Howdy market watchers. The summer is rolling, rolling, rolling with only two weeks left until Labor Day weekend. Can you believe it?
Speaking of unbelievable, what an August we’re having weather-wise. Decent amounts of rainfall, with more gracing us this weekend, and highs in the upper-80s, even low-80s tomorrow to kick off the week. This is definitely welcome news for soybean, sesame and cotton farmers across our great state and the bees that pollinate them. Speaking of which, we’ve been working with a few beekeepers this summer pollinating these very crops in our local area whose output you soon may find in a craft beer near you. More to follow on this as the year progresses, so stay tuned.
Now to the markets. It was a week of surprises across both equity and commodity markets starting with the plunge in Turkey’s currency to a new record low in early Asia-Pacific trade Monday that seemed to light a fuse globally of the risk of a potential slowdown in emerging markets. Words such as “contagion” were being thrown around as volatility impacted other emerging markets and translated to the Dow Jones Industrial Average and S&P 500 Index by Wednesday. Despite a more than 300-point drop, news of the U.S. and China re-engaging in trade talks early Thursday, as well as strong earnings reports, more than recovered those losses, with equities actually closing the week higher. While the U.S. economy remains strong, such short-term swings make one cautious of trepidation among managed money after a more than 8-year bull run in equities.
We have started this past week working on option positions on equity indices, primarily the S&P, as insurance to protect these gains in your stock portfolio without having to sell the underlying stock.
With physical wheat stocks resembling the stock of an actual company, this essentially works the same as a farmer protecting gains of his underlying wheat as wheat futures rally. And that they have … again. Starting the week out under continued pressure following last Friday’s slightly, though definitely not overly, bearish USDA WASDE report, wheat prices stabilized mid-week, bouncing off the 100-day moving average. The real move, however, came on Friday morning amid reports that Russia was planning to limit exports. With reports from the Russian Ministry later in the morning that sought to clarify intentions of just discussing volumes rather than curbing exports, the wheat market remained firm into the day’s close at $5.65 on September KC wheat. With an unusual discount for July 2019 wheat relative to contract months before and after, we had several clients adding additional new crop protection, but out in the September and December 2019 contracts near the $6.26 and $6.37 levels, both pretty attractive price levels. While we’ve continued to add December upside positions on pullbacks, remember that for new crop, higher prices cure higher prices and together with adequate moisture heading into planting season, we could see more wheat acres planted this fall that could be bearish prices, baring any major disaster in several countries of concern including Russia, Canada and Australia. Opportunities come and go and are often short lived, so if you are reading this and are interested to get protection on next year’s wheat crop above the $6 mark, give us a call this week and let’s get you protected. There is no reason to miss out on these opportunities to protect your operation at commodity prices above break-even levels.
This next week will be an important one for corn and beans, with the 26th annual Pro-Farmer Midwest Crop Tour kicking off Monday. The results of this four-day tour will either validate USDA’s recently increased yield estimates or potentially cause some excitement in the markets with lower estimates that we believe may be more the reality. With corn yield estimates now adjusted to a record 178.4 bpa and the third largest crop on record, conditions are going to indeed have to remain favorable for that number to hold. Stocks-to-use ratios are now at 14 percent, so the global corn balance sheet is relatively tight and thus, we remain bullish on the corn market at these levels. Note September options expire this next Friday, and we will be watching positions to potentially liquidate before expiration or offset once they exercise into futures. Despite good gains Tuesday and Thursday and ending up higher on the week, September corn closed slightly lower on the day Friday just above $3.64.
For soybeans, the week’s surprise was indeed the resumption of U.S.-China talks with a Chinese delegation heading to D.C. this next week. Beans were up 26 cents on Thursday with some profit-taking Friday to close the week just above $8.92 on the November new crop contract. With yields pegged at 51.6 bpa, the second highest on record, and the largest output on record based on USDA’s estimates, the crop tour will have to report major changes to excite this bean market, which is unlikely. With global soy stocks-to-use ratio at a 28-year high and the U.S. ratio at a 12-year high, we are not that bullish on beans even if a conclusion is reached in the U.S.-China trade spat. It may be prudent then to reposition with downside protection over that $9 mark on November new crop beans.
Cotton prices seem to be in somewhat of a rut after losing momentum up near the 88 cent mark. With December new crop cotton now trading around 81.50 cents and a one point increase in the overall crop condition rating and concerns over demand, we would advise those with significant exposure to cotton to be cautious at leaving all your exposure unprotected.
The cattle market had an impressive finish this week after trading lower to start things off. With lower and limited cash trade reported, it has been a concern that futures soon would follow to the downside. After breaking out of the recent range on Thursday and a pop on Friday, we have come up to a trendline that we believe will be difficult for the market to penetrate come next week. This is particularly evident in the September feeders chart. While we have been moving with volatility in recent months playing both sides of this cattle market, we have returned to the short side of the market expecting a pull back before Labor Day demand kicks in, which hopefully will be impressive with a strong U.S. economy. Smaller corn yields that see strength in that market also could pressure cattle in the near-term.
And finally, be sure to tune in to KGWA 960 every Friday morning 6:30-7 a.m. to catch our Weekly CommodityBuzz on the airwaves with Alan Clepper where we discuss latest trends influencing our industry, marketing strategy ideas and commentary. Wishing everyone a successful trading week ahead.
Sidwell is a Series 3 licensed commodity futures broker and principal of Sidwell Strategies. He can be reached at (580) 232-2272 or at firstname.lastname@example.org. Futures and options trading involves the risk of loss and may not be suitable for all investors.