Howdy market watchers. We reflect this weekend on the tragic events that took place in New York and our nation’s capital more than two decades ago.
Much time has passed, but the impact on our nation and individual families remains fresh in our hearts and minds. May we never forget. The world seems to be an increasingly perilous place, or perhaps we are just more aware.
The passing of Queen Elizabeth II reminds us of just how much the world has changed in the decades past. The transition to a contemporary constituency has its own set of challenges that are being redefined in leadership changes around the world.
The battle to control inflation is among the key issues to stabilizing economies globally. The European Central Bank this week increased interest rates by the largest hike in history at 0.75%. The market also is pricing in the same increase by the Federal Reserve of U.S. interest rates in the upcoming FOMC meeting on Sept. 21. As central banks around the world are increasing rhetoric on the resolve to control inflationary pressures, the U.S. dollar finally took a breather starting Wednesday after making a new high at nearly 1.11 on the ICE US dollar index going back to October 1986. By Friday, the index weakened to nearly 1.08 as a low. Such weakness will be critical for U.S. commodity exports to be competitive globally. Rising interest rates however will keep upward pressure on the U.S. dollar.
After an abbreviated trading week with U.S. markets closed Monday for Labor Day, buying returned to ag and energy commodities as well as equity markets.
The wheat market found fast support on comments from Russian President Putin that the Ukraine grain export corridor brokered with Turkey and the U.N. was one-sided as sanctions on Russia remained restrictive despite the “allowance” of peaceful shipments. The Turkish president then reinforced these comments on Thursday. Markets will anxiously await the discussion over the coming weeks as to how Russia will approach the remaining time in this 120-day deal signed in mid-July as well as its renewal.
With Ukraine stepping up its offense and the U.S. getting more involved, I foresee Putin stepping up at least the rhetoric if nothing else. Language alone should be enough to move this market with stocks-to-use ratios already tight across wheat, corn and soybean balance sheets and threatening weather keeping markets reactive. Thursday’s inside day, higher low and lower high, on the charts followed by a break higher typically suggests follow through in that direction. I was hoping to see a high above the Sept. 9 high, but we fell short, although by just a penny. After five consecutive sessions of higher lows, the KC and Chicago wheat charts look friendly, technically. The crossover between the 20- and 50-day moving average at $8.80 on December KC wheat looks to be strong support should we face some volatility and profit taking.
Next week, we will have USDA’s monthly Crop Production and WASDE right out of the gate at 11 a.m. Monday to determine directional trading for the days ahead. Wheat will be in focus, but U.S. production for corn and soybeans will be watched even closer. Average trade guesses call for corn yields to be reduced by 2.9 bushels per acre (bpa) to 172.5 bpa and total production to be cut by 271 million bushels. For soybeans, average trade expectations are for yields to be reduced by 0.4 bpa and production to decline by 35 million bushels and so minor adjustments. U.S. grain stocks in 2022-23 are expected to decline for corn and increase slightly for corn and wheat. World stocks are expected to decline for corn and soybeans in 2022-23 and increase slightly for wheat. Yet, additional increases of Russia’s wheat crop by private estimates are sure to see further increases by the USDA. However, Russia is experiencing some of the slowest exports for this time of year. Thus, regardless of production increases, the extent to which USDA adjusts Russian exports should have a larger impact versus production alone. The Ukrainian Agrarian Council recently reported that 2023 winter wheat planting area is likely to decline by 30%-40% due to lack of inputs, funding and labor.
The uncertainty around production and exports from the Black Sea should continue to keep volatility high in wheat markets. If you’re still holding physical wheat, the time to market on rallies is coming soon, in my estimation. When selling physical, I do advise getting a long position back on in the market. The extent of dry weather in the U.S. and Europe going into planting season likely is to bring additional support to wheat markets in the coming weeks, weather permitting.
The cattle markets found support late in the week with equity markets rallying back and continued strong demand from domestic and export markets. The reaction of grain markets to Monday’s USDA reports will feed through to livestock markets. August 2023 feeder cattle contracts traded over $2.00 per cwt for the first time this week. I foresee more nearby months following soon, although I don’t believe we’re out of the woods just yet. For now, it looks that the 50-day moving average is going to hold for feeder contracts. That is $184.25 for October 2022 feeders and $187.80 for March 2023. Fat cattle contracts look set to make new highs and higher corn should support the live cattle contracts. I remain bullish on the cattle market, but advise price protection through put options or Livestock Risk Protection (LRP) to protect downside while keeping upside open. The cost of cattle, feed and inputs, as well as interest on money, are all significantly higher, which means there are more dollars at risk. Increased daily trading limits, $7.00 per cwt on feeders, translates to profit margins being compromised quickly. The cost of risk management is the price of doing business. It should not be seen as speculative. Think of it this way, increased protection should result in greater access to funding and expanding your business. Protect your equity.
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.