Ag markets were higher Thursday except wheat and deferred hogs.
Soybeans Make Contract Highs
August soybeans ended up 4 1/2 cents at $12.37 1/2 and November was up 4 3/4 at $12.43 3/4 and made a new contract high.
Chip Nellinger of Blue Reef Agri-Marketing says the rally is being driven by China demand and weather.
New crop soybean exports totaled 56.5 million bu. in USDA’s weekly export report and China accounted for 40 million bu. of that business. They also bought 2.6 million bu. of old crop soybeans. Plus, rumors have circulated nearly daily about additional China buys.
Hot dry forecasts continue for the Northwestern Corn Belt and that is also fueling the fire.
How High Can Soybeans Rally?
Nellinger says at current prices, the soybean market has factored in some risk to yields being sub-trend line, so how high prices rally is dependent on August weather.
“If the forecast trends worse into August, we’re going to spend some time likely well north of $13. If we come in here next week and the weather forecast normalizes, probably going to put a strong correction in.”
There are also potential questions about Southern hemisphere production with a super El Nino.
“We’ve got questions of whether they can even get the amount of nitrogen fertilizer into their country that they need. This thing could get really explosive. It doesn’t mean it’s got to be in the next six weeks, but the set up is there,” he says.
Plus, soybean oil continues to surge with increased biofuels demand and the 25% increased tariffs on Brazil beef tallow making bean oil more competitive as a feed stock for renewable diesel.
“I think crude oil getting back north of $90 continues to add profitability in the crush sector, which has been having massive bean demand. It is all systems go as far as bullish news for the bean market,” he adds.
Will China Chase Higher Soybean Prices?
If soybean prices rally up to $13 or higher is China going to chase the U.S. soybeans or not?
Nellinger says, “Yeah, that’s a question in the market’s mind and a valid question. I don’t know. Likely, history would tell you that they wouldn’t.”
However, there is speculation that China may have bought futures positions well before they started buying U.S. soybeans.
“If you go back to when this rally started, there was a lot of open interest that increased back down near the lows. There’s some indication that China maybe had made some moves on the long side, whether that’s futures and or option positions that kind of hedged what they eventually would buy from us. If that’s the case, then price doesn’t matter because they’re bought in and hedged from a lot lower level. Only time will tell on that.”
Processing Demand Also Strong
China isn’t the only demand in the market. With strong crush margins processors are also making money and will chase the soybeans.
“So crushers, as long as there’s profits there, it doesn’t matter if beans are $10 or $14. They’re going to continue to buy beans if there’s profitability there, and there is at this stage.”
Corn a Follower or Trading Weather?
September corn ended 2 cents higher at $4.64 and December up 2 3/4 at $4.87 1/2 which are new highs for the move.
Is the market just following wheat or is it trading weather and pricing in lower yields?
Nellinger says just like soybeans, the hot dry weather in the Western Corn Belt is trimming corn yields and that is starting to support the market.
“Trend line yields in my mind are very questionable right now. There is a small minority that think we have a crop as big or bigger than a
year ago. I’m not in that camp. I think the next three or four weeks of weather obviously will determine that. But I think 183 is best case absolutely at this point and we’re probably shrinking that.”
Spread activity is also holding back corn he states, “Where people are buying wheat selling corn because that spread fundamentally probably has some room to widen out or wheat gaining on corn.”
Does Corn Get to $5?
With winter wheat and new crop soybeans making contract highs will corn get above $5?
He says, “Probably in the short run, it depends on what the forecast is into the first half, two, three weeks of August. Eventually, I think that is going to give way and we’re going to get well over five bucks, maybe challenge closer to six eventually. Weather in the short run is going to dictate that.”
However Nellinger thinks any setbacks are going to be bought in the longer-term bull market that likely lasts out in the next winter and spring.
Winter Wheat Sees Profit Taking
Winter wheat futures set back on profit taking a day after the rally Wednesday to new contract highs. However, the export disruptions in the Black Sea region and geopolitical tensions have not subsided.
So Nellinger doesn’t think the rally is over.
“Just like in corn and beans. It has been straight up. It is way overbought in the short run. But I don’t think it’s done by any stretch of the
imagination. I think any type of a setback finds good support. You mentioned the geopolitical issues. I think this Black Sea issue is something that’s longer term, wildly bullish.”
European drought is also historic and and world wheat stocks are shrinking. Add on top of that, the funds probably are just now out of
their short position. If they want to go long 30,000 to 50,000 contracts, plenty of upside left in the wheat market. Although you may need a correction first because of the overbought situation.”
The key is how long the export disruption lasts and if the U.S. picks up some export business as a result. Russia supplies to the North African countries and so they will eventually have to turn to the U.S. or other sources.
Spring Wheat Yield Falls With the Heat
The other developing story is the impact the extreme heat has had on the hard red spring wheat crop in the Northern Plains. So far HRS wheat has not made new contract highs like the other two classes.
“The spring wheat yields can just be decimated by heat very quickly. And I think you’re at a very critical time frame. So if that heat comes back into the far Northern Plains, you know, the next two to three weeks, I think you’ll be working backwards. And I think the market’s assumption will be that spring wheat yields are working backwards and then you’re going to have an emerging bull market in spring wheat,” he adds.
Funds Buying Grains
The funds are adding to their length in most of the grain complex including corn, soybeans and hard red winter wheat.
“For the last four or five years, they’ve had a net short position built up in the Chicago wheat contract, which has more of the volume of the world wheat trade in general. And they’ve had a short position probably just this week. They’re out of that position, maybe now slightly net long.”
So the funds have a lot of runway ahead of them if they want to build up a larger net long position in the wheat.
Cattle Market Bounces
The live and feeder cattle futures ended higher, finally seeing a bounce after making new lows for the move on Wednesday.
However, Nellinger says for the market to hold it will need to see cash and cutouts stabilize.
“Cash drove us to new all-time highs. Cash is going to have to stabilize and start rallying before we can put a bottom in the futures market.”
He says the market may be close to that, “I mean, it’s been a pretty healthy break in here. It may be something that the market kind of needed here longer term.”
Still he is concerned the funds still have a fairly long position in the cattle market, especially live cattle.
Pre-Report Positioning
The funds may have taken a break from selling and shorts covered their positions heading into Friday’s USDA Cattle on Feed and Semi-Annual Cattle Inventory Reports.
Average trade guesses include: On feed at 102.2%, placements at 98.2% and marketings at 97%.
Nellinger says the reports could be a reminder of the tight herd numbers but the market needs to get that in the rear view mirror.
Cattle Futures Discount to Cash
Nellinger points out that the August live cattle contract is still well under where cash is and that should also provide some support.
“Even though we’ve broke the cash market $20 plus here in a short amount of time,” he says.
Hog Charts Constructive
The lean hog futures ended higher on Thursday and the charts look constructive with help from cash values and cutouts that are over $100.
Nellinger says the market has been trading counter seasonal for the last nine months.
“We should be coming off of a summer high and going into a low period here into the third and fourth quarter. We made a low when we normally should make a summer high. And so this thing’s so out of whack seasonally.”
Funds were also near record short in the market and have barely budged off that position even with improving fundamentals.
