Grain and livestock futures ended mixed on Thursday.
Wheat Rallies on China Interest
Wheat futures made new lows for the move early in the session and then reversed and rallied as Bloomberg reported that state-owned crop trader Cofco Corp. asked about U.S. SRW for delivery to China, potentially signaling Beijing is gearing up to expand purchases of U.S. crops beyond soybeans.
Shawn Hackett of Hackett Financial Advisors says with wheat falling nearly $2 off the Sept. 2 contract highs, it isn’t a surprise that China and other buyers would see it as an opportunity.
“And when you came down to the one year, three-year and five-year moving averages, that’s usually a time that buyers tend to start stepping in. And it also means that maybe we’re going to start seeing China look at buying corn, or even we saw some cotton numbers that would look pretty good from them,” he says.
This is a signal that China may make good on the $17 billion of pro-rated business they committed to.
Hackett says this is typical for China to come in and buy when prices are the cheapest and it makes good business sense.
Could This Bottom The Market?
Hackett says this is the kind of demand news the market has been looking for and it what could finally stop the selling pressure in wheat and even corn and cause some short covering.
If that happens it could also signal a possible bottom in the wheat and corn markets, which have been tied together.
He says the key is whether there is an confirmation of the China sales and there needs to be fairly sizable purchases and it needs to be buying beyond just soybeans.
“A one hit wonder is not enough. But if we see that this is a part of a systemic program of buying consistently, then I think that this week will be proven to be an important week for a low.”
Corn Sees Demand at $4.50
The corn market had strong weekly exports of 51.3 million bushels on Thursday, which is a good indication that end users see value when corn falls below the $4.50 mark.
“There’s no question that we’re stimulating demand at that level and remember that one year, three year and five year average that we came to in wheat we also did in corn. Those are really important for buyers,” he says.
Will China Buy Corn?
China has bought around 62 million bushels of U.S. SRW wheat so far this year but no corn.
So how much corn could they purchase as part of the prorated $17 billion?
Hackett speculates, “You know, of all the markets that I look at, of course, we never know how big their crops are over there. They never really tell you for sure. But I think they probably don’t need the corn as much as they might need the wheat and the soybeans and the cotton and maybe even like things like dry
whey or things.”
It doesn’t mean China won’t buy some corn, but they don’t need much unless it is a good deal.
Corn Exports Lag
Currently corn exports are lagging last year by 34% so getting China in the market would be good but can the U.S. export program get caught up?
Last year corn was pulled ahead to export because the Pacific Northwest had no soybean export program with China out of the market. So this year the shipping may have to move back to normal.
“It was a little bit of a distorted year over year comparison, but I do believe we’re going to catch up at this price level. We’re absolutely going to start catching up and the numbers going to start looking better. And as we get to the end of the year, I think that gap’s going to narrow considerably. Corn is a very, very good deal here right now,” he says.
Harvest Pressure Subsides
At the same time the harvest has moved past 50% and farmers are likely to going to store corn and wait for better prices.
He says, “It’s going to be hard to get much selling, in my opinion, out of farmers’ hands after another couple of weeks.”
Funds Done Selling?
This year there was not only commercial selling pressure in corn but the double whammy of fund selling at the same time.
So are the funds done liquidating? Hackett thinks the market is getting close to the end of the fund liquidation.
“I would say that they’ll probably square, give or take. That’s my estimate right now, that we’re probably fully liquidated. And I don’t see an appetite for them to go short post-harvest. That’s not typically a good time to put a big short position on post-harvest rallies, typically what happens this time of the year.
Soybeans Searching For Low
The soybean market made new lows for the move again on Thursday and seems to be searching for a low.
Funds are still heavily long in soybeans and meal and have been selling ahead of first notice day for the November futures and the Brazilian currency falling to the U.S. dollar which was like a 10% to 12% correction.
Hackett says, “Yeah, I don’t think we’re at flat yet on the soybeans, and plus the real, I’m not sure we’re done with that yet. We have to watch how the real trades here over the next week or two.”
Higher Yields
He thinks the market is also nervous about the higher yields farmers are reporting during harvest and the possibility that USDA will increase yield in the November WASDE.
“And maybe those carryouts go up, so we have to price that in yet. And we have not come down to the one-year, three-year, and five -year moving average. In order to do that and achieve a corn and wheat, have already achieved, you need to get yourself into the low 12s. So maybe another, you know, still another, let’s say 30 or 40 cents to go before we might get some more strong technical support here.”
“You quickly have to adjust the price in the U.S. to kind of re-normalize the arbitrage and that’s why that you know immediately we were down 15 or 20 cents right out of the gate when that happened and we haven’t been able to like we’ve been just sort of falling ever since. It’s a big problem for soybeans, not as much for corn, not as much for wheat because they’re not as dominant, but in soybeans, really, really tough to overcome such a dramatic adjustment in such a short period of time.”
Cattle Correct With Cash, Beef Prices
Cattle futures were lower again today and have been seeing some profit taking with lower cash trade being reported in the north at $350 to $352 dressed and $223 to $225 live.
Hackett says boxed beef has also been seeing pressure and is below year ago levels as packers are trying to regain margin.
“It’s very disappointing to see that production is down, slaughters are down, and beef cutout is down from a year ago, showing demand is not chasing beef prices any longer,” he explains.
At the same time more cattle are coming across the border from Mexico. “Those feeder volumes are now 50% back to normal and every week that we’re bringing more in, it’s easing the animal pinch over time. And so it’s really hard to see why the market would do much more than it already has.”
Ran Into Chart Resistance
Technically the live cattle ran up against strong resistance at $230 to $240 on live cattle and that $340 to $350 on feeder cattle.
“Now we’re starting to roll over. Hard for me to imagine that we’re not going to continue this correction into November.”
How much could prices retrace? He thinks the August lows are a possible target.
“I think we might be establishing some kind of a trading range back and forth and back and forth and back and forth for a while until the market could determine better about what the long-term demand side picture is and whether or not we can actually do something with supply,” he adds.
He also discounts the ability of the market to rally into the supply hole created by three months of record low placements that will come in 1Q.
“I feel the market’s going to be looking ahead. The market always knows that the cattle market’s a long-term moving train. And if they see that the supplies are going to be better further out into the year, I don’t think they’re going to be chasing and panic trading because we have some tighter supplies in the near term. I think they will overlook that and trade the bearish longer term picture,” he explains.
Lean Hogs Bounce
Lean hog futures bounced off of new contract lows. The market was oversold and due for a correction and did see some short covering, plus weekly exports were strong at 42,300 metric tons.
Hackett says more demand like that is needed to stabilize the market.
“And today’s number was the first number we’ve gotten that says, well, maybe we finally have come down low enough to at least get the export demand side going. 20% down on pork cutout year over year and the slaughter and the production’s down year over year. It’s just, I just don’t have an answer for how demand
could be this bad for a meat protein that’s should be pretty economical,” he states.
He says the commercial short positions in hogs is as low as it has been in 25 years, which usually occurs when you’re near a low.
