Grain and livestock futures ended higher on Friday.
Grains Rally Friday, Post Higher Weekly Closes
Grains closed higher Friday with Dec corn up 3 cents, Jan soybeans up 12 1/2, Dec SRW wheat was up 9, HRW up 6 1/2 and HRS up 4.
For the week Dec corn was up 4 cents, Jan soybeans up 37 3/4, Dec SRW wheat was 2 cents higher, Dec HRS was up 10 3/4, while Dec HRW was down 3 3/4.
Demand a Driver
The market saw fund and technical buying but demand was a big driver according to Jim McCormick of AgMarket.
Weekly export sales on corn were at 113.4 million bushels a marketing year high. Mexico was also in for another 12 million bushels of corn reported in a flash sale.
South American Weather
While Brazil farmers have planted the soybean crop at a near record pace there are some dryness issues starting to emerge.
Farmers in Mato Grosso are seeing some of the driest conditions for planting in 27 years which has caused some replanting of soybeans and in turn that will delay the planting of the second crop corn.
“If you can’t get that bean in on time. You can’t harvest it on time. And that delays the Safrina crop planting, which could cause problems down the line,” he says.
For soybeans the world balance sheets from Tuesday’s WASDE don’t have much room for error according to McCormick.
“Essentially the world production is roughly going to increase by 13 million metric tons. A good U.S. crop, a solid trend line yield in South America. But the key is that 13 million metric ton increase is needed to keep ending stocks stagnant. Because essentially, we don’t increase our world production by that much. We’re going to draw down our ending stocks,” he explains.
So if South America starts to have problems due to El Nino it becomes bullish in a hurry and will offset any increase in soybean yield USDA provides in futures reports.
WASDE Tailwind
McCormick says the November WASDE also helped improve the market sentiment with the bullish surprise on corn and soybean ending stocks which produced a nice rally of 40 cents on soybeans and 10 cents on corn.
The market did not retest the report lows which he thinks generated some technical buying.
China Tariff Cut
Despite the rising tensions tied to the Nvidia spy scandal, the grain market may have also been trading some optimism that China and the U.S. will drop tariffs at the APEC Summit next week when President Trump and Xi meet.
China has asked the U.S. to lower tariffs as part of the 30 x 30 Plan. “I think it kind of scared some of the bears out and I think it brought some speculators in.”
China’s purchases of U.S. soybeans were part of the deal to cut tariffs. China has stated they would buy other non-soybean ag goods as part of the pro-rated $17 billion deal, but only if the tariffs were removed.
“That is what we’re all waiting on and if it does not happen this week don’t I’m going to tell clients do not panic just yet we get another shot at this in about three more weeks after this because we have the G20 Summit here in Miami and President Xi will be over here,” he adds.
China Versus Non-China Soybean Buyers
China bought another 4.9 million of soybeans on Friday and unknown accounted for 3.7 million bushels. China has easily purchased over 20 million metric tons of U.S. soybeans and McCormick says it looks like they will hit their target.
However, he wants to see other countries come in and buy. Vietnam bought 4.4 million bushels of soybeans on a flash sale Friday but there is concern the U.S. won’t be competitive with South America as the U.S. dollar hit 19-month highs this week while the Brazilian real is going down.
McCormick adds that red hot inflation reading this week suggest at least a quarter point rate hike in December, maybe a half point. That will keep the dollar higher for longer.
“The problem is when you start raising interest rates, Michelle, that drives money into the U.S. market. It drives the dollar higher and then it makes our products a little bit less competitive.”
Inflationary Buying
The silver lining may be that inflation can bring some investment money into the commodity market as a hedge.
“So that could help support the market a little bit if we start getting some of that spec New York money hedging inflation by buying our commodities.”
The key is when will it happen? “That’s a million dollar question, Michelle. They really don’t telegraph it. How you look at it is you just got to start looking at CFTC reports and you’re going to start seeing them grow their
position bigger and bigger. And that’ll be a good hint that that money is coming back into the
grain and livestock market.”
Black Sea Export Crunch
Black Sea peace talks took place this week between the U.S., Ukraine and Russia but did produce any meaningful results, so exports out of that region are still limited.
That may have stoked some buying interest on Friday as traders add some war premium back into the market.
However, McCormick says the frustrating part is the export disruptions have not shifted business over to the U.S. In fact, weekly wheat exports were a marketing year low at 8.7 million bushels on Friday.
He thinks it could be a more bullish story down the road, especially if Russia and Ukraine also have quality issues.
“And right now, the Ukrainians are saying last year they had about 10 million metric tons of grain at the beginning of the marketing year. They’re saying it could be up to 30 million metric tons. The question is, if you can’t sell that grain as a Ukrainian producer, how are you going to finance this upcoming crop season? Which could lead to smaller production down there, which eventually hopefully will drive some of the
world demand back to the United States shores.”
Are the Lows In?
With the rally after the friendly WASDE report on Tuesday there were hopes the grain market had finally forged some lows, at least corn and soybeans.
McCormick is optimistic because it feels like an emotional bottom was put in.
“The crop got smaller on the corn. The carryout got smaller. A lot of people are anticipating that crop to get a little bit smaller in January,” he says.
Plus, he says top buyer Mexico, was in aggressively buying corn and even some soybeans. “I would argue that’s showing you they believe we’re at value. So I think that’s a good sign for the corn.”
For soybeans the crop and yield was not as big as the market feared, plus the carryout dropped due to strong demand.
“That tells us that the demand-driven market is starting to form up. And then if this dryness issue and Brazil really starts to build out, that will drive more money into the market. Hopefully that generates that end-of-the-year rally so many producers are hoping for.”
How Much Can the Market Rally?
There is a fine line though because corn and wheat exports are already behind last year’s pace. If prices rally too much it stifles demand.
“And that’s where I think producers have got to be a little bit realistic. I think we could get a nice rebound, but are we talking back up to the summer highs? To get to that kind of a move, Michelle, you’re going to have
to have some outlying factors, either a weather issue or some buying that you just don’t anticipate.”
Hitting 20-Day Moving Average
Dec corn and Jan soybeans are also going to have to get above technical resistance at the 20-day moving average which stopped both contracts on Friday.
“It just feels like the market’s just not ready to go through that. I think if you can generate some technical closes above that, that will encourage more technical buying. That may also encourage some end users to have to chase the market a bit,” he says.
However, there is still uncertainty with the APEC summit and the week following is a short holiday week that will limit buying.
“If traders had a good year it’s not uncommon to see the volume die down as we move into the holiday season as well.”
Cattle Finish Higher for the Week
Live cattle futures were up $1.85 on the Dec contract, Jan feeder cattle were up $3.57 on Friday. However, for the week Dec live cattle gained $6.60 and Jan feeders were up a whopping $16.97.
McCormick says that has confirmed a low and he thinks prices got over done to the down side with the very tight supply. “We have not solved that problem. And so far, the demand in general has been very, very good. If the stock market really starts to erode, I’m going to get weary about some of that demand. But at this point demand has held in there, even with these higher prices.”
Credit card debt is rising and savings are going down but consumers are continuing to spend.
Feeders the Leaders
Feeder cattle futures were the leaders due to the red hot cash market and rising cash index and that has been pulling up the live cattle futures.
The fed cash market was untested on Friday but a few sales in Iowa on Thursday took place at $210 live and $335 dressed and McCormick says cattle feeders in the North are still working through heavy cattle.
How Much Upside is Left?
Technically the feeder cattle futures blew the 50% retracement levels and several key moving averages.
“Then you’re going to be looking at your 62% retracement. And like I said, the goal of the market, Michelle, is we’re really kind of stuck in a broad-based sideways range. What will happen is we’ll push our way back up to it to where we get to the point where the consumer says enough’s enough and backs off.”
He says demand for protein generally goes up around the holidays, especially at Christmas time. Then cools after that as credit card bills starting coming in from Christmas.
While gas prices have come down it will still be an expensive holiday season to travel around, which could also limit beef demand.
