Wheat rallies, cattle-on-feed leans bullish

Fall is here market watchers. Well, at least it was on Thursday. Then, 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– to 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%, taking the Fed Funds rate to 3%-3.25%, 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 U.S. 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 U.S. 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 U.S. dollar index spiked Friday to 111.360 before closing the week within the Sept. 7 previous high just shy of 110.500. With the Fed likely to raise rates another 1.25% through the end of the year, the strength of the U.S. dollar is likely to continue. U.S. 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% 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 already has 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 $9.89¾ before closing the week at $9.50½, below the 200-day moving average. The next level of resistance is the 100-day moving average just above $10. We may see a move to that $10-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 $9.62½. Crop insurance prices were set for fall planted crops last week benefiting from the recent rally. Wheat planted in Oklahoma, Kansas and Texas is set at $8.79 per bushel. Barley is $6.09 per bushel. Canola is $15.25 per bushel. 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 Sept. 9 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 Sept. 12 and 13 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 U.S. corn and bean crop conditions as harvest gets underway will, however, keep some support under these contracts. The Chinese were rumored to have bought U.S. 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. Sept. 1 on-feed was slightly higher than expected at 100.4% of last year vs. 100% expected. Placements in August also were slightly higher than expected at 100.4% versus 97.3%, 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% versus 105.9% expected.

There still is 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 buying 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.

Come see me every Thursday sale day at the Enid Livestock Market and let’s talk markets. Wishing everyone a successful trading week.

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