Grains were mixed early Thursday, with livestock futures higher except for deferred hogs. Cotton was making new contract highs.
End of Month Profit Taking Early in Corn, Soybeans
Corn and soybeans saw early pressure after new contract highs Wednesday and some three year highs in corn.
Darin Newsom, senior market analyst with Barchart, says it is not unexpected to see a little profit taking after a big rally as the markets are overbought. Plus, this could be some positioning ahead of the month and first notice day on September contracts.
Funds Buy the Break?
However, he thinks any break in the grain markets will quickly be bought by the funds.
“This comes down to funds, algorithms, this sort of thing, because the fundamentals of the market really aren’t changing all that much day to day. But, you know, if we look at what we’ve seen so far this week, let’s just look, you know, December corn is an example by my count. The
December contract itself had a trade volume of over 500,000 contracts on Monday, followed it up with nearly 400,000 on Tuesday and then another 400,000 plus on Wednesday,”
He says those are huge numbers for corn for this time of year as we head into harvest.
“And these aren’t sell orders. These aren’t this isn’t commercial hedging going on. This has basically been unchecked fund buying in the market. And as you said, it’s pushed it to multi-year highs, two to three year highs.”
Newsom says there is risk of liquidation when a market goes straight up. “It doesn’t leave much underneath. You’ve burned up most of the buy orders.”
Still he says the close is more important today and for the week and month and he thinks the funds will buy on any break.
End User Buying?
Is the rally all based on fund buying or are end users also buying?
Newsom says he doesn’t see clear evidence of that. “We continue to see a pretty solid carry in the in the Dec March futures spread. So it tells us the commercial side remains relatively comfortable with the supplies that will be available as harvest gets rolling, particularly coming out of this marketing year. The Dec future spreads covering something like 73, 74 percent calculated commercial carry. So it’s bearish telling us that there’s going to be ample supplies left over, rolled ahead into the new crop. But it’s later on that things start to get tightened.”
He says right now it looks like some possible end user buying out in that March or May timeframe with the May-July spread, getting close to going to par, possibly going to inverse, maybe not by the end of this month, but possibly by the end of September. So that would make things much more interesting,” he adds.
Are Farmers Selling the Rally?
The other possibility is the rally is being met by some farmer selling at contract highs.
Newsom says he hopes producers are taking advantage of the rally any many are asking about marketing strategies.
“How do you sell this up here when volatility is this high and so on? Some have had a good idea of running some trailing stops. You’ve got to give it a lot of room. But, you know, again, if we just look at the market from where it is, you know, as Dec corn rallied past $5.30, approached $5.40 and so on. Prices that, again, we haven’t seen in two or three years. Getting a little bit on the book certainly isn’t going to be a bad thing.”
He also says some sales are prudent as there will be some harvest pressure in areas where the corn crop looks good.
“I’ve heard from different parts of central Nebraska where the corn crop looks like it’s going to be fine. We would expect basis to continue to weaken. So if you could just make some cash sales, get some cash sales on the books that lock in both price and basis, you’d probably be looking pretty good once harvest gets going,” he says.
Wheat Adding War Premium
Wheat futures started lower but immediately turned back higher adding war and geopolitical premium. Russian President Putin yesterday sounded the alarm on Wednesday about escalating the war with Ukraine putting the market on edge.
Newsom says the headlines are moving the algorithms.
“But what’s the reality? We’ve been dealing with this for over four and a half years and we’ve heard the threats before and we’ve seen the threats before and we’ve seen the headlines and all of this sort of thing. Yes, algorithms move to the beat of these things. But again, what’s the reality? I know nobody’s actually interested in reality, but what’s the reality of supply and demand? And we look at the soft red winter wheat market and its reality is it’s fundamentally bearish. It has been fundamentally bearish. It simply hasn’t changed,” he explains.
Crop Getting Smaller?
The entire grain complex has been getting a boost from ideas that at least the corn crop is getting smaller.
Newsom admits that started after the August WASDE.
“Everyone knows me. Everyone knows my opinion of these things. But there’s no denying that the rally that we’ve seen in corn this month. started on August 12th. We posted a low on August 11th. It was relatively quiet up until about 11 o’clock central time, 12 o’clock eastern time when the report was released. And December corn has done nothing but go up since. I mean, it’s obvious what the connection is. When USDA lowers its numbers, right or wrong, doesn’t matter. It doesn’t matter what yield is, production. But when they lower the numbers and the algorithms see that X is below Y and Y was what was expected. They’re going to buy. It triggers the buy. It doesn’t matter if it’s logical. It doesn’t matter if it makes sense. That is what’s going to happen. And that is what happened,” he explains.
He says that is why the corn market has seen such incredible volume and growth in open interest.
Rare Rally in August
It is also somewhat rare to rally in August as it is a counter seasonal move.
Newsom says that is true to a degree. “Now, the seasonal patterns have changed for December corn I’ve noticed over time. You’re right. I mean, used to be in the old days, you know, December corn would move lower September into October and so on. Then it got pushed back to once we hit August it started to flatten out that was usually because there was so much pressure over the rest of the summer starting in June July and so on. We would see the market really fall during that time frame and then you know we would flatten that into August sometimes we would post our low in late August early September and then slowly start to move higher.”
However this year it was a straight V bottom on the charts, including the weekly and monthly charts and it has continues higher ever since.
“So it’s a bit contra-seasonal. And contra-seasonal means fundamentals have changed,” he says.
Demand Part of the Rally?
It is not just tighter supplies driving the rally it is also demand. Corn exports have already made records and should stay strong with the EU drought.
Plus, soybean exports are at record levels for new crop sales with 91 million bu. in the weekly export report.
“The real story is the new crop soybeans and it isn’t because the U.S. is such a good deal? No, it’s because there’s concern over Brazil’s 2027 crop. And again, we can see this in the March, May and May, July spreads. March is not concerned about U.S. harvest. If we look at the Nov Jan spread, Nov March, we can see commercials are relatively comfortable with what U.S. production is going to be. It’s when we get further out in that time frame when Brazil’s new supplies take over the export picture,” he says.
China Buying on South American Weather Concerns
Newsom thinks the concerns over Brazil’s crop are why China has been buying U.S. soybeans.
“It’s not politically motivated at all. I mean, the trade war is still in place. That hasn’t changed. It’s not going to change. And I just don’t think people understand that. There’s nothing concrete. There is there is no deal there are no deals the situation is the same as what it was when this whole thing started in January 2018,” he adds.
Funds Concerned About Inflation
The funds may also be buying on concerns about inflation according to Newsom.
“I think there’s a certain part of that. You know, we know inflation is real. We know it’s still a problem. We have seen if we look at the Fed Fund futures forward curve, the idea of a rate hike has now been pushed back to after the midterm election shockingly enough. So now it’s showing that it’s probably going to be December when we see the next rate hike. Initially it was supposed to be in September then possibly October there’s no FOMC meeting in November and now it looks like it could be December,” he states.
So he says the energy sector prices have cooled while grains have rallied, and much of it has to do with the change in money flow from one sector to the next.
“The U.S. dollar really hasn’t moved all that much. That’s simply because, yes, we are dealing with inflation and we are seeing some commodities react to this. But the bigger part of it is that the rest of the world, for obvious reasons, is selling the U.S. rather than buying.”
Cotton Above 90 Cents
Newsom says cotton is one market that is reacting to inflation concerns as December has moved above 90 cents and new contract highs.
However, it is also adding weather premium with the heat and drought in particularly in Texas, eastern Texas, and across the southeastern growing area. “The weather’s been a little bit rough. So, you know, it certainly could be lending some commercial support outside of also renewed non-commercial buying.”
Cattle Bottoming?
After a tough start to the week on the Trump administration’s plan to lower beef prices by bringing in imports and reopening the border to Mexican feeder cattle.
The market tried to bounce off new lows for the move late Wednesday and was higher Thursday.
So is the market finally bottoming? Newsom is hopeful.
“Yes the U.S. president’s trying to crush the U.S. cattle and beef market, similar to what it did to soybeans way back when, what it’s done to corn and ethanol and all of these other U.S. ag markets. Cattle and beef is just the latest, but the reality, again, is the fundamentals didn’t change. We didn’t all of a sudden create new domestic supplies. That hasn’t happened. And that’s one of the reasons why all this talk of reopening the border, importing hamburger, and all these other things is to crush the market ahead of U.S. midterm elections. It’s very important that the cattle and beef market crashes and prices stay low because then that makes the administration look better, at least in terms of possible voters.
