This morning I was interviewed by Michelle Rook on AgWeb's Markets Now. She asked me about the wheat, soybean, and corn markets. In addition, we talked about the cattle market and the stock market. WATCH THE INTERVIEW HERE.
Michelle Rook: Welcome to Markets Now. I'm Michelle Rook with Darin Newsom, Senior Market Analyst with Barchart. We're seeing some mixed trade in grain and livestock futures this morning. Darin, I guess let's talk first of all about the grain trade. Wheat market, it's the price leader to the plus side, so let's talk about that one first. Is that just short covering, or is that market following this European market, which has been tacking on some higher closes?
Darin Newsom: It could be a combination of both. Michelle, I'm not really reading a lot of fundamental change to the market right now. If the European market is providing support, it's going to be light. I think the bulk of this is probably coming from noncommercial short covering. Based on the simple fact, funds are getting bored with this market. The news in wheat just doesn't change. Fundamentally, the US market is bearish. It's been bearish for as far back as I can remember. We've got spring wheat harvest going along. We've got basis in all three of these markets. Hardwood winter, softwood winter, and hardwood spring are weak compared to their previous five years.
There's just nothing to get excited about. With so many other outside markets, particularly over in the energy sector, starting to show some life, it wouldn't surprise me if money just starts coming out, meaning short positions are covered and moving over into something a bit more active, something a bit more interesting like energies.
Michelle: Yes. They go, the funds that is, they pick things that are undervalued or at least, like you say, have some decent price movement, right?
Darin: Correct. They're looking for activity because low volatility markets just don't do much for them. One of the things we'll talk about is when funds start to move money around. This is an opportune time. We've got Goldman roll and everything else going on in the September contract. If they're getting out of some markets and they're looking for others to go to, one of the first things they look for is markets or market sectors with bullish fundamentals, and we can tell that by futures spreads. They're going to look over at energies. They're going to look over at maybe some of the oil seats. They're going to look over at some other markets.
"Okay, we've got strong carry in the wheat's subsector, all three markets." There's nothing interesting about that, there's nothing for them to do, so they're going to look for other markets that may have a bit more life going over the next quarter or so.
Michelle: Well, certainly, we haven't seen evidence yet in the row crops sector anyways, that they're going to cover shorts over there, except for some like one or two-day pops with money flow, like when we had the stock market sell off earlier this week. Is this what you're seeing that's typical of just a big crop? We just keep leaking lower?
Darin: Yes, it is. If we watch these spreads from week to week, we can see that they're covering more calculated full commercial carry. In other words, the commercial side is growing more comfortable with what the 2,000-- what the new crop supply and demand situation is. It doesn't tell us anything about yield. We don't need to know what yield guesses are or overall production guesses are. What we can read, what we do need to know is that the commercial side is getting more comfortable with overall supply and demand. If we look at how December is losing ground to March, May, July and so on, it tells us production is getting larger.
This all seems to fit seasonally. We've still got time, I believe, a couple of months before the market tends to bottom out, the Dec corn and November soybeans. Time and space is not on the side of the markets right now. It certainly looks like there's just no reason, again with harvest just coming on, for funds to get overly excited about having to get out of their short futures positions and probably be adding to them here over the coming months.
Michelle: Technically, December corn, last week we took $4 out. We closed back above it. That's going to be pretty pivotal here, key for Friday, isn't it?
Darin: I think so. A couple of reasons why. Number one, round number reliance, corn likes round numbers. $4 is a big round number. If it takes that out, then we're probably destined for $3.90 and then maybe $3.80 and so on, until it starts to uncover that buying interest. Also, if we go back to this past February and look at the US government insurance spring base price and we take 85%, I think it was like $4.67, that comes right in around $3.95 to $4. You would think we have a synthetic floor here at this point where it just doesn't pay on the commercial side to push the market below. Sometimes that provides support. So far, it's a little bit dicey.
We'll see how we close out, how we finish today, and as we move into next week with weather being the key driver.
Michelle: Yes. Weather is a key driver in the soybeans as well. Obviously, that looks fairly bearish for next week anyways. We did get some export business that was finally confirmed here this morning. The spreads have been telling us that we were going to see that business, right?
Darin: Yes. There's been a number of mornings here this week where we've seen some overnight trade, where the nearby contracts made gains against the deferreds. Then, as the day wore on, it eroded away. This told us, there was some overseas business being done, possibly over into the Eastern Hemisphere. Certainly looks like some of it was done. Our new crop export sales, based on the last weekly export sales and shipments, are still aren't anything great. We are starting to see some sales made each week, which again, isn't overly surprising. We've got the national cash index down well below $10 at this point and dropping almost a dime a day.
That's going to attract some actual cash buyers, not a lot, but enough to just say it covers some secondary needs.
Michelle: To your point, I think new crop exports for soybeans are down like 56% versus last year. Certainly, that gives the bears a little bit more ammunition. Do you think that the November soybean contract is going to be able to hold $10 with what we just talked about and the fact that you're still looking at a big crop?
Darin: Probably not. I think it closed Thursday somewhere around $10.07, $10.08. Depending on how Friday plays out, it could really test that big round number here as we close out this week and looking ahead to next week. Unless something changes weather-wise, unless we start to see a more dramatic move, say above normal temps and below normal precipitation for most of the Midwest and in parts of the Plains, it's going to be hard for November soybeans just because it's a $10 number to hold above that level.
My guess would be it's probably going to work below until we get some sort of reason for either the commercial or noncommercial traders to step back in and start buying.
Michelle: No doubt. I don't see a reason on the horizon that would be unless it's something black swan, geopolitical, something like that, right?
Darin: Yes, as far as the politics of the situation go, I don't see that changing anytime soon. We know the US has become, again, a secondary player. Brazil basically takes care of China's immediate needs. Then, again, China, unknown destinations and so on are basically just picking up some blue light specials on the US supplies whenever they just, again, need to top off what they're getting elsewhere.
Michelle: No doubt. We've blamed a lot of the pressure in the wheat, corn, soybean market, whatever it might be in the grains on technical selling, fund selling, but there's been a lot of farmer selling too, hasn't there?
Darin: I would say so. If we look at where the cash indexes were at the end of July, it told us available stocks to use have really ballooned over the course of last month. That indicates that there had been a lot of grain moved to town. Now, we had winter wheat harvest going on in July. We got spring wheat harvest going on here in August. I have a hard time believing there was a lot of soybeans in store that came to town. There was probably some, but I think the bulk of what we saw moving to town was probably on the corn side. Again, we could see this with basis weakening a little bit late in July and continuing that weakness, continuing to see that slide here in early August.
Michelle: Cattle market is trying to recover here this morning. We've had a big sell-off here, a correction, in tandem with the stock market, although it was interesting yesterday that the stock market had a big rally, and cattle market was still down. What do you see ahead for this market? Are we going to be able to heal or recover?
Darin: I think it's going to be a real test. Again, there is a tie between particularly the live cattle market and the US stock indexes. As I wrote about once this week, there seems to be a change in attitude towards stocks at this point. It's gone from buying the dips to selling the rallies. Thursday's, as you mentioned, sharp gains or solid gains was met with a little bit of selling. We'll see how Friday plays out. This could have ripple effects over into the live cattle market. Now, what has stood out to me, even with Monday's washout in the livestock sector, we saw solid commercial buying in both live cattle and not quite as much, but similar in feeder cattle.
As the weeks progressed, the commercial side of the live cattle market stayed solidly behind these contracts. We can see this starting with October moving out. Yes, August is a proxy cashed contract at this point, but we can certainly see that in the spreads, October, Dec, Feb and so on. As long as that continues, that gives market bulls at least a little sliver of hope.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
