Earlier today I was interviewed on AgWeb's Markets Now, hosted by Michelle Rook. We discussed the recent action in the corn, soybean, and wheat markets. We also talked about the crude oil and the future actions of the Federal Reserve based on the CPI and PPI data. Watch my interview here.
Michelle Rook: Welcome to Markets Now. I'm Michelle Rook along with Darin Newsom, a Senior Market Analyst for Barchart. We're seeing a lot of red on the board and grain and livestock futures trade this morning, Darin. Of course, oh, let's get rid of the elephant in the room right away. It's report day, and obviously, you and I have talked before about what USDA reports do or don't mean, but what is the market telling us right now about what we might see in the report?
Darin Newsom: The market's not telling us anything about what we might see in the report, and I like the way you asked that question. It's not telling us anything about what we might see. If we want to make some guesses I think the key here is we have to go back and look at what are the guaranteed insurance prices in the US from this past spring. It comes back to Uncle Sam doesn't like to write out big insurance checks. If we're trying to make guesses about what could happen in this report, it wouldn't be surprising, particularly with DCE corn dollar under its guaranteed price, that somehow or some way USDA finds a way to decrease expected or its production guess. That's really the only guess that we can make going into this silly thing.
As far as the market goes, what we've been seeing over the last couple of months is that the commercial side is growing more comfortable with 2023-24 supplies. We don't know anything about demand. We're making a few sales but on the supply side, future spreads are certainly indicating both corn and soybeans, that commercials are getting more comfortable.
Michelle Rook: Well, and a lot of that has to do with this change that we have seen in the weather, right?
Darin Newsom: Absolutely. That's what it's all about. These are weather derivatives. About midway through July, we saw the weather patterns change. Some are telling me it was too late for corn but looking at the market, the commercial side doesn't seem to think so. In soybeans we haven't moved to-- we're still in a bullish situation as far as spreads go, but they're not as bullish as they were. We still don't have a lot of acres, we knew this past winter that we lost some acres between September and March. DCE corn did its job and bought acres away. It's not going to be completely like the Brazilian situation where they went from a good crop to a great crop supposedly, but we're going to go from a questionable crop to a good crop here in the United States, at least by what we could tell with future spreads and the way they've been acting.
Michelle Rook: You can also tell that though, in the basis levels which have collapsed in some areas. Again, end users feel like, "Hey, I've got enough inventory at least to get to this new crop then."
Darin Newsom: That is correct, not only in spread-- Commercials don't always position themselves in spreads, but also in basis. As you said, both old crop and new crop basis bids have been taking a bit of a beating here over the last number of weeks. Number one, it tells us that as you said, we've got plenty of supply spot to finish off old crop, particularly with a slowdown in demand. As we look ahead to new crop, there isn't a great deal of concern at this point about getting the supplies needed to cover what demand is on the books at this point. Again, yes, you're right, basis has been slowing down most notably in soybeans, but also in corn.
Michelle Rook: Demand is the other side of the equation. Once the market feels comfortable with supply, then we'll start focusing or transitioning into demand. Price levels, how low do we need to go? Are we at levels where we are starting to stimulate demand or become more competitive on a global front?
Darin Newsom: The competitive on a global front is an interesting conversation, something we could spend an hour talking about because I don't know that it really comes down to competitive price when we're talking about the world's largest buyer, particularly China. I think it has more to do with politics and the games that are being played elsewhere. I think what it comes down to now is, how long will Brazil's supplies of both soybeans and corn last into the next marketing year, and at what point does some of the world's largest buyers, again, including China have to turn to the United States as a secondary supplier. These are outside of the values of the US dollar and the Brazilian Real, Chinese Yuan, and all of these other things. These are some of the real-world things that we have to deal with, outside factors other than value.
Michelle Rook: China's part of the equation, but also the Black Sea tensions rising. Will it eventually translate to any business for the US? It hadn't here the last 18 months. Do you see any corn or wheat business going over to the US eventually?
Darin Newsom: There is chance that eventually, and you used that word, eventually, we could see some corn business but really, of all the markets that stand out to me right now, as we head into this next round of silliness, is what's been going on in Chicago soft red winter wheat. We've seen the September-December spread covering anywhere from 90% to 100% calculated per commercial carrying. In some cases, some days are actually beyond that. The CME is running its average right now for full carry as it's getting set to possibly increase commercial storage rates based on this timeframe through August 25th.
If that running average is greater than 80%, then we will see an increase in commercial storage rates as of September 19th. As of Thursday's close, I think that average jumped up to almost 85%. It just doesn't look like-- it looks almost like a guarantee at this point that it's going to be greater than 80% on August 25th. We're looking at increased storage and none of this is bullish, none of this is saying that demand is going to come pouring in, rushing in, and start to gather up these supplies in the US. It just continues to tell us the supply and demand situation for US wheat, particularly soft red winter wheat is just incredibly bearish at this point.
Michelle Rook: What are the technicals telling us?
Darin Newsom: Technically, market charts are a bit of a mess. If I look at the hard red winter long-term monthly charts for its cash index, it'll look like it had turned bullish here at the end of May, and all of a sudden here in August, we've taken out that low so that raises some questions. Soft red winter again is mostly just China chopping sideways in here. We're not getting a lot of selling, but any rally in the futures market's met by an increasingly bearish basis market. Corn, the key today, key Friday, and into the weekend is can it hold the July low of 481. I think that's the key for us.
Michelle Rook: You and I have talked about that 481 level needing to hold before. Soybeans, we've bounced off a 100-day moving average, 50% retracement, like around that 1290. Is that pretty critical there too or not?
Darin Newsom: I think there could be some interest down at that level, but if we start to fall through it, the biggest thing in soybeans is our fund's still holding a relatively large net long futures position. If we start to crack some of these moving averages and we start to see some other types of pressure building in the market, would not surprise me if the funds start to get out of and just throw in the towel on some of these long soybean positions.
Michelle Rook: Got you. Let's talk about crude oil first of all, which has had a big run off of the lows here and now, and we made some new highs for the year here this week. Do we keep going higher?
Darin Newsom: From a purely technical point of view, it would suggest hitting a new four-month high this week. I would certainly suggest yes, that this market should continue to go up. Also, fundamentally we talk about spreads all the time. We look at the forward curve. In the crude oil market, it's been inverted telling us the supply and demand is still tight here domestically and globally. When both sides are bullish, that would tell us that this market should be going higher. It struggles at times if it seems to run out of some buying interest, but as we were talking about, if traders are not going to get interested in the grain and oil seed sector, and if we start to see stock indexes sag a little bit after the big run they've had here through the early part of 2023 and they start to pull back a little bit this quarter, then I think some of the money is going to flow over to those market sectors where fundamentals are bullish. That's certainly is energies.
Michelle Rook: No doubt. The energy component, I started off with that because that's a big part of what we see in terms of inflation data. CPI out yesterday, PPI out this morning. What are those two indicators telling us about what the Fed might do going forward? Because it's been surprising to see that energy wasn't a bigger component or didn't push that number up higher.
Darin Newsom: It's always interesting to listen to the economists argue about this because for every six that say these are still bullish economic numbers, there are six that are saying that these are bearish numbers. They are bigger than expected, larger than expected, and so on and so forth. I think what it really boils down to is that what the Fed's been doing for a number of months, for a couple of years now actually, and that's front running its next meetings and its next announcements. A couple of months ago fed Chairman Powell actually came out and said, "Look we should be expecting at least one more, if not more rate increase." Well, we got one in July and the next meeting's in September. I wouldn't be surprised if, for whatever reason, using the CPI, PPI, whatever numbers they want to be talking about that the US Federal Reserve raises rates once again looking for another quarter 25 basis point increase.
I don't think it changes the program or the process that they're going through at this point at all.
Michelle Rook: You've got to think those inflation numbers are going to start creeping up though if crude oil and energies stay where they're at right now or go higher, right?
Darin Newsom: I would think so, yes. If we see the type of rally that the charts are showing, then I do think that we probably close out 23 with some higher inflation numbers and that's certainly going to keep the fed on the defensive-- I should say, not on the defensive, but on the offense of when it comes to rate hikes and what it most likely will do, could push any thoughts of decreases. There was some talk that maybe we could start to see decreases by the end of the year possibly into early 2024. I think that pushes those back a little bit if overall inflation reads start to go higher based on energies.
Michelle Rook: Yes. It puts them in the corner, that's for sure. All right. Thanks for joining us. Darin Newsom, Senior Market Analyst for Barchart, that's 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.
