While it doesn’t seem possible, we’re heading into a holiday shortened week and the unofficial kick-off of the holiday season with Thanksgiving this coming Thursday.
Traditionally this time of year signals the start to slower markets, quieter headlines, and in ag at least, as harvest wraps up across the country, there’s an overall slowdown that just tends to happen.
This year seems poised to be very different as we continue to deal with the threat of major market moving headlines daily. While I am not expecting anything earth shaking to take place this week, I am watching some more nuanced situations that continue to develop that could have major implications on the grain markets in the weeks and months ahead.
A quick look back at last week shows an interesting market dynamic that is starting to develop when it comes to the situation in Ukraine and how the market seems to be reacting to it. Of course, we got the much anticipated 120-day extension of the grain corridor deal. Everything that was outlined in the original deal continues for the next 4 months as the parties involved work towards a long-term solution.
Mid-day Tuesday markets rallied on reports of missiles landing in Poland, signaling the conflict could quickly spill over into one with NATO. At the start of the conflict news of escalation of that kind would have likely sent us limit higher, this week we got 30 cents max in Chicago wheat, only able to settle the day a dime higher.
The shallowness of the rally and the willingness of traders to sell once the situation was confirmed to be more likely the result of equipment failure than nefarious intent, shows there may be a bit of fatigue coming from buying Black Sea headlines.
In addition to questions surrounding potential fatigue when it comes to trading invasion headlines, one must wonder what a collapse in the crypto space and tightening monetary policy may mean for rally depth as we move ahead.
While the collapse of FTX, one of the world’s largest cryptocurrency exchanges, seems to be far removed from ag markets, the bankruptcy lists over one million creditors with trillions of dollars being sucked out of the tech and crypto space since the start of the year.
We aren’t far removed from the idea short squeezes fueled by everyday citizens with a plethora of capital and access to the commodity trade via ETFs would be possible. But that power now seems limited, with interest falling off significantly. That shift combined with talk that inflation is waning could make buying commodities far less sexy as an investment than we’ve see the last two years.
All of this is now pushing me to ask, is it possible the changing dynamics of the outside markets and the loss of capital by Joe Citizen is a lost catalyst, potentially limiting market moves even in the face of bullish developments? For instance, do we now see what would have pushed us to $7.30 front month corn in the past year or so find us limited to $6.80 or $7.00? Of course, only time will tell, but this week’s market dynamics gave me pause.
Other market developments I’m watching have far more to do with the cash side of things than anything else. There has been a lot of talk lately about basis strength and what it means for corn futures, especially as we move ahead into the second quarter of the marketing year and beyond.
Feedlots in the Southern Plains are paying a record high amount for corn, pushing ethanol plants and other end users across the Western Corn Belt to scramble to compete, pressuring ethanol grind and elevator margins as a result.
There was a lot of conversation in 2021 about global end users moving from a place of “just in time” buying to that of “just in case,” pushing countries to stock up and buy most anything they could get their hands on, no matter the price. A loss with the knowledge of ownership was okay because having the physical product on hand trumped economics.
Domestic end users—especially feeders--had never seen this type of market structure in the global marketplace, finding themselves fishing behind the net the last two years, paying up for bushels late in the year they could have owned for much cheaper months earlier.
With two years of drought in a row, a large Mexico export market and what was a very large Western Canadian export market last year, supplies in the Western Corn Belt were running on fumes as we worked into harvest. That nearly empty pipeline combined with more space and a bullish farmer and elevator has created an interesting dynamic in the market, with basis levels soaring.
One must wonder though, with the dynamics shifting in the global market and countries working back towards a just in time buying mode thanks to more available freight and cheaper supplies out of the Black Sea and South America, if the feeder could be running ahead of competition that just doesn’t show.
The job of basis is to move bushels from where they are to where they need to be and with reports of corn values paid getting high enough to encourage imports, the imbalance in values we’re seeing is not likely to last long.
Of course, with poor rail performance and other logistical limitations, values in the South and other areas with shorter corn crops versus their demand base will stay firm, though whether it’s a sign futures prices need to move higher or not feels questionable at best.
In addition to watching the overall market feel and shifts there, I will of course be watching what happens in China. Officials in Beijing reported their first Covid death since May over the weekend, with talk of even more confusion when it comes to Covid protocols as local governments try to align with state policy.
National leaders say they are working to build more hospitals and expand space for intensive care, signaling that perhaps a more relaxed approach to Covid will take place. However, after two years of hearing how bad the virus is and the knowledge that a positive case is a ticket to a government hospital stay, it is likely going to be more difficult to get the Chinese consumer to just go back to pre-Covid behavior than it may have been in the West.
South American weather bears watching as well. Brazil seems poised to produce a massive crop, but issues in Argentina are real. Speaking of Argentina, I and the rest of the market will be watching for a potential announcement of another round of the “soy dollar,” with some rumors the adjustment to currency conversion could happen with corn too as Argentina needs to generate big time cash before year-end.
The holiday season this year is likely to be anything but calm and serene, but I guess on the plus side it’s not likely to be boring.
As always, let me know if you have any questions and have a great week!
More Grain News from Barchart
- Spring Wheat Widened Inter-Market Spread this Week
- Commercial Bean Hedgers Added Longs
- Chinese Oct Corn Needs Revealed
- Sugar Prices Rally on Asian Supply Concerns
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