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Is this wheat rally for real?

Sidwell Strategies - Sat Dec 2, 2023

It’s December market watchers!  The countdown of the advent calendar has begun!  

A rare, but welcome thunderstorm with ample rain blessed several areas of the Southern Plains late week after last weekend’s snow and other mid-week precip. All in all, our area of north central Oklahoma and southern Kansas received anywhere from 2-4 additional inches on top of last week’s totals.  This is a welcome change from the last couple of years and it is good to see predictions of El Nino finally coming to fruition.  Hopefully this trend remains throughout the winter months.  

The drought monitor is largely clear in Oklahoma, but Kansas, Texas, New Mexico and much of the Midwest, South and Southeastern states maintain various levels of drought conditions.  Wheat pasture conditions are the best we’ve seen in years despite fewer stockers available to turn out.  Cash prices of light calves remain strong despite volatile feeder futures as moisture conditions and low wheat prices have boosted optimism among cattle grazers. 

Winter wheat conditions improved two percent ahead of last week to 50 percent Good-to-Excellent, slightly better than expected.  Having said that, conditions by state vary widely with worsening conditions in those states with continued drought.  Wheat conditions in Kansas actually declined by one percent to 32 percent G/E while Nebraska conditions slid five percent to 49 percent G/E.  In the soft wheat states, Illinois weekly conditions fell 10 percent although from a higher level that is now 72 percent G/E.  Bottomline, national conditions are improving, but there are underlying issues in isolated areas going into dormancy.  

Storms have also caught attention in the Black Sea with heavy rains and winds last weekend disrupting shipping and port logistics in that area and increasing Russian wheat export prices.  This combined with continued weakening in the US dollar has finally helped Chicago and KC wheat futures sustain a 4-day, 50-cent rally.  After follow-through selling on Monday and making fresh, recent lows, the Chicago and KC wheat contracts started the strong reversal on Tuesday. 

With the end of the month on Thursday, December wheat and corn contracts rolled to March as the front-month.  Note that your local cash basis will have adjusted lower by the gain, aka “carry”, between the December and March contracts. Chicago wheat closed Friday above the 50-day moving average after touching down on the 20-day moving average for session lows.  KC wheat closed above the 20-day moving average with the 50-day moving average the next upside target that is 16 cents higher.  

After a frustrating 5-month selloff in the wheat market, the real question is if we have finally seen a bottom.  The bulls are gun shy, but it is important to maintain perspective as resistance could very well now be support.  I do feel there is a shallow correction somewhere next week, but I would see those as buying opportunities.  

Next Friday’s USDA WASDE and Crop Production report will provide fresh news for this market to trade into year-end and to kick off 2024.  We often see stronger markets over the next 4-5 weeks.  

US export sales this week were stronger than expected for corn and wheat while China made several purchases of US soybeans. Chinese hog futures have been under immense pressure recently falling 5.7 percent on Monday alone, which muddies the outlook for soybean and corn demand, but buying continues.  Perhaps Chinese traders are concerned about Brazil’s soybean crop or recognizes that cancellations are always an option as they often utilize. 

The outlook for Brazilian rains has been extremely fickle and mixed across the country.  This will continue to see soybean futures trade with enhanced volatility, but within a range.  We’ve seen that range be in the magnitude of around 25-cents so far, but South American weather and the upcoming USDA reports will determine the course ahead. 

US crush demand remains extremely strong as we’ve indicated in area basis bids in recent weeks.  The USDA released the October soybean crush on Friday that came in at a new record high, as expected.  October soybean oil stocks were modestly lower than expected.  This strong US domestic demand is expected to keep the balance sheet tight as well as the stocks-to-use ratio making futures more susceptible to headline developments.  

Frankly, I could see soybean futures breaking back out to the upside, but much depends on China demand and Brazil’s catch-up planting and crop conditions as the all-important December weather forecast materializes.  To put things into perspective, Rio Grande do Sul is only 26 percent planted versus 87 percent average.  

The corn market finally found footing this week sustaining a 3-day, 15-cent rally.  Futures closed 5-cents off session highs on Friday and below the 20-day moving average. October corn for ethanol usage released on Friday showed levels above last year, but below 2021.  

Energy markets have seen continued volatility from OPEC meeting delays and announcements of cuts that were not seen as unanimous among member countries.  The expectation that easing inflation and slowing economic activity may result in interest rate cuts as early as Q1 in Europe and Q2 in the US caught attention this week and will be a factor as we near those dates.  

The Dow Jones surged to new, all-time highs on this news with the S&P 500 not far behind.  This equity market has defied the projections of many given widespread uncertainty over geopolitical conflicts and China’s shaky economy.  US equity strength usually supports the cattle market and while it did for part of the week, it failed to sustain the surging trend of the major equity indices.  

The daily movement in the cattle markets recently have frankly been absurd.  Follow-through holiday selling on Monday slammed markets near limit lower after Friday’s shortened session rout.  Tuesday’s trade brought some sense back to the trade with markets recovering nearly all of Monday’s losses and January feeder contracts closing limit up ($8.25 per cwt).  

Just as the market’s looked set to move higher into Wednesday, much of the gains were given back on Thursday and Friday although held above the November 27th lows.  March feeder futures finished the week around $217.00 per cwt and there is a chart gap around $245.00.  When this market comes to its senses, I could see us reaching back to those levels. January is usually the highest market of the year, but we are in different times and so anything is possible. 

There were rumors that LRP underwriters were selling CME futures to hedge exposure, but I think this was overstated as such companies have strict guidelines for covering risk including utilizing the USDA risk pool and solvency requirements.  

Great optimism has emerged that the Fed could in fact manage a soft landing and avoid a recession.  However, looking at past recessions, it is usually an unexpected, outside interference that results in a recession and not simply monetary policy. While our hope is for this time to be different, we need to remain vigilant into this US presidential election year that disruptors could be on the horizon.  Could it be China’s economy or debt crisis or another pandemic concern or a conflict that grows into a regional war?  I pray that a more peaceful, stable time is ahead, but we also cannot let euphoria cloud our vision of what is often reality.  

If you locked in hedges or LRP at a higher rate and would like to capture this selloff, call us to buy call options that helps you capture the upside should this market rebound.  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.