I was interviewed by Michelle Luke this morning on AgWeb’s Markets Now. We discussed the corn, wheat and soybean markets. We also talked about interest rates and the beef market. Check out the interview here.
Michelle Luke: Welcome to Markets Now. Michelle Luke here with Darin Newsom, Senior Market Analyst for Barchart. We’re seeing some noticeable red in the grain and livestock futures markets this morning. Darin, I want to start by talking a little bit about corn and soybeans. Both markets are at three-year lows. The idea that rain produces grain is taking hold right now, right?
Darin Newsom: Yes. Long term, there is not much supply and demand uncertainty. You can see this in the cash market. You can also see this in the futures spreads, especially the new crop spreads. Commercial traders are pressuring the market to follow what the funds have been doing here recently. Admittedly, the weather has been, I wouldn’t say perfect for anybody, but it has been generally favorable for the 2024 crop. Again, you can see this in the market reaction and the attitude of commercial traders.
Michelle: Absolutely. You mentioned funds. They are very short in this market. Corn short interest is close to, if not at, all-time highs. Do you think funds are continuing to short the grain market?
Darin: Right now, they don’t have much of a reason to stop, but you could argue that from a technical and fundamental standpoint, there’s not much room left for December corn prices to continue to fall further. If you look back over the last 10 years, from the fall of 2014 to the fall of 2020, these corn futures were pretty much stuck in the $320 to $420 range. They’ve reached an all-time high. Now that can be viewed as support. As the old adage goes, old resistance turns into support. You can look at it that way.
From a fundamental standpoint, why push the market below $4? [sound cut]–It’s right around $4, so there’s not a lot of fundamental reason for the market to go below $4. We’re testing that floor right now. Could funds be pushing this further down? Yes. Again, going back to what the new grain spread is showing, it’s neutral. It’s not extremely bearish. The Dec-March carry isn’t super strong, and it’s not when you look at the Dec-July forward curve. We’re not there, at least at this point. There are still questions about what production is going to be and what the overall supply and demand picture is going to be as the next marketing year progresses. For now, funds seem comfortable. There’s no reason to cover. As you said, we’ll see if they get into record-large net short positions.
Michelle: Yes, absolutely. There is a shortage in soybeans. There is a shortage in the wheat market on all three exchanges. At the same time, as I said, it’s down to a three-year low, which doesn’t seem to be stimulating demand very much. But the cash basis levels are strong because farmers are not selling here. Isn’t that right?
Darin: Yes, and this will be an interesting confrontation because supposedly, and reportedly, producers are still holding on to significant amounts of their 2023 corn production. At the same time, as we speak, funds have moved into massive net short positions, probably on record. Who is going to win this battle? Who usually wins this battle? In the meantime, yes, merchandisers are trying to source some supply at this point to meet the demand that is there.
Let’s say at some point the storage doors start to open and U.S. producers start to wave the white flag and start selling cash grain, what then happens to the basis market even though futures are at or near 3-year lows? If all of this comes to fruition, could we be in for a challenging few months?
Michelle: Absolutely. You said December corn is support at $4. November soybeans broke through the $11 level. That’s a psychological level. I think the other slight support area that broke through on the chart was $10.80. Where do we go from here? Where is the support?
Darin: Yes, November soybeans are in an interesting situation right now. If you look back, the low yesterday Tuesday, and as I recall, November 2024 soybeans hit an almost three-year low. I think it was almost three years ago that we saw a drop at this level. At this point, there’s not a lot of support for the market to recover. It’ll be interesting to see how far it goes down, because if you look at the long-term supply and demand, the commercial side is very bearish.
Futures spreads are still neutral to bullish at the moment, but there is an asterisk of low futures volume. That needs to be understood. There is not much incentive for funds to continue to push this market higher. We could be hitting bottom. We could see some kind of spike pattern forming at any time down the line. Seasonally, there is certainly still time for this market to fall. But we don’t know what the next price target will be.
Michelle: Demand is once again an issue in the soybean market, despite the first new crop sales of soybeans to China this morning.
Darin: Yeah, I was surprised there wasn’t more of a party at that announcement with hats and buzzers and stuff. We have some kind of deal with China right now. It remains to be seen if China will change course and cancel it later. The US has a new crop sales deal with China for soybeans for 2024-2025. 5 million bushels as I recall, roughly 4.9 million bushels. Let’s wait and see if this starts to grow or if it’s just symbolic. It seems like everything is on sale at the moment so just buy it.
Michelle: You and I talked about the fact that China has often made the United States its second largest supplier lately, even when it’s on sale.
Darin: Oh, of course. With the start of the trade war, the US dropped out of the Big Three. There is no doubt about that. You can look back. It is visually clear. The US was no longer one of the major players in the global soybean market. Yes, the US is and will remain the second largest supplier. In fact, the only time the demand for US soybeans increases globally is when Brazil has weather or production problems. That’s why we will have to wait and see if the recent rumors of a sharp drop in demand from next year onwards become reality. We’ve been hearing that for the past 10 to 15 years. Unless something actually happens, the US will have a surplus of soybeans.
Michelle: The wheat market has also come down a lot from the spring highs. Of course, we’re in the middle of harvest now. I wonder if the market is sensing that this crop is a lot bigger than we thought it would be? We’re seeing more yields coming out of the combines, right?
Darin: Here’s a funny little story about this. Every grower that I’ve talked to from the Southern Plains to the Midwest says the same thing. They all say it the same way: Yields are better than expected. We’re talking to wheat growers. Yield projections range from zero to worst case. Better than expected doesn’t necessarily mean it’s great. We don’t really believe in it.
Now, if you look at the market, you see that the commercial side believes that supply will be adequate and that yields will not only be better than expected but also a little closer to the upper end of the range that we normally see. There is incredibly strong carry on the Sept-Dec spread in Kansas City. There is also strong carry on the Sept-Dec spread in Chicago. This is what we really need. The yield numbers are certainly better than expected, but I think they are greater than what we normally see. The reality is, there is just more supply than demand. This not only pushes the futures market down but also strengthens the carry.
Michelle: Absolutely. Do you think there is a significant risk of a downturn in the wheat market? The harvest is at least 50% or more than 50% full. When do you think we’ll start to see some of the harvest pressure ease off?
Darin: Back in the day, when I was a merchandiser, and this may no longer exist, many elevators offered 30 days of free storage during wheat harvest. And once that 30 days started to pass, you would get a glut of wheat that would be sold for cash regardless of price, because usually the price would have been lower during that time. Again, I don’t know if this is still the case, but as the harvest deepens and we get closer to mid-July, cash sales of wheat may start to slow down. Growers don’t want to hold onto wheat unless they absolutely have to.
That might start to ease some of the commercial pressure on the market. Right now, from the funds’ side, they’re still net short in all three markets. Will they have an incentive to buy? Not anytime soon, as far as I can see. If we can ease some of the commercial pressure, we might be able to start to slow this decline a little bit.
Michelle: Okay. What do you think about the beef market? It’s down for the third day today. Boxed beef seems to have hit a new high, but have futures also hit a new high?
Darin: I would say so, at least in the short term. What’s interesting to me in both beef markets is the amount of commercial selling we saw over the weekend. There were some reports of strong cash activity after last week, and then commercial selling going into this week has been strong, especially in the live cattle market, so the boxed beef situation so far this week has been impressive. In the short term, all the indicators are pointing to the beef market peaking again.
Michelle: Just one last question. Fed Chairman Jerome Powell just testified before the Senate, and I believe he’s also testifying before the House today, and there’s been a lot of speculation about the timing of interest rate cuts. Has he said anything that would suggest a change in direction from the Fed on this point?
Darin: Not true. What struck me about Tuesday’s speech was that Chairman Powell said, “Keeping interest rates too high for too long could have negative effects on the overall economy.” This is exactly the same as what he’s said in the past and has said in the past. One or more rate cuts in 2024 certainly remains a possibility.
We’ll see if that happens. Will it happen here in July? I don’t know. Probably not. Anything could happen. For me, it doesn’t change my approach, obviously, other than the fact that interest rates will likely start to come down at some point. It could be 2024 or it could be pushed back to early 2025.
Michelle: Okay. As always, thanks for the insight. Darin Newsom here with Barchart. That’s it for Markets Now.
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On the date of publication, Darin Newsom did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s disclosure policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
