Grain and livestock futures all ended lower on Wednesday.
Risk Off Selling Ahead of FOMC Rate Cut
Alan Brugler with A&N Economics says the commodity markets saw some risk off selling ahead of the FOMC announcement of a 25 basis point cut in interest rates, with signals of two more cuts by the end of the year.
“You know, everybody was waiting to see what the Fed was going to do, what that would do to the dollar, what would that would do to interest rates? Initial reactions were to that the dollar did weaken quite a bit. Interest rates like the 10 years yields dropped a little bit below 4 % initially, but I think grains and livestock were just kind of saying, hey, if the dollar weakens after the Fed moves, then as probably helpful to commodities. It might boost inflation a little bit if the Fed cuts rates, which they did.”
However, the market was expecting it so he says after the announcement the stock market also sold off in more of a “buy the rumor, sell the fact” reaction.
Grains See Profit Taking and Farmer Selling
The grain markets have had a decent rally and so some of the selling was profit taking after rejecting chart resistance.
December corn, according to Brugler, got up into a chart resistance area just below the gap left on July 7 at $4.32 3/4.
November soybeans could not close above the $10.50 mark either.
However, there was some farmer selling especially as harvest is starting to progress across the Midwest.
“There’s been a little light farmer selling as we got up into that resistance. We’ve had a pretty nice run off of the August lows.”
Are Lower Yields Priced Into the Market?
Brugler says the rally in corn and soybeans has been a function of the market trying to price in lower yields with early harvest reports indicating results that have fallen short of a year ago.
However, he points out that the early fields that are being harvested are those that died down due to disease and are likely going to be the worst yields.
According to his analysis the corn yield needs to fall in the mid 180s.
“Our virtual corn tour suggested something around high 185, the 186, I think that’s still pretty good number, but we’ve historically been within 2% of final and so that does leave you plus or minus four bushels,” he explains.
Soybeans Await Possible China Deal
Until the setback on Wednesday soybeans were also pricing in a possible China deal with President Trump saying an agreement has been struck on TikTok and the South China Morning Post confirming the deal includes soybean purchases.
The deal is complex as Brugler says it includes a the U.S. asking China to stop buying oil from Russia.
The market wants the deal to include soybean sales but he explains that even if China does not buy, under his global displacement theory those soybeans will find a home in another country.
Wheat Sets Back After Technical Strength on Tuesday
The wheat market also saw some profit taking on Wednesday after a chart breakout in both Chicago and Kansas City futures the previous day.
Brugler says with the interest rate cut that should keep pressure on the U.S. dollar which will make the U.S. grain complex more competitive and that is especially important for wheat.
Cattle See Poor Technical Close
Cattle futures saw a sharp selloff and did some technical damage to the charts in the process.
Brugler says this is causing some fund long liquidation in the futures after the speculative crowd has been long for many weeks.
The cash and boxed beef cutout values have been dropping seasonally which is part of the fundamental pressure in the market as well.
Choice boxed beef ended $4.44 lower on Wednesday at $388.18.
Lean Hog Futures Correct
Lean hog futures also saw pressure on Wednesday on spillover from the lower cattle market.
However, several contracts scored bearish key reversals Tuesday and saw some additional fund selling and long liquidation.
