Ag markets ended mostly higher Thursday except corn futures.
Wheat Hits Contract Highs Again
Wheat hit contract highs for a second day on fund buying and adding Black Sea war premium.
Shawn Hackett with Hackett Financial Advisors says the market is trying to price in the loss of Russia and Ukraine wheat exports.
“The largest export months are September, October, November. In the month of August, they exported only the same amount that they did in 2010 when they had a one in 50 year drought and had export controls. So it’s just incredibly low volumes coming out of the region. And if those supplies stay turned off going into September, I don’t believe we’re anywhere near close to pricing in what that means for lost supply and scrambling buyers having to go find other supplies elsewhere to make it up.
Black Sea Exports Cut in Half?
Estimates on the loss of Black Sea wheat exports are right around 50% and Hackett concurs.
“That would be my view is the worst case scenario is that we stay at this 50% mark through the end of the year and there’s nothing resolved. And all that supply, gets stuck in Russia, Ukraine,” he says.
Global supplies are down due to drought in U.S. hard red winter wheat areas. So, the EU may provide some wheat but Hackett says it will be difficult to make up that large of a quantity of lost exports..
Ukraine is already talking about planting less wheat next year, maybe 7 to 9 million hectares less, due to low prices and logistics.
“You’re starting to hurt each other’s important agricultural assets. The price of wheat in Russia, Ukraine is going down because they can’t get the wheat out. The farmers there are just looking at dire financial circumstances. And so, yeah, the real possibility of lower planted acres, lower production potential because of lack of investment incentives is certainly there,” he adds.
Funds Buying Wheat
The funds were still short as of last week’s Commitment of Traders Report from the CFTC but have likely covered some of that position.
How much farther will the funds push the wheat market. Hackett says there is still room for them to cover shorts and add length to their position in hard red winter wheat.
“I don’t know exactly where they’re at today. We’d have to see the COT here on Friday. But I don’t believe that they’re anywhere near a maximum long position as a percentage of open interest, which is what we look at to see when they might be exhausting their ability to
continue to buy into the market. I still think they’ve got plenty of ammunition if they continue to be fed the kind of bullish news that they’re looking for for the next weeks and months,” he explains.
Corn Takes a Break
The corn market was unable to follow wheat and saw some end of month profit taking off of Wednesday’s new contract highs. It is also possible some farmer selling pressured the market.
“I think there’s a little bit of both. I mean, there’s always some shenanigans at the end of a month, as you probably know and many know. And so I think there’s a little bit of that going on. Plus, there’s no question there’s some coin that needs to be sold ahead of harvest here. That’s logical. And even for the December 27 contract, what actually got hit a little harder today, there’s some automatic hedge programs that when you hit $5.20, $5.30, you automatically sell X amount of percentage of your production,” he explains.
So that was a logical reaction to a market that’s moved up a lot.
Funds Buy the Break
However, he doesn’t think the corn market will stay down long as the funds and even end users will buy on the breaks.
“If we’re correct, that we’re in a more protracted move to the upside, higher highs and higher lows. Every break will be bought by cash buyers, by the physicals, by the people that need the product. I think everyone is now understanding that there’s likely not going to be as much or not enough product. And you need to be taking advantage of dips instead of selling rallies,” he states.
What Corn Yield is the Market Trading
So what corn yield is the market trading right now?
Hackett thinks it is the typical correlation on the Pro Farmer results. “We did an analysis that typically Pro Farmer is about 3% below what it actually is on January, which would put you in that 176, 178 area, which is smack dab between Pro Farmer and USDA.”
However, he thinks yield is likely to be closer to Pro Farmer’s number this time around which will mean tighter ending stocks and a stocks to use ration under 10%.
$6 Corn Possible?
So is $6 corn possible with that tighter yield, if it is confirmed by USDA?
Hackett thinks that is a reasonable target fundamentally. “What’s happened with the EU corn crop and what we think is going to happen with some really super El Nino-induced adverse weather in Brazil, we think $6 corn is a reasonable target to correctly balance supply and demand
going into the South American growing season. I think that’s reasonable,” he states.
That is especially true if wheat keeps moving higher and making contract highs as it competes.
“You start putting the wheat market at $8, $9, or $10, it makes it a lot easier for corn to put a $6 handle on it, for sure,” he says.
And the funds are not record long so they could add to their position in the corn and really all of the grains.
“We still got room to run here if the funds really want to continue to pile in. They’re not yet at historical exhaustion points.”
Soybeans Make New Contract Highs
Soybeans reversed a lower opening in tandem with the bean oil market to close higher, making a new contract high in November by a tick.
Even with record yield estimates the market has been moving higher with fund buying and strong demand. China has been buying and the new crop soybean exports were at 91.1 million bu. on the weekly report.
“They keep buying. Xi Jinping is coming here on the 24th to talk to Trump. I’m sure they’re going to keep buying and maybe they’re going to make some positive announcements on some other ag markets that they’re going to be buying.”
On top of that the crude oil market is not that far from $100. “And that’s obviously positive for the biodiesel market. So you have to keep your eyes peeled on that as well.”
Dry Finish to Soybeans in the Northwest Corn Belt
Plus he says the finish to the soybean season in the Northwestern corn belt looks hot and dry.
“I mean, that is definitely going to shave, you know, some bushels off in the West, in the Northwest,” he says, “And if you look at where the USDA is, if we just took a half a bushel off or even one bushel off the top, which really isn’t a big deal. But where the carry-outs are, we’d be talking about 220 million bushel carryouts,” which he says will make the market uncomfortable.
Plus, Hackett sys Brazil is moving into a hot, dry pattern for the first half of their growing season.
Bean Oil Reverses
The soybean market also got help from the huge reversal in the soybean oil market. Bean oil responded to a positive rumor that the SREs or Small Refinery Exemptions to be announced by Sept. 1 may be closer to 1.2 to 1.4 billion RINs or gallons versus the 1.8 billion that had been reported by news wires.
“They hit the market hard down this morning after the market had been hit for many days. And then just immediate reversal. A lot of times those down hard close up kind of days are your exhaustion reversal days that puts in the lows. I really don’t feel fundamentally whatever the ultimate rules are I don’t think we’re going to be spending a lot of time on bean oil prices below 70.”
Are $13 Soybeans in the Cards?
So are $13 soybeans the next target for the November contract? Hackett thinks so because he believes the Chinese are going to continue
to buy.
“I think the demand is going to remain strong, and I think we’re going to have to shave off a little bit off the top on the yields, and I think that’s going to be good enough with the funds still having ammunition to come in. I think that’s easily good enough to put a 13 handle on the market, and then we’ll have to wait and see,” he adds.
Cotton Makes New Contract Highs
December cotton also rallied above 90 cents and to new contract highs closing at 92.41 up 327 points.
Hackett says the market is adding weather premium. “We’re destroying the Texas cotton crop with crazy hot dry weather and we’re destroying the cotton crop in the deep south southeast with wet weather at exactly the wrong time.”
The crop was already near at decade low acreage and yields and crop conditions are continuing to fall.
“So we’re just looking at a really, really significant downgrade in U.S. supplies at a time that we’re having problems with China cotton drought out west in their areas. And even in India, they’ve had some unfavorable weather in Gujarat. So I can’t find any major cotton area that’s having a good crop this year.”
So he sees higher prices ahead. “If you look at the chart. So $1 a pound has just been an area that the market likes to gravitate towards when it gets over 90 like it did today. So to me, it just looks like that might be where we’re heading. And then those round numbers tend to stop the market for a while,” he adds.
Cattle Bottoming?
Cattle futures were higher on Thursday and look like they may finally be putting in a low as the most bearish news may finally be factored in.
Hackett says, “I think we’re getting close to at least a short-term exhaustion. I do. We’re starting to see the beef cutout prices starting to rally
again. We’re starting to see the packer margins improving. Definitely starting to see the funds getting uncomfortably short that market. And we’re getting into $210 support under the live cattle market, which, you know, looks to me pretty solid.”
He thinks the market is ready for a relief rally.
“One of the biggest declines we’ve seen really since the one we had, I guess it was the middle of last year that we had that big knockdown briefly. So it’s been an uncomfortable decline for sure that we haven’t seen in a while.”
