Corn, soybeans ended slightly higher on Friday, with wheat lower. Cattle and hogs were mostly lower.
Corn, Soybeans Add War Pre-Holiday War Premium
Corn and soybeans were slightly higher on Friday with some short covering ahead of the three-day holiday.
Mike Castle of StoneX says the markets were also following crude oil and adding some war premium in the event the conflict in Iran escalates over the long weekend.
“I think a lot of our price action here in this week specifically, but broader over the last few months, has really just been dictated by money flow. And like you mentioned, you know, coming into a holiday weekend, markets closed for three days, the possibility of seeing escalation pop back up, that may be kind of, you know, a hedge against potential additional escalation taking place over the weekend, maybe trying to get some of that money back into that commodity sector.”
Corn Sees Export Business Awaiting China Sales
Corn also saw some flash sales from Mexico and unknown destination of around 24 million bu. with old and new crop combined. That provided some light support.
“Obviously it’s good to see and we would like to see more, especially, you know, in this backdrop of waiting to see if we actually get some business from China. That’s really what everyone’s going to be keeping a close eye on and whether that’s going to show up as actual sales
committed to China or if that’s just going to be reported as unknown destinations that gets the rumor mill going or fuels that speculation.”
However, at some point he says the market needs confirmation of that business.
“There’s not one commodity outside of oil that’s going to hit that number. So you need to see pretty broad support. So that means you would need to start seeing actual confirmation of that. And whether that comes from flash sale announcements or even just actual tariff reductions to kind of signal that that’s coming, eventually you have to kind of see the signs for the market to believe it and to keep the speculative length in these markets.”
How Long Will Funds Wait for China Business?
So how long will the managed money traders wait around for China to buy and how long before purchases start taking place? Will China wait until harvest to capture lower prices?
Castle says, “That is the million dollar question. Right. And, you know, from China’s perspective, I don’t think they’re necessarily in any hurry. There are certain commodities where they have let their stocks kind of, you know, I don’t want to say deplete, but get smaller. Obviously, they’re still massive compared to any other nation. But there are some things like corn, for example, where their stocks have been shrinking now for quite a while. It’s at their lowest in a decade plus. So that kind of fuels the speculation of bringing it in.”
But he adds China is in a position where they don’t need to step forward and buy right away.
“We have yet to see them actually commit or you know confirm their commitment to soybean purchases for the year ahead but in the fall a lot of the times we actually cheaper than South America,” he explains.
However, the U.S. can’t afford to wait that long because prices will tank.
As far as when funds will lose interest in the grain markets waiting for China, he says it is difficult to estimate but he thinks as long as the conflict remains in the Middle East it will keep some speculative money in the grains.
“Grains have seen these intraday moves on headlines tracking crude very, very closely. So a lot of that money flow is really just watching what’s happening there.”
Funds Waiting for Proof of Inflation
The other possibility is the funds could hold some of their long position in the grains and wait for the inflation data to confirm.
“Everyone’s kind of got their eye on it because again we’re seeing inflation already heating up a little quicker than expected, right? Everyone’s kind of expecting it to heat back up, but that increase has already been very hot. As we get more data, I think you’re going to continue to see that happen,” he says.
Even if the Strait opening tomorrow global fertilizer and energy prices will stay elevated for a while, supporting rising inflation.
“It’s going to take months for supply chains to normalize and then ultimately potentially years for supply of some of these products,” he adds.
Money is also flowing into equities with strong earnings and despite the backdrop of war.
Argentina Lowers Export Taxes
This week the Argentine government also lowered export taxes on wheat, barley and will in the future on soybeans.
That weighed on wheat futures along with speculative selling pressure.
“When you actually get a bearish headline like that in the wheat market, that helps fuel some of that speculative selling, right? They have an actual reason to pull the trigger on that sale,” he adds.
BAGE Raises Argentine Crop Size
The Buenos Aires Grain Exchange upped Argentina’s production estimates significantly with the corn crop at 64 MMT, they were at 61 and that’s already at an all-time high. USDA is at 59 MMT.
“This would tell me they’re probably not high enough yet because Argentina still has a fair bit of corn harvest to go. They’re about a third of the way done now,” he says.
Soybeans also saw an uptick of 1.5 million tons, now at 50.1 MMT. USDA is still at 48 MMT.
“Obviously, you’re already seeing record Brazilian production. So that does kind of keep something of a bearish undertone out there because we’re facing this extreme competition from South American supply, especially on the bean side. Corn, we are somewhat competitive, but again, this is something that you still have to compete against out there.”
Highs in the Grains?
So are the highs scored on May 13 in the grain markets the top without China business or a weather problem?
He says, “I think barring some kind of big unexpected shock like that, its difficult to call the top. But unless you see some kind of story on the demand side of things or a really unexpected turn in the weather. I think, you know, it kind of may be the case, right?”
Seasonally the market peaks in May or June he says. “It’s typically, you know, maybe it’s a planting story, an early establishment weather story, but we’re getting planted very quickly. Forecasts right now look pretty unthreatening for the summer. You know, we’re shifting into a pretty strong El Nino that’s generally beneficial for the Midwest. You typically see above trend yields. The analog year that I keep hearing about is 1997. 2015. Both of those years saw above trend yields on both corn and soybeans. So the longer term supply story, it’s looking like healthy supply here in the U.S.
USDA Fertilizer Plan
USDA also this week announced a two-prong plant to increase fertilizer production but Castle says it is not an immediate fix.
“The quickest fix would be removing countervailing duties on Morocco to bring in phosphate. We have not done that. You’re fast tracking a couple of ammonia plants. What does Morocco import a lot of? Ammonia. What do we need to import more of? Phosphate. They’re the world’s top exporter now because China is restricting. That would be a very, in my mind, easy thing to kind of make a trade deal that would benefit both sides,” he explains.
But he thinks the steps being taken are beneficial for the fertilizer manufacturers, not necessarily the farmer. “It’s great to fast track these plants. I do think it’s very important for us to take advantage of the cheap nat gas we have and expand our domestic production but I would like to see that happen in somewhere that is not an export focused plant right because you can fast track this plant but if those tons are
leaving the U.S is that really doing that much for the u.s farmer?”
Cattle Melt Down This Week
Cattle futures melted down at the end of the week and had lower weekly closes. Funds have been liquidating and may have more to go according to Castle.
“We’ve seen several weeks in a row of record high cash values, but the futures market’s been pretty soft. And I think it was Wednesday’s session, we saw a drop in live cattle open interest of like 7,400 contracts when prices fell. And it’s hard to point to anything other than long liquidation,” he says.
However, he thinks the push to lower beef prices has received a lot of headlines and the market was nervous ahead of the Cattle on Feed Report with higher on feed and placement numbers than last year for the first time in 18 months.
Headline of the lockout it Fort Morgan also hurt the market even though it doesn’t changes the fundamentals much.
“I really think it just changes the emotion. And again, kind of says to these managed money folks, maybe let’s just take some profits and get out of here,” says Castle.
