Grains were sharply higher early Wednesday with livestock futures lower.
Grains Adding War Premium
Grains were back sharply higher on Wednesday following crude oil and adding war premium according to Darin Newsom, senior market analyst with Barchart. He says, “We can throw out technical analysis. We can throw out most fundamental analysis. It all comes down to algorithm analysis. And in these days, it’s pretty simple. Algorithms are driven by social media posts and events.”
Grains See Inflationary Buying
Newsom says the technical buying by the managed money funds is driven by the fear of long-term inflation and that is driving the commodity sector higher except for livestock.
He says, “We’re certainly seeing it in the energy sector and the energies is pulling the grains higher. We’re also seeing rallies again in the softs market for whatever reason, because weather’s been fine for most of the softs market. So, you know, again, we’re just seeing basically across the board in the commodity complex.”
Do the Funds Keep Buying in the Grains?
So will the funds continue to buy in the grains as a hedge against inflation?
Newsom thinks it is very possible. “I think so, because, you know, the reality is, yes, they’re driven by each and every. They seem to be driven by each and every social media post. But the reality is, if we take a step back, if the engineers or the writers of the coders of these algorithms take a step back and realize what some of the long term investors do, this thing’s going to last a long time. This war is not going to be over just because the U.S. president sends out a social media post that says “very completed.”
He says as long as mines are still going off in Iran and the Strait of Hormuz is still closed the market will see buying. “I mean, this war is going to last for a while and the markets are registering that. And again, it’s being led by the energy sector. But it’s basically the same thing that we saw four years ago when Russia went to war against Ukraine. “
How High Could Crude Oil Get?
The IEA is proposing the largest release from the oil reserves in history at 300 to 400 million barrels. So how much will that help the supply issues and how high could crude oil prices rally?
Newsom says it is interesting that the previous administration was criticized for doing the same thing during the Black Sea war in 2022 and this war is self induced. “So the price explosion that we’ve seen has is due directly to what the U.S. is doing and so how high can we go? We saw almost $120 per barrel overnight into early Monday morning. And then, of course, we get the famous social media post that dropped crude oil, cut 33% from the crude oil market, the price of the spot month contract by the end of that day. So we know the market’s comfortable going up to $120. It could certainly go beyond that, $140, $150. It depends on how long this lasts. It depends on how long the country who’s benefiting from this the most being Russia, oddly enough, how long they want to continue to sell cheap crude oil into the rest of the market that can’t get it from Iran at this point.”
CPI as Expected, But Not For Long
The CPI out Wednesday morning was at 0.3% month over month, up 2.4% year over year. However, that will change dramatically next month with higher crude oil prices and gasoline prices.
He says, “These are government numbers and you never know exactly how they’re put together. So, you know, there’ll be arguments both ways. But yes, theoretically and logically, they should go up because, yes, it’s being driven by fuel right now. But it’s going to I mean, the ripple effect, as we’re seeing right now, because of the buying, it’s going to pull food prices up as well. So we’re going to have food and fuel going higher. We already know housing’s going up. We already we also know that interest rates aren’t going to be cut any time soon because of this fear of inflation.”
Bean Oil Surges on RVO Talk
Bean oil is also surging on the May contract over 280-points due to a rumor that the RVO levels, which are supposed to be released yet this month, might be as high as 5.4 billion gallons on biomass-based diesel and 70% of the small refinery exemptions (SRE)s might be reallocated to refiners.
However, Newsom doesn’t think the levels will be that favorable. “We’ve heard this before. And, you know, the powers that be have to make waves in markets. So this is something we’ve seen it for the last decade, the last 10 years, that things are said, rumors are released, market reactions are watched and tracked. Over the last 20-some years, we’ve heard the same thing. Renewable diesel is going to do this. Crush is going to make it so that U.S. doesn’t have to export any soybeans. It’s all ridiculous.”
China Meeting: Will it Happen?
The soybean market has also been pricing in optimism regarding a China deal at the end of the month. However, with China’s two biggest sources of cheap oil taken away by the U.S. he doesn’t think the meeting will end up happening. “There’s no benefit to China to going to the meeting. And right now they still have one of their bigger suppliers of cheap oil still available to them. And that’s not going to get cut off because again, Russia is benefiting from all of this. And that was the game plan.”
What are Basis and Spreads Doing?
In the meantime what are basis levels or grain spreads doing? Newsom explains. “This is where we’re starting to run into some problems. How much can we believe spreads since the nearby contracts are getting overloaded? And I can’t believe I’m the one saying that there comes an asterisk now with the spreads. But if we just boil this back to basis, we continue to see weak basis in both corn and soybeans in the wheat markets and so on.”
Cattle Fall With Equities, Higher Gas Prices
Cattle futures were under pressure again Wednesday on the fear that higher gas prices will hurt beef demand, plus weakness in the equities market.
“And historically, there’s been at least a weak or casual link between U.S. equities and particularly the live cattle market,” he says.
The spreads are also weakening which indicates increased commercial pressure. “Its due to the lack of consumer demand, fear of inflation, higher gas prices, and all of these things could start to be coming, you know, could be weighing on the cattle markets at this time and could stick around for a while,” he explains.
