Corn and soybeans ended lower on Thursday with cotton, wheat and cattle higher.
Corn and Soybeans Fade Despite Skyrocketing Crude Oil
Corn and soybeans ended lower Thursday fading early strength tied to skyrocketing crude oil prices after President Trump addressed the nation and said the war in Iran would continue and could escalate if Iran doesn’t reach a deal.
Corn and soybeans ran into chart resistance and were also capped by the strong dollar but Shawn Hackett with Hackett Financial Advisors says those markets are also experiencing war fatigue and are tired of chasing every headline.
“I also think when you think about renewable diesel, the EPA, the new rules that the EPA put out, we’re not going to alter that too much depending on what crude is doing. So, when i really look at soybeans and corn I don’t really think there’s as much an energy component as
the market has kind of been worried about. In terms of fertilizer we know soybeans don’t really worry too much about fertilizer prices and corn, unless the weather for planting is not great, I don’t really think producers are going to change their intentions too much.”
So he thinks the market will soon move beyond geopolitics and back to weather.
Markets Setting a New Norm
The crude oil market as well as the grain markets are setting a new norm says Hackett. So, what is that norm?
“If we assume that we’re not just going to leave Iran and everything’s going to go back to the way it was, I mean, I don’t think anyone really believes we’re going back to the way it was. And I think what’s likely going to be that we’re going to keep a ongoing long-term geopolitical premium in the crude oil market and even in the international LNG market and in the fertilizer prices. My feeling is $75 is your low end during good times in the market’s perception. And I think $110 is the high side. I think that’s your new normal in terms of where the market can kind of bounce back and forth depending on how it feels about things.”
He thinks that is positive for higher soybean and corn prices depending on how long the war lasts and the outcome and its impact on energy markets.
“Who’s running the Strait of Hormuz? How much gets through? Who’s policing the Strait of Hormuz? How much of the infrastructure that was damaged, supposedly, how long will it actually take to bring that back on to the marketplace? Is it six months? Is it three months? Is it a year? These are all unanswered questions that we’re going to need clarity on once we feel we’re at a point where this situation has stabilized and we can make these determinations.”
When Will Grains Divorce From the Headlines?
Hackett thinks the grain markets are getting close and will soon turn towards weather for direction.
“I think we’re going to start to move away from it. We’re going to get into the planting season. We’re going to watch planting progress. We’re going to watch how things are progressing.”
He is keeping an eye on the weather and a strong El Nino pattern for the growing season.
“Generally speaking, historically, since 1950, El Ninos have always produced trend line to above trend line yields. The market is going to start to have to factor in the fact that we are probably going to have very good corn and soybean and spring wheat crops and factor that in to the equation of what the market needs to do from current prices. It’s going to be very, very hard for grain markets to take out and move substantially higher if we don’t have weather problems to worry about during the U.S. growing season.”
Will That Uncertainty Keep Funds Defending Their Long Position?
The funds have added to their long position in corn and soybeans and so with the uncertainty about weather, does that keep the funds defending those longs?
Hackett says they are going to defend the longs until they are sure how weather is going to turn out but once El Nino develops and the weather pattern changes they will head for the door.
“I think they’re going to quickly head for the exits as they typically do if weather’s good heading into August, where we’ve historically continue to make harvest lows repeatedly over the last five to seven years.”
Money Flow
So some of buying in the grains has been on money flow out of equities into grains, which are undervalued. So is that move just about done?
Hackett says, “I mean, there’s been a lot of new reaction of buying agriculture because of high fertilizer prices, the long term impact that that has on production, which in fact does if it remains the longer haul. But I do believe we’re not going to see much more of a rotation into
the ag group without getting Mother Nature involved. You can only do this for so long. You can only attract so much capital flows. And then you actually need to see the supplies actually get tight.”
He says that only happens if the U.S. has a poor growing season, which is unlikely.
Wheat Holding Weather Premium?
The wheat market was slightly higher on Friday but lower for the week. There were some rains in HRW areas but coverage wasn’t broad. So is the market trying to hold some weather premium?
“Yeah, some of the western parts of Kansas and the western parts of Oklahoma and the western parts of Nebraska did not catch those rains. It’s still a big swath of the KC winter wheat belt that needs the rains.”
He’s more worried about the likelihood for a flash frost coming in late April, early May.
“A lot of our work says we could be worried about kind of a cold snap that could come in at the wrong time. That might be the weather anomaly to pay more attention to than the dry weather.”
Some of this rally, though, in wheat has been technical and adding some overseas geopolitical premium.
Cotton in Uptrend
The cotton market was higher on Thursday and for the week and is in a clear uptrend. Hackett says the market has been getting help from higher crude oil prices and historically low planted acres for a second year.
“When we look at the blends that most clothes that you buy at the store, the blends are mostly polyester, which is petroleum based and cotton fiber. When polyester is economical, they increase the use of those polyester fibers, reducing the cotton fibers. Right now, the price of cotton relative to the price of polyester is near historic lows, meaning. There is every incentive to increase the blends of cotton and reduce the blends of polyester. And in order to get ourselves into a more normal relationship, Michelle, we’d have to get ourselves into the, let’s say, low to mid 80 cent range on December cotton.”
So he thinks there’s more upside to be had in the market. He also doesn’t buy into the 9.64 million acre planting intentions figure from USDA.
“All our independent work, all the customers we work with in the cotton area, all the economics, we look at it from comparative crops, the fertilizer situation, the cost of equipment, all of it says that we are not going to plant one acre more than we did last year. And we’re sticking to the idea that come June, when we get the June planting report, we’re going to see those numbers come down and be more in line with what we
saw last year.”
Live Cattle Hit Contract Highs Chasing Cash
Cattle futures were higher on Thursday with new contract highs in the deferred live cattle futures cashing cash trade.
A light trade was reported in most areas Thursday afternoon, with Southern live deals at $245 to $246, $8 to $9 higher than last week’s weighted averages. Northern dressed business is marked at $380 to mostly $385, $13 higher than last week’s weighted averages.
Hackett says continued tight supplies are also driving the market. Some herd rebuilding is starting which is further tightening available cattle numbers and that is being priced into the live cattle.
He thinks the market can continue higher with strong demand as long as higher energy prices don’t push the economy into recession.
“Which we don’t think would happen as long as we stay at $110 a barrel or less.”
The market was also impressive as it shook off the lower equity markets and unless the stock market corrects by 20% he thinks the cattle market will stay intact.
