This morning I was interviewed by Michelle Rook on Markets Now. We discussed the mixed trading in grain and livestock futures, particularly the sell-off in soybeans and the pressure on the cattle market. We also talked about the stock market and interest rates. 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. The stock market indices are all trying to rebound a bit after the big sell-off yesterday, but Darin, let's talk about the grains first of all. Soybeans had a sell-off of their own yesterday and melted down with new contract lows and soybeans and the product values. Can we recover today? We're trying to bounce, but it's just looking like it's maybe a little technical bounce.
Darin Newsom: Yes, I thought you were going to use the old cliche of dead cat bounce there, Michelle.
Michelle: No, I know you hate that, so I did not use it.
Darin: I don't mind it because sometimes that's exactly what we see. The old saying is, you drop a cat from far enough, it's going to bounce. It certainly looks like that. That could be what's going on. You mentioned the US stock indexes, you mentioned soybeans. Again, we're going to have to see some support coming in here at some point. Now, what'll be interesting is given the degree of the sell-off seen during Wednesday's session and how it added to the pressure that we've seen over the last couple of weeks, as you mentioned, new contract lows.
Is this going to be enough to spark another round of late 2024 export demand as far as making export sales? There was an announcement early Thursday morning of some small amounts of 2024-25 and 2025-26 going, I believe, to unknown destinations. It wasn't anything big. Now we'll see if this sell-off has been enough for the world's largest buyer, China, to get interested in at least covering a little bit more of its secondary supplies or have they done enough now they can sit back and wait to see what happens in Brazil.
Michelle: It was interesting because beyond what you just said about Brazil, not a lot has changed in this market. The one thing we should talk about with Brazil, though, is the real fell to a new low to the US dollar. That is adding pressure to that soybean market or at least serving as a headwind, isn't it?
Darin: It certainly could be. Theoretically, the old argument is that we can look at global currencies and get some degree of support, resistance, headwinds and so on. The real certainly has continued to weaken. Most likely it's had some international help in doing so. I will continue to argue that the value of currencies or the economics of supply and demand are secondary to the politics that I don't know that it would make any difference if the real was strengthening against the dollar, if it would increase US sales into China. I continue to go back to a conference that I was able to take part in back in 2018, where an analyst study who did nothing more than study China said at the time Chinese buyers were- -penciling out the equation to only buy the bare minimum from what they needed from the United States. That's exactly how it's worked out. I don't see it necessarily as an economic development or as an economic headwind, but there is still some of that. The weakness of the real versus the strength of the dollar certainly could come into play down the road.
Michelle: You also believe though that we had a capitulation of farmer selling pressure, maybe in anticipation of policy changes, tariffs, whatnot, right?
Darin: I think so. If we look at what's going on with the National Soybean Index, the National Average Cash Price, it rallied. As we saw the futures market rally, we saw basis firming, and this was generating some cash sales from producers who were still holding on to some 2024 production. That was fine as long as we were continuing to make decent weekly export sales. Then all of a sudden the sales started to slow.
As the market started to teeter a little bit here, as we get deeper into 2024, ahead of the expected chaos of '25, I do think we saw increased producer selling, and all of a sudden the bottom fell out. We've seen basis weakening the last two, three weeks. This tells us that the supply-demand situation had shifted from a focus on demand to more supply in relation to that demand. It's very simple economics, and all of a sudden we're looking at the cash index coming in around $9 on Wednesday evening. That was its lowest settlement since I believe September 1st, 2020. Bottom line supply and demand is right back to where it was four years ago.
Michelle: No doubt. We also have product values which have dropped into contract lows. In particular, bean oil, you mentioned policy being maybe part of the focus here. Biodiesel tax credit, the blenders credit is going to go away here at the end of the year. We have no guidance on 45Z or where we're going with the RFS or anything like that. Is that maybe part of the pressure there?
Darin: I think it certainly is. I think it almost has to be because there was so much built into the US is going to build all of these crushing plants and the domestic demand for US soybeans is just going to skyrocket. It's going to be this, it's going to be that, it's going to be all these things that we've heard over the last 10 to 20 years. The situation just simply, it just never changes.
Now we're going into a new administration that I'm not going to say is necessarily renewable fuels friendly, particularly if we look at who the nominee is for the head of the EPA. It's more of a petroleum industry, has more petroleum industry background. We'll see what happens. I do think there is some hurdles that the industry as a whole is going to have to get across. Yes, we still have exports. Yes, the latest weekly export sales and shipments continue to show a solid demand for US soybean oil and soybean meal. How long is this going to last, particularly if we get ourselves into more trade wars and whether South America improves again for 2025?
Michelle: The South American crop has definitely been a headwind. The pop that we're seeing today, we're already up of our highs. Can we recover in this soybean market off these new lows that we put in or not?
Darin: We could, and it wouldn't be surprising. Again, we mentioned dead cat bounce. To me, what I've seen so far has been a lot of funds moving their positions around. They haven't seen a lot from the commercial side yet outside of the weakening basis. That's going to be the next thing is what is the next move made by the commercial side of these markets? Are they finding new buying interest? Are they finding new demand? Are they going to continue to put pressure on this and just let funds reposition themselves off and on?
That's what's going to be interesting. It's a tough time of year. We're looking at lower volume trade due to holidays. If we go back to Wednesday and we see not only the FOMC announcement, which was largely expected, but then the news out of Washington regarding ag and welfare payments and these sorts of things, it doesn't take many orders to make big moves. It certainly was what we saw on Wednesday.
Michelle: Corn also broke some key support yesterday. Tried to bounce this morning already following soybeans, but you've got wheat making new contract lows. I guess the question is can corn divorce itself and trade on its own?
Darin: Theoretically, it should be able to because each of the markets have their individual supply and demand scenarios. The problem is, in reality, that just doesn't always work, that they are tied together, that we see a lot of spreading going on between the different markets. If you get like what we saw on Wednesday, where corn tried to hold on for, at least, much of the morning, while watching what was going on in soybeans, and finally, traders finally threw in the towel and down corn went.
Today you've got pressure in the wheat market, and it might not add as much pressure as the soybean market would but still, there could be some spillover effect into corn, despite the fact they all have their individual supply and demand situations.
Michelle: Of course, you had a record ethanol grind yesterday for this week. We also had exports this morning out were very good. Corn still has a good demand story, right?
Darin: It does and we can see that. Again, if we look at the March-May spreads, and even go out to the May-July, we can still see the longer-term commercial view is not bearish. We still have solid demand, but similar to what we talked about in corn, this latest rally did uncover some producer selling here at the end of 2024. There's still a great deal of uncertainty about what's going to happen next year, particularly with one of our biggest customer, the US's biggest customers being Mexico. What's going to happen? How is this going to change the picture? Is it going to change the picture? I find it interesting that the supply and demand situation, at least what we can see in future spreads, is still bullish, relatively bullish. Whether or not this is enough to keep investors buying, or if they're just going to sit back and say, "Look, there's better market sectors for us to get into that doesn't have a wide open area underneath this floor."
Michelle: Wheat, Chicago Wheat, SRW Wheat scoring more new contract lows here this morning. Are the funds just pouncing on that thing and starting to sell it or is there another reason maybe we're seeing pressure?
Darin: I think we've got both commercial and non-commercial selling coming into this market. We've seen some recent pressure in the March-May future spread basis is still relatively weak compared to its previous five years. There's some fundamental bearishness that this market's still having. One of the things that's expected in January is for all sanctions to be lifted against Russia. Now, whether or not it actually changes the global supply and demand situation, is something to be seen because we never really saw, the US never really saw that big bump, that big bounce in export demand.
We've actually seen better export demand this time around, through the first half of the '24-'25 marketing year. Still nothing extraordinary. Just it's been better than the last couple of marketing years. I do think there's a fundamental reason for Chicago to still be under pressure for funds to continue to build their net short future positions. Something we need to keep an eye on is that today starts the next tracking period for the variable storage rate system the Chicago Board of Trade has.
From today's close through the end of February 21st, we'll be watching to see what amount of calculated full commercial carry the March-May covers and whether or not it leads to some official storage rate change.
Michelle: Got you. Cattle market seeing some pressure again here today. I guess my question there is, do you think the top end or is this just maybe some end of the year profit taking by the funds who have been so long in that market?
Darin: That's a tough question. It has looked like cattle should be topping out now for a number of weeks. Every time I say that, then we get one of these spike hires. A couple of weeks ago, it had to do with cash, just all of a sudden jumping and we've seen strength in boxed beef. How much longer can this last? How long will packers be willing to pay 190-plus on the live side? It seems like this market should start to slow down. As we look ahead, or actually as we look back at what happened during November in particularly the Feb-April and April-June- -future spreads, it looked like we started to see a build in supplies versus what the expected demand is for those particular timeframes. It seems like longer term, the fundamentals are starting to change. Packers may have had this last gasp of pushing the cash markets. I think it's going to get interesting. Does it look like it should be topping to me? Yes. Am I willing to stake a huge bet on that? No, not right now.
I like the fact that implied volatility remains low. If I need to get some coverage on, I'm looking at puts. I've been looking at puts for the last couple of years just because a market that won't go down, can't go down, won't go down. It certainly has been proven that here for the last number of years.
Michelle: I don't want to stand in front of that freight train either. I don't think. You mentioned the meltdown that we saw yesterday in the stock market in reaction to basically the FOMC guidance going forward. Do you think that the market can recover from here? It looks like we did a lot of technical damage yesterday.
Darin: Yes. I can go back a couple of months. I think at the end of October, it looked like the stock markets, the three major indexes that we track here in the US, all looked like they were getting a bit toppy at that point, possibly bringing about an end to the long-term uptrends that they were showing on their monthly charts. Then we had all of the action-reaction, hyperventilating tied to the US presidential election and we saw new highs established.
You have to respect the fact that the markets went to new highs. Now it starts getting a little bit-- It seems to be leaning a little bit too much to the one side. Again, this is the argument has been made over the last number of years. Maybe these indexes are finally starting to outrun their underlying fundamentals, whatever that is, whatever measurement people use to justify a fundamental argument. Do they look a bit toppy to me? Yes.
Again, I'm not going to step in front of this runaway train, but I'm going to be very cautious up here with investments and looking at the various stock indexes and stock markets and corporate stocks themselves. We have to be careful here. If we've got long-term investments, we might want to rearrange them. We'll protect ourselves a little bit because, again, these are dangerous levels and there's a lot of room underneath all three of these major indexes.
Michelle: We did get the quarter point cut from the FOMC, which we expected, but we're not going to see as many rate cuts going forward in 2025, is what we reacted to, right?
Darin: Yes, I think so. When you get a rate cut and yet you see the dollar rally, it will go to something like 130 points immediately thereafter and close more than 100 points higher. You see gold under pressure and you see all the stock markets going down. This tells us it wasn't the rate cut itself because that was expected. As we look at the Fed Fund Futures Forward Curve, we can see there is a great deal of uncertainty with the next couple of meetings, one in January and another one in March, where the futures contracts for those timeframes aren't showing a cut or an increase. Beyond that, I don't know that we can read much into the futures prices because no one's really certain how the economics of not only the US, but the world are going to play out over the next, 45, 60 days and what that's going to mean for future FOMC announcements, for future FOMC meetings.
I know there was one holdout again this time around, I can't remember which one it was. It was the same as before, who, again, voted to not cut rates. Again, it all comes about because we just simply don't know what the effect on the world, and again, the US and world economies are going to be once the wheels start to fall off.
Michelle: Markets do not like uncertainty, that's for sure. All right, thanks so much, Darin Newsom, Senior Market Analyst with Barchart. That is Markets Now.
