Grain and livestock futures ended lower on Monday.
Grains Remove Risk Premium
Grain futures were lower with risk off selling pressuring the complex. December corn ended 13 1/2 cents lower at $4.74, November soybeans plunged 39 3/4 cents to $12/13 3/4 and September soft red winter wheat dropped 18 cents to $6.60, September hard red winter lost 16 1/4 to $7.29 and September hard red spring fell 8 cents to $7.06 1/4.
Brady Huck with Empower Ag Trading says the grain complex removed war and weather premium.
With the de-escalation of the Iran war over the weekend the energy market plunged and crude oil was down over $7 during the session.
That spilled over to pull down the grain markets.
“Crude oil down $6, $7 today. It’s been a dynamic market in your energy trade. There were two chart gaps that we had on the charts, Michelle, and one was below us and one was above us. And we took the higher one out last week and made a heck of a run on your crude market. There was definitely some pressure, the war premium coming out of your grain markets, coming out of your crude market,” he explains.
Weather Flip
The relief in the extended weather forecast also impacted the grains but did it change enough to warrant the huge selloff in the row crop futures?
Huck says where he ranches in Kansas rain in desperately needed and that is the case in much of the Western Corn Belt.
“It doesn’t look like there’s a whole lot of relief there other than maybe some some precip in Nebraska. But the heart of the Corn Belt and in corn and bean country looks like they’re going to get an inch or so of moisture over the next seven days. We’ll see if that actually comes to fruition,” he says.
Huck adds that it would be welcome relief and an important time to receive rains to pack the the starch into the corn kernels and get soybeans a much needed boost as they come into their key reproductive phase in August.
“Maybe that’s why beans are down 40 cents here today is because of some of that precip coming in maybe having a bigger impact on your bean market,” he states.
Crop Ratings to Fall
Despite the extended forecast the market was looking for a drop in crop ratings on USDA crop progress report that could indicate the recent heat and dryness may have taken its toll on yield.
“We’re facing some adversity right now across the Corn Belt. The last half of July has been trying for areas for sure. So I think trend yield is. It’s a tough, tough question to ask right now, but we’re taking bushels off and it’s going to take above trend in other areas to offset below trend in areas that have been stressed over the last 15 to 20 days,” he says.
So the crop is taking off bushels while demand has stayed strong with additional flash sales on 4.85 mb of new crop soybeans sold to China and 4.0 mb to unknown destinations.
“We’ve seen some flash sales come in China continues to buy some beans and demand remains strong for a lot of our crops. If we tighten this production number up we got a ration demand and that’s what your markets have done during the month of July,” he speculates.
China Tariff Talk Hits Soybeans
Despite China’s flash sales on Monday morning the soybean market took a signficant set back as China responded negatively to the U.S. Trade Representative’s Office invoking a Section 301 tariff of 12.5% on China for forced labor violations on Friday.
There was some fear in the marketplace that China could back out of their purchase commitment with the U.S. and cancel the meeting between President Trump and President Xi on Sept. 24 in Washington.
Huck says, “Quite possibly. That relationship is always a little bit dicey, Michelle. That certainly adds some pressure to your market.”
China’s recent demand has been a strong reason for the soybean rally the last few week and what pushed November soybeans to contract highs.
“China’s been coming in and buying,” he says, “It’s great to see them return to our market. And they are very opportunistic. When markets have their pullbacks and have problems, they tend to come in and swoop up some bushels. And we’ve seen those flash sales come across over the last few weeks. It’s good to see.”
New crop soybean export commitments were running at 225.5 million bu. which is a four-year high, in part due to China’s business.
The break in prices could be just the one China was hoping for to buy more U.S. beans at a lower price.
Still, Huck says November soybeans were just at new contract highs on Friday and so the grains, were overdue for a little profit taking.
“This has been a great run, Michelle.”
Farmers Get Second Chance
The rally in the corn and wheat markets has given farmers a second chance to market at higher prices especially in the wheat market.
However, Huck is having difficulty getting farmers to market at these prices because they don’t know their crop size due to heat and drought in the West.
“So when you face adversity, that first half of your crop is easy to sell, but that last half of your crop is difficult to sell, especially when
it’s looking like it’s facing some challenges out there on the weather side.”
He says the market had a nice run in July and should be rewarded with some sales.
“We’ve extended above some of those key moving average when you look at the wheat chart, when you look at the bean chart. Corn testing the 100-day moving average, critical support for us to hold over the coming week. But those beans and wheat still extended above those averages and maybe some error in the charts there.”
He cautions producers to respect the rally and not get caught up in the headlines like the funds do.
“I want to have upside flexibility and opportunity to participate down the road longer term, but I don’t want to give up this near-term opportunity that we’ve seen and get sucked into the day -to-day noise and get distracted and freeze up and not make decisions too.”
Wheat Market Erodes
Wheat prices continued to erode with the market sliding late last week on talk of Russia and Ukraine make a deal on some type of Black Sea corridor to assist Ukraine in making export sales and shipments of corn and wheat.
However, Ukraine denied that rumor. So if the export disruptions continue will wheat be able to retest last week’s contract highs.
Huck is holding out hope. “Those initial headlines are always the most shattering, I guess, to the market and get the market really excited and create those parabolic moves. So we need some sort of re-escalation to take it to another height to really get this market excited.”
Still he points out the fighting does not actually remove bushels from the market.
“We do make them harder to access with the bombing and the attacks that are happening over there. Blowing up boats full of wheat and grain storage facilities full of wheat, those bushels are going to come off the market but in the past it seems like Russia has found a way to move those bushels.”
So those opportunities sometimes can be short-lived Huck adds.
He thinks the rally could buy some wheat acres going into the fall planting season in Kansas as the 27 futures were knocking on the door of $8.
Cattle Crash as Border to Reopen
The live and feeder cattle futures took an ugly hit on Monday in response to USDA announcing late Friday the U.S. would be reopening the border to Mexican cattle in a staggered phase starting on August 24th.
Huck thinks the market over reacted especially with the two positive USDA reports on Friday,
“The trade did not like that. I think that led to the majority of the selling today, the limit down move in the deferred feeders. We’ll see how this market reacts as it digests the headline going forward.”
Right now he says there is a lack of confidence in the market.
“Your cattle sector between feed yards lacking the leverage to push bids. The packer wanting to pass his negative margin along to somebody else, the feeder at this point. And when does that feeder want to pass it down into the cow-calf sector? So lots of questions
ahead,” he explains.
How Low Will Cattle Prices Fall?
After a historic bull run in the cattle market, especially for the cow-calf sector at some point Huck says things balance out.
“They don’t have to abruptly end, but they can go into a choppy, more sideways type of trade. I would expect continued volatility for these markets to move in $30, $40, $50 hunded weight swings over the course of the year. But it’ll take some time to shake this thing out,” he remarks.
The market took out last week’s lows on Monday but Huck is still hopeful the feeder cattle futures can respect the June lows.
“I’ve been hoping that we’ve reached the bottom here over the last three weeks and have been wrong looking at that. But for the last three years, the bulls have been right and the bears have been getting ran over. And this market has been resilient.”
However, he points out we need the consumer to support the market.
“But with imported Brazilian beef and now imported feeder cattle from Mexico coming in, there’s a lot of headwinds here to give the confidence to have consumers and the funds come in and buy this market.”
Unfortunately, producers could not even do LRP contracts to protect their risk because of the USDA report release on Friday and that will continue with the limit down moves in deferred feeder cattle on Monday.
However, he says if producers waited for this type of move to do marketing, it wasn’t much of a marketing plan at all.
