Howdy market watchers. Well, it’s been a hot start to September while a cool down continues across ag commodity markets. Spooked by political uncertainty from various global trade disputes, a strong U.S. dollar, adequate supplies amid slowing demand worldwide and no threat as yet of an early frost, our commodity complex including cattle prices yearn to find firmer footing.
Discrepancies in USDA reporting of corn and bean acres and yield estimates in the U.S. along with the USDA investigation launched last week into live cattle and finished beef pricing practices by major packers after the Tyson Holcomb, Kan., facility fire, only serve to further muddy the water. Domestic politicking intensifies as the campaign for president nears and each party works diligently to undermine the other. And then there’s the Fed and another potential rate cut later this month backed by Chairman Powell’s commitment this past week to continue defending a 2% inflation rate. With U.S.-China trade talks supposedly back on in early October in Washington, equity markets just seem to keep on keepin’ on, further bolstering Trump’s tact on renegotiating trade deals. While the August U.S. jobs report missed expectations, the labor market remains tight, indicating that the U.S. economy is strong, though possibly some hairline cracks forming.
This Thursday’s next round of USDA WASDE and Crop Production numbers has managed funds holding net short positions given little expectation of any bullish surprises. Trump met Friday afternoon with EPA and USDA officials regarding changes to boost biofuels in the U.S. in support of farmers in the backdrop of much criticism recently over the special hardship waivers issued to small refiners to get around the blending targets set out in the Renewable Fuel Standard. Although such revisions would not occur until 2020, this “giant package” that Trump has touted would indeed be seen as bullish for the corn market in particular with increases thought to be in the magnitude of 500 million gallons of ethanol equal to 170 million bushels of additional corn annually. We’re expecting an announcement at anytime over the weekend or next week. This move also would be a way for Trump to support farmers without having to write more MFP checks that already total $2.46 billion this year with another $7.25 billion said to be available this fall depending on the progression of trade talks. At this point, we need all the additional demand we can get.
With U.S. corn condition ratings improving 1% this week, in line with expectations, despite still being 2-3 weeks behind average maturity, December new crop corn prices slid 14 cents this week to settle Friday just above $3.55, a new recent low. IEG Vantage, formerly Informa, came out with estimates Friday, pegging U.S. corn yields at 169.9 bpa, up nearly 2 bpa from previous estimates and in line with USDA’s August number of 169.5 bpa. However, the question still remains on acres with much confusion over where the now 11.4 million acres of Prevent Plant factor in to the 90 million planted acre number and 82 million harvested acre figure.
While still early, there are no signs yet of cold air threats in the 16-day forecast. With average frost dates in most of the I-states occurring in early October, forecast around mid-September will be more telling. Lower volatility and a weaker market have seen option premiums continue to be quite reasonable. If you are selling corn or milo at these levels, do consider getting back in this market with call options or long futures protected by puts. As an example, a December $3.50 call option costs about 15¾ cents and is already 5 cents in-the-money while a $3.60 call costs around 11 cents. To give yourself more time, you also could consider a March 2020 $3.70 call option for 17¾ cents, less than 2 cents from the March 2020 futures price.
The KC wheat market this week led losses on Tuesday with a 16 cent plunge, but managed to bounce back to close the week down only 5 cents just above $3.93. Drought conditions in Australia continue to worsen impacting their wheat crop. USDA is likely to trim Australian production and export numbers in the upcoming report by 1-2 million tons while locals are expecting erosion more in the area of 3-4 million tons. At this stage, any news of tightening supply will only help the wheat market climb out of the $1.43 slide witnessed from June 4 until Tuesday’s new low at $3.81. Stats Canada came out this week reporting quarterly stock levels sharply above expectations while Argentina sees a record wheat crop in the making, both pressuring markets this week. The wide spread between KC and Chicago wheat now at -70.5 cents just isn’t budging for the time being. We need more HRW exports to trump soft wheat shipments, which has been difficult with the Black Sea competitiveness.
The soybean market started out the week much stronger with China news seen as supportive. However, as the week progressed, the November bean market quickly lost momentum with demand concerns resurfacing among higher private yield estimates. IEG Vantage estimated U.S. soybean yields at 48.4 bpa, up 0.2 bpa from previous estimates and in line with USDA estimates at 48.5 bpa. Again, the question remains acres although not near as glaring as the gaps in corn. While bean exports this week were above expectations, new crop sales on the books are the lowest in 14 years.
Declining forecasts for China’s soybean imports as the African swine fever epidemic persists doesn’t help. The USDA ag attaché in China, whom I met with on my recent trip to Beijing, came out this week with an 80 million ton estimate for 2019-20 imports versus USDA’s official ideas of 85 million tons. Adjustments could be made in this next week’s report. Mindful of these concerns, we have been discussing putting option protection strategies for our clients on rallies.
While we too believe a China deal will support soybeans, the demand destruction in that country is concerning. With $8.50 puts priced at around 15.5 cents on the November contract, only 7 cents out of the money, this could be a valuable insurance policy for the choppy road ahead especially given we are well off the May 13 lows near $8.15. Give me a call to get an account set up to protect your price risk and take advantage of rallies. With all that going on in the macro sense, a conservative approach may in fact be the best approach when prices are above your breakeven.
In related news, October lean hog futures this week fought back to the 68-cent level before losing momentum and closing the week at 63.5 cents. China purchases of U.S. pork for July released this week by the USDA showed a six fold increase from last year. Overall, July shipments of fresh/frozen and cooked pork were the highest ever recorded, up 33% versus last year. Trade with Mexico was 19% higher than a year ago. In contrast, beef exports in July were down 2.9% with fewer exports to Japan as the primary reason.
Thus, we need this U.S.-Japan trade agreement to be finalized soon with shipments for August and September also expected to be lower. Support for U.S. beef prices therefore relies heavily on the U.S. consumer continuing to eat more beef. While this has not been an issue as of late, persistent talk of a recession on the horizon could cause consumers to cut back. This would not be good for the cattle market unless trade routes are reopened and flowing. October feeder cattle settled the week at $130.9, after trading to a low of $129.2 on Friday. December live cattle finished the week at $99.75, just off the lows. With packer margins remaining firm at $394.55 per head on Friday, we should be able to keep current with record numbers of cattle-on-feed.
However, we also need the consumer to keep beef front and center in order for the whole chain to keep moving product. Easing tensions in Hong Kong after the extradition bill was pulled from the LegCo this week following several weeks of mass protests provides some glimmer of hope that the U.S.-China trade negotiation will steer clear from ideological warfare of democracy versus communism. Although on second thought, that may in fact just be the underlying conflict. Ultimately, playing fields need to be level with rules established and all parties having wins. Put in that way, the dispute at hand may never truly be “concluded.”
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.
Sidwell is a Series 3 licensed commodity futures broker and principal of Sidwell Strategies. He can be reached at (580) 232-2272 or 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.