Fed pause, cattle stall and grains trade in range
Howdy market watchers! It’s officially Fall, my favorite time of year!
The Autumnal Equinox is the halfway mark between the summer and winter solstices. It is the time when the sun appears directly over the Earth’s equator. Let’s hope it soon brings cooler temperatures and more frequent precipitation.
The southern plains received spotty rains over the past week as did parts of the Midwest, which is slowing row crop harvest in some areas. The 6-10 day forecast is fairly open for corn belt harvest and wheat planting in the plains, now 15 percent complete, with moisture chances returning in both areas in the 11-15 day outlook. It is the time of year when open weather for fall harvest and winter crop planting are preferred. However, we always welcome the rain.
With a somewhat volatile though trending higher week in the US dollar, the bears continue to be in control of the grain markets. Just when it looks like we’re turning a corner in wheat and corn with closes above the downward sloping trendline, selling returns and retests recent lows.
Kansas City wheat made a new recent low on Thursday below the September 12th level and then again on Friday closing 4 cents off session lows. Chicago wheat managed to hold above the September 12th lows, but only by 2.75 cents. Depending on any Black Sea developments over the weekend and US dollar moves early next week, we could see a new recent low also made in the Chicago wheat contract.
Seasonally, it is time for the wheat markets to turnaround. A short covering rally could be momentous, but it is difficult at this time to pinpoint a potential catalyst. The market has seemingly ignored continued bombing of Ukrainian port and grain infrastructure. Vessels started to sail again this week, the first since the grain corridor collapsed in July. This is likely to be very tenuous with Russian aggression increasingly unpredictable with the failures to gain ground. Approaching winter conditions will be a tactic used by the Russians to immobilize the Ukrainian forces and people, but indeed impacts both sides of the line.
Dryness in the Black Sea region over the next two weeks will hamper winter wheat establishment. This could provide some support to the market, but large exportable supplies in Russia seem to cap the extent to which that could spark anything meaningful.
Egypt, the world’s largest wheat importer, tendered for wheat this week with Russia prices uncompetitive due to the unofficial government-requested price floor at $270.00 per metric ton FOB versus the lowest bids from France and Romania at $260.90 and $261.05, respectively. With lower French supplies for export this year, if this Russian price floor remains in place, we could see international prices rise up to that level soon. Such an increase in export prices would be supportive for US wheat futures although the strong US dollar will continue to hinder competing in the export market.
The US dollar index has reached back to 105.00 not seen since March of this year. Despite the Fed’s rate pause this week, the ‘trend is your friend’, as they say, and that trend is higher.
China has been increasing imports of wheat after devastating rains impacting quality and quantity of the domestic crop this year. In fact, the Chinese have purchased 200,000 more tons per month this year from June than this time last year. They made a large purchase of French wheat this week and are likely to be an active buyer through the end of the year. I’m sure we will see Russian wheat offered in exchange for needed items from China at some point this year.
One area to watch will be the restriction by Eastern European countries to continue limiting Ukrainian grain to pass through to ports. The EU unilateral ban on Ukrainian wheat ended last week, but Poland, Slovakia and Hungary have extended individual bans. Ukrainian wheat that cannot get exported out of Ukrainian ports travels by land through these countries to other export infrastructure. However, the extra grain often gets dumped in those domestic markets and lowers grain prices. The Ukraine is courting countries to regain access to alternative export avenues.
Soybean futures plummeted this week with the November new crop contract closing below the 100- and 200-day moving averages and below $13.00 for the first time since late June. Brazil increased soybean production forecasts this week and decreased corn production. The progress of the Brazilian crop will need to be closely watched as any issues could see an explosive move to the upside due to strong demand and extremely tight stock levels.
There is no market with tighter stocks than the cattle market. We’ve seen an explosive breakout in the last month since late August that peaked last Friday and on Monday’s open. Front-month feeder cattle contracts ended the week around the 20-day moving average with an inside day on the charts awaiting Friday’s USDA Cattle-on-Feed report released at 2 PM after the market close.
September 1st cattle-on-feed came in as expected at 97.8 percent. Placements in August were expected to come in 2.2 percent higher than last month, but were even higher at 94.9 percent or 3.5 percent higher than the previous month. August marketings were slightly lower than expected at 94.0 percent.
In a “normal” market environment, this report would be seen as slightly bearish with higher placements and lower marketings. With drought persisting in certain areas, more cattle continue to be placed in feedlots, but is pulling future supplies forward and out of the country. The result is more supply in the immediate term, but exacerbating the shortage in future months.
Fed cattle cash traded up to $184.00 in Texas this week and had strength. Live cattle futures rebounded Friday with October back near all-time highs put in on Tuesday. The stock market ended the week soft and likely has further to fall. Higher energy costs from surging oil prices that could keep inflation elevated and bring about further potential rate hikes.
The prolonged UAW strikes and threats of a government shutdown are dampening optimism and consumer confidence. Margins are getting squeezed throughout the supply chain. If we see feeder cattle break lower on Monday, we could see further downside in the near term. I believe we are yet to see the highs, but we could have a temporary top here until some of these headlines are behind us.
Also be aware that if the US government shuts down, there could be an interruption in LRP coverage. Sidwell Strategies is the one-stop shop to protect cattle with futures, puts, LRP or a combination of all, which is probably the best strategy overall.
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 risk management and marketing solutions 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! Let us know if you'd like to join our daily market price and commentary text messages to stay informed!
Brady 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.
On the date of publication, Brady Sidwell did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.