Grain and cattle futures were mostly higher early Tuesday with hogs lower.
Grains See Technical Bounce
Grains were seeing additional technical and corrective buying after 30 cent losses last week in corn, 40 cents in beans,
and 15 to 25 cents in wheat.
Darin Newsom with Barchart says, “I think the majority of it is funds just simply moving money around. We’ve got the NASDAQ going to new highs. So what we’ve seen of late is some money coming out of the grains sector in particular, going over into other markets.
That’s what a big part of the sell-off was because the fundamentals of the market didn’t actually change last week and they haven’t changed early this week.”
Corn and soybean markets both recently posted record large net long and long futures positions. So this pullback is not surprising to Newsom, especially at harvest time when supplies tend to increase.
Quarterly Stocks on Corn Easy to Explain
One fundamental that has changed is USDA finding another 173 million bu. of corn in the quarterly stocks but that should not have been a surprise considering what the basis has been doing says Newsom.
“The basis has been weak so the market’s been telling us that the U.S. isn’t running out of supplies anytime soon, particularly on the corn. I mean, it’s running between its previous five-year and 10-year low weekly closes. So it’s, not a critically tight situation.”
He says it is also typical for USDA to fund 150 to 200 million bushels, in the September report. That’s because new crop bushels are co-mingled and counted with old crop, especially as the southern Midwest was harvesting early and making strong progress.
“Well, what happens if you have certain areas of the United States that have already seen harvest like the East Coast, like some of the fringe areas where harvest happens early in the southern plains, where corn comes into town? You have those bushels already going in by the end of August. And so they should count in the stocks,” he adds.
Slow Harvest, Crop Ratings Fall
Crop ratings and harvest progress are also supportive of the grain markets.
USDA had conditions down 3% on the good to excellent rating on corn at 54% and down 1% on soybeans, which is unusual for this time of year.
Harvest is also behind 8% on soybeans at 25% and corn was behind by 4% at 23%. The slow pace was reflected in the western Corn Belt states like Iowa and Nebraska.
Newsom says the crop ratings are completely made up. However, areas like Iowa and Nebraska received 5 to 10 inches of rain last week and some of the crop is setting in water or seeing disease issues and rotting in the field.
Still he says merchandisers aren’t concerned as reflected in the Dec/March spreads in the corn.
“It was still covering a neutral 45, 46% calculated full commercial carry. Deferred spreads didn’t change. I mean, they’re taking a wait and see approach in corn.”
In soybeans to Nov/Jan the deferred March-May added 10% to the calculated full commercial carry that they were covering from the previous week. So that’s showing some mild concern.
Black Sea Export Woes
The other supportive feature is Russia escalated its attacks on Ukraine’s grain export facility in Odessa over the weekend.
Then on Monday Russia sank two commercial vessels carrying corn and wheat from Ukraine.
The situation indicated there is some concern about the disruption to exports, although Newsom points out there is still plenty of wheat in the world it is just a logistical issue.
So, again he chalks the bounce up to fund short covering and buying.
“Basis is still neutral. Futures spreads are still neutral indicating we aren’t going to run out of wheat,” he adds.
China to Double Purchases
President Trump also indicated in a speech Monday night in Grand Island, Neb. that China is going to double their purchases of U.S. goods after the successful meeting between he and President Xi.
Newsom says the headline watching algorithm traders may have bought into this news.
“The market’s not known for being the brightest thing in the world as artificial intelligence is lacking in intelligence,” he explains.
He says the market has heard this before with the Phase One deal that China did not uphold and in his opinion did not exist in the first place.
“So, I mean, let’s let’s be honest if it comes from the White House. I think we have to take it with a grain of salt and, you know, kind of take a wait and see approach as to what actually happens long term.”
Brazil Real Rallies
The Brazil real also rallied 5% on Monday and continues to be gaining strength on the U.S. dollar tied to Brazil’s election results.
Generally when the real strengthens it makes Brazil goods less competitive but it does not carry as much weight as it used to.
“It’s not like because the real is going up that China is suddenly going to stop buying Brazilian beans. That’s simply not the case. What they’re concerned about is Brazil’s 2027 soybean crop. That’s a bigger issue. Interest rates are going to be going up around the world to try to battle inflation. And that means currencies should be firming in the U.S. and Brazil and so on, because that is the normal relationship. Higher interest rates usually. and a stronger currency. So what this is actually telling us is like in the US, Brazil’s interest rates are probably going to have to go up,” he explains.
Bond Market Rallies
Meanwhile the U.S. bond market has been hitting multi-decade highs due to the concerns about inflation and higher interest rates.
Newsom says, “It’s indicating that long-term investors, long-term money is concerned about the overall economic picture with the type of debt that the U.S. is seeing and the trade problems it continues to have, putting the spurs to inflation at this point. So not only are we seeing it in the short-term rates like the Fed fund futures, but we’re also seeing it, as you mentioned, in the long year 10 and 30, where yields just continue to go up, indicating You know, the market is pricing in or showing that it needs to see higher interest rates.”
This should take money out of U.S. stocks but the Nasdaq has set new highs due to artificial intelligence stock.
Presidential Executive Order on Dyed Diesel
President Trump signed an executive order on Monday to allow highway use of dyed diesel. This is supposed to lower prices on average 24.4 cents but will that be the desired effect?
Newsom says this was a mid-term election maneuver but it won’t achieve lasting results.
“Now, in reality, is it going to have a desired effect on changing supply and demand? Not to what is expected. If you lower the price of a cheaper product to begin with, that’s going to increase the demand for that cheaper product. And it can actually raise the price
at a time when you cannot increase supplies because you have little reserve crude oil to turn into diesel. And you are in a trade war with the number one exporter to the U.S. of crude oil that is made into diesel. It’s a difficult situation. I don’t think it’s going to have
the effect, at least economically, that it’s being promoted at this point,” he concludes
