Grains ended sharply higher Friday with hogs in the green, while cattle plunged.
Grains Make Fresh Highs for the Move Following Crude Oil
Grains markets all hit fresh highs for the move on Friday as funds piled into buy in the complex. Chip Nellinger with Blue Reef Agri-Marketing says they were adding risk premium due to the huge rally in crude oil Friday and for the week in response to the Strait of Hormuz being shut to shipping traffic as war escalated with Iran. That channel moves around nearly 25% of all global oil supplies. .
He explains, “It’s 100% correlated to what happened in crude oil this week. Obviously, well known with the tensions in Iran and a war there. The Straits of Hormuz closed. Somewhat historic situation because we’ve never really faced that for this length of time. Crude oil prices put on almost $23 a barrel just this past week. And so that has spilled over and caused a lot of fun buying in the grain markets.”
Funds are covering their short position in corn and especially wheat and extending their long position in soybeans. “Obviously, they’ve been long beans with the China hopes of buying additional beans there, but they took no prisoners this past week. They’re now net long wheat for the first time in over three years, and they’re back building a net long position in corn. They have a lot of ammunition to go there if they want to build up additional length in the corn and the wheat market, but they’re probably getting a little bit closer to max position on the bean side of the equation.”
Buying Also Tied to Inflation Fears
The buying in the grains was also tied to inflation fears says Nellinger. “You know, there’s a lot of money on the sidelines. There’s probably some that, you know, with these tensions with Iran flowing out of the stock market into some inflationary type assets. And, you know, understandably so. I mean, you look at wheat prices, you look at corn prices relative to where we’ve been. They are on the cheap side. There’s also a strong long term historic correlation with the United States war and sharply higher wheat prices. Now, I don’t know that that has anything to do with the fundamentals necessarily to wheat, but wheat was probably one of the stronger performers of any commodity outside of an energy complex this week. And it just goes to show you that when the funds and speculative community want to place some hedges and buy commodities and hard assets, the fundamentals don’t always matter.”
Can the Rally Continue?
So the big question is can the rally continue and what needs to happen to keep that momentum going? He says, “I think a continuation of the war longer than what was expected. And maybe it’s not the war so much as the closure of the Strait of Hormuz. That really is the big issue right now. So the longer that stays closed, the higher crude oil prices are going to go. And the more pent up buying of other assets, commodities, hard assets are going to follow along with sharply higher energy prices.”
Conversely, he says if there’s a quick resolution, not necessarily to the war, but to the flow of ocean freight through the Straits of Hormuz, and energy products can move then it will release a lot of pent up risk premium in the crude oil market. However, if crude oil hits $100 it will have long-term ramifications on the world economy. “So there’s a lot of things pushing and pulling at us here. In the short run, it’s friendly commodities. In the long run, though, the higher energy prices stay, that could have some long-term effects that could become deflationary potentially if we really put a crush on the U.S. economy and the world economy because of these sharply higher energy prices. “
Technically Can Grains Keep Moving Higher?
Grain markets saw higher weekly closes across the complex and had some technical breakouts. So high do prices project to?
He explains, “We hit some major targets to the upside this past week, especially in corn and especially in wheat. There’s some extension levels that we stopped right at on the wheat side of the equation. There’s some major resistance right in the low $4.60s in May corn futures. And you push north of $12 for a period of time on May bean futures. So in this type of environment, though. Sometimes the technicals get thrown out the window. You can go much higher than what people expect.
Scale up Selling
Should farmers be taking advantage of the rally by scaling up sales? Nellinger says yes!. “Yeah, I really think so. You talk to elevator managers, and they’ve been busy this week buying a lot of corn. There’s a lot of unpriced corn still out there. So, reward this rally. It could be gone before we realize it. Also consider some new crop sales. We’re north of $4.80 December corn futures. You know, we’re knocking on the door of $11.50 November bean futures. There are opportunities staring us in the face right now that we didn’t really think we’d have until this summer on a potential weather scare 10 days ago.”
Different Than 2022
The last time this kind of a rally occurred in the grain markets was after the war erupted in the Black Sea in the spring of 2022, but there are big differences. “Every situation has its own unique perspective and risk. Obviously, the Straits of Hormuz is the big thing. It’s not just for grains, right? In our world, you know, we’re talking about the flow of nitrogen and fertilizers through that area, obviously crude oil. But there’s a lot of food and other items that move through there, too. We’re talking about food security for some of those, you know, smaller Gulf countries right now that there’s an issue there. It is just long-term ramifications of this lack of ocean freight moving through that area right now.”
Stock Market Falls
The stock market had a tough week in response to higher crude oil, but also not only inflationary fears, and what that might mean for interest rates. Nellinger says interest rates were sharply higher this week. He says the bond market was also showing inflation fears. “Interest rates need to move up to stem that inflation. Two weeks ago, we were excited about a new Fed chairman and all the interest rate cuts he was going to enact once he took the seat there as the chairman. And then this war changed that entirely. So again, volatility there, unexpected move higher.”
Cattle Crash With Stock Market
The cattle market had been pretty resilient most of the week despite the correction in the stock market, but finally saw spillover pressure combined with economic fears. He says, “I think that fundamentally, I think if it weren’t for these higher crude oil prices and the stock market heading lower we’d be much higher on cattle. Nothing’s changed, right? The numbers are tight. The fundamentals are still there for a bullish story. But it just goes to show you how correlated we are with the S&P 500. Earlier this week, you put up an S&P 500 chart to the tick almost and overlay a cattle chart, and it was highly correlated. Then on Friday, to add insult to injury, the stock market was fearful as the jobless report showed unemployment ticked up a notch. Total jobless claims went higher.”
Higher gas prices may also curb consumer beef demand. However, lower cash trade at $380 and $240 did not help the cattle market.
Cattle Hold Support But for How Long?
Cattle held right at support at the 100-day moving average on Friday but for how long? He says, “We didn’t quite touch it, but it is not that far below on the April. Now, you can argue for the next few weeks, April is going to be more tied to cash. I can buy that argument. Maybe there’s a better bid under the April live cattle contract, but it’s not going to be immune. And I think next week it’s going to be really critical, not only for what happens with this war and the Straits of Hormuz but what happens with the stock market. If it follows through to the downside you could see and we give way of that 100 day moving average you know these funds that are long don’t care that cattle fundamentals are bullish, they’re going off a technical model and if their model says we got to get out of our longs.”
Hogs Hold Better Than Cattle
Hog futures held up better than cattle as Nellinger says there was some spread unwinding with cattle. Plus, pork is viewed as a cheaper protein.
