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Grain deluge continues while higher vs. exp placements seen in Cattle-on-Feed

Sidwell Strategies - Sat Feb 24, 8:31AM CST

Howdy market watchers! 

Well, if we’re not at the bottom in the grain markets, we’re closer than we were last week.  

It’s been quite a commodity cycle in the past two years with Russia’s invasion of Ukraine on February 24, 2022, spiking energy and ag markets to new heights.  We’re now back to late 2020-early 2021 lows while the war continues to wage on.  Only 3 of the Black Sea’s ports are said to be operational from attacks and only a hand full of Danube river ports that have been filling the backlog.  

The Biden Administration announced 500 new sanctions on Russian companies and individuals to apply further pressure on President Putin and the economy although they’ve seemed to be of limited impact thus far in deterring continued cross-border pursuits.  Drone warfare is now the norm with cooperation among the world’s most authoritarian regimes emboldening bad actors.  Unfortunately, this state of play is likely to keep geopolitical tensions elevated and cross-border trade tenuous, rerouting supply chains and the true cost of overseas reliance for critical components.  There will be plenty of rhetoric in this US presidential election year regarding this I’m sure.  

Well, it has been one of the warmest February’s on record in the US Midwest, Southwest and Eastern states.  The state of Iowa is nearly all covered in some level of drought, nearly 20 percent of which is in extreme and over 56 percent in severe drought categories.  And yet, March corn futures dropped below $4.00 for the first time since November 2020. 

While the grain markets have been trading South American weather and demand, we are soon to start trading Northern Hemisphere planting and conditions are less than ideal.  At current prices, producers are favoring soybeans to corn, but the margin is narrowing with beans under greater pressure than corn.  In fact, corn prices are the lowest relative to the cost of production since 2016.  

US exports were weak this week adding insult to injury although we did confirm a 126,000 metric ton sale of sorghum to China.  I’ve heard more local producers talk about planting sorghum this year given the shifting outlook to dryer La Nina conditions this summer.  When China is in the market for US sorghum, it makes all the difference on basis.  Hopefully, this early purchase is an indication that they will be again this year and keep local basis levels firm.  

The US dollar softened this past week and broke much lower Thursday before recovering well off the lows and finishing the week just below 104.00 on the index.  There is still a chart gap to be filled at 102.410. In order to see a weaker US dollar, we’re going to need to see lower inflation for the month of February and I’m just not convinced that we will just yet.  

So, what will be the catalyst for changing the status quo of these grain markets? Could we see freeze concerns for winter wheat in the US as we will see for Russia this weekend?  I think this is a real possibility with temps in parts of Russia reaching -10 degrees Fahrenheit.  With adequate moisture and warm weather, winter wheat has accelerated growth that may make colder conditions in March or April concerning.  

Could we see funds starting to trade N. Hemisphere planting weather than is sub-par?  Or could it emerge that China is much shorter on wheat and corn than they are leading to believe with reportedly ‘record’ domestic production?  Or possibly that South America’s soybean crop is smaller than expected once harvest progress nears completion?  Rosario Grain this week did lower Argentine corn and soybean production, but Brazil soybean production will be the trigger, if any.  

March grain options expired on Friday, which I believe was the first step at a market recovery after this.  Next week, cash contracts will be rolled from March to May and so you will see basis adjustments accordingly.  

Regarding new crop marketing, I would not lock in a loss below your break-even.  Buying puts is a possible strategy to limit downside and selling calls would help to reduce the “cost” and is a way to use sideways or lower markets to realize value from those short calls.  

The most excitement we’ve seen in ag commodity markets recently has been cotton and cattle. 

The cotton markets have been fighting for acres rallying from 77 cents late last year on the December new crop contract to the recent high just shy of 85 cents on February 15th.  There was some profit taking early this week, but managed to recover some of those losses by week’s end.  Crude oil’s recent strength has also helped support the cotton market.  If these levels are sufficiently above your breakeven to capture a profit, I would advise to either lock in prices or buy put options.  
 

The cattle market has been nothing short of impressive.  The chart gap on April feeders filled on Wednesday followed by the May chart gap filling on Thursday.  This week’s bullish sentiments have been in anticipation of Friday’s release of the monthly Cattle-on-Feed report that was out at 2 PM after the close.  

On-feed figures as of February 1st came in slightly higher than expectations at 100.4 percent versus 100.1 percent average guesses ahead of the report for a total of 11.797 million.  The most bullish of expectations was that of placements thought to be 88.4 percent of last year.  However, the surprise of this report was that January placements came in at 92.6 percent or 4.2 percent higher than average trade guesses.  Despite the higher-than-expected placements, it was still an 8-year low.  January marketings came in as expected at 99.9 percent versus expectations of 99.8 percent.  This put marketings at 1.844 million head while placements were 1.792 million head.  

March, April and May feeders put in new recent highs on Friday.  The higher than expected placements could result in some correction next week especially after chart gaps have been filled and there was heavy buying ahead of the report.  However, strong cash trade for fed cattle also manifested Friday with $184 per cwt traded in Texas, which is usually the lowest given it is the furthest south while packer plants are further north.  A higher chart gap exists on February live cattle at $187.525 that will likely be filled soon.  

I believe that either the feeder market needs to come down or live cattle futures need to move higher and this relationship will likely start coming back into order soon rather than later.  Supporting demand optimism is the continued euphoria in the equity markets that seems to be limitless with new highs made in the Dow Jones and S&P 500 again this week.  

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 brady@sidwellstrategies.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.

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