Happy Labor Day weekend market watchers. That means September is here, and what a wet start it’s already been. After recent dryness, we definitely welcome the change back to wetter conditions just ahead of wheat planting and helping summer crops finish stronger despite delaying Oklahoma’s corn harvest.
Markets will be closed Monday in observance of the holiday. Unless we learn something different beforehand via Trump’s Twitter handle, new tariffs on an additional $112 billion of Chinese imports will come into effect Sunday. Apparel will be hardest hit, with 92 percent of U.S. imports from China being assessed a 15 percent tariff, previously 10 percent. Bottomline, macro noise continues to add uncertainty across global markets and asset classes as fears of a slowdown build despite a U.S. labor market that remains tight supporting equity markets though under increased volatility.
Ag commodities finished on a weaker tone Friday, which marked the end of the month before the long weekend as well as First Notice Day on September futures for corn, wheat and beans and the roll to December as front month futures. Note local basis levels will widen approximately 10 cents on the roll from September to December. Thus, not much of a surprise in the overall context as funds hold net short positions and squaring takes place at months end. A delay in tariffs and announcement of ethanol blending waivers being reallocated by Trump to larger refiners would definitely put markets back on a firm footing. Regarding the latter, 85 small refinery waivers equivalent to 4.03 billion gallons ethanol equivalent have been granted by the EPA during Trump’s administration, the recent 31 of which have attracted particular attention from the farm constituency across the country hard hit by trade issues that have contributed to lower commodity prices.
About 40 percent of the US corn crop is utilized for ethanol, similar to feed demand, so it is a critical component of the U.S. and global demand equation. Trump’s political maneuvering around this issue alone, said to be announced in the “next couple weeks,” may help extend support from a farmer base whose tolerance is waning. This week’s highs in the corn market were put in Thursday at $3.77 on the December contract, but closing the week at $3.69. Chart patterns clearly show this market awaiting news to set a direction trading in a tight 15 cent range for the past 13 days. This, however, creates opportunity with lower volatility resulting in cheaper options. For example, December $3.70 calls cost 12.25 cents ,while $4.00 call cost around 4.5 cents.
Similar is the case in wheat calls and soybeans puts. Kansas City wheat has suffered a similar fate ,with December trading in a 13 cent range since the recent selloff after USDA’s last report. However, Friday’s weakness hit wheat hardest with the week’s close near $3.95, breaking through the low end of the range. Wheat contracts have been pressured by burdensome supplies across classes, export competition from the Black Sea and the recently harvested, larger French and German crops. Egypt’s wheat tender this week was 66 percent won by Russia with the rest split between the Ukraine and France.
Friday was the last marketing day of the old crop corn, with exports for new crop corn better than expected this week. Wheat exports also remain respectable out of the U.S. with SRW leading the charge. This continues to keep the width of the spread between Chicago and KC wheat historically wide at a negative 66 cents on the December. The Australian drought continues and is forecast to prolong for at least the next three months. Such conditions could add support to the wheat market, although meaningful support will need to come from U.S. corn supply issues and stable-to-expanding demand. The USDA FSA came out this week with a pre-Sept. 12 WASDE report to update already controversial figures on certified acres of planted and prevent plant corn among the rest. They also released an eight-page explanation trying to close the reasonableness of the gap between NASS and FSA numbers. PP corn acres increased by 200,000 acres to 11. 4 million acres while planted and failed acres increased by 821,000. We’re still trying to figure out where the 2 million acre additional “cover crop” acres between Aug. 1 and 22 for a total of 4.7 million acres are being factored and how this play out despite the explanation. Time will tell, but we will likely not be able to make sense of the numbers until harvest gets underway and/or is complete.
The timing of the frost is central to a move in corn, but there is as yet no indication of the timing. However, with continued rain and cooler temps and only 30 percent of the corn crop planted by May 12, it seems that concern over frost loss with at least part of this crop is inevitable. Again, time will tell.
The cattle market has yet to recover from the Tyson facility fire near Garden City on Aug. 9. Cheaper cattle prices and higher retail prices have spawned the USDA into investigating pricing that resulted in packers realizing historically wide margins. August feeder cattle futures and options expired and cash settled on Thursday, settling above $138. September now becomes the front month. October feeder cattle closed the week at lower at $130.40 with a gap remaining on the chart starting at $136.575 up to $137.825. With last week’s cattle on feed report being supportive, a glut situation of pork in the U.S. without being exported to China, that will soon need the supply, tempers the extent to which beef prices can accelerate. What we need is a strong domestic economy to keep trucking that has thus held up the demand side of the equation. Fears that the continued media talk of a recession may ultimately convince consumers that a recession is on the horizon could be problematic if spending were to pull back.
As discussed at our commodity conference last weekend in Denver, the spread of African swine flu in China and other areas is more devastating to the demand complex for pork, as well as soybeans, than most realize. China needs pork, but we understand has the equivalent of U.S. pork production in its freezers from culled hogs that ultimately were never destroyed. The PRC officially announced this week that some of the reserves are being released to try and help mitigate price spikes, although such inventories are expected to last only for 3-4 months. I heard this week from a friend in China that U.S. boneless short ribs are double the price in Shanghai as can be found in the U.S., yet we have a fall out in U.S. pork prices. As the trade dispute looms between those that have and those that need our agricultural products, U.S. prices slide for Chinese buyers to take advantage of at lower prices. After living in China for a decade working in the food and agriculture industry as well as banking specifically for our industry, I would advise the Trump administration, as I have administrations before, of the importance that agriculture plays in negotiations with fast developing countries such as China. While agriculture is today bearing the brunt of the trade dispute, it should in fact be a bargaining chip for a long-term future agreement. But what do I know …
And finally, be sure to tune in to KGWA AM960 every Friday morning from 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.