livestock futures ended mostly lower on Wednesday.
Grains See Profit Taking, Report Positioning
Grain futures ended lower on Wednesday on profit taking after hitting chart resistance on corn, soybeans and wheat. The market saw a run up Tuesday on slow harvest progress and falling crop ratings and got overdone.
The market was also seeing some squaring ahead of the October WASDE according to Rich Nelson of Allendale.
Traders are anxious with swirling questions about what USDA will do with corn and soybean yields but also demand.
Report Estimates
The current pre-report trade estimates have corn yield being cut less than 1 bu. per acre, which would be a disappointment according Nelson.
“Keep in mind, we have a lot of questions about this corn yield story. At the end of August, we certainly could say this market was trading a higher yield than what the trade expects for this report. But given our two and a half to three weeks of excess rains for many locations. The trade has questions about not just bushel declines, but also questions on the quality side here as well,” he says.
Growing quality issues in the crop are certainly cutting yield but USDA may not reflect that in this report.
“Certainly for soybeans, much of the trade would suggest that we are going to run some yield numbers at this strong number from USDA last month, or perhaps a little higher than what USDA gave us last month,” he says.
Demand Adjustments
What does Nelson expect for demand adjustments? He says for corn there’s a large hole in demand.
“As USDA’s current export number is 29% over the prior five years. The problem with that, is we’re looking at export sales right now down 3%. So to make that math work, we have to see remaining sales boost to 43% over the five-year average from here on out. That’s going to be a big question as we really have not seen those numbers in recent weeks.”
Quarterly Stocks on Corn
USDA also has to adjust the balance sheets to compensate for the 173 million bu. increase in corn in USDA Quarterly Stocks report.
“So we have the finalized ending stocks, and now we’ll be showing a lot of interest to how USDA fits that into the finished old crop balance sheet. And considering the fact that we know exports, we know corn for ethanol, this leaves really feed residuals the main category to take most of this brunt. So the question is, did we have strong feed residual in the first three quarters and then trail back in that fourth quarter?”
Some in the market have also suggested the higher quarterly stocks were a result of new crop bushels from the early harvest in the south being co-mingled into the old crop stocks. Nelson is not in that camp.
Farmer Selling?
With the unusual rally in the grain markets in the middle of harvest ramping up may have also triggered some farmer selling or hedge pressure.
While harvest in the western Corn Belt is behind, the weather is also starting to cooperate and the market may be looking ahead in anticipation of harvest pressure picking up.
Quality Issues
Farmers continue to see quality issues is the western Corn Belt due to excess rains. Nelson says those problems and subsequent yield losses won’t be reflected in the WASDE report or the futures market. Instead the cash market will tell the story.
Nelson says, “So is it going to be a yield issue? Is it impacting test weights or is it more of a quality issue with various toxin concerns and perhaps discounts located in some specific areas? So I think that’s a big question. We have had some other years like this with late harvest and therefore some yield issues. In this case, I’m not quite sure if we’re going to have the same type of decline in yields that we saw, like, for instance, in 2010, 2020 or 2011 or 2009, in terms of excess moisture story.”
He thinks it could create a moderate yield hit in the WASDE but it will be mostly a local cash grain issues.
“Yeah, and that’s a question. And we can certainly make that argument, especially if we have producers bring in high moisture product. and doing a very quick dry down and perhaps really suffering that test weight story. So I think that’s a question which we have maybe some answers on, but we’re not quite seeing the whole picture yet. I think from USDA’s perspective, they may want to
wait until next month until they get that really full picture story here, though.”
Currency Play
The value of the Brazilian real has been appreciating the last few days tied to the outcome of their presidential election and it is gaining faster than the U.S. dollar.
The more the real gains on the dollar the bigger impact it will have on slowing Brazilian farmer selling and driving up their prices.
Nelson says the currency play is benefiting U.S. farmers and exports, “I would expect maybe just a little further appreciation for the real versus the U.S. dollar. And for us on the U.S. side, frankly, we needed it. Last Friday when you included Brazil’s shipping advantage, which has been widened with the current fuel cost issue, Brazil was actually, believe it or not, cheaper than us for soybeans for this current immediate delivery and next month. And as for soybeans, in fact, also the same story for corn.”
China Buying U.S. Goods?
Tuesday’s rally in grains was also tied to talk China was looking for soybeans off the Gulf, in addition to President Trump saying China may be doubling U.S. ag purchases.
However Nelson says there is no evidence of China buying physical product or futures. He says the market is still feeling the bearish hangover from the lack of purchases or other details.
“They made no agreements to fulfill that unofficial second trade deal. Plus, that meeting did not have any sorghum purchases, corn purchases, or wheat purchases. And that meeting did not remove that 10% import tariff against U.S. soybeans,” he says.
So, the market will need to see proof of purchases before getting more excited.
Black Sea Soap Opera
Wheat futures were down the hardest Wednesday, despite the escalation of fighting in the Black Sea region.
Nelson says the market is discounting the impact of this story. “Keep in mind, this is all in psychology. In terms of recent discussions here, it does appear as though we have various leaders still talking to Putin. At this point, even as of this morning, Putin said he’s still not changing his mind, even after a recent conversation with Trump. So we don’t yet have that story saying that there’s any change in
the plan.”
The market has been disappointed though the U.S. has not gained any additional exports with the Black Sea exports restricted.
Cattle Consolidate
Cattle futures also saw risk off selling and profit taking after a big rally on Tuesday. The market may have also seen spillover from the lower stock market and lower wholesale beef prices.
Plus, Nelson says futures have run up into chart resistance.
“On the live cattle side, a lot of us have been watching this question about a long term head and shoulders bottom formation. That was lightly confirmed in the prior day’s trade. Feeders have actually been trading their head and shoulders bottom here for more than a week or so. So the chart suggests we have a long-term strong rebound in pricing over the next two or three months.”
The fundamental story, though is balanced with growing consumer demand concerns verses a decline in supplies in Q1.
Boxed Beef Values Watched
Boxed beef was up over $4 on Tuesday but retreated on Wednesday.
Nelson says, ''These boxes have been dramatically erratic these past few weeks. So keep in mind on a historic basis, typically wholesale beef is still weakening into the 9th of October, and then we rebound. But really, the second half of that traditional break was not seen this year. So I think there’s still a lot of questions. And frankly, I’m not quite sure the market itself has a strong argument, especially considering the fact that this wholesale market is waffling over the past five to six sessions here.”
Hogs Further Consolidate
Lean hog futures saw a second down day after posting a key weekly reversal in the futures.
Nelson says the cash and cutout values have not responded which put pressure back on the market.
Cutouts were also down by $2.17 on Tuesday, setting at a two year low.
“So wholesale pork has not found stability. We’ve had a terrible procurement period going into this month’s National Pork Month featuring, and so far we’re not seeing stability just yet. So I know that we have hopes or expectations that this pork price is just low enough to generate demand. So far, we have not seen that story yet.”
