Will the Turmoil in the Equity Markets Spillover Into the Commodity Markets?

Today I was interviewed by Michelle Rook of AgWeb's Markets Now. We had plenty to discuss, including the question of whether the equity market's turmoil will spill over into the commodity markets. We also chatted about next week's Fed meeting, China, grains and livestock. You can watch the interview here and below is the transcript:

Michelle: Good morning and welcome to Markets Now. I'm Michelle Rock, along with Darren Newsom, who is senior market analyst with Bar Chart and a mixed start in grain and livestock futures this morning. We do have some of the outside markets, a little bit negative again here, including the equities sector and Darren, it has been a tough week here for the equities, especially with what's been going on with the banking sector and is this continuing or will it continue to be a concern here for the outside markets and spill over into commodities?

Darren: I really think it can, we got news what late Thursday that what 11 large banks were set to bail out one of the bigger banks that's in trouble here to the tune of $30 billion in this, after the National Bank of Switzerland was going to bail out credit Suisse by with 54 billion.

One analyst, one long-term investor talking about this, it really isn't a good thing, it really isn't a bullish thing for the market because the potential is to spread "the contagion" among the rest of the banks who are starting to take part in this. We've seen it often off and on today. We saw a big selloff on Monday and US equities came back Tuesday on some news that was taken as bullish back into low side Wednesday rallied on Thursday.

The stage is set for some potential pressure and could be a lot of selling heading into Friday session in the weekend particularly if we consider what I read, something, how many trillions of dollars of options are set to expire and/or be rolled over on Friday's session. It's going to be quite a day in the equities.

Michelle: No doubt. Then what about next week as we set up for the Fed announcement?

Darren: It's going to be interesting to see, I've said that I don't think any of this is going to change the Fed's stance, going to change its game plan as has been the case for the last year or year and a half. Many of the Fed members have been front-running this by talking about there is going to be an announcement early on, it was expected to be 50 basis points.

I don't think it's going to be that strong. I certainly could be another 25 basis point, but I do think we're going to continue to see interest rate increases. I don't know that the banking situation and all that changes what the Fed needs to do because what it's doing seems to have an effect on inflation. We'll see. I'm not expecting them to all of a sudden stop raising rates and to actually go into reverse and start lowering rates, and the Fed Fund futures is saying that could be a possibility later in 2023. I'm just not expecting it this month.

Michelle: Got you. The impact on the [unintelligible 00:02:44] sector, there has been some spillover in terms of money flow, hasn't there? Will that continue?

Darren: Yes, there really has. If we look at the corn market where from late February through mid-March may corn broke 17 cent. What we've seen since then is just some incredible commercial buying. We know that the US situation is still tight, supply and demand. Basis remains strong. Future spreads have just exploded here the past couple weeks. We know there's lots of commercial buying going on out there. Merchandisers trying to source supplies to meet demand. The liquidation that we saw was a warning that there was something brewing on the financial side. It came to pass.

Now, we've got commercial interest. My concern is when the commercial business is done, when we get what we need covered, and I had a good friend ask me about this yesterday. Does the non-commercial side, does the investment side start selling again? If they do, I don't think it's going to be just long liquidation. I think they could start to establish some short positions if they think this financial situation is going to get worse if it does spread to the rest of the banking industry.

Michelle: I don't think they've done that Darren, since 2021. We were in the middle of the COVID pandemic, right?

Darren: Yes, that sounds right. I haven't gone back and checked. We've seen a non-commercial net futures position go negative, go net short, I should say, in the wheat sector, all three wheat markets at one point. It's been a while for corn and soybeans, and I'm not looking for that to happen, particularly given how tight supply and demand still is here in the US. It certainly could. Anything's possible when you start talking, and we can look at April Lean Hogs to see what can happen when algorithms get triggered April lean Hogs, crude oil, and so on. It could happen. We'll have to deal with it if it does.

Michelle: That's right. We already have seen funds liquidate a massive amount of their position in corn. I think they're long, only about 21,000 contracts. Now, let's also talk about China corn business today for the fourth day in a row. We're now up to almost 84 million bushels this week. Is that helping to stem the tide of what we would otherwise see as more pressure in that corn market? Will we see more corn business by China?

Darren: We've entered the second half of the marketing year. This is when the US usually sees its corn business pick up. We need to. Sales have been slow, shipments have been slow. Both of them are picking up. I would expect this to continue. We've heard rumors that China was in the market for the last couple of weeks. Again, if we go back to that May-July spread, I think it went to something like a 17-cent inverse overnight.

It's just an incredible move telling us that commercials are buying as much as they can, basis has gone to like 8.5 cents over May, national average basis in some areas, particularly where their corn deficit is running much stronger than that. We have all of the signs out there that this sort of activity should continue. Now that being said, I saw a piece of news yesterday. A friend have shared with me a piece of news. China's more interested in Brazil's safrinha crop. They want to buy as much of that as they possibly can. They don't want to buy from US. We know that they don't want to buy anything from US.

Darren: anything from the US, but with the safrinha crop planning still behind schedule and it's still wet across much of central Brazil. They've been forced to basically come knocking at the US door. We don't have an unlimited supply of corn. We've had three short production years that yes we may see better production in 2023, but that's a long way from being in the bin.

Michelle: Yes but our price actually got cheap enough to stimulate demand from China too, didn't it?

Darren: Yes, that 75-cent sell-off in futures even with bases staying strong, that's going to be an attractive buying opportunity to both domestic merchandisers and Chinese end users who absolutely jumped in on the market at that point.

Michelle: Seeing just a little pressure this morning despite the fact that we saw another downgrade of the Argentina crop now down to 25 million metric tons. Is that just more this fund liquidation that you talk about this money flow that's impacting that?

Darren: To a certain degree yes. We've seen some liquidation in the soybean market as well. What we also have to deal with is the second half of the marketing year is win China and win a lot of the biggest buyers in the world lose interest in US soybeans. We've done 75%, 80% of our shipments at this point to get us through the second half of the marketing year. Most of the interest goes to South America now.

Harvest has been slow. We know Argentina's crop is much smaller than expected. What we need to see now is if US crush demand gets stronger and export demand for soybean meals starts to pick up soybeans we may just ship what's already on the books. There may not be a whole lot more sales to come but now it could turn-- or the attention could turn to crush and soybean meal exports.

Michelle: What about the wheat market? We're still waiting to find out whether this grain deal in the black sea's going to be extended 60 days or 120 days. What do you think it's going to be?

Darren: It could be 60 days, 100 days, 360, 720, doesn't make any difference. The good grain has been moved out and/or stolen. I don't think there's much left in the Ukrainian ports along the Black Sea to move. They didn't get much planted last fall as far as wheat goes. Corn and soybean, corn harvest was likely disrupted and smaller. A lot of that didn't move to town either. I really don't think it matters. That seems to be Ukraine's stance as well. Russia's willing to agree to anything because they know it doesn't make any difference at all either, and they'll come across looking like the good guy. I think it's pointless.

I think a lot's been made of it. The US wheat market has been moving higher mostly due to the Kansas City hardwood winter market, particularly out in new crop. It's about time that that crop starts to move into the spotlight is we get closer to what's supposed to be spring-like weather. I think the attention's going to go to how dry it is and how poor that crop actually is.

Michelle: Hog's trying to bounce this morning after, as you mentioned, we've had a lot of fund liquidation there tied to the outside market uncertainty. Cattle have seen the same thing. Do you think that the cattle-on-feed report, if it's bullish, that that's enough to stabilize that market, or is it going to take more of the stabilization in these outside markets?

Darren: I think the key that we have to remember with the cat on feed report, it's as of March one. It was February placements, it was February marketings. It's all old news. We've seen it traded, we've watched future spreads, we've watched futures. There will be a knee-jerk reaction, there always is. Calling it bullish or bearish, I usually stay away from that.

I just don't see it that way. We know future spreads did firm during February, we did see some commercial buying indicating there was likely some smaller numbers as far as odd feed and placements and so on. The bottom line is, we still have plenty of cattle, we still have ample supplies.

The thing is the market just looks a little bit top-heavy, we've seen some pressure recently in the boxed beef market. That raises a little concern over how demand is going. I think those things are more important to watch. It'll be fun, watch everybody's reaction. It'll be passed very quickly on Monday morning.

Michelle: All right. Thanks so much for joining us.

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