Ag markets were mostly lower on Monday except for cattle.
Grains See Fund Selling
Grain markets ended lower on Monday with fund selling and long liquidation across the complex.
Garrett Toay with AgTraderTalk says the grains fell despite the sharply higher crude oil market.
Grains were lower last week following the nearly $10 correction in crude oil. So why were grain markets able to finally divorce?
Why did the grain markets finally divorce after falling lower most of last week as crude oil corrected with a possible cease fire Iran.
Toay says the futures market and the physical cash market for oil are disconnected and crude oil traded under $90 last week with expectations of a cease fire with Iran.
“I think the market is kind of past the point where the worst has already been seen as far as bombs dropping and explosions and concerns about destroying infrastructure. The inflation trade is still there, and that’s a marathon, not a sprint.”
The one exception was soybean oil made more new contract highs following the diesel market according to Toay.
“We also have distillate stocks, which is diesel fuel, at its lowest levels in 20 years. So the physical markets are saying one thing, the crude market’s saying another,” he explains.
Seasonals Turning Lower in Grains, with No Weather Treat
The seasonals normally turn lower in grains this time of year as well says Toay.
“You know, it’s time and I think the funds are sitting here looking at this big old crop corn carryout. Basis was weaker last week. Commercials
are starting to sell corn or short their DP positions. And, you know, we’re just waiting on the farmer to move,” he says.
Plus the fast planting pace nationally and the lack of a weather threat are also pressuring the market.
“I know there’s some germination issues. The month of May was fairly cool. So it wasn’t perfect, you know, in a lot of places but 60,000 foot view is that it’s good enough and potentially the size of this old crop carryout could temper any weather effects going forward because we have to have a big production loss to offset the carry-in,” he explains.
Funds Keep Liquidating?
So he says the funds are getting out of the way and they still have a large net long position.
Chart damage has been done to wheat and corn now and the spreads are getting weaker even in soybeans.
“And that’s the big thing that concerns me about this bean market is that, you know, the funds that have liquidated corn are still rather sticky in soybeans. And as you start this index roll here this week, the fact that, you know, now it’s costing these longs to roll to the November rather than an inverse. Well, they head for the door and beans could be another shoe to drop,” he adds.
Funds are long nearly 450,000 contracts in soybeans, meal and oil combined and so they could liquidate more of that length.
In the corn funds have sold hard the last three weeks. “Even in corn. I mean, even though we liquidated 80,000 contracts last week, it would still be the largest long for this week in history. So it’s the same situation of beans. It would be the largest bean long in this time of year.”
Funds Impatient with No China Sales Yet
Have the fund traders also become impatient with the lack of China sales or details of purchases following the China summit?
Toay says that is a concern he has. “Whenever we’ve had negotiations with China or trade deals like this announced, we typically see a symbolic purchase by the Chinese, and that hasn’t shown up yet. So whether we have a deal or don’t have a deal, typically, it’s a sign of goodwill that they have a deal. But the cloud of war, the fog of the trade war, the South American crop has a pretty significant tail. So maybe that’s what’s delaying things a little bit.”
So maybe it is too early to get concerned about it but in the next four weeks, if there are no new crop Chinese purchases he thinks the market will get nervous.
How Much Lower Will Prices Fall?
July corn has corrected nearly 45 cents from the May high and July HRW wheat is down over a dollar from the May 13 high of $7.50. So how much more downside risk is there in the market?
Toay says, “Well, we traded today’s Monday’s low at $4.40 on July corn. The trend line off the January lows is $4.37. You know, I think ultimately,
I mean, the September contract is the one to keep an eye on once that farmer movement.”
He looked at a seasonal chart of December corn since 2015 to provide perspective. “Outside of the years where there is a weather problem or potentially this year, the setup was inflation with crude being where it was, where we trade above $5.25. All the other years trades, corn is
$4.25 or lower by harvest time.”
He isn’t sure December corn warrants that with where the new crop S&Ds are at. “But, you know, a 1.9 to 2.1 billion bushel carryout, movement of grain into harvest could be the catalyst to push us down to those levels if we have a normal crop.”
However, he says it is still early in the growing season and crop ratings on the first report from USDA on Monday should be good.
“It is setting up to be a typical seasonal year where highs are set in May and June. Last year we set the highs in February.
“The Commitment of traders looks like the farmer did a fairly decent job of selling these highs into the fund long that wanted to be there. So I think that they’re in better shape than the past years,” he adds.
Cattle Rally, Funds Done Liquidating
Cattle futures were higher on Monday with a technical bounce and short covering but is the fund liquidation done?
Toay says, “Yeah, I mean, it feels like we’re done consolidating. I mean, cash is still at a premium to the board and supplies are still tight.”
He says the biggest concern is consumer beef demand slowing down.
“Everything you see is credit card delinquencies are increasing, high fuel prices, everything that points to the spendability of the dollar is diminishing. So when that type of thing happens, then food choice becomes a little bit more critical,” he says.
However, according to Toay, some retail beef prices are starting to come down.
NWS Cases Faded
He also thinks the market reaction to the New World Screwworm (NWS) cases was muted with one detection in a steer only 52 miles from the Texas border, followed by a six month old sheep only 31 miles from the U.S.
“It’s kind of interesting that we had the New World Screw Room headline last week and we really didn’t react a whole heck of a lot in my opinion. And so, I mean, it feels like we’re just waiting for this next shoe to drop.” he adds.
Hog Market Makes Six Month Lows
The lean hog futures also made new six month lows in the August contract, despite the fact funds have nearly liquidated their entire long position.
Why can’t the hog market bottom?
He says, “Sometimes it just comes down to order flow and where the funds that are underwater.”
With the price of pork verses beef, he thinks the consumers should be buying pork hand over fist.
“But the problem is, underlying this, that’s why I kind of focus on Christmas hogs more than anything. It feels like it’s kind of a bit of an oversupply situation that we’re trying to work through right now and trying to get the herds down. So, I mean, obviously the cycle in hogs is a lot shorter than in cattle. It looks like the last two years of cattle prices, you know, the hog producers rewarded that with increased production. And ultimately it feels like it’s kind of coming ahead here right now,” he adds.
He says the market has been down the last nine out of 11 days and so it has been ugly.
Yet, he remembers the low prices in 1997 and 1998 and says the market is much better than it was at that point.
