Grain Markets Caught in a Tug-of-War: Fundamentals vs. Investor Sentiment

Darin Newsom Barchart Thu Oct 10, 10:49AM CDT
Wheat - Wheat field landscape by Lenalindell20 via Pixabay

I had the opportunity to speak with Michelle Rook on AgWeb's Markets Now this morning. We discussed the most recent action in the wheat, soybean, and corn markets. In addition, we talked about interest rates, the cattle market and the stock market. WATCH THE INTERVIEW HERE.

Michelle Rook: Welcome to Markets Now. I'm Michelle Rook, with Darin Newsom, senior market analyst with Barchart. We're seeing some mixed trade in both grain and livestock futures this morning. Let's start maybe dicing apart the grain market, Darin. Wheat market is up again here this morning. Do you think that we continue to see the market a little bit concerned geopolitically? Are we putting in some premium because of that? Or is it just all still fund short covering?

Darin Newsom: That's a great question, Michelle. There's probably 1,000 opinions or more on what's going on in the wheat. To me, it still looks like some fund short covering. That being said, as we saw in last week's CFTC commitments to trade support, particularly the legacy futures only, funds have dramatically cut their net short in both winter wheat markets, Chicago and Kansas City. It's very possible that funds are getting close to par or an even position.

The question now becomes with fundamentals, our reads on real fundamental spreads, basis and so on still leaning towards the bearish side, do funds have a reason to go net long? Right now I don't see it. Right now I don't see any big shift in global supply and demand, geopolitics, all of these things that's always coming up, weather, and so on. Could it happen? Absolutely. It's always a possibility. It certainly could happen. Right now I'm not seeing it. There's nothing in the markets that are indicating it, except for the fact the wheat subsector wants to continue to move higher.

Michelle: No doubt. Like you say, maybe no catalyst to go long in wheat or maybe any of the grain markets at this point. If wheat keeps moving higher, will it continue to pull corn and soybeans with it?

Darin: I'm not a huge proponent of that idea. It certainly could. To me, wheat has its own supply and demand issues as do corn and soybeans. To me, more often than not, wheat is, as I said, its own subsector within the grains sector. It likes to do its own thing. It likes to march to the beat of its own drummers. We all know, anyone who's ever been involved in the wheat market know there is really no logical rhyme or reason to it. Could it possibly pull corn and soybeans higher? Let's just say yes. Again, I'm not a huge proponent of that. I'm not absolutely convinced. If we just see a screaming rally like we saw in 2008 in the wheat sector, yes, it could certainly spill over into corn and soybeans.

Michelle: You bet. Right now it feels like the corn market is caught a little bit between wheat going up and soybeans maybe going down. Is that market also just range bound waiting for something different to move that market?

Darin: Corn's big enough to trade on its own. Yes, there could be some spillover activity from both of the markets, but right now it's just found an equilibrium, can't even say it, equilibrium between $4 and $4.40. It's sitting comfortably right around $4.20. We've got harvest going on. We've got bushels coming in. We've got exports going out. We've got other demand using up supplies. Future spreads are flat. Basis is generally flat.

Futures are generally flat. There's just nothing exciting, at least at this time, going on in the corn market. I just don't see anything changing that scenario. We know we've got good export demand right now, but it's being compared back to the last couple years when the US struggled to move anything as far as exports go. We're seeing more feed demand. We've still got solid ethanol demand. Again, it's just an equilibrium situation where corn doesn't have a reason to go up. It doesn't have a reason to go down. It sits here comfortably.

Michelle: Export sales were good this morning, again, here on a weekly basis, as you point out. I wonder, do we have maybe a lack of harvest pressure or big harvest pressure yet just because farmers are not far enough into the harvest, and so they're putting some of those bushels into storage and we won't see that big harvest pressure until we get a little bit farther down the line?

Darin: That's certainly a possibility. US producers, regardless of how the market is set up, regardless of what the market structure is as far as carries and so on in the different markets, they like to sell soybeans and store corn. Right now, it certainly seems like given the weather that we've seen, it hasn't rained in however many months, soybean harvest is rolling along quite quickly. Corn's still progressing as well. Again, those bushels, as you mentioned, are going into storage. At some point, on-farm storage facilities are going to fill up.

Then it's going to start coming to town. Will that finally put some pressure on the de-smart spread? It should be before December goes into delivery. We also have to remember, again, I mentioned the Goldman roll in soybeans. Goldman roll starts in corn early next month. There's a lot of things to come into play. I do think that the extra bushels coming to town are going to play a role. We'll probably see it in basis more than anything else.

Michelle: What about soybeans? A little pressure again this morning. We've basically been consolidating off of the, or under the recent highs. Decent exports this morning, almost 47 million bushels. Again, we're in the middle of harvest and we've got some rain in the forecast for Brazil. Is that dominating the trade?

Darin: I think it is dominating the trade at this point. That would be out in the May-July spread. As far as the note, Jan, it's everything that you mentioned. We've got a quick harvest coming in. We are seeing some seasonal demand. That's what we have to remember about some of these bigger sales and shipments numbers that we're seeing here early in the marketing year. The first six months of the marketing year belongs to the US.

That's when we get most of our business done, albeit we're still a secondary supplier or a secondary player on the global stage. It's just a seasonal move. Again, if we compare it back to what we saw last year, nothing overly surprising in the numbers that we're seeing. We have enough demand to offset some of the supplies that are coming in, not all, because we have seen some pressure on the Nov-Jan spread, Jan-March as well. Basis continues to run near its previous five-year lows.

Michelle: We are, like you said, removing a little weather premium from the soybean market. I want to go back to what we were talking about when you said funds really don't have a reason to go long here. Let's talk about money flow, because what do you see in terms of money flow with the dynamics that we're seeing? We're going into the election. We've got energies moving higher. Are there areas that maybe the funds will go to now instead of grains?

Darin: I appreciate the question. I just wrote about that again for Barchart because I had the question come up from a gentleman yesterday. Stock indexes are in a long-term uptrend. We know that they have been for the last couple years. They've been going almost straight up and that's usually a scary situation. The question was, could some of that money come out of the indexes and go to other markets? It certainly could. When funds pull some of that investment money out of stocks, what they're going to look for are other markets that have bullish fundamentals.

We've got US treasuries that look good. They're in a long-term uptrend as well. As you mentioned, energies, particularly crude oil, they have an inverted forward curve as far out as we want to look. That's a bullish supply and demand situation. In the softs, we see inverted forward curves or at least inverted spreads. Some of the deferred contracts have some thinner trade volume, but at least nearby we've got inverted spreads. That's bullish. These are all tied to global weather.

There's markets, I think, that these funds could move into. Do grains fit into that category? Not at this time, but it could change. Again, if it turns hot and dry again in Brazil and all of a sudden there's getting to be concern about Brazil's first corn crop in early 2025 and its 2025 soybean crop, that could change the picture. That could change the spreads, starting with the May-July situation in both corn and soybeans. We have to remember, in corn, that May-July spread is still bullish. That could start to draw some of that investment money in longer term.

Michelle: CPI data out this morning at 2.4%, so just slightly above what was expected. Really, we're getting close to the Fed's target. Is that enough reason for-- I know the stock market is at a really high level. You say, what is there for people to keep buying on? Is there really any reason for them not to buy when you look at the fact that we're getting inflation under control?

Darin: I go back to my market rule number seven, stock markets go up over time. There's still a comfort in finding stocks and buying stocks of companies or indexes that one likes. Do we have to be careful up at these levels? Certainly. It's interesting you bring up the CPI. I view them as I do any government number. I don't take them all that seriously. What I notice is that most of the commentary that is around any government number, particularly when it comes to economic numbers, they don't have anything to do with economics. It all has a political bent to it, depending on which side of the aisle you're on, whether or not these numbers are good or bad, whatever the case might be.

We can basically throw them out just for that alone. Do I think that we could see a pullback in US stock indexes? I do. I think it's going to come down to, again, they're going to be looking for some of these other market sectors that haven't had these huge runs, that haven't gone to new all-time highs. That being said, I'm not looking for a collapse in the market. The overall economy is good. There's still a lot of investor interest in buying stocks across the scale, NASDAQ, Dow, and S&P. I'm not looking for a collapse, at least at this time. Certainly, given what's going to happen here over the next month and the chaos that could ensue, that could certainly change the picture.

Michelle: You mentioned the stock market. What about cattle? Is the cattle market like the stock market, where it's getting hard to find buyers up at these higher levels? we've had two days now where we've corrected here. Is that just the case until we get some cash trade maybe to lead us higher or not?

Darin: You hit the nail on the head there, Michelle. We've seen the cash market, at least the cash index get stuck up between $185 and $190 on live cattle. It does raise the question, is cattle going to be like stock market? Is it going to be like gold? It just, regardless of how high it is, continues to find buyers. There's more fundamental reason to say maybe not. The market may need to pull back a bit. This week has been an interesting mix. There's been days when we've seen commercial buying, some days when we see commercial selling.

Likewise, on the non-commercial side, they'll spend some time buying, they'll spend some time selling. There seems to be a lot of uncertainty with the market up at these levels. We have to be careful. If I'm a producer and I've been, because of all of the unknowns in the market, we've been buying puts along the way, low volatility and so on. I think you just continue to do that. You just continue to sell cash into the market and lift your puts if you have them.

Michelle: Thanks so much. Darin Newsom with Barchart, and that is Markets Now.



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On the date of publication, Darin Newsom 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.