Grain values held up better than last week to energy price drops and rain. Mixed to small losses were created overnight.
Grain Overview
It’s not only a new week, but a new month, and it has been greeted with a drop of over $5.00 in crude oil as Pres. Trump withheld any heavy military action against Iran after discussing it late Friday, which had energy markets a bit higher on concern. Following consultations with the King of Saudi Arabia, Pres. Trump is now looking to again give negotiations a chance, but made it clear they must move at a rapid pace to produce a solution, or he will follow through with his previous plans. Apparently, it’s some kind of “Wax on, Wax off” strategy, in reference to The Karate Kid.
This break in energy prices, along with last week’s rains, provided some relief for producers in portions of the drought-stricken Western Corn Belt. Grain prices softened overnight, but values did not break anything like they did last Sunday evening. This afternoon’s crop condition ratings are expected to come in steady to slightly lower, still keeping yield prospects below USDA’s trendline assumptions of 183 BPA for corn and 53 BPA for soybeans.
It’s now estimated that roughly 29% of the corn crop is located in drought areas, with the Northern Plains, more specifically North Dakota, the nation’s eighth-largest corn producer, suffering heavy crop losses after another weekend of triple-digit temperatures and sporadic to no rain. The soybean crop has roughly 26% of its acreage in drought as well. According to last week’s Commitment of Traders report, funds remain long 160,000 corn contracts and 155,000 soybean contracts. The correction from July’s highs has now retraced roughly 50% of the rally in both markets.
Over the weekend, Russia lowered its wheat export forecast, but the reduction is minor compared to what reality could become if export restrictions remain in place for another four weeks. Currently, no wheat is moving from the Sea of Azov through the Kerch Strait, while Russia’s largest deepwater Black Sea ports are reportedly operating at only about half capacity. This is likely to become a much bigger issue before August ends. Pres. Zelensky of Ukraine continues to warn that he needs more Patriot missile systems to protect Odesa, the country’s largest export port, as missile attacks continue to barrage the area. Unlike corn and soybeans, index funds remain short wheat and are defending those positions. If the Black Sea does not receive some type of UN-backed solution or another agreement brokered by Turkey, their eventual exit could fuel another sharp rally to new contract highs.
European corn production has collapsed under one of the worst droughts in decades, and there is no getting around the reality that corn imports into the region will increase. USDA will eventually have to reduce world corn stocks, and if it is also forced to trim US corn production by just a couple of bushels below trendline, today’s values will look like a bargain, setting the stage for December corn to move above $5.00 in the months ahead.
Weather forecasts, whether you follow the Euro or the GFS model, continue to paint a picture of the haves and have-nots. The Eastern Corn Belt remains well-watered, while the Western Corn Belt continues to see only scattered rainfall. Heat returns to the Plains later this week and is expected to persist into mid-August. Those above-normal temperatures will continue to accelerate crop maturity.
Cattle Overview
Last week, cattle futures collapsed on Monday after news that the US border would reopen to Mexican feeder cattle was announced the prior Friday, but then staged a sharp rebound through most of the week. It’s obvious that the steep decline experienced over the previous 30 days had already anticipated such a solution being worked on inside the USDA. I was even able to suggest this was likely what was happening two weeks before it was announced, simply because it was the only explanation that justified such a sharp decline in the deferred feeder cattle contracts and the extreme discounts they were carrying.
Last week’s rally in live cattle produced a technical “outside week up,” meaning prices traded below the prior week’s low and closed above the prior week’s high. That is a strong technical indication that major support has likely been established in the 217-219 range for the spot October live cattle contract. The question now is how much upside can be generated. We continue to view the 230-231 range, based on a 38% Fibonacci retracement on the October continuation chart, as major resistance. Last week’s negotiated cash cattle trade saw northern sales gain $3.00 to $233, while southern live sales improved $1.00-4.00, trading at $232-235.
Feeder cattle also recovered but did not produce the same technical reversal. They did generate key upside reversals, although those signals do not carry as much weight. Last week’s feeder cattle index declined another $3.82 to $345.83, the lowest reading of the year. If feeder cattle can maintain upward momentum, September feeders will encounter major resistance in the 348-350 range, which will likely be the first area to produce a major challenge to this recovery rally. In just over two weeks, the October feeder cattle contract becomes the active continuation contract, and it is currently trading at an $8.50 discount to September. Major resistance for October feeders comes in at 340-342.