Earlier today I spoke with Michelle Rook on AgWeb's Markets Now. We discussed the soybean, corn, and wheat markets. Michelle and I also talked about the cattle markets, the weather, the sagging US dollar, and crude oil. WATCH THE INTERVIEW HERE.
Michelle Rook: Welcome to Markets Now. I'm Michelle Rook with Darin Newsom, senior market analyst with Barchart. Grains are leaning to the downside, as well as hog futures, and crude oil. The dollar index in the cattle market are to the plus side today. Darin, let's talk about soybeans. We've been testing that $14 level, we did it again in the overnight session in the January beans, but are we seeing profit-taking today? Is that why we're getting this set back in the market?
Darin Newsom: Yes, I think what we're seeing is pretty standard anymore operating procedure for soybeans, where initially, in the overnight session, we see some commercial buying coming in, certainly indicating there's some interest from eastern hemisphere buyers, while the western hemisphere is asleep, and so the market rallies. We saw that again in the January. Then, as the overnight session wears on, we get into the early morning hours, things start to fall apart, and then as the day session progresses, there just isn't any follow through.
With funds already long the soybean market, and rightfully so, they're getting out of a few contracts here and there. I don't see a huge volume here on Wednesday, so likely putting a little bit of pressure. Long-term, the fundamentals of the market haven't changed. There's still a great deal of concern going further out. If we look at those March, May, May, July future spreads, we know that the commercial side is still concerned. Yes, I think we're going to keep testing that $14. Overnight, we're going to probably pop through it at some point, but then, the market's got to set back to get the buyers interested again.
Michelle: Although we have seen maybe a little rain in the forecast for areas of Brazil coming up here, and we've seen some downgrades of the Brazilian crop outlook in the meantime, what is your assessment? If we miss these rains this weekend, could this market really take off, get above $14 and keep going, or not?
Darin: Sure. We have to keep in mind, it's the equivalent of May here in North America, so there's a lot of time for the Brazilian crop, but if they miss these rains, there's going to be a great deal of excitement. We're going to see funds coming back into the market. They're going to push this thing higher. We already know, as I mentioned, that the commercial side is already concerned. We've seen the major widespread cut to something like 2 or 3 cents carry, so it's not that far away from going inverted.
When that happens, then we'll know that there's-- I'm not going to say there's a panic, but there'd be a panic-like situation in the long-term soybean situation. We knew going into the 2023 crop, the US production was going to be smaller. We knew we'd lost acres. Now, this doesn't look like production is going to be that great no matter what because of weather here in the United States. If we top that off with reduced Brazilian production, all of a sudden, the global situation starts to tighten, even if the US isn't a major player in the global market anymore.
Michelle: We're still seeing the meal market kind of driving the boat here. We're back lower here today after new contract ties again in the meal market. Do you anticipate meal is going to continue to be strong here for a while and hold up the beans?
Darin: I think so. I think that's really the catalyst for what we've seen in soybeans so far. Soybeans could certainly take the baton here later in the marketing year, but right now, it's all about soybean meal. Quite honestly, soybean meal looks to me to be doing very similar activity as to what we've seen in the soft sector with coffee, and cocoa, and sugar, and orange juice. All these just skyrocketing to historic highs, all on tight fundamentals driven by weather problems around the world.
If we go back to last year's weather issues in Argentina and its reduced crop, Argentina being the number one soybean meal exporter in the world. We knew then that the world was going to have to look for another source. Right now, it looks to be the US based on what we're seeing in US soybean meal sales and shipments. Yes, I think we're going to continue to see strength in the soybean meal market until we get a better feel for what Argentina might produce this year.
Michelle: We also have President Xi and President Biden meeting here today, and we've had some sales prior to this. Is China buying because they are concerned about South America's crop, or is this just goodwill gestures?
Darin: Probably a little bit of both. There could be some headlines of some large sales, but these will probably be worked out. Well, probably, what has been worked out when the Chinese contingent came to Iowa, what, a month and or a couple months ago, something like that. I'm not looking for anything earth-shattering in the way of supply and demand changes. We do know that Chinese buyers are concerned. They can look at the crops, they can look at the future spreads, and they're part of the commercial side that's been buying deferred issues, knowing that the top has probably been taken off the Brazilian crop. Chinese demand is going to stay strong. Whether they want to or not, they're going to have to buy some beans from the United States, possibly more than what they were planning. That's just the nature of the beast when you're dealing with weather.
Michelle: Corn is also down today, probably following beans, maybe a little profit-taking there as well. That market is going to have a tough time really rallying here, unless we see a big pickup in exports. Because supply situations still is pretty burdensome.
Darin: Yes, the supplies, we've got plenty of corn supplies right now. Again, we can see that in basis and we can see it in spreads. It's interesting, interesting is probably the wrong word, to look at the daily chart for December corn, basically just going sideways. Overnight, we popped through the round number, and Tuesday's high on 480, but it did not generate any buying interest and we quickly fell back below that mark. Now it just looks like we're going to be comfortable between last Friday's low, I believe, at 464 and Tuesday's high of 480. We've just established another sideways range, until either side commercials or non-commercials show any type of long-term interest in this market.
Michelle: You've got kind of that same scenario going on in the wheat market, and certainly, demand is an issue there too, isn't it?
Darin: Yes, demand is a big issue in wheat, particularly in soft red winter, but I guess we could say demand for US wheat as a whole, but the supply and demand situation in soft red winter is just a train wreck. We've still got the D Smart spread as we're closing in on delivery for the December contract, still running a 73%, 75% calculated full commercial carry. That's with the higher storage rate that went into effect with variable storage break program here in September. It's just an incredibly bearish situation. We're also seeing national average basis running well below its previous five-year lows. There's just nothing bullish fundamentally about soft red winter wheat, and that's certainly weighing on the Kansas City and Minneapolis markets as well.
Michelle: Now, the speculative setup is the same in corn and wheat, with funds really short. What would be the one catalyst that could get them to cover those short positions in either market?
Darin: Yes, just losing interest. I would say that if something's going to happen along that line, we could probably see short covering in corn before we see short covering in wheat, because if they're looking at the fundamentals, we've got a neutral situation in corn that could start to work towards the bearish side, if things start to play out differently. That's just not going to happen in the wheat market, particularly the Chicago soft red winter market, it's not going to go bullish. It's going to struggle to even get back to neutral anytime soon.
If we're going to see some short covering in the not-too-distant future, it would probably be in corn. I know there'll be a lot of argument that the funds could look to start covering some of these shorts if the US dollar starts to fall flat. I don't know that that's going to be a huge catalyst. One of the other thing, we could see some of that money moving over into other markets, say, seeing more investments, getting out of the dollar, going into, say, equities and possibly treasury futures, and these sorts of things. I just don't think it's going to have a big play on the fund position in grains.
Michelle: Cattle market is up for the third day here today, after a really ugly week last week. Are the funds going to wait for a little appreciation in prices before they pounce on this thing, especially if we get some bearish placements in this cattle on feed on Friday?
Darin: We have to remember that the cattle on feed is as of November 1, so those prices theoretically and realistically, they've been priced into the market a long time ago. There'll be a set of folks that get excited about it, but these numbers are at least a month old upon release, so we have to keep that in mind. As far as the cattle, it's interesting and you mentioned this could be the third day higher, and that certainly brings to mind a Benjamin Franklin fish scenario or a similarity, where we have to talk about guests and fish. Markets start to stink three days of moving against the trend, and the trend has been down.
We'll have to see, if we do close higher again on Wednesday, if that does bring some selling back into the market Thursday and possibly leading into Friday again ahead of the next cattle on feed report.
Michelle: Yes, but the cattle market, man, we had a correction, $23 off. They hide a low in the February live cattle contract. I think about $45 in the Jan feeders, and so we could just be cleaning up our oversold status too, couldn't we?
Darin: We can. We certainly could be, because again, the market's got way ahead of themselves. We've been talking about for weeks how they look top-heavy, and the sell-off that we saw was extremely contra-seasonal. This is the time of year when we normally see markets going up, and so usually, that tells us there's something that's changed fundamentally. I think we might have to put an asterisk by that this year.
We haven't seen a huge change fundamentally. In fact, we've been seeing commercial buying in the live cattle market, according to what we're seeing in the spreads. This would tell me, this is more of a fund play than a fundamental play. Those happen sometimes, and then they can lead to these contra-seasonal moves, but you're right, that was quite a collapse seen in both cattle markets.
Michelle: Your thoughts about some of these outside markets, dollar for one, we hit two-month lows yesterday after the CPI number came out and it was better than expected. Is the market anticipating we're not going to see another rate hike in December? Is that why the dollar's doing what it's doing and will it continue that trend?
Darin: Yes, it's interesting listening to the talking heads on financial television because that certainly seems to be what they were pointing to yesterday. What we've heard from Chairman Powell and the Federal Reserve governors as a whole is that, we can't completely discount the idea of a possible rate hike in December. It would make sense and it would still fit with the overall plan that the Fed has had, and nothing really has changed economically. Inflation, is still here. It's not rampant, like those of us who have gone through the '80s and everything could point to, but we still have inflation.
We could still see another interest rate hike, and what we do know is that interest rate cuts are still down the road. What I found interesting is that the dollar supposedly collapsed on the better-than-expected CPI number and then the PPI number followed that here on Wednesday. It was also better than expected than the dollar's rallying, dollar's firming. It's basically just playing out some of its trends. Long-term trend of the dollar is still up. We just have to see how much further down it wants to dip before it finds buyers again.
Michelle: Finally, crude oil, we're down again today and we have had a pretty sharp loss off of the highs that we set here just a few weeks ago. Do we keep going down?
Darin: This is again a seasonal play, where crude oil tends to work lower down into about mid-December, if I recall, and then it starts to find its winter buying. What's really interested me about the crude oil market, particularly if we look at the West Texas Intermediate, the US domestic market, is that if the future spreads and the forward curve has moved from an inverse in just a few days ago, maybe late last week, we actually saw it go into a carry for the first time in well over a year, which to me indicates there has been a shift in supply and demand.
Now again, some of that is seasonal, and it immediately went back to an inverse, but we do have to keep a close eye on that. If the commercial side's going to continue to put pressure on this market, then there is some downside possibility. We could continue to see crude oil in some of the distillates and RBOB and so on, follow lower.
Michelle: Very interesting. We'll keep an eye on it. Thanks for joining us, Darin Newson, senior market analyst with Barchart with Markets Now.
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.
