Grain and hog markets were lower on Wednesday with cattle higher.
Grains Tank With Crude Oil
Grains markets were lower in tandem with the plunge in crude oil on headlines of peace talks and a possible end to the Iran war. If the war is over and the Strait of Hormuz is reopened how much lower could grain futures fall with energy markets?
Oliver Sloup with Blue Line Futures says grain markets were trying to divorce from the war headlines and crude oil the last few weeks but now are right back trading with the energy moves.
“If oil continues to slide sharply lower, you know, that’s obviously going to be a big headwind for the grain markets. But I wouldn’t be surprised to see the market maybe chew through this headline quicker than we saw earlier in the year and maybe get the grain markets to trading back to their fundamental backdrop and the uncertainties that lie there,” he says.
Market Hit Technical Resistance
Corn also saw technical headwinds come into play according to Sloup as July corn made a double top.
“We saw July corn futures bump up against those March highs, $4.84, $4.87 1/2, tag that top to a tee and then set back. And if you look back all the way to last spring, that was also kind of a key inflection point for the market as well. You had the RSI or the relative strength index getting into overbought territory, which has really only happened about four or five times over the last year and a half. And each of those times, you know, we did see a correction of about 10 to about 30 cents. So somewhere in that ballpark, which is what we got today. So maybe a little bit more weakness here in the near term,” he explains.
New crop December corn though he thinks can trade on its own merit once the market stabilizes.
Is the Grain Rally Over?
Sloup is not sure the grain market rally is over due to the uncertainties surrounding acreage, yield and fertilizer. That will continue to keep fund or managed money traders interested in buying commodities.
“You’ve got fertilizer concerns and you talk about the energy markets as well. I don’t think that the energy markets or crude oil specifically is going to drop straight back down to where we’re trading 50 or 60 bucks. I think those prices probably stay somewhat elevated. And the concern there was get longer, higher for longer energy prices, and that feeds into the inflation narrative. And that props up commodities as a whole and continues to draw in some managed money participation, which we’ve seen in these grain markets for the better part of really the year,” he says.
So, he thinks the pullbacks are still buying opportunities. “Maybe more so in those new crop contracts.”
Soybeans Also See Technical Resistance
Soybeans had also hit technical resistance and drug down by crude oil the market went down and closed below the breakout points on the charts.
“So, we’re kind of right back down there to that breakout point that we saw about a week and a half ago. I think it was April 29th that we broke out above that range. And now we’re just retesting it and hopefully being able to defend that. That’s going to be a key area to keep the market in check. If we break and close back below there, potentially we see another 20 to 30 cents of downside here in the near term. But again, I think we potentially settle back into that choppy sideways range,” he explains.
However, new crop soybeans have had a more bullish chart pattern than old crop.
Soybean oil also hit new contract highs before reversing lower with crude oil but Sloup doesn’t think the market did technical damage.
“It was a big pullback in the bean oil market but with what we saw in the oil complex, I don’t think it was all surprising. Really not a whole lot of damage on the chart but a bit of a caution flag here in the next week’s trade,” he adds.
Awaiting China Meeting
The soybean market should be supported with the China summit next week May 14 and 15 and there could even be some buying ramping up into the meeting on optimism about the 25 MMT new crop soybean business being confirmed.
Sloup says, “I think that certainly kind of keeps funds interested and playing, so to speak. Funds have shown an appetite in the soybean complex really all year, as well as the corn market. So I wouldn’t be surprised the optimism build going into that.”
Broader Fund Buying in Grains
Sloup says there is also optimism growing about future expectations in other market.
“You don’t have to look too far to see what’s going on in the equity complex, whether it could be the S&P, NASDAQ, the Dow, etc. Just massive participation from money managers and potential. They start to look at commodities in a similar fashion here this year. Commodities have been pretty quiet over the last couple of years. But when you zoom out and look at the historical commodity super cycles, as we like to refer to them as, they really start with the base metals, precious metals, and then flow into energy. The next year to drop would be the agricultural complex.”
Last year money managers were moving into metals, this year energy and next is the grain markets.
Has Wheat Topped?
Wheat markets were lower removing war premium but have also been removing weather premium according to Sloup.
“A lot of uphill sledding for the wheat market and it is the wheat market so it can be a little bit more irrational for lack of better terms. We had the big move higher but I think you know looking back about a week and a half ago, we had that big blow off top, new highs for the move, and then a sharp reversal. And you just saw that snowball on itself. So, $6.60 is going to be the big level to hold for that Kansas City contract. That was the breakout point and kind of the old resistance area. If we can continue to defend that, I think that the Kansas City contract. Probably holds firm and continues to mark higher highs and higher lows. Breaking close below that would make me a little bit more nervous,” he says.
The Chicago contract has done more technical damage. He says, "$6.10 to $6.16, that’s a 20 and 50 day moving average. That’s the line in the sand that we want to see hold below that. You know, there’s potentially another 30 cents a downside,” he adds.
Wheat Production Cuts In WASDE?
Will USDA made any meaningful cuts to wheat production in the May 12 WASDE?
Sloup says, “I don’t know that they’re going to make any significant adjustments. I’m not really expecting them to. I would say that the market will trade this USDA report rather quickly. And then it’s probably going to be back to headlines and what’s going on in the corn and soybean market and potentially those markets feed on each other as far as the money flow goes.”
Cattle Continue Recovery
Cattle futures were up for a second day and continue to try to recover from last Friday’s key reversals with help from higher early cash.
“Cash continues to be the leader in that market and really hold a good foundation underneath things as well as just the technical landscape of things. We tested the 20 -day moving average earlier in the week. That will be probably a key inflection point, $249.25 to $250. Break and close below there, potentially you get some long liquidation. But again, the fundamental backdrop, the herd size, the cash trade continues to be just a solid foundation for this market,” he says.
But still he says cattle are resilient. “And whenever we see the turbulence, like we saw earlier in the week, it’s almost like holding a beach ball down underwater or trying to press one down underwater where you can only push it so far down and then it pops back twice as high as you pushed it down. So that continues to be the theme for the cattle market. It seems that dips are buying opportunities.”
Plus, funds are defending their longs according to Sloup.
“They have a net long position of currently about 131,000 contracts, which is historically large, but off of the recent highs that we’ve seen,” he adds.
The one concern he has is a black swan event. “I guess the thing that would make me potentially nervous would be outside market headlines or a potential border reopening, but trying to time those is nearly impossible. So for now, dips are potentially buying opportunities. Yeah, I’m sure lower corn futures, lower gas prices Probably helped out the cattle market and some total here today as well.”
Cattle, Restest the Highs?
He thinks the cattle market can retest the record highs and negate last Friday’s reversal.
“It’s really not all that far away. I wouldn’t be surprised to see the market continue to grind and push to the upside. With regards to the oil market, I think it’s interesting. I would almost look at a retracement in oil futures as a potential bearish catalyst. If you look at the correlation
between those, they’ve been trading almost in tandem, obviously not today. But I think that you probably look at that more as an inflation hedge rather than just risk on, risk off,” he states.
Hogs Lower....Again
Hog futures were back lower on Wednesday unable to extend Tuesday’s gains. So what is the problem with the hog market?
Sloup says, “I wish I had a good answer for you. We’ve been trying to be optimistic here on hogs as of late, but it just continues to mark lower highs and lower lows for that June contract, the 100 level. obviously has a little bit of psychological significance behind it and seems to have a gravitational pull to it as well this week. I think if we can defend that, you know, potentially we can carve out a low here, but not only do the bulls need to defend that, but we need to see consecutive closes out above $102, $102.50. That’s the 20 and 200 day moving averages. Consecutive closes out above there, maybe neutralizes some of the technical damage that we’ve seen over the last two months.”
Funds are only long about 46,000 futures. So no huge conviction to the downside or to the upside. It seems like they might be in a wait and see mode from these levels he adds.
