Yesterday I was spoke with Michelle Rook on AgWeb's Markets Now. We discussed how the high temperatures, dry weather, and a lack of rainfall is affecting agricultural commodities and where I think the wheat, soybean, corn, cattle and hog markets are headed. Watch my interview here.
Michelle Rook: Welcome to Markets Now. I'm Michelle Rook along with Darin Newsom, senior Market Analyst with Barchart. We are seeing higher prices in everything but hogs today, and Grains leading the charge, Darin. We're in a full-blown weather market, and I guess everybody's probably asking, "How high do you think we're gonna go here?"
Darin Newsom: Yes, that is the question of the day. After Thursday's close, my target was up there around 5.80 for [unintelligible 00:00:25] corn, and it didn't waste any time blowing through that Thursday night through Friday morning. Now, that opens the door. You've got to imagine there's a lot of sell orders ready to go at 5.95 to 6. Corn likes round numbers. We may bounce around up there for a little while, but again, we've got time with this weather market. If they usually last about six weeks, that means we've got through the end of June, so there's time for this market to get through the $6 level. Once that happens, at that point it becomes how many are still willing to buy. It's really hard to put a top in at that point.
Michelle: Is this a typical weather market? It seems like it might be for corn, maybe a little early for beans or not?
Darin: A great question. I think it's a little early for both, but certainly too early for soybeans. There's really nothing threatening in the soybean market right now. I think it's riding the coattails of basically the old crop market. That's where it's really been interesting is watching the July and August contracts. August, I can't believe I'm talking about August soybeans, but July and August is really where the story's been. Given the fact that we aren't exporting anything, this puts the spotlight on domestic crush, possibly even increased exports of soybean meal. I think that's where the story's gonna be, the last quarter of the old crop marketing year.
Michelle: Yes. We got that confirmed in the NOPA Crush Report yesterday. It looked like there was some record crush.
Darin: Yes. Not surprising. Again, we've watched those oil seed markets. We've seen some support building in bean meal and in bean oil. We also know Argentina had a dismal crop this year. Again, it's what I like to call as a silly season for soybeans. This last quarter of the year, you got rolling from July to August, September, possibly November. It's hard to get a good read on future spreads and basis, but if we just look at the cash market, since the end of May, it's up like $1.20, $1.30 at least. Just the cash index. There's a great deal of buying coming into the cash market. That tells me that there is some demand for what we have left of old-crop soybeans.
Michelle: That's a good thing because demand is not as good for corn, that's for sure, from an export perspective anyways. Is it possible that because the funds were actually short corn and maybe only slightly long beans that they got caught flat-footed here ahead of this weather rally, and they're pushing it harder?
Darin: I think so. I think in the corn market, they were short the old crop market. Again, we just didn't have any demand. We've saw non-commercials build up a pretty sizable net short futures, but the last few weeks, they have been covering it to go along with the weather market going on in new crops. You have the September contract then caught in between the two. Yes, I do think some short covering has been the key in corn. Soybeans, I think they've just been adding to their longs for the most part.
Demand is an issue. Demand is a problem right now. In the corn market, we're seeing basis really start to collapse particularly with the futures market rallying. I'm hearing it for different parts of the US Midwest and Plains right now, basis is just taking a beating. If there's some bushels coming out of on-farm storage, it's finding its way to markets finally. If not, it just means that there's really no push for-- there's no new demand coming in at this point from feed or exports or ethanol, or anything at this time.
Michelle: Okay. Is there an analog gear to compare this to from a drought perspective because we always start going to 2012 and 1988, but those happened a little bit later in the season?
Darin: Yes. I'm just not a big believer in analogous years. Chaos theory tells me if there's one difference in the years, and there's always one difference, you're going to have a different result. I haven't really been looking back through the archives to see if there is an analogous year. We have to take this one on its own. We're coming off a three-year drought. We were seeing a shift from La Niña to El Niño. We could still see that later this summer where we could see more moisture across the Midwest. It just hasn't arrived yet, so that's why we have an early weather market.
Have we seen weather markets in June before? I'm sure we have. I can't recall a year at this point, but I'm sure we've seen a weather market in June, particularly in corn. I don't think it's anything extraordinary. It is unusual, but I think we'll see how long this plays out.
Michelle: No doubt. Is corn and soybeans the rally there just pulling wheat along or are we blown out of those shorts, especially in Chicago? That was a pretty massive short position they had.
Darin: Yes, all the way around. I think some of the reason why we're seeing this massive short covering going on in the Chicago-- That net short futures position as of the last report last Friday was almost 91,000 contracts. It was just enormous for Chicago wheat. We've seen a great deal of short covering coming into that market. Again, you've got a rally going on in corn, soybeans, they don't want to be sitting out there holding short Chicago because it's probably going to rally at some point. We also have to calculate, we've got harvest going on. If these funds are short, and they want to stay short, they're going to have to move from the July contract out to something else anyway.
It's a different situation in Kansas City. Kansas City has been talked about. The Kansas City Hard Red Winter market has been talked about a great deal due to the drought across the southern plains, how much of the crop was supposedly dead. The reason why we really haven't seen Kansas City move, particularly in relation to Chicago, I think there's still this thought process that the wheat crop has to prove that it's dead. They know that there's going to be a Soft Red Winter crop, but so much of the Hard Red Winter crop was expected to just be zeroed out.
Now it has to be proven once the combines start rolling through the worst of the southern plains, if there's actually very little wheat there, then I think maybe the Kansas City market starts to react, possibly starts gaining on Chicago again.
Michelle: They've unwound that spread, haven't they?
Darin: Yes, they really have. That's been dramatic over the last couple weeks, and as you said, a lot of it has to do with the short covering in Chicago. They've been holding a relatively flat position in Kansas City. I do think it'll build to a long. We still have more bullish fundamentals in the Kansas City market. If we look at future spreads, they're still inverted.
If funds want to follow that rather than just the more heavily traded market in Chicago, then I think it could bring some buyers back into Kansas City over time.
Michelle: Got you. We're up in the cattle market here today and I think there's a lot of agreement maybe we put in a short-term top anyways, but longer term, are you bullish? Do you think we go back up and challenge the highs at some point in time?
Darin: I'll tell you, this market has proven-- One of my rules talks about a market that can't go down won't go down, and this certainly has been cattle for the last six months to a year. It's just been an incredible market. So many times we do see some technical tops forming and then they just get blown out. I do think this market's getting a bit top-heavy, but as long as boxed beef continues to go up, as long as they're willing to continue to push the cash market higher, then it's going to be very difficult to break this market.
We may see a few days down, we may see a couple weeks down, but by and large, I think you're going to find plenty of buying until the cash side actually proves that it's done rallying.
Michelle: We did see some lower cash trade this week, I think $4 lower yesterday in the dress market. We haven't had a lot of trade in the north and the south I've yet to see. Even with cash being a little bit lower, the futures are at such a discount, it really doesn't matter, does it?
Darin: No, that's a strong basis. The way we've seen the cash market rally and cash over futures, it's still considered bullish. If you see the cash market back off a little bit, I don't know that it'll immediately bring pressure into the futures market. It certainly could because, again, we've had funds doing a lot of buying in here in the cattle market. If they start to sense a little bit sharks in the water, if they start to sense some blood, some cash markets starting to weaken a little bit, they could start getting out of those. Really, like we've seen in so many different commodity markets, commodity sectors, just switch over to something else. Maybe it's time to move from livestock back over to grain and oil seeds.
Michelle: No doubt. Choice boxes though, clearing the 342 mark. These are levels we haven't seen for a while. Boy, you can't really say that demand is not good with that number.
Darin: Now, in my mind, that just continues to speak to just how strong consumer demand is for beef. It doesn't really matter the price. You got choice running away from select. You've got the market as a whole at prices we haven't seen since the fall of 2021, so almost two years down the road. It's an incredible market right now. Again, I use it as an economic indicator, general economic indicator for the US. Right now it certainly looks bullish. Again, until we get some consistent breaks in this market, I don't think anyone's going to worry about it too much.
Michelle: Yes. Hogs have had quite a recovery off the contract lows. Was a lot of that just short covering or here again, were we unwinding those cattle hog spreads or was it fundamental?
Darin: All of the above because what's interesting is we have seen the non-commercial side start to reduce its short. Again, this was another market where funds were not afraid to be short. At the end of May, the CME Cash Index on its monthly chart completed a bullish reversal pattern. This told us the long-term trend had at least bottomed out and possibly turned higher again. This seemed to be bringing some buyers back in. Certainly has been providing some support here over the course of June, at least so far.
Michelle: Okay. Thanks for joining us. Darin Newsom with Barchart, and 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.
