Grains were higher early Thursday with livestock lower.
Grains Chasing Crude Oil and War Headlines
The grains markets were back higher early Thursday recovering from previous day losses.
Darin Newsom, senior market analyst with Barchart says the grains are chasing the sharply higher crude oil prices which were up over $10 and Iran war headlines.
President Trump addressed the nation on Wednesday night and said the war with Iran would last two to three more weeks and he warned of a major strike to Iran’s power plants without a deal soon.
That sent energy markets skyrocketing and equity markets lower.
“We knew that the war wasn’t over. We knew it wasn’t going to be over anytime soon. We knew that the Iran premier was not actually asking for a ceasefire. These are all things that are floated to get market reaction. And yes, markets came down, but nothing had changed. So all it took was the next headline saying how the U.S. is going to destroy Iran. Algorithms did what they are trained to do, and that is get triggered to start buying again,” he says.
Largest Oil Supply Disruption in History
Shutting down the Strait of Hormuz is the largest crude oil supply disruption in history.
“Now we’re looking at it most likely getting shut down for an indefinite period of time and you know this doesn’t bode well for prices,” he adds.
You can’t use technicals, you can’t use fundamentals, but the market seems to be building some
How high could crude oil prices go?
Newsom says that is anyone’s guess.
“Who knows, $200, $300, I don’t know. It does bring to mind back in 2008 when all of the talk was about $150 crude oil and it was around $140 at that point, the West Texas Intermediate. But the problem was, as I argued at the time, that the forward curve was actually in a carry so there was no fundamental support. And so by the end of that year, by the end of 2008, it actually wound up down around $33. This time around, as we’re pushing up towards $120 and so on, the forward curve is in strong inverse, meaning that this is supported by the commercial side due to what you just asked about the disruption of supplies and demand is still there. So putting a target out there is difficult to do. It could go as high as possible before it uncovers much selling because nobody’s going to step in front and sell this thing, at least not long term at this point.”
Grain Markets Following Oil, Headlines and Not Fundamentals
The grain markets are back higher early Thursday following crude oil and chasing war headlines says Newsom.
“Yeah, I mean, there’s again, there’s no fundamental change in the grain markets. There hasn’t been for quite some time. And I know a lot of folks come on and talk about, yeah, these markets are still fundamentally driven. Well, I mean, let’s be honest, they’re not the fundamentals don’t change 30,40, 50 cents per day it just it doesn’t happen. Even longer term we can’t really point at fundamentals because these markets have no memory. They don’t remember what happened yesterday. So, you know, if they don’t remember what happened yesterday, then they have no clue as to what the fundamentals actually are. It is simply the latest headline,” he explains.
Money Flow Also a Factor
Money flow is another result of the headlines the market is chasing and in the case of the grains it has brought fund money back into the market as it comes out of the equities.
Funds have added to their length in the grains but will that continue?
He says, “Part of this algorithm trade that we’re seeing, again, based on headlines, is the flow of money. And that’s what sets trend. So all we have to do is watch the trend and we can guess and we can see what the flow of money is doing. And we do know that money is coming out of equities and it is going into energies and it is going over into grains. So, I think this could continue because it is still based on the fear of inflation long term.”
Higher energy prices impact every sector of the markets and it is carrying over into the grain sector and grains are under valued.
“These markets are still down near their lows. If we look at the potential of these markets that’s attractive if we see inflation start to skyrocket. They are attractive to long-term investment money and so you know and this could this could continue to bring some of that money coming out of equities into grains.”
Fear of Fertilizer Prices and Availability
Is the market also concerned about fertilizer prices and supplies for crops in the U.S. and around the globe?
Newsom says at least the corn market is fearful of lower yield. “We didn’t learn anything this week about acres that we didn’t already know. But if input costs will be skyrocketing like diesel fuel, you know, nitrogen fertilizer is skyrocketing as well as a lot of the world’s nitrogen moves through this Strait.”
Cattle Down With Equities
Cattle futures were down with lower equities and higher gas prices after hitting new highs on Wednesday.
Newsom says there is a direct correlation between the cattle market and S&P and that could trigger additional fund selling.
However, he thinks an extended war and inflated gas prices could also hurt long term consumer demand.
Could Higher Gas Prices Lower Beef Demand?
Newsom thinks this could finally be the factor that stops the cattle market rally.
“Because, again, there’s no incentive for producers to increase supplies, to increase the herd. But if we see a reduction in feed availability and an increase in feed costs that even puts a bigger damper on the thing. So, when it comes down to consumer demand and that has been the backbone of what’s held this beef market up and if all of a sudden we’re having to pay you know, $1, $2 more per gallon of gas. I think beef is going to be one of those markets that dies along the wayside as, you know, disposable income goes somewhere else”
While supplies of cattle are tight, weights are heavier and so overall beef supplies are not down enough to withstand a cut in consumer demand.
