Howdy market watchers. Inflation or not inflation? That is the question beguiling markets.
While inflationary pressures do appear in the data, Fed Chair Jerome Powell maintains they are transitory at the present time resulting from the rapid reopening combined with supply chain backlogs due to COVID restrictions. Only time will tell.
Upward pressures on wages are being eyed carefully as a sign that inflation may be more permanent. However, there remains artificial tightening in the labor supply due to generous unemployment benefits that are just now coming to an end in many states. The next several months will paint a clearer picture of where our economy is headed, but concerns of overheating are now being heard across newswires.
While commodity prices have come off recent highs, this asset class is seen as a hedge against inflation and should find underlying support should upward pricing pressure persist. For agriculture commodities, the weather uniquely influences market movements not seen in other commodities. After USDA’s monthly WASDE and Crop Production reports released Monday set the tone for the week, it was all about returning weather premium.
U.S. spring wheat ratings continue to decline due to extreme drought, now down 41% compared to last year followed by Durum down 46% from last year. The USDA lowered new crop ending stocks for wheat by more than 100 million bushels versus just last month, 54 million bushels below average trade guesses pre-report. Global stock levels on wheat were also trimmed, although just by around 5 million metric tons with increases in Australia, the EU and the Ukraine, while output is seen lower in Canada and Russia versus last month.
Major flooding across the EU may change the forecast for wheat production there with quality and yield concerns rising as harvest gets underway. The death toll now surpasses 120 people due to excessive rainfall.
U.S. hard red and soft red winter wheat were increased, but managed to move higher from overall conditions, as well as China stepping in to buy SRW this week. With France and Australian origins cheaper than the U.S. especially considering the stronger U.S. dollar, China’s move to buy U.S. origin with prices rising gives some indication of the need. No doubt weather in France and Germany supporting global prices is likely part of the reason for the U.S. purchase and the fact that Australia’s crop won’t be available until the end of the calendar year, the return of Chinese buying will help to keep grains elevated.
The USDA kept corn imports unchanged at 26.0 million metric tons while increasing soybean imports by 4.0 million metric tons above last year. Many see this corn number underestimated considering large shipments from the Ukraine. China’s WTO tariff rate quota for wheat is 9.6 million metric tons and I expect that level will be reached though the origin is yet unknown. The gaps on the wheat charts were filled this week as they were for soybeans. The gap on corn remains unfilled with futures facing strong resistance at the 50-day moving average. A push to $5.74 on the December new crop corn contract is required to fill the gap while futures closed the week at $5.52. Despite a 50-cent rally this week, the corn market has struggled with Midwest rainfall and USDA keeping yields unchanged in this week’s report at 179.5 bushels per acre and overall production at 15.165 billion bushels compared to average trade estimates of 177.8 bpa and U.S. production at 15.031 billion bushels. Old crop corn stocks did tighten 25 million bushels, but new crop ending stocks moved higher by 75 million bushels.
Hotter, dryer temps in the 8-14 day forecast particularly in the western and northern parts of the belt could see corn move higher, but be cautious once the gap is filled. Put options, whilst somewhat expensive, can keep the upside open but provide protection for producers that are unprotected. A large crop is expected and is a tall order to fill, but pollination conditions have been favorable in much of the belt and may pressure these markets even if temps increase. Brazil corn production was reduced 5.5 MMT from last month, but higher than expectations. Beans were unchanged. Argentina corn was slightly higher, but beans lower. 2021-22 world ending stocks for corn and soybeans were increased somewhat.
For U.S. soybeans, yields and overall production also were left unchanged from previous estimates and 0.6 bpa higher than last year. More uncertainty over bean yields at this stage helped fill the gap on the November chart and close above the 50-day moving average settling the week just below $13.92. I believe there is more upside in this bean market, but watch the recent highs at $14.65. Should we make it to that level again, we are putting in a triple top.
With consolidating grains in recent weeks that finally found some support, the cattle futures have enjoyed a bullish channel that was tested at the end of this week. After an inside day Thursday on August feeders, the market broke lower. This is often an indication of a directional move over coming sessions. We could see August feeders come back down to the $154 level and ultimately to fill the gap that would fill at $151.90. As I’ve said in the last two columns, I believe these front month feeders should be protected. Cash prices at sale barns remain very firm and we will see if they hold into August. I expect prices to soften somewhat as more cattle become available, but the question is are the cattle out there? Fat cattle prices have weakened with boxed beef continuing to slip as we progress through the dog days of summer. To protect your price risk in cattle, I offer both futures and options on the CME as well as Livestock Risk Protection through crop insurance.
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 strategies to pursue your objectives. Self-trading accounts are also 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. 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 firstname.lastname@example.org. 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.