Grains ended mostly higher except soft red winter wheat. Cattle ended mixed, hogs higher.
Grains Mostly Higher Chasing War Headlines
Grains ended mostly higher on Wednesday chasing war headlines with the Strait of Hormuz remaining closed and crude oil soaring $6 to $7 and looking poised to take out the March highs.
Dave Chatterton with Strategic Farm Marketing says the grain markets were supported by money flow and funds were buying adding risk premium tied to war, inflation fears tied to higher energy prices and weather.
“Big up move in crude oil on Wednesday afternoon. And I think that’s tied back to the comments that are coming out of Trump. The ceasefire, the two-week ceasefire extension expires on Wednesday, expired on Wednesday night. Trump has made it pretty clear that we’re preparing for a lengthy blockade of the Strait of Hormuz. As long as that stays closed, we’re getting no energy, no fertilizer coming out of that. The longer we prolong that shortage, if you will, I think the more acute the problem becomes,” he says.
He says the longer it lasts the more the inflation concerns rise.
“The big move in oil, it spills over into the food commodities and particularly into the grains, whether it’s the biofuel connection or the outright just, you know, food connection that goes along with that. We’ve seen buying interest perk up there and money flowing into the complex.”
Wheat Makes New Highs Then Fades
All three classes of wheat hit new highs early Wednesday with new contract highs in hard red spring wheat and 22 month highs in hard red winter and soft red winter, before fading.
Chatterton says dry weather has been driving the hard red winter wheat market.
“Certainly, we’re looking at weather and what the production potential is in that hard red wheat crop, particularly the dryness in western Kansas. We had some more frost overnight. It didn’t help the situation,” he explains.
The other risk comes from inflation fears he says.
“I think the inflation play and just money flowing into our complex is the other side of that so a little bit of a marriage of those two and when you look at that and your money manager placing money into the grains complex wheat is where that fund length has not been present. So, it’s the natural absorber of that,” he adds.
Wheat Sees Profit Taking
The markets ended off their highs due to some farmer selling and profit taking as the market was overbought.
“Not enough damage here to really call any kind of a trend change or any kind of a top action in that chart.”
Still he thinks wheat prices could go higher until rains start falling.
“I think until we can get some assurance that you know the rains are going to start, the crop is going to stabilize these production ideas are going to stop going down you know we started at 700 million then it was 650 million then it was 625 and it was 600 now we’re sub 600 on that hard red wheat production number in some some analysts mind. So, we need to stop that trend and until we do I think that that upside emains open here,” he says.
Dec Corn Makes New Contract High, Does it Take Out $5?
The corn market has seen spillover support from higher wheat and crude oil and was also putting some inflation premium in.
December corn made a new contract high by 1 cent and then faded. So will it take out $5 eventually?
Chatterton says, “Yeah, I think we’re right on the cusp of it here. And again, I think, we’re well supported here and as being as close to that target as we are, I suspect that we make a, you know, make a move to and slightly above that. What happens from there, I guess we’ll have to see. But, you know, the market to me remains well supported again until we can get some kind of resolution in that Strait or Hormuz.”
Ethanol Production Down
Despite the run up in energy prices the ethanol production number was down 31,000 barrels per day for the week.
Chatterton says that is due to regular maintenance.
“We had the EIA data out on Wednesday at mid-session and another kind of sub par production week for ethanol. I think that’s just a sign that plants are taking their normal seasonal maintenance and a little bit of downturn here. Not anything that I would see as a long-term problem. If you look at kind of where we’re at production last week. Down 3% year over year. That is a little concerning. But overall, corn usage for ethanol is still up year over year. We are running a little bit below the seasonal pace to hit that USDA full-year target. But I think there’s plenty of time to recover from that. And blending fuels should certainly be in demand here as we go forward here, looking at the price of gasoline and diesel fuel,” he explains.
Planting Slowed
U.S. planting progress on Monday showed corn at 25%, 6% ahead of average and soybeans at a record 23%.
However, many planters are sidelined the last few days with heavy rains so will that negatively slow those numbers on Monday.
He says, “Yes, I suspect the progress numbers are still going to run ahead of normal here, Michelle, and not indicate any big overall problem. Now regionally there’s issues here. We had a pretty overdone rain here in central Illinois where I live over three inches here for the week so far and on top of some newly planted seeds for both corn and soybeans. So a little bit of replanting to be done. There’ll be a little bit of catch up that gets done.”
He says the cold temperatures will also slow emergence but so far there are no pending issues for traders to be concerned about.
I think the temperatures this week are going to prevent the crop from really you know, growing and accelerating, whether that’s germinating and coming out of the ground or just are just gaining on,
Soybeans Follow Bean Oil
Soybean futures were also higher following soaring soybean oil prices. The July contract was up 160 points and made new contract highs again supporting the soybeans.
“That certainly helps underpin what’s happening when you look at these crush rates whether it’s cash or board I mean these are some phenomenal $3 plus per bushel type crush rates no reason that these crushers won’t be running as fast as they possibly can or pushing through as much product as they can. The capacity constraint of of that is probably going to be tested here and going to be the issue going forward in terms of crush demand,” he says.
Record Soy Crush Margins
Crush margins have been running over $3.50 per bushel so very close to record highs.
“Historically, we’ve had some blips above that on a very short-term basis, but this time around, we’re looking at a little bit more of a sustained move that the change in the RVO and the biofuel regulations that have come out of the administration here, out of the EPA of late, are really changing the ideas here. And it looks like, you know, if we’re true to the numbers here, we’re going to follow those numbers to the letter of the law,”
So he says the U.S. refiners are going to need to not only use soybean oil, but probably import oils from other parts of the world.
“And on cue, we’re getting stories about China’s used cooking oil making its way to the U.S. West Coast here again,” he adds.
November Soybeans Near Contract Highs
November soybeans, despite 3.5 million or more additional acres expected this year, got within a penny of contract highs on Wednesday.
Will that market get over that technical barrier?
Chatterton says, “I think it’s a little bit more of a measure of approach here as we approach that level and kind of try and get on top of it. And where can we go? But, you know, the the outside markets or the oil markets are really floating all boats here. You know, so we’ll see how high that they can take us. In the meantime, like I said, the demand story has not changed. And, you know, we’re going to need those bean acres going forward here in the U.S. if we’re going to hold this kind of a domestic crush pace.”
FOMC Leaves Rates Unchanged, But For How Long?
The FOMC meeting wrapped up Wednesday and the Fed left rates unchanged which was no surprise.
However, with high energy prices driving inflation when is the Fed going to have to change its course of action here?
Chatterton says it is a very interesting scenario.
“You’ve got, you know, Warsh coming in as the new Fed chair. It’s a little bit unclear right now as to whether the current Fed chair is going to step aside or whether he’s going to, you know, run out his term here into the new year. And so depending on how that plays, if you get a new Fed chairman who has, I won’t say assured President Trump that he’s going to cut rates, but who has openly stated that he felt rates were too high. It can be very hard for him, I think, to initially raise rates in a situation where even if inflation is telling him to do so. So got a little bit of a cat and mouse game, I think, there going on,” he explains.
Still he thinks the market is better rates will go no where.
Live Cattle Make Record Highs on Record Cash
Feeder cattle futures set back on Wednesday, but nearby live cattle futures ended higher and made record highs.
This was on the heels of record cash trade which ranged from $250 to $258 live and $392 to $400 dressed.
Packers had to pay from $4 to $14 more for cattle this week to procure inventory so their margins are in the red.
But is the market looking anywhere close to a top?
you know, are the packers starting to bleed enough here that we’re going to roll this thing over
Chatterton says, “In reality, they were very aggressive buyers early in the week here, yesterday and today, midweek, you know, coming after cattle tells me that they’re short bought here and that they need the product. And even with margins getting worse, we’ve got them somewhere around a negative $140 a head on the spot marketplace. They’re continuing to come after cattle.”
He thinks cutout values will need to go higher to help balance out those negative margins.
“But for right now, you know, it’s really hard to call, you know, how high is high in this marketplace. They continue to bid up for cattle and show a need for them. So definitely the producers and the feeders have the upper hand here in the short term,” he adds.
Beef Demand Not Slowing
Even at these high prices it doesn’t seem like consumer demand is faltering.
“We’ve talked about record retail values, record wholesale values, the durability of the U.S. consumer and the demand base that’s going on there. So far, we continue to see that we’ve got the choice in the select basically neck and neck here in terms of, you know, not a premium for that choice or the select. I think that’s one thing. These grading rates with. you know more prime more choice you know coming out of the animal or out of the carcass here really kind of changing the old rules on that in real time,” he states.
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Can Feeders Retest the Highs?
Feeder cattle set back on Wednesday with higher corn prices a limiting factor but Chatterton thinks there is a possibility to retest the highs.
“With the fund interest coming into the marketplace it looks like that door may be open. We had Florida announcing that they’re going to you know restrict cattle coming from the Texas border counties and require an inspection before they come into the state. I think that probably is a sign or can be at least interpreted as a sign that the Texas border opening or the U.S. Mexico border opening is nowhere close, that it’s still pretty far down the road and some things to be worked out there. So feeders to me still well supported,” he explains.
Hogs Higher on Technical Buying
Lean hog futures had a strong day with triple digit gains and June closed above the 20-day moving average.
He thinks the market saw some technical buying.
“Hogs have been, in a sideways pattern here, a little bit beat up. We’ve had that fund position get paired back a little bit. And then all of a sudden, you know, yesterday we got into that gap that was left two Fridays ago on the June chart. We weren’t able to kind of come out the other side yesterday, but we did that today. I think it’s a very positive technical sign with these funds a little bit, a little bit more dry powder than maybe what they’ve had here of late,” he says
