Howdy market watchers. Pray for rain.
Much of the Southwest U.S. getting ready to plant winter wheat needs a drink. Nearly half of Oklahoma, the Texas Panhandle and parts of Kansas have varying degrees of abnormally dry to moderate drought on the drought monitor map. Exceptional drought is now seen across most all the western states and extreme drought conditions cover much of the High Plains.
Cooler temps are finally in store for next week the day before fall is officially here on Sept. 22. Hopefully, this is the beginning of more relief to come. There is in fact a frost risk threatening Ukraine corn next week. There is no such threat in the U.S. at this stage, but we may start see weather changing more quickly in the coming weeks and months. Recall the surprise ice storm we had last October, which is less than two weeks away.
Grain markets found support this week despite some profit-taking on Friday. The wheat market led the charge with reports of a global shortage in milling wheat supporting higher protein KC and Minneapolis spring wheat contracts, followed by Chicago wheat. Tuesday marked the first time since October 2018 that the KC wheat contract closed above the Chicago wheat contract on a continuation chart that traded to a low of minus $1.20 in December 2019. It has been too long of a ride, but finally the value of quality is getting priced accordingly.
If the December 2021 KC wheat contract holds at $7.10, we likely will be moving higher. July 2022 new crop KC wheat futures traded to a high of $7.23 this week before closing just below $7.17. The mid-August high at $7.35¾ is within reach. Wheat exports also were impressive this week coming in above expectations despite the U.S. dollar index rebounded to a 2.5 week high that will be a factor to overcome in the coming weeks.
Another support to the wheat market this week came from reports that Russia’s wheat crop this next year is likely to be smaller given areas of drought that may not get planted. Higher prices at planting time bring optimism to producers and likely will result in more wheat acres getting planted globally. Crop insurance prices were set this week at $7.08, which will also support wheat acres in the U.S.
However, input costs also have increased dramatically. Phosphate prices, in particular, have surged with continued transportation issues at the Gulf only adding to tightness in the market. Barge prices continue to move higher as backloads persist. While facilities are starting to restart operations in Louisiana, another storm and power outages have slowed progress.
With higher fertilizer costs, I already have heard several producers commenting that they are going to cut back. If you’re going to put seed in the ground, I would advise to fertilize as you should or perhaps lay out those acres. High input costs and volatile futures markets can translate to margin squeeze, which require high yields to overcome. The break-even yield at $6.00 cash wheat is around 45 bpa. The break-even price at 40 bpa is $6.65. Enterprise Grain’s new crop cash price as of Friday was $6.97, only $0.32 above break-even if you raise 40 bpa. Weather is, of course, out of our control and covered in part by crop insurance, but fertility management is up to us. Bottomline, give the crop its maximum potential and protect the market price of your output. These are the best ways to ensure profitability in a higher cost environment.
Higher prices mean more acres, already expected to be 5% more than last year, which could result in price slippage as we get closer to harvest, and even now there is not much give above break-even, so consider these two strategies as you start a new crop year. In terms of protection, there are forward contracts at delivery points, forward contracts that do not lock in a delivery point (call to discuss), selling July 2022 futures or buying puts or bear put spreads to protect downside while keeping the upside open. As you lock in the price of fertilizer, I would suggest starting to protect July 2022 futures.
Corn futures ended higher on the week, but started to trade both sides toward the end of the week. This $5.30-level looks to be a decent area to price corn and milo. Early yield reports from Illinois suggested that bushels were below expectations. Producers who applied fungicide to corn were seeing a 10 bpa reduction while the 15%-20% that did not apply fungicide could expect more of a 30-40 bpa reduction in yield versus expectations. Just beware of harvest pressure should we see better yield numbers being reported. U.S. corn harvest this week was reported at 4% harvested, 1% behind expectations. Brazil corn harvest is well behind average while next crop corn planting is ahead of schedule. U.S. winter wheat planting is 12% complete.
Soybeans managed to push back above the $13.00 level this week but did not hold. If we see weakness in this market again, I would expect the $12.67 to be support. If we close back above $12.95-$13.00, then we likely will see more upside. The November soybean futures finished the week at $12.84.
There were positive economic reports this past week, with August retail sales rising above expectations and the biggest increase in 5 months. The U.S. September Philadelphia Fed business outlook survey also came in stronger than expectations. However, U.S. weekly unemployment rose, reflecting a weaker labor market. We will hear from Chair Powell this next week after the FOMC’s meetings on Tuesday and Wednesday. The market’s interpretation of these comments and actions likely will provide some direction for the cattle market.
Higher retail prices for beef have added some headwind in fear of consumers rationing demand. August retail prices for beef were reported up 17.7% above last year and made a new record high above the previous set in May 2020 during the height of the pandemic. Feeder futures are trading at to under the 200-day moving average and need a catalyst. Monday’s blow off bottom with news of the fire at JBS’s Nebraska plant ultimately didn’t impact markets much, with stability returning in Tuesday’s rally. Should we see positive comments from the Fed and risk on trading returning, we should see this cattle market move higher. Cash market remains firm. Once it rains, we likely will see a much firmer cattle market return for feeders. Be sure to consider Livestock Risk Protection, which I also offer, in addition to puts and hedges to protect cattle prices.
If you’re ready to trade commodity markets, give me a call at (580) 232-2272 or stop by my office to get your account set up and discuss risk management and marketing solutions to pursue your objectives. Self-trading accounts also are available. It is never too late to start, and there is no operation too small to get a risk management and marketing plan in place.
Come see me every Thursday sale day at the Enid Livestock Market and let’s talk markets. Wishing everyone a successful trading week.
Sidwell is a Series 3 licensed commodity futures broker and principal of Sidwell Strategies He can be reached at (580) 232-2272or at email@example.com. Futures and options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at http://www.sidwellstrategies.com/disclaimer.