Grain and cattle futures closed higher on Monday, with hogs lower.
Grains Reverse Higher Monday
Grains markets were down overnight Sunday and opened lower on Monday following a sharply lower crude oil market on news of a peace deal with Iran.
Both old and new crop corn made new contract lows and soybeans hit new lows for the move and July posted a four month low.
However, grains saw nice reversals and closed higher on Monday, which was a victory considering the amount of bearish news the market had to absorb according to Kevin Duling with KD Investors.
Was it just a dead cat bounce or can the grain markets continue to recover?
Duling was encouraged by the action and the ability of the grain markets to divorce themselves from the lower energy markets and bearish weather.
“So to me, this market feels like, okay, what else that’s bearish are we going to throw at this thing? It’s like we’ve already factored in perfect growing season weather for the year.
We’ve factored in peace and plenty of inputs available,” he says.
He says it is only mid-June. So there is quite a bit of upside risk but the key will be if there is follow through buying Tuesday.
Are the Funds Done Selling?
The other key is are the funds done liquidating in the grain markets and adding to their net short positions in corn and wheat?
They posted a record week of selling at nearly 375,000 contracts across the grain complex as recorded by the Commitment of Traders Report looking at futures and options. It included selling over 120,000 contracts of corn, 65,000 soybeans, nearly 75.000 meal, 25,000 bean oil, 18,000 contracts of hard red winter wheat and nearly 22,000 contract of soft red winter wheat.
Have the funds exhausted their selling?
Duling says, “They should have, but I mean, we tend to continue to break records on the hedge fund size. So, they could continue on but I question if they are tracking weather models or what. In my opinion the weather models are not much better today in the longer range than they have been. They are good for about three days and after that they change a lot.”
He adds that is seems too early in the season to be this bearish on weather.
Removing Risk Premium
Not only have funds removed all of the weather premium they have also removed most of the war premium after getting chopped up the last three to four months with the energy markets.
“By most analyst ideas crude oil probably should have been another $50 higher than it was and it wasn’t. You look at the the hard red wheat crop and how bad it is. And, you know, we probably should have achieved something better than $7. I mean, that’s barely a break even when you factor basis. I mean, it’s probably still a loss and it’s like, wow. So we’re just not getting commodity traction at this time. So there’s that function too.”
Grain Markets Getting Close to Lows?
So after this amount of fund liquidation are the grain markets trying to put in lows because that is the question on most farmer’s minds.
“Personally, I think we have. When I look at the long-term charts, so look at the weeklies and the monthlies, those patterns are more important than the dailies. And what I see in those is we established the lows last summer, fall, and we bounced, and then we’ve came back. We haven’t gone below the important points yet. It’s still an uptrend. And so this, to me, looks just like a big, big correction,” he explains.
He says low prices cure low prices. “We’ve been low for a long time. Demand continues to build. So I got to think that we’re close to these holding and getting some better numbers longer term. It’s just throwing us a curveball right now because the seasonals are out of whack and we’re factoring in perfect weather here in the middle of June, not when we get into the middle of July when it’s actually gone by.”
How Low do Grain Prices Fall Before China Starts Buying?
With old crop corn dropping nearly 80 cents from the highs and wheat and soybeans down over $1 how low do prices need to fall before China steps in to buy?
Duling says specifically for soybeans he thinks sub-$11 will be attractive to the Chinese, “That’s a good question. You know, if they’re like me, they’re looking at the chart a little bit and saying, you know, that $10.80, $10.90 area is probably good. And in their shoes, they did exactly what I expected. Once it was expected of them to buy some more soybeans, they sat on their hands, which creates doubts, which creates the hedge funds to jump in and sell. It just gives them a gift. And so I would expect them to move between $10.80 and $11. That’s basis of July.”
He says China typically starts buying U.S. beans in August.
However, funds are still long in the soybean complex and could be vulnerable to more selling if China waits.
Crude Oil Correction to Weigh on Corn and Bean Oil?
Soybeans have also been supported by the rally in bean oil and the increased demand for biofuels. So with a correction in crude oil below $80 as the war in Iran ends and the Strait of Hormuz reopens what will that mean for bean oil? And if it leaves the commodity sector does it go into equities or where?
Duling says, “You know, I thought if they got a real peace deal, one that might stick for a bit, that we’d see a big spike in equities, big push there before that really saturates itself.
And then we start correcting everything. And that remains to be seen. That’s my expectation going forward. So that’s where the money goes for a little bit. But at some point, I still think there’s life in these commodities because you can’t press these things down that long and build demand and then just have them not react because production has been cut in just about all of them. And at some point, that’s got to hit.”
End of Quarter and Report Positioning
Duling also says he doesn’t think funds will push the short side of the market much more with the calendar ramping up to the end of the month and quarter and with the big USDA Acreage and Quarterly Stocks Report on June 30.
“If we can hold and get a bounce this week, maybe that pegs it and they’re done. But if we don’t hold this week, if they start to sell more into it the rest of this week. We can see them kind of pad the books up until that last few days of June before those reports, before the end of the quarter, just to pad the books,” he says.
Wheat Crop Shrinking?
Last week’s WASDE report also reinforced the idea of the historically small wheat crop and it could be getting smaller according to Duling.
However, he thinks the market will take note of that in the cash market first.
“I don’t think you’re going to need it via a government report. And as we go worldwide, you’re going to see the reaction to the input crisis we just went through and you know especially the Southern hemisphere. The spring wheat crop was smaller than expected in Russia, the U.S. and Canada and that is going to add up and it’s got to matter,” he explains.
Duling says the harvest reports are also confirming the smaller crop.
Cattle Rally on Cash, Follow Equities
Live and feeder cattle futures staged a strong rally on Monday pushed by firming cash on Friday and ideas of higher cash this week.
Plus, Duling says the equity market rally also was supportive.
“You got the equity markets, plus you have the boogeyman out of the room with the screw worm thing. So, people realize that maybe that’s not bearish cattle. So to me, we’re bouncing back. We’re right in the dead center of the range. And I wouldn’t be surprised to see if equities can hold, we’ll bounce back towards the top end of it. So that seems to be a nice tradable sideways market,” he says.
New Highs in Cattle?
Despite the fact that the futures are starting to take out resistance, Duling doesn’t think the market can make new highs even feeders.
“I still think $380 is kind of the mark. I think sideways is the game. You get above that. I mean, we might spike above it, but if you get up there, I feel like the consumer takes a hit and the consumer is not in a good position anyway. And I just don’t think that demand can hold very well above that.”
