Grain market bulls making meaningful chart progress

Happy Labor Day Weekend market watchers!  

It is officially the unofficial conclusion to summer 2024!  We are thankful for the rains and overcast conditions to conclude the month in the Southern Plains.  Note US markets are closed Monday for Labor Day.

Soybeans are getting a much-needed break from the hot, dry conditions as harvest approaches. For now, corn picking is progressing while milo harvest is just getting underway.  

The month of August was a wild ride across all market segments.  The Dow Jones and S&P 500 both managed to finish the month above where they started that immediately saw a dramatic selloff in the first three days that shook investor and hedger confidence.  In fact, the Dow Jones even eked out a new high above the July 18th all-time high on Thursday and Friday.  

This strong finish was also attributed to cooling inflation and the increasing odds of an interest rate cut at the Fed’s upcoming FOMC meeting in September.  Friday’s Personal Consumption Expenditures (PCE) reading, the Fed’s preferred inflation gauge, increased 0.2 percent in July, which came to 2.6 percent for the 12-month period, slightly below forecasts of 2.7 percent.  Most all inflation items were in line with expectations while personal income increased 0.3 percent, which was slightly above the 0.2 percent estimate.  

While this report could be called neutral, it does continue to support the narrative of the shift in monetary policy that Fed Chair Powell announced last Friday from Jackson Hole.  The next key report will be the US jobs number for August that will be released on September 6th at 7:30 AM CDT.  

The US dollar selloff reversed mid-week and rebounded up to the downward sloping trendline into Friday’s close where I think we will see the index stall. Depending on next week’s jobs data, which I’m assume will again show weaker growth, we will likely retest this week’s lows, which were the lowest levels since December 28th, 2023. 

The slump in the US dollar index is of critical importance to generate international demand for US commodities. Let’s put it this way.  When we were last at these levels of the US dollar index at the end of last year, December corn was at $5.05, November soybeans were at $12.60 and December Chicago and Kansas City wheats were both at $6.70. Of course, that was a different time of year, but it does provide some perspective given slower export sales that are just beginning to pick up.  It is also very interesting that these levels are right where chart gaps were created on the December corn and November soybeans charts and remain unfilled at this time.
 

While China bought more soybeans this week that helped spark buying in bean futures, the biggest demand news was Egypt’s return to the wheat market announcing a refreshed tender after the early August tender of 3.8 million metric tons that grabbed headlines, but only resulted in 7 percent being purchased stating confidence in buying cheaper.  However, the tides have turned.  On Thursday, Egypt’s President Abdel Fattah al-Sisi announced another wheat tender representing over half of the country’s annual imports and 20 times its usual size. 

Interestingly, this hastened announcement was triggered after an intelligence briefing that stoked fears of new supply risk in the region.  With international supply-side prices depressed while inflation in Egypt is elevated amid a potential crisis, now is seen as the time to lock in prices and food security concerns.  
 

And rightly so with Middle East tensions continuing to become more erratic and Russia amping up retaliation on recent Ukraine advances with infrastructure bombings on the power grid this week.  

While the headline itself is again market moving, the key will be how much is actually purchased this round, at what price and from whom.  Black Sea origin has typically been the most competitive, but with the weaker US dollar combined with lower US futures prices and certainty of delivery while other origins are in conflict zones, the US may have the opportunity to compete.  With global wheat supplies tighter than the market acts along with net fund shorts, we could begin to see some excitement return to the wheat complex that has long been lacking.  

I have been traveling with Sidwell Insurance in recent weeks providing market updates and strategies as we do several times a year for clients.  As I do every year, I outlined the cost of carrying physical grain versus selling the physical and buying call options.  The numbers make even more sense this year than they have in past years given elevated interest rates.  

At-the-money March call options provide 6-months of opportunity for the market to go higher for around $0.38 per bushel.  With many grain elevators increasing storage rates to $0.05 per month and the cost of interest around $0.044 per bushel per month, 6-months of storage and interest will cost you roughly $0.5625 per bushel.  No matter what the market does during those 6-months, you still have to pay 56.25 cents per bushel.  If the market goes up, you still have to pay interest and storage.  If the market goes down, you still have to pay interest and storage, but also lose how ever much the market goes down.  

Now, if you sell the physical wheat and buy a 38 cent per bushel call option, you now have the opportunity for the wheat market to go up for 6-months and the cost is 18.25 cents less than the cost of interest and storage.  Better yet, if the market goes down, you don’t lose any more than the 38 cents that you paid for the call option.  If the market goes up, your call option gains in value just as your physical bushels would have if you were still holding them, but with no interest and storage costs. 

Furthermore, you get to free up cash to use to pay expenses, loans or buy assets such as cattle.  Here’s how that works.  If cash wheat is $5.00 per bushel and you have 5,000 bushels in the grain elevator, the size of the CBOT contract, that is equivalent to $25,000 that you cannot use if you’re holding physical grain until you sell that wheat. The 5,000 bushel call option costs $1,900.  So, if you sell your 5,000 bushels for $25,000 and buy the call option for $1,900, you now have the opportunity to make money on 5,000 bushels if the wheat market goes up, but have $23,100 in your pocket to use for purposes other than waiting for the wheat market to go up.  Call me to discuss further details and to get your account open.  

This same strategy works for other grains that you deliver to a grain elevator versus different strategies for storing in your own bins.  

US crop conditions saw some declines this week that helped put support under the grain and oilseed complex.  Corn conditions came in 2 percent below last week’s reading while beans came in one percent lower.  Spring wheat backed off 4 percent versus last week although still at elevated levels as harvest reaches the 50 percent mark.  Cotton conditions have continued to slip and fell another 2 percent this week to 40 percent Good-to-Excellent.  With US crops in the Midwest all but made, the focus is really more on demand.  
 

In that vein, China made a frustrating announcement this week that they are proposing new curbs, actually halts, on purchases of barley and sorghum to “ease domestic stockpiles and support farmers.” This couldn’t come at a worse time for US farmers that are just beginning to harvest grain sorghum.  Suffice it to say, China is the driver of the milo cash market in the US.  If they are not buyers in the market, basis levels drop.  If they are in the market, cash basis can be well above corn.  That is not the case today.  

Interestingly, China made that announcement on Wednesday and then on Thursday bought US sorghum, but it was only old crop.  This is likely just another tactic to delay purchases and keep international prices depressed as they will likely be in the market at some point in the coming months.  If you’re selling milo, look at the call option strategy on December or March corn futures to make up for these lower futures levels, but also lower basis levels. 

There is no reason to get caught with selling physical grain at low levels and not knowing your options to continue to participate.  Everything is tight right now, but you don’t have to completely give up and get out of the market.  

And then, there’s cattle.  This market has yet to recover it’s August losses although it made some headway this week, but still failed to make a high above the mid-August high.  August feeder futures and options cash settled on Thursday at $243.175.  September is now the front-month.  
 

Most feeder contracts rebounded on Friday, but closed right around the 20-day moving average.  We could be in for a bit more strength, but September and October are usually tough for equity and cattle markets and so my bias is to protect the downside on meaningful rallies.  

Fed cattle cash trade was relatively light this week with highs in Texas and Kansas at $183.  Live cattle futures also bounced Friday, but closed right around their 20-day moving averages. Upcoming data on the US economy and consumer will set the course for the cattle complex.  

More indications of lower interest rates and strong equity market performance could support cattle futures, but be cautious heading into these fall months.  Hopefully, the cash markets will hold even if futures weaken as buyers begin stepping up for winter stocking.  

Sidwell Strategies offers both in one place and so join the Sidwell Team today!  Sidwell Strategies is the one-stop shop to protect cattle with futures, puts, LRP or a combination of all, which is probably the best strategy overall.  

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.  

Wishing everyone a successful trading week!  

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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 brady@sidwellstrategies.com.  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.