Grain and livestock futures ended mostly lower on Monday.
Grains Make New Highs for the Move Then Fall
Grains futures all made new highs for the move in the overnight session but could not hold on to gains during the day.
Garrett Toay of AgTrader Talk says the market moved in lock step to crude oil following headlines tied to the war in Iran. “Grains are largely a follower of the energies with corn trading the ethanol component. Beans are obviously supported by soybean oil, which is tied to the energy complex.”
Crude oil traded as high as $119 overnight as Israel attacked Iran’s oil fields, but fell off highs as the G7 nation’s said they would release 700 million barrels of oil, plus he says some ships are trying to go through the Strait of Hormuz undetected.
Soybeans hit 2-year highs overnight, while December corn got close to $5 and so there was some farmer selling as well. “Today, especially in corn, we ran into a round of farmer selling, pretty heavy farmer selling,” he adds.
If Oil Starts Falling Will Grains Retreat?
However, if oil starts moving through the Strait of Hormuz and energy prices continue to fall will that drag down the grain markets?
Toay says that is a present risk. “I mean, the way these spreads reacted here this morning, you know, obviously March, May is in delivery, and May, July traded to new lows, kind of collapsed here this week. It tells you kind of the extent that the farmer has rewarded this market. You know, if this crude market should happen to correct remember we started at $60. So it depends on the depth of this correction in crude. But would I be surprised to see corn revert back to the old range? Absolutely not.”
Could an Economic Slow Down Hurt Corn Demand?
Toay says the other concern is the impact an slow down in the economy could mean for corn demand.
“Obviously, this corn demand on the export front is fantastic. That’s largely tied to, you know, we’re basically down to two major corn exporters between the United States and Argentina. Brazil will export some, but not to the extent that they were four or five years ago. And that’s why, you know, the U.S. corn export demand is so strong. So any threat to the world economy could underlie that, but that’s on the demand side.”
Crude Oil and Soybean Oil
Toay says the question mark is what the bean and bean oil markets do from here as so far bean oil has also been following crude oil.
“You know, we’ve just got so many cross currents out here is what impact does $100, $100 plus crude have on the economy? You know, higher gasoline prices?”
Inflationary Buying in Grains
With higher energy prices and crude oil flirting near $100 are the grain markets seeing inflationary buying by the funds?
Toay thinks this is more of reactionary trade but fund buying as a hedge against inflation is possible.
“I mean, obviously, I think at this point, $100 crude, the market can withstand that. But, you know, it moved to like $130, like we saw during the Russian invasion of Ukraine, then the story changes here a little bit. So I think at the end of the day, we’re not at that point where we see inflationary buying. In fact, inflation at this point, considering credit card debt, things of that sort, is probably more deflationary as it has impacts on the economy and a potential recession.”
Will Corn Acres Fall With the Fertilizer Price Spike?
Fertilizer prices have also skyrocketed with the Iran war and the last of the spring supplies may be in jeopardy with product unable to move through the Strait of Hormuz. So does that cut corn acreage?
Toay says, “Well, I mean, if you use the USDA Ag Outlook Farm numbers as they are, like I said, that 92 million acres is kind of the line in the sand. You know, if we get down to 92 million acres, then we have to repeat last year’s 186.5 yield in order to keep carryout from getting into a tight situation. Now, obviously, we don’t know what the impacts are going to be on fuel consumption if energy prices stay high. But still at this point, ethanol is a cheap alternative to gasoline and should support usage there.”
China’s 8 MMT
If China also buys the 8 MMT of old crop soybeans as part of a trade deal announced during the April summit can the market handle that type of demand shock?
Toay says, “At face value, 8 million metric tons, 295 million bushel leaves the carryout in a ration situation. But that being said, we’re also a $1 higher than we were at this point a month ago, or two months ago, when President Trump first posted the social media post. So, to some extent some of this might be already in the market.”
He says the South American soybean harvest is at 50% and so far there has been little hedge pressure as the market has basically absorbed all that selling. So that leaves him hopeful for additional rallies.
“I mean you know the old adage is you know beans don’t like $11 and here we are $12 beans. You know are we setting the stage up if they buy a 8 MMT to make a move towards $13 or $14, it remains to be seen. I don’t think that they’ll do it outright without some sort of concessions from the United States.”
He says if China doesn’t buy then it will come down to what the fund managers do because they are very long. “If they decide to liquidate, then we revert back to the low $11. But like I said, we’re starting to get a little bit stretched as far as this market positioning is concerned.”
Should Farmers Sell More on the Rally?
With highs the markets have not seen in several months and with two year highs in soybeans, how much more should farmers sell?
Toay says not many farmers have old crop soybeans left but they still have corn to sell. “On corn, we’re pushing that final 30, 40% here on this rally. As far as new crop corn, we’re a week past the crop insurance spring price discovery period. And we’ve already kind of, you know, we had these corn trade to $4.99, which is nearly 30 cents over the spring guarantee. So, you know, I think that this market has given you an opportunity to get back to your historical norms. I think most producers should be be 25% 5o 40% sold around this time of year.
Beans obviously have given you opportunities. “We’ve got new crop beans trading $11.50. So there’s opportunities out here to market new crop beans. And, you know, depending if you have on-farm storage, the ability to roll those out and manage those positions, you know, depending what carries we have in these markets. I mean, you know, $11.50 November futures and 25 or 30 cents spread, you know, out to May or July, then you’re looking at $11.80, similar with December corn, you know, $5 corn for new crop, all things considered, you know, 25, 30 cents, then all of a sudden you’re looking at 525, you know, out to May or July and, you know, things, you know, are pretty decent.
WASDE a Non-Event
USDA will release the March WASDE on Tuesday and Toay is expecting it to be a non-event.
“I don’t expect much changes. The trade isn’t expecting much changes. It is interesting that they’re looking for higher corn carryout. You know, that’s possible tied to ethanol numbers running a little bit behind because yields are running better this year. But exports are running so far ahead that, you know, to me, if they cut ethanol, we get an increase in exports. And beans are looking for a small decline. That’s obviously tied to crush.”
Toay is expecting just small declines in South American production numbers.
Cattle Crumble
Live and feeder cattle futures had a rough day and closed below key moving averages, including the 100-day. The lower stock market, fear of higher gas prices hurting beef demand and the JBS plant in Greeley, CO being idle today all combined to crash the market.
“It just kind of feels like a combination of the three and just exhaustion of length here. Do we see some old longs get out? Maybe some new buyers come in? Possibly. But actually, the cash market leads this thing, and that’s the most important.”
Downside Risk
With futures closing below long term support is there more downside risk in the cattle market? Toay says, “When you’ve got crude moving $30 a day, absolutely and expect the unexpected, especially when you get the trading algos and the technical trading algos kicking in here.”
He says the big key is what does the economy do with higher gas prices? “I mean, you know, just around the corner of Dubuque, Iowa, gasoline or diesel is $5. So that undercuts freight, that undercuts producers and trying to plant a crop this spring. “It was just interesting to me that when crude was coming off the highs that there was minimal bounce in the cattle market.”
Hogs Follow Cattle
Hog futures were also lower on spillover from the big losses in cattle. However, he says the higher dollar and some hedge pressure may have also set in.
However, pork is fairly competitively priced on the retail side. “So, it may be a little bit more immune if you will to downside corrections,” he says.
