Grain futures ended higher Wednesday with cattle and hogs mixed.
Grains Add Risk Premium
The grain markets rallied on Wednesday adding risk premium on two fronts, war and weather.
Dave Chatterton with Strategic Farm Marketing says the ongoing Iran war and higher crude oil prices helped drive speculative buying interest in grains.
“Crude oil or the oil complex is still kind of floating all boats in terms of commodities. And we certainly saw that on display in the grains here in the action on Wednesday. And higher closes were getting close to the recent high here in December corn and some interesting things happening. But certainly money flow coming back into the commodities and willing to find its way into the grains here as we watch what’s happening in the Mideast. At this point, you know, we’re glad to see him come back in. The question is how high is high and when will we see the other direction, I guess,” he explains.
How Much War Premium Do the Grains Need?
So, how much war premium do the grain markets need to add and what does past experience suggest?
Chatterton says the market doesn’t have an exact template for what’s happening in the Strait of Hormuz right now. “We’ve never seen a closure of this length or this duration. And I think today part of the story was that we had news reports that Iran’s infrastructure in one of their largest gas fields was being hit by the Israeli armed forces and with the consent of the U.S. This opens kind of a new chapter in that situation where we’ve stayed away from the majority of Iran’s infrastructure to this point.”
He says Iran is also starting to strike back at other infrastructure in the Gulf. He further explains, “And really what that means is it’s not only about reopening the Strait of Hormuz and getting vessel flow going again. It’s also about repairing that infrastructure to get that oil back flowing the way that it was before.”
However, when and if the war ends it will have a negative impact on the grain markets as witnessed this week in soybeans.
Corn Follows Wheat, Crude Oil, Reacts to Acreage Cut
Corn saw spillover support from higher wheat and crude oil, but was the new crop corn trying to hold on to acres?
Private estimates are mirroring USDA’s acreage cut at around 5 million. “Yeah, I think very much an ongoing debate and a battle in price in terms of beans trying to attract acres or corn trying to attract acres. You’ve got the fertilizer situation that is not helping the cause in beans.”
Can December Corn Get Above $5?
So as corn fights for acres can December get above $5 as it is already within striking distance?
Chatterton says, “Well, it sure acts like it wants to, Michelle. And again, I’ll go back to what I said earlier. I don’t think you want to rule out anything in this environment. And certainly when capital starts flowing into our marketplace, call it an inflation play, call it a war risk premium, call it just a fundamental, you know, the idea of the marketplace looking at how corn exports and demand have performed.”
Wheat Seeing Weather Concerns or Technical Buying?
While Chatterton says most of the rally in wheat has been technical buying but admits the market may have some weather concerns.
“The forecast itself does not look very favorable. We went from record cold over the weekend and early in the week to almost, you know, the upper 80s here by the end of the week. No real rain in sight here for the next two weeks in a big portion of the Plains.” he says.
However, the export market is not concerned, in his opinion, with the potential for EU wheat imported into the Southeast U.S. because of the U.S. export pricing. Russian wheat is now working its way into Mexico, a market that the U.S. would typically own, because prices are too high.
Soybeans Trying to Recover but Can it Happen Without China Buying 8 MMT?
Soybeans are trying to recover after the limit down closes in old crop contracts on Monday but is it possible without China buying the 8 MMT of U.S. old crop beans?
He thinks it’s a challenge. “I mean, it’s going to take the other markets to continue to pull soybeans higher. It’s a situation where I think the expectation that was built in for this additional 8 MMT of old crop from China you’re talking 300 million bushels has now been you know severely downgraded. That goes on to China’s own comments of talking about hey we’re interested in U.S. grains and looking at other things but not so much soybeans.”
The fact, the Trump Xi summit has now been pushed back by Trump’s request some five to six weeks also pushes the business back further in the crop cycle. So it changes from and old crop to a new crop situation for soybeans.
“I think that old crop particularly going to be a challenge to go up and test those highs or make new highs.”
New Crop More Hope for New Highs
Chatterton says new crop soybeans may have a better chance of getting to new highs bidding back some acres.
He says the increase in soybean acres by 4 to 4.5 million may not be enough depending on the biofuel situation, potential China business and the new crop.
“You know we need to have some additional acreage there as well. At the end of the day I’m not sure that the the farmer is ready to budge much on the plans that he’s been making here for several weeks if not several months. However, we will get more private estimates coming out as you mentioned as we get a little bit closer to that March 31st Planting Intentions Report,” he adds.
The corn soybean ratio also took a hit on Monday. “Well you know we just talked about corn moving up towards a five dollar level and we’ve got a kind of very middle of the road new crop corn to soybean ratio right now that 2.3 to 1 type of a ratio but we probably do need a few more bean acres,” he says.
That is especially the case if EPA makes a favorable biofuels announcement at the end of the month, combined with potentially China honoring this 25 million metric ton commitment for next year on soybeans.
Biofuels Announcement?
President Trump has announced an event at the White House on March 27 and the market is anticipating a biofuels announcement that includes the final guidance on RVOs and SREs. Parties from both oil and biofuels have been invited.
However, the bean oil market has rallied sharply in anticipation of the news, so it there enough premium in prices?
Chatterton says, “Yeah, it sure feels like we probably have put it in enough premium.”
Plus, he thinks if the RVO levels are robust and the SRE ruling leans in favor of biofuels it will be challenged in court. “The odds favor that we’re looking at some lawsuits from one side of the other, depending on the outcome,” he adds.
FOMC Leaves Rates Unchanged
The FOMC meeting concluded with rates staying unchanged from last month, which was no surprise to Chatterton and the big key going forward for any further cuts will be how the war and higher crude oil prices impact inflation.
“Certainly inflation has been a key topic in the commodity markets of late.”
Live Cattle Continue to Recover?
While feeder cattle futures were pressured by the higher corn market, live cattle futures were higher for a third day.
There are expectations by feedlot operator that cash will trader higher this week, according to Chatterton.
“We’ve seen a vast improvement in the packer margins here over the last five to six weeks with boxed beef running to $400, so margins going from negative $200 and something to almost $200 positive here just in a matter of weeks. But with spring demand coming on and good support underneath that side of the complex, offers this week are higher. The market is, I think, futures market is trying to tell us that that’s the direction that the cash trade will take. But it’s going to take some confirmation of that here later in the week,” he explains.
Cattle on Feed Report Positioning
The market is also going into the Cattle on Feed report on Friday and may be seeing some positioning ahead of that.
“We’ve tended not to have any big surprises in those cattle and feed numbers for a while. So maybe we’re due here, Michelle. But I think, you know, the placement number will certainly be watched here, as will that marketing number.”
Cattle Absorbed All the Bearish News?
The cattle markets have absorbed a great deal of bearish news the last few weeks including the correction in the equity markets and the plant strike at Greeley. So is it all factored in?
Chatterton thinks the market is close. “I think that’s weathered the biggest part of the storm here at the moment. Production numbers and slaughter rates have really not changed a lot despite the Greeley plant shutdown. Those cattle have been moved to other facilities. So the question is, where do we go going forward here? We’ve been testing this retail demand or consumer demand for beef at these high prices for some time now it’s proved to be pretty durable, as has the fund length in the cattle market. So, I think until one of those two factors gives away we’re still opening the door to higher trade,” he says.
