Grain markets ended higher Friday, with cotton and cattle lower.
Wheat Higher, Adds Risk Premium
Wheat futures ended higher again on Friday and put in higher weekly closes.
Shawn Hackett with Hackett Financial Advisors says the wheat market has been adding in geopolitical or war premium with concerns about the escalation of fighting in the Black Sea region and what the wheat export disruptions arising from it.
He says the amount of premium the market needs to add depends on how long the conflict lasts and disrupts shipping.
He says, “If it looks like this is going to extend out into August or longer we have not put enough premium in. We would have to then move another level higher to adequately suggest that maybe a good portion of these 30% exports that Russia typically moves out of the Strait of Kerch come out. And that would be a big loss.”
So he feels this coming week will be important in determining the length of the closure.
Can Wheat Make New Highs?
Funds have been covering their short position in soft red winter wheat and adding to their length in hard red winter.
Technically can the market take out the May contract highs?
“We’re right in the hunt for making new highs here on both winter wheat markets. It’s really going to come down to the headlines over the next week on duration of the Kerch Strait closure.”
Hackett is also concerned about the drought and high heat in the Northern Plains, the Southern Canadian prairies impacting spring wheat and cutting yields. The planting season was tough in spring wheat country and acres were also down more than expected. So he thinks the crop could be down.
“If there was a market to watch for where maybe premium isn’t in there yet on weather. I think that that market might still be mispriced based on the weather,” he adds.
Corn Following Wheat
Corn futures closed higher Friday and for the week and Hackett says corn has been primarily getting help from the rally in the wheat market.
He thinks that is playing a bigger role than weather.
“There is some weather, some very, very bad weather going on in Europe, in the core corn areas there, especially France, as they’re trying to pollinate the corn crop. Crop conditions for corn over there have plummeted. But I think there’s a limit to how much that can drive the corn market higher,” he states.
That’s because he thinks the U.S. could still be looking at an above trend line corn crop that will be primarily made by the end of the month.
“I think the U.S. crop will outweigh those factors. And I’m not sure that’s enough to drive the corn market higher without wheat helping corn along.”
Can Corn Get Through Resistance?
So corn has gotten up into another layer of stiff chart resistance, which is going to be pretty tough to take out without a bigger
catalyst according to Hackett.
“Absolutely. It’s been very, very difficult to get through this $4.70, $4.80 on the December contract. We think unless the weather models completely change over the next few weeks, if we get timely rain, pollination’s done, crop looks good, I’m thinking it’s very difficult to get
through those levels,” he explains.
Plus, he adds if yields are trendline at 183 going into August,that’s a big crop that the market will have to typically absorb with lower prices historically.
Soybeans Close Above $12
Soybeans were also up for the week, and the August and November contracts closed above the $12 mark.
The market has been pushed by strong demand and the surge in bean oil prices.
USDA reported flash sales of soybeans totaling nearly 26 million bu. Friday morning, with 12.5 million to China, 9.4 million to Mexico and 4 million to unknown, all new crop.
Hackett says that is helping keep the market on edge.
“I mean, the monthly crush was very, very high. The bean oil market went back up, making those crush margins continue to be very
good. And clearly getting these repeated purchases to unknown destinations, which we know pretty much is China, is continuing to feed into the idea that this 300-ish million bushel carryout may be at risk of being reduced here in the future.”
August Weather Problems Could Feed the Rally
Weather problems in August could cause an explosive rally and it is what the funds are waiting for to really add on to their long positions.
“If we turn hot and dry in the first half of August into the middle part of August when we’re setting pods against the backdrop we just mentioned, then we wouldn’t even be close to factoring in a major weather problem in the core soybean belt. And that’s going to be the
key. And I think the funds are going to kind of key off what the weather models will be saying as we approach the last week of July and put that two-week forecast out,” he says.
Soybeans Shake Off President Trump’s Rhetoric
The soybean market was able to shake off President Trump’s comments in prime time about China’s election tampering and the possibility of that unwinding the deal on soybeans and and ag purchases.
Hackett says, “I don’t think that is at risk. I mean Trump knew all of this already. He wanted to be more friendly with China. I think this is more of him trying to put on a particular persona ahead of the midterm elections more than it is trying to say that somehow he’s going to alter his relationship with China.”
So he believes China soybean purchases will continue to be orderly unless there is a weather threat that would cause panic buying.
Bean Oil Surges
Soybean oil surged higher for a second week and the market has been getting support from crude oil pushing back above $80 as the Iran cease fire ended and the Strait of Hormuz closure threatened supplies.
Cotton Falls for the Week
Cotton was sharply lower for the week despite and over $11 rally in crude oil.
However, Hackett thinks the cotton market may rally if energy prices continue higher because of the relationship between
polyester prices that are based upon crude oil as the input versus cotton prices.
“We’re starting to get a gap again that I think will bring in some stronger demand for U.S. cotton, just as India weather and China weather are seeing two of the worst droughts we’ve seen in at least 10 to 15 years in the core cotton areas of those two countries. It’s a pretty good setup for why the cotton market here could be looking at its sights back into the 80s again, like we were at the last time crude oil took off.”
So far there has been a disconnect as he says the market is worried about consumer demand, the economy and higher energy prices, plus inflation returning.
War Impacts Money Flow, Fertilizer
Hackett says with two wars going on there are some money flow moves that could impact the ag space.
“The key to the capital flows when it comes to war, is keep an eye on those fertilizer prices again.”
He says prices will continue to move higher if the Strait remains closed and that could impact not just the U.S. crop but also South America’s crop.
“Our overall understanding is they have not locked in a lot of their fertilizer yet and they could be vulnerable to another spike trade higher for that key input that could determine yields and how many acres get planted,” he adds.
Cattle Continue Record Slide
The cattle market was lower again this week and the August live cattle have been down a record 15 days in a row, losing $20 in the process.
Sharply lower cash at $237 to mostly $238 have been part of the equation but also fund liquidation.
Are funds done selling?
Hackett isn’t so sure, “I don’t think the funds are done liquidating. They were really, really, really heavily long before this correction began. If you look at the big move we had last year. I think we came down to the $300 area on feeders and the $200 area on live
cattle before we bottomed out. Oftentimes, those targets on charts are magnets for when speculative liquidation reaches a crescendo.”
So he thinks those areas will need to be tested before a low is forged.
What is the Signal the Low is In?
He is watching boxed beef values as well because cutout has been falling for nearly a month and is down from last year, despite tight supplies of cattle.
“It’s telling me that despite the view that there’s strong demand for beef, it’s not actually as strong as the market thinks. And the beef cutout is not acting the way that it should,” he notes.
Packer have been losing money for some time and are trying to regain some of that leverage.
“Either the packers have to make margin if they’re going to continue to be in the beef business. And either the price has to come down low enough so that they get their margin back or the beef cutout price has to go up high enough so they get their margin back. If the beef cutout price is not going to go higher, then the cattle price has to correct in order to bring the margin back. And that’s what’s starting to happen.”
