Corn, soybeans and cattle ended higher on Monday with wheat and hogs lower.
Soybeans Bounce
Soybeans saw a slight technical bounce on Monday after 36 cent losses and a key reversal on Friday.
Mike Zuzolo with Global Commodity Analytics says the market was also factoring in strong demand with export inspections at 24.7 million bu. “Export inspections were above the highest trade guess,” he says.
The market has also factored in the disappointment from the higher yield estimate in the WASDE as USDA raised yield .1 bu. per acre to 52.8 bu. per acre.
He is going to be watching the crop conditions to see if they continue to go lower and opposite of the USDA trend for higher yield.
“I do wonder how corn yields can keep going lower, but bean yields can inch higher, even with bigger pod, more pods. That doesn’t mean there’s much in those pods. And so if crop conditions decline again, Monday afternoon, I think the trade maybe will start to scratch their head about that higher yield number,” he says.
He emphasizes that a yield cut on soybeans of 1.5 bu. could cut carryout in half.
China Buying Ahead of Summit
Soybean demand has also been strong with China buying U.S. soybeans ahead of the Sept. 24 U.S. China Summit in Washington D.C.
So, will there be more purchases ramping up to the meeting?
Zuzolo says, “China came in and raised their imports. They’ve also been very aggressive. I don’t look for them to do much more before the Trump-Xi meeting. They may do something during that meeting. The trade rep, Greer, has signaled that in some of his interviews I’ve seen in the last week, that ag is going to be a big feature in this meeting. So we better perform because I think the trade’s expecting it.”
China already has around half of the 25 MMT booked.
Soybean Spillover Strength
Soybeans also need soybean oil and crude oil to stay strong as well as the wheat market according to Zuzolo.
“Wheat is ultimately still my leader up and down because it’s attached to the crude oil market. We have to remember Russia is the number one wheat exporter, number two diesel exporter. So if the crude and diesel are going higher, why isn’t the wheat? And I think that’s a big issue as we go forward. So for the soybeans, we need that bean oil market to stay strong as well,” he adds.
Corn Bounces
Corn also saw a technical bounce with spillover strength from soybeans and the energy market but was held back slightly by wheat.
The market is also looking ahead and trying to price in disappointing early harvest reports.
“We’re down 4.5%, I think, in terms of the yield at this point, close to 5% versus last year. Clients I’m working with are telling me, especially east of the Mississippi River, they’re down 10% to 15% from last year. So I think we could go lower,” Zuzolo says.
For December corn to break above $5.45 chart resistance though it will need help from both wheat and crude oil.
“The idea is that we don’t have those yields out there and we need to ration demand. And I do think globally, especially at 20%, 20.6% stocks to use levels, being even below 2013 levels at this point, we are getting very close to needing to ration some demand,” he explains.
Wheat Fails on Trump Post
Wheat also decoupled from higher crude oil today due to President Trump’s social media post that Russia and Ukraine were not targeting each others infrastructure.
He says, “The trade is so easy to sell into a de-escalation or bearish news when it comes to the Black Sea and the Middle East. But they’re so lackluster when it comes to bullish news. And so, yeah, I think mid-session when President Trump said that Russia and Ukraine have agreed to take energy targets off their bombing maps, it funneled through to the European market. And that’s our big leader. Europe is still our big leader. European maize, European wheat, they didn’t provide any support.”
Plus, USDA added 3 million metric tons to global wheat stocks in the WASDE report, which was at the top end of trade estimates.
Black Sea Export Issues
So are USDA and the market underplaying the export disruptions in the Black Sea?
“I do think we have,” states Zuzolo, “I think that the idea of a new grain initiative is unlikely based upon history. I actually think that Iran and Russia want higher prices, want us to face inflation. Let’s look at it from a diesel perspective. We’ve got diesel 30% higher than the peak of 2008. We’re running dangerously close to a recession.”
Inflationary Buying
With the Black Sea crisis, record high diesel fuel prices and crude oil over $100 does that stoke the inflationary fears and buying in the grain markets? Will that keep the funds supporting their near to record long positions in corn and soybeans?
“The crude rallies off of the geopolitical escalation, the inflation gets stoked. The dollar goes higher because bond yields assume the Federal Reserve is going to raise rates. So the answer to your question is ultimately, what does Kevin Warsh do this week? If he raises rates, he may be on a policy of raising rates for several more months. And I think that’s what the funds are waiting on right now,” he explains.
He says they have trimmed their net longs in the grains and livestock in preparation.
Spread Trade
Zuzolo says the funds have also been spreading various commodities such as corn and feeder cattle, corn versus the beans, and wheat versus the corn.
“Because wheat ultimately is a feed grain once it gets down low enough and that’s where the dollar comes into play. It’s the common denominator between the geopolitics, the supply-demand fundamentals, and what the Federal Reserve ultimately does, and that inflation question you ask,” he adds.
Cattle Rally on Strong Technicals, Cash
Cattle futures put in another solid close with more technical buying after higher weekly closes and higher cash. Can the market continue to build on it?
Zuzolo is encouraged with the action, “I think we can and I think we should. The funds don’t get it right all the time and we’ve seen that quite a bit the last 60 days and the energy markets are a good example and now cattle fit into that category.”
USDA has projected commercial beef production down three months in a row, over 560 million pounds he says. “So we’re now down almost 4.5% from last year on beef production. That’s getting us much closer to where we are on year to date production figures. And we’ve talked a lot about this is how can we be running so tight and so much below last year? Are we really going to have that many more animals to slaughter in Q4 when meatpacking facilities are closing?”
He doesn’t think the supplies are there and fat cattle need to be at $230 to $240 but the funds have been selling that market.
If funds come back to buy into the cattle market it will be when energy prices correct and the stock market rallies back to its highs.
Hogs Retreat
Hogs were lower again on Monday on follow through selling after a lower day on Friday plus lower cash and cutouts.
“We just can’t get a footing on the cutout value, whether it’s hams or bellies. They’ve been very erratic this summer, and that’s indicative of that weaker demand and consumption that beef keeps taking from them,” he says.
Zuzolo describes the hogs in a sideways to higher range though due to the tightening supplies USDA confirmed in the WASDE report.
He is of the mind set the hogs could see another rally closer to the Thanksgiving, Christmas time period.
Energy Prices Curbing Protein Demand?
Are hogs also seeing some demand pressure due to higher energy prices? So far, Zuzolo says protein demand in general is staying strong but grocery store receipts are going down.
“Fortunately, it’s been mainly unleaded that has held down in price and the diesel has been the one that goes higher. What we’ll have to wait for is some spillover effect of higher diesel prices, making cold storage freight. I’m starting to see it in some areas right now, making those freight rates higher and then that gets passed on. But again, that may not be close until closer to the holidays,” he adds.
