Grains – Jeff Kaprelian
Grains finished higher, though without much excitement, from follow-through buying after yesterday’s strong action. Corn rallied 1’4 to 368’6, soybeans gained 3’2 to 898’6, and wheat was higher in all months but December, which was down 0’2 to 483’4.
This morning the Chinese announced they will exempt U.S. soybeans and pork from additional tariffs. I want to be clear: this is not them lifting tariffs, it is simply saying they won’t add new ones. There have already been three rounds of tariffs, which now puts pork at 72% and soybeans at 33% Retail pork prices in China have skyrocketed over the last few months and have doubled in 2019.
Hog futures traded limit-up in their expanded 4.5 cent limit today in the December and February contract months. The expanded limit will remain in effect on Monday.
The NOPA crush is due out on Monday, as well. The average trade guess calls for a record August figure of 162.018 million bushels with oil stocks falling to a 21-month low of 1.410 billion pounds. Recall last month’s 168.093 million bushels was a July record. Typically we see smaller numbers in August with the low for the year coming in September. 2018 was a steady year for crush usage, and we seem to be on a similar trajectory. Subsequent USDA reports will likely increase usage.
With the rally in soybeans the board crush has fallen sharply to 81’0/bushel:
Despite the big numbers being put up, basis is seasonally pretty low at plants. ADM Decatur is currently -20’0. The five-year seasonal average is -12’2.
From a technical perspective, the upside momentum in soybeans is waning a bit. Daily stochastics are now starting to flatten out near the overbought zone, and today’s fall from the high was a bit troubling. The seasonal index shows today being a turning point with lower trade through the beginning of October, though it is worth noting the percentage of down days isn’t all that significant.
One of the crazier things I pay attention to is the lunar cycle. I don’t necessarily believe the moon controls the market, but there is undeniable evidence that the phases of the moon tend to correlate with market highs or lows. The last few full moons have been within a day of a top, and today is the Harvest Moon. I remain cautious of a pullback to 880’0, but ultimately I believe there is value in the bean market and the crop will only get smaller from here.
Cattle – Patrick McRae
Cattle markets slipped going into the close. The chart gaps above the market are still needing to be closed but I do think that the back month contracts will get the job done shortly here. Now that the plant fire episode is behind us conversations regarding backed up supplies of cattle are wide spread. Certainly we will see some of this but I tend to believe that we have priced in that story at this stage. We continue to see interest in bear spreading the front month vs the back months and this should do the trick to add poundage on the back end of the cattle supply while diverting the short term glut as much as possible. This does put some anxiety to hedging interests for the first quarter of next year. While I am not a bear at these price levels nor am I seeing systemic downside risk with the technical of the market, moves back up to profitability should be protected in some way for cattle that have been purchased with a December or February breakeven. I Would suggest an option spread position without margin risk.
The hog purchasing agreements with China should add to the supportive nature of the whole meat market as well. How much we will see cross over into the beef market will likely be limited, but we could easily see speculative money move from their light position into their seasonally bullish interest going into the end of the year. Recommendations right now are to focus on feeding margins. Corn has dropped down to levels that have been both seasonally supportive and price level supportive. I would suggest sourcing as much physical corn as you can hold at current levels and purchase on the board the remaining needed corn for the year.