War, weather, and demand support grain prices overnight.
Grain Overview
The grain trade opened higher overnight, with wheat posting the strongest performance during the first few minutes of trading. Corn and soybeans initially faded with wheat before recovering to new overnight highs later in the session as forecasts continued to advertise a warmer and drier than desired weather pattern developing across the Plains and the western Midwest.
Fighting continued over the weekend between Russia and Ukraine as both sides kept targeting port and logistics infrastructure. No new reports surfaced indicating additional major grain loading facilities had been damaged beyond what was already reported last week, but one thing is becoming increasingly clear. With no meaningful peace negotiations taking place, the Black Sea is no longer viewed as a consistently reliable source of inexpensive grain.
One of Ukraine’s key export routes into Europe is the Danube River, where water levels have now fallen to their lowest point in nearly 30 years. That has prompted irrigation restrictions while also disrupting commercial shipping and tourism. Rainfall is expected to improve across Romania and Poland over the coming week, but much of Western Europe has received very little precipitation in recent weeks as drought conditions continue to worsen.
Soybeans found additional support overnight as Argentina continues importing soybeans from Paraguay to meet domestic crushing demand, raising further questions about the size of its own soybean crop. At the same time, additional buyers continue to emerge for US soybeans and soybean products, suggesting growing concern over global oilseed supplies.
It is no longer just weather or war supporting grain prices. US grain has become increasingly competitive in world markets, attracting strong export demand. China is still expected to secure roughly 25 MMTs of US soybeans, while demand for other US grains also remains strong. Domestic crush margins continue to support soybean demand, and ethanol production remains at robust levels.
Concern is also growing that new crop corn carryout continues to shrink as weather conditions across the western Corn Belt remain less favorable than they were a year ago. A 180 BPA national corn yield would still rank as the second highest on record, yet it would reduce carryout to roughly 1.5 Bil Bu. If demand continues exceeding USDA expectations, ending stocks could ultimately fall below that level. Soybean carryout also appears likely to move closer to 200 Mil Bu, while wheat ending stocks head below 700 Mil Bu. Those are tightening balance sheets that continue to support a constructive outlook for grain prices.
Cattle Overview
The relentless liquidation by index funds continued last week as the cash cattle market broke more sharply than is typical following the post Fourth of July slowdown in beef demand. Beef imports continue to increase while consumer demand has gradually softened. Last week, the Choice cutout declined $15.87 to $366.81, while Select fell another $13.00. Just three weeks ago, Choice boxed beef briefly reached the $400 level but was unable to hold those values for more than a day.
The cash feeder index also lost momentum, falling $6.39 for the week. The negotiated fed cattle trade in the North declined $8 to $12, trading at $235 to $240, while dressed sales dropped $12 to $17 to $375 to $380. In the South, cash cattle traded $10 to $11 lower at $237 to $238. All of this occurred while cumulative cattle slaughter remains 8% below a year ago and is running at the lowest level since USDA records began in 1990. The problem is no longer just supply. Demand has begun to soften while imported beef continues to provide additional competition.
From a technical standpoint, live cattle are now testing major five year trendline and moving average support, while August feeder cattle are attempting to stabilize at similar long term valuation levels. An initial washout low could be close. However, if the market cannot produce a meaningful recovery rally this week, the charts will be signaling that a major long term top is likely in place.
Any recovery rallies that develop into the fall and winter should now be viewed as retracement opportunities from the 260 high in live cattle and the 383 high in feeder cattle. The market is transitioning from one driven almost entirely by tight supplies to one where demand is becoming an increasingly important part of the pricing equation.