Fall is here market watchers! Well, at least it was on Thursday.
Then, well summer returned and looks set to linger for another two weeks. The new drought monitor has plenty of deepening reds across Oklahoma, Kansas and Nebraska as wheat planting gets underway. It continues to come up in conversations that we are in the middle of a 5–7-year dry period. The unprecedented triple La Nina expected to last through early 2023 is on the horizon. Input costs are high and interest rates are rising in an attempt to curtail 40-year high inflation. There is unfortunately plenty to weigh on our hopes in the present time.
The Federal Reserve’s FOMC this week raised interest rates by a third consecutive 0.75 percent, taking the Fed Funds rate to 3.00-3.25 percent, the highest rate since early 2008. Unprecedented times are indeed upon us. While such action is targeted at slowing inflation, it also increases the borrowing cost for US government debt. To put things into perspective, the 75-basis point rate hike on Wednesday will increase interest on our national debt of $31 trillion by around $2.1 trillion over the next decade. I mention this not to highlight the impact of the rate increase as much as the magnitude of our country’s debt load.
Rising interest rates also attracts buying in the US dollar relative to other currencies driving the value of our currency higher. This makes our commodities relatively more expensive to foreign buyers and is a headwind to export pace. The US dollar index spiked Friday to 111.360 before closing the week within the September 7th previous high just shy of 110.500. With the Fed likely to raise rates another 1.25 percent through the end of the year, the strength of the US dollar is likely to continue. US and global ag commodity markets will therefore need support from weather and geopolitical issues to hold risk premiums.
There was plenty of the latter this week with Russia’s President Putin upping the rhetoric regarding his lagging campaign in the Ukraine as the West wielded tough talk at the United Nations meeting in New York. Under pressure within his own rank and file, Putin is turning to more extreme measures at least verbally including nuclear weapons. Mass mobilization of an additional 300,000 troops is being initiated as is a referendum of several Russian-occupied areas of Ukraine that started Friday and concludes on Tuesday. The area represents 15 percent of the Ukraine territory. I think we know the results.
I expect the next target will be the grain corridor. SOVECON this week again raised the size of the Russian wheat crop to over 100 million metric tons compared to USDA’s recently raised 91.0 MMT. However, Russian wheat exports remain sluggish. Putin has already referenced the imbalance of Ukraine vs. Russian grain exports due to strict sanctions on his country and I expect this will lead to more unraveling of the deal brokered by Turkey and the UN in the coming weeks.
The wheat market took a breather on Friday due to lack of fresh news and end-of-week profit taking. December KC wheat made its weekly high on Thursday at $9.89 ¾ before closing the week at $9.50 ½, below the 200-day moving average. The next level of resistance is the 100-day moving average just above $10.00. We may see a move to that $10.00-level this next week. Should we move lower, I believe the $9.20-level is strong support for the time being.
July 2023 new crop KC wheat futures made a weekly high at $9.62 ½. I believe producers should start protecting new crop at the $9.70-9.80-level on July 2023 futures. Realizing that most producers have not planted a kernel of wheat, put options, though expensive, are probably the way to go versus forward contracts to stay flexible and leave room for upside. India’s rice export ban effective September 9th that I covered last week is another wild card for the wheat market. Give me a call this week to discuss strategies for protecting and marketing new crop.
The corn and soybean markets have so far not been able to break above the September 12th and 13th crop report highs, respectively. While it has required patience, I believe we will finally start seeing harvest pressure come into these row crop markets. Declining US corn and bean crop conditions as harvest gets underway will however keep some support under these contracts. The Chinese were rumored to have bought US PNW shipments this week, but yet to be confirmed. Renewed export sales will help support, but buyers usually wait until further into harvest to price cargos expecting some peak harvest weakness. I would price or protect downside on soybeans and start on milo as well.
Pressure from the macro markets this week collapsed the recent cattle rally. The Dow was absolutely wrecked this week making lows below the mid-June rout. As I said during the recent Sidwell Insurance-Strategies road show meetings, this 29,500-level is critical to hold or risk further fall out. Returning talk of recession has brought more sellers, but believe we are due for a bounce off these levels, at least temporarily. I talk equities as they do influence the livestock markets as somewhat of a barometer for consumer appetite.
Friday’s USDA Cattle-on-Feed report released after the close presented a mixed picture that leans bullish in my opinion. September 1st on-feed was slightly higher than expected at 100.4 percent of last year vs. 100.0 expected. Placements in August were also slightly higher than expected at 100.4 percent versus 97.3 percent, which is somewhat bearish, but not surprising given continued drought conditions. The marketing number was the real stand out with August sales higher than expected at 106.4 percent versus 105.9 percent expected.
There is still potential for weakness in feeder and live cattle contracts, but I believe we are near strong support. In combination with harvest pressure in corn, feeders in particular should find some strength. Clients are starting to wean home-raised calves and buy stockers. While bullish sentiments run high in the marketplace, I believe rallies should be protected when buying cattle. Market swings are more extreme in this environment and profits can quickly disappear amid higher feed and borrowing costs.
The Livestock Risk Protection (LRP) policy is a subsidized put option that allows you to protect individual head instead of the minimum 50,000-pound CME contracts. LRP premiums also do not have to be paid upfront, but rather netted off any indemnity due at the end of the policy. This can help with cash flow. Give me a call if you’d like to discuss price risk strategies for your cattle business and I’m happy to help discuss these with your banker as well. Protecting your equity protects the bank and can result in a bank’s willingness to increase your access to funds for growth. Cash fats traded at $143 and $144 this week. We should see these numbers continue to creep higher next week.
US wheat planting is now 21 percent complete. We have WestBred, CoAXium, OGI, KWA, Agripro and other varieties available at competitive prices. We offer seed treatment that protects against early army worms and timely emergence. We have pickup points in Kremlin as well as Goltry with delivery also available. We offer bulk, totes and 50-pound bags. We are also able to load DAP or MAP when you pick up your seed. Give us a call (580) 874-2286 to see what fits your rotation best to maximize value amid higher priced inputs ahead for next season.
If you’re ready to trade commodity markets, give me a call at (580) 232-2272 or stop by my office to get your account set up and discuss risk management and marketing solutions to pursue your objectives. Self-trading accounts are also available. It is never too late to start and there is no operation too small to get a risk management and marketing plan in place.
Come see me every Thursday sale day at the Enid Livestock Market and let’s talk markets!
Wishing everyone a successful trading week!
Brady Sidwell is a Series 3 Licensed Commodity Futures Broker and Principal of Sidwell Strategies. He can be reached at (580) 232-2272 or at firstname.lastname@example.org. Futures and Options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at http://www.sidwellstrategies.com/disclaimer.