Grain and hog markets ended mostly lower on Tuesday with cattle mixed.
Grains Fall Removing War Premium
Grain markets saw risk off selling and ended lower removing war premium.
Alan Brugler with A&N Economics, Inc. says the market is cautiously optimistic a cease fire or peace deal between the U.S. and Iran is near.
“The Iranians tried to pull a fast one and put some mines into the shipping channels because that reinforces the need to pay them. The U.S. countered that by taking out the boats and some of the missile structures. Both of those would be seen as moderate moves, not something that’s going to break the ceasefire,” he says.
The crude oil market was sharply lower overnight and early Tuesday which weighed on grain markets early but the market recovered off its lows.
“WTI crude oil backed off. That’s negative for ethanol and biodiesel to the degree that we’re trading energy molecules in those grains.”
Iran War Ends, Grains Fall?
So if there is a 60-day cease fire and more importantly a re-opening of the Strait of Hormuz, does that take the energy and grain markets lower as funds liquidate?
Brugler says, “I think you would see some removal of some of the risk premium. The hot money went in long. Hey, this is a crisis. This is going to be very inflationary. Supplies are going to be very tight. If it looks like Iran is going to open the Strait let some of the energy supplies move, then some of that hot money is going to leave.”
While it may take some time to repair the infrastructure and normalize the market he thinks the funds will still liquidate.
“I think you could see 50,000 or 100,000 contracts leave most of these markets that have the high open interest. That’s come in simply as an inflation play or a war play. Crude oil could easily, WTI could easily drop into the mid to upper 70s just because of funds leaving, not because they necessarily thought that crude oil supply was going to back to ample levels,” he explains.
Inflation Lag
However, even if crude oil prices cool will it take a while for inflation to cool down?
While inflation data hasn’t been hot in the most recent PCE or CPI reports there is a lag effect according to Bruger. “And things have to percolate through the economy your higher transportation cost. It doesn’t show up in your retail price right away and sometimes it’s going to be slow to come down.”
He says the Fed and most of the central banking community looks at CPI minus food and energy, because those are volatile components.
“So your headline numbers can be high and persistent for a while. But if the core numbers aren’t really going up that much, it demands a more moderate approach,” and he thinks that’s the key.
Bean Oil, Corn Buffered By Surge in Global Biofuels Growth
Despite that markets like bean oil and corn may be more isolated to fund liquidation just because the global biofuels push is not going away.
“Bean oil is an interesting situation because you do have the RFS mandate the increased blending rate. That’s been a real benefit for the U.S. to have that ability to extend our domestic supplies with biofuels. Bean oil is going to continue to be a major component here for the renewable diesel industry. I think ethanol is still benefiting from high gas prices and will continue to do so, even though some of the E15 initiatives haven’t really succeeded yet.”
Grains Remove Weather Premium?
Despite the long term forecast showing hot and dry conditions in the North Central Midwest was the market also removing weather premium?
Brugler thinks so. “I think we got a little post-holiday weakness based on the rains that we did see. There was quite a few storm systems over the last week and over the holiday weekend. Southern Plains, Western Corn Belt mostly. East is actually getting a little too much rain in some spots.”
The forecast is showing above normal temps for the Northern two-thirds of the U.S. for the 6-10 day and 10 to 14 day period. Still Brugler says it is too early to be a negative for the crop.
“Because the the average temperatures are not you know above 86 degrees where it starts to influence your your yield potentials for corn. I think you could get some actual temperatures that are above that right now. However, above average in May and early June unless you’re in a severe drought area is not going to hurt the crop,” he adds.
Fast Planting Pace
Plus, the planting pace has been ahead of normal and so the funds or speculative traders see the crop as still having good yield potential.
He says, “I think the the wild card of course is how much did the fertilizer shortage impact yields and that’s probably a minor factor as far as national yield is concerned.”
Fertilizer issues will not show up on the crop condition ratings either.
“So seasonally for corn by mid-June, we kind of get comfortable with acreage, we get comfortable with yield potential and the corn market breaks after mid-June or late June. Sometimes the nail in the coffin is that June acreage report at the end of the month,” he adds.
But looking at the seasonality, you’d expect the funds to start to back off.
Funds Betting on China?
Do the funds also stay long in the grain waiting for China business?
“Well, I’d argue that if that’s what they’re waiting on, they could be waiting a long time. China, on the bean side, China’s made a commitment to buy 25 million tons. They normally don’t buy new crop commitments until August into December,” he explains.
For corn and wheat they have WTO minimums that could be steered to the U.S. but if China isn’t buying U.S. product, other customers will.
“The supply and demand doesn’t leave the planet. If China’s slow to buy, somebody else is buying. Mexico, for example, just in the last couple of days bought and it just displaces the destinations. Now, China comes in and makes a statement to buy four or five million tons of corn. It is going to move the market,” he adds.
Cattle Market Absorbs Bearish Cattle on Feed
The cattle futures ended mixed in live cattle and mostly higher in feeders after two-sided trade during the session.
The market did a good job of absorbing the 5.5% increase in placements compared to a year ago and the 1.8% higher on feed numbers.
The question is are the funds done selling? Brugler says, “The funds have a really large position. It’s tied to the cattle cycle and we haven’t reversed the cattle cycle yet. The cattle on feed report shows that we are getting some more placements despite relatively low cow and heifer numbers, or that’s the beef on dairy situation.”
He thinks the positive is that the market sold off and funds liquidated before the report but then held.
“We got a bearish report, really didn’t break the market today. Can the funds lighten up 40,000 to 50,000 contracts? Certainly. But I do notice that the boxed beef was pretty firm today. The cold storage report was not a negative in terms of showing consumer resistance to supply and price,” he says.
So he thinks as long as the market breaks are held to less than $10 in cattle this is nothing to be concerned about if you’re a bull.
Lean Hogs Lower, Except June
Lean hog futures were lower except for the nearby June contract and the charts look terrible. Are the funds done liquidating yet and can the market find a bottom?
Brugler says, “It’s been a very contra-seasonal move in hogs. Typically, you see some seasonal strength in hogs, April through June or July. Certainly haven’t seen it yet. What we’ve seen instead is hog prices going down to recheck the December lows.”
He says the reason is April pork inventories have been building compared to a year ago as detailed in USDA Monthly Cold Storage Report.
Still he thinks the market is oversold and due for a bounce.
“It’s rechecking the lows. It’d be a great place to put in a bottom. We just don’t have any evidence that it’s actually initiated the process yet. So, the jury is still out but I personally would not be very comfortable adding new short positions if I was already short,” he states.
