Grain, cotton and hog futures were lower Friday with cattle higher.
Grains See Pre-Weekend Profit Taking, Weather
Grain markets ended lower on pre-weekend profit taking and technical selling, plus a change in the weather forecast according to Darren Frye with Water Street Solutions.
Even though crude was higher and has been supporting the grain markets, with the volatility tied to uncertainty regarding the Iran war and crude oil, some traders were cautious and didn’t want to have a position on.
Rain chances also worked back into the forecast for wheat country he says. “I think they put some additional rain in the forecast and new models. Obviously Kansas City wheat has been gaining on Chicago and it’s been leading the complex. And so a little bit of moisture coming in there. I don’t know if it really is going to rain.” That’s because the weather models have continued to pull predicted rain out of the extended forecast.
However, he says with the dollar higher and the stock market lower, so there was some risk off selling pressure as well.
Grains and Crude Oil Correlated
Grains have been closely following crude oil but we able to divorce from that market on Friday. However, Frye says if crude oil is higher on Sunday night with the escalation of the Iran war the chances are good money will flow back into the grain markets.
“I do think that funds, index funds, traditional funds have a different appetite now than they did six months ago. And that’s why I think we’re going to see more buying. Some of these funds are correlated to, you know, crude oil, for example, if crude oil goes up $10, we need to add more corn and wheat into our mix. And there’s a correlation of 90% corn and crude oil. And so how can you be bearish if crude oil is going up?”
He adds that if the Strait of Hormuz isn’t opened soon there is a risk of new highs in crude oil and $150 isn’t out of the question which would likely pull grains higher as well.
Will Money Flow Into Under Valued Grains?
Money flow has been a huge part of the markets since the war began. Money has been coming out of the equity markets and metals and going into crude oil and grains, which are under valued according to Frye.
“They’ve been undervalued for a long, long time, and there’ll be a day where they catch up. I kind of think that’s more into the bull phase of the commodity cycle, which starts in 2030. But, hey, we could be starting to see an early transition of that if equities come down a little bit and, of course, commodities go up and close that gap a little bit. But you’re seeing the Bloomberg Index and some of these commodity funds really have good earnings here over the last few months. And so there is more of an appetite for commodities and that’s good to see.”
Start of the Next Super Cycle or Bull Market?
With higher energy prices and inflationary buying in the grains could that be the trigger for the next bull run or super cycle in the market?
Frye replies, ''I think it’s really hard to say. I think if you tie it to a weather issue for Safrina, which is looking like that’s not going to happen, things are going pretty good down there. But if you tie it to a drought in our growing season, then it could. But if we grow a big crop, I think this is a rally to sell.”
He won’t be convinced otherwise until corn gets above the $5 to $5.25 level, wheat rallies to $6.75 to $7.25. He thinks soybeans may have already made their high but with the right set up could go to $12.50 to $12.75.
“But I think this is an opportunity to sell above break-evens. I’m not real bullish beyond that unless we have a cropping problem.”
Funds Have Room to Add to Corn and Wheat Positions
Funds currently have room to add to their long positions in corn and wheat but did the soybean complex get over extended long?
Frye says, “They have these new limits, so they could have bought a lot more. I mean, I kind of throw out the old records. They were close to a record long in soybeans, I think 25,000 contracts away, but they can even go more than that. And so I guess I wasn’t real alarmed at how much size they had. If they want to own this stuff, they’re going to own it. They got a lot more money to buy more contracts.”
What if China Doesn’t Buy 8 MMT of Old Crop Soybeans?
Soybeans were limit down on Monday reacting to the delay in the China summit and the fear they won’t buy the additional 8 MMT of old crop soybeans from the U.S.
Frye says he hopes they still honor that. “Well, I hope they’re not off the table because we’re 30% behind last year. If you look at the first six months of business, I know the crush rate’s great, but we need export business too. And if you don’t have that, then beans are overpriced right here unless we have a problem with acres or yield coming into 26. I don’t think it’s off the table. I think there is something going on between President Xi, President Trump.”
He says he was surprised China bought the first 12 MMT from the U.S. but he would not put it past President Trump to get a deal with them.
“So we’ll wait and see. I think, you know, Bessette will actually get the deal and make it, you know, solid. And then Trump takes the pictures and shakes the hands and announces what it is. But hopefully that’ll happen.”
If Not Are the Highs in Soybeans?
If the deal doesn’t happen is the high in at least old crop soybeans? Frye thinks so.
“Especially with 180 million metric ton crop or bigger coming out of Brazil. I don’t know, we’re going to be swimming in beans. So it is a concern if we don’t have more export business, for sure.”
Does China Buy Cotton or Corn?
Soybeans were also spooked by China trade officials saying they wanted to buy other non-soybean crops. That helped to rally cotton early in the week as well as higher crude oil.
“I mean, crude oil going higher keeps polyester rates and the cost of that product going higher. That makes cotton more competitive than in the marketplace. And then China showed some interest here in last week’s sales. And so I think it’s a combination of both.”
What else might China buy if they do buy other than soybeans in that China deal?
Frye says, “I hope they buy corn and wheat. I think their corn crop was a lot smaller than they said. Yeah, their prices are down. And their prices are $375, $400 a metric ton. So that’s in that $950, $10 area. So I think they need corn. And I hope they have a couple million metric tons of corn and wheat in there and some beans. So we’ll see what happens.”
Acreage Focus
By next week the market will start gearing up for the big USDA reports at the end of the month. The trade estimates already have corn down as much as 5 million acres, but could that be cut further with higher fertilizer prices?
Frye says not based on their clients. “It kind of looks like still the farmer wants to plant corn. I don’t know if we’re going to be 93 or 94 or 95 million. I was thinking with the fertilizer issues and maybe 30% of the farmers not having all their fertilizer booked and nitrogen costs changing maybe we have a few less acres. However, maybe corn acreage is going to be close to what the outlook forum said maybe we get a few more especially if the planting season gets off to a fast start.” he adds.
Cattle Market Higher Friday Despite Lower Equities
Cattle futures rallied on Friday despite a risk off sell off in the equity markets, a higher dollar and higher gas prices.
Frye says it was a function of lower corn prices and strong cash.
Fed cash trade was mostly steady at $235 live and $372 dressed in the North. Plus, feeder cattle prices were higher at the auction barns and he says the supply is just super tight.
He says if the market rolls over it won’t be due to more numbers. “When you look at what’s happening at sale barns, when you look at what’s happening with the packer, even though he should have a little bit more control with JBS closing down out in Greeley, really the cash market’s holding together pretty good given all that.”
Long Term Risk?
However, longer term if gas prices continue to climb and the equity markets continue to fall can cattle hold together?
Frye says it will be tough.
“I’m very defensive right now with cattle and feeder cattle we’re totally hedged up. I’m concerned about how long the funds are you know the funds sat through that break from October to November it was a big break. I’m not sure they’ll sit through the next break if we start tipping this market over. I think if the funds start leaving that market, that’s when you really get the washout,” he adds.
