Grain Market Update: Are Iran Ceasefire Rumors Creating a Commodity Trap

This morning I joined Michelle Rook on AgWeb’s “Markets Now” to discuss crude oil prices, the cattle market, and the soybean, wheat, and corn markets. WATCH THE VIDEO HERE. 

Michelle Rook: Welcome to Markets Now. I'm Michelle Rook with Darin Newsom, Senior Market Analyst with Barchart. We're seeing red on the board in both grain and livestock futures trade this morning. Darin, thanks for being with me. A lot of this is tied to the idea that the war with Iran is over, the Strait of Hormuz is going to be reopened, but what odds do you give it that that's really going to happen?

Darin Newsom: I'd say the odds are somewhere between zero or less than that any of this is actually true. It makes for nice headlines, and as we've talked about before, these markets are all driven by headlines. The reality is the war isn't somehow mysteriously all over, miraculously completely over. I'm sure there's still missiles firing. I'm sure there's still bombs going off. What we'll find out most likely over the weekend, because that's when these things tend to happen, is that there is no peace, that there is no ceasefire, even though it's been one of the most continued warlike ceasefire that we've seen in quite some time.

What we'll find, again, most likely, is that none of this is true. We have to get used to the fact that most of what's said just simply isn't true. The markets are going to have to deal with it once we come out of next weekend.

Michelle: Right now, though, the crude oil market has bought into it. You have parts of the grain trade that have as well: corn, bean oil down, following crude oil. How much lower do you think we will go here before we find support? That's key here today, isn't it?

Darin: Yes, and that's what's interesting. We've seen so much buying coming into the commodity sector. We've had these predictive market sites promoting the fact that their bettors, gamblers, "investors," can trade commodities basically without regulation by CFTC. They've been hustling. They've been barking folks just like the old barkers from the circus. They've been getting people into the markets. Now you've got all these folks coming in, basically, who are familiar with these types of things through meme stock trade over the last five, six years, and so now they're being forced to get out.

There's no real magic price. There's no real magic level that these markets come down to. What they're going to have to do is come back to where there is some intrinsic value support, some fundamental support. As we see, basically, across the board in the grain sector, is that basis is weak, so the intrinsic value is weak in relation to where these futures markets have gone. That leaves a lot of room for liquidation. It leaves a lot of room for these markets to come down.

Michelle: We are going into the China Summit next week, though. Do you think that at least soybeans, maybe even some of the other commodities, will start to ease that selling pressure and maybe even buy going into that meeting?

Darin: Yes, because again, that's going to play into what we see this weekend when the news comes out that the war is still going on. We're going to see some buying coming back into the energy sector, most likely, which is going to support the soybean oil market, which is going to support soybeans. Then we're going to get all of these social media posts, and I'll put it kindly, that aren't, again, necessarily the truth about how wonderful the relationship is between the United States and China, about how great things are, about how the trade is going to do this and that, US producers need to do this and that to prepare for all the demand that's coming.

Then demand just simply won't come because nothing's going to change. We will get the social media posts. We will get the headlines associated with those. Again, not necessarily the true social media posts. The markets are going to react. Yes, I would expect the grains sector, for those two reasons, to rally next week. Is there going to be anything really come out of this? No. There's going to be talk of computer chips, and there's going to be this and that. As far as US Ag's concerned, nothing's going to change.

Michelle: Do you think we have a lot of the China news already priced into the soybean market? Goodness, we're a couple of dollars over where we were last year at this time.

Darin: I think a lot of what's happened in the soybean market has to do with soybean oil.

Michelle: Bean oil, okay.

Darin: Again, if we look at bean oil, we know that the funds have gone to a record large, long, and record large, net, long futures position here of late. That's really been what's been pulling soybeans higher.

Michelle: All right. Let's talk about that a little more because we made new contract highs in soybean oil this week, and then we had the reversal. As you said, we maybe got a little frothy here, but we've had record crush margins. There has been at least some domestic processing demand helping to support the bean complex. That isn't necessarily going to go away, right?

Darin: It's not necessarily going to go away, but you ask if things have been built in. To me, we've most likely built in the bulk of this explosion in demand. I say that with a little bit of an-- we can attach a bit of an asterisk because--

Michelle: From the biofuel standpoint, is what you're saying?

Darin: Exactly. Yes. You and I have heard about this for the last 20, 30 years, how renewable diesel, biodiesel, all of these things are going to be the next big thing. This goes back to the Energy Policy Act of 2005, and it's just never matured. It's never really fulfilled all the possibility that it's had. Yes, could the US eventually become this huge crusher and global power in the crush? Yes, but we're not there yet. I think the market's done a good job of pricing it in, possibly overshot it a bit.

Now, we're going to see how much pressure we've come under if diesel wants to continue to slide, and I don't know that it's going to fall all that much.

Michelle: Right. Soybean oil tracks with heating oil with diesel fuel, right?

Darin: Yes. My son Ben ran a study showing just the one-month correlation is up near 100%. I know correlation does not prove causation, and anytime you get 94%, 95%, it raises an eyebrow, but there's been a tight correlation between the two markets. Again, this has to do a lot with funds coming into the markets. We've seen similar activity between RBOB gasoline and sugar based on Brazilian ethanol production.

Again, with the flow of money coming out of equities that's been created in equities moving into the commodity sector, we've seen these correlations tighten as newbies or this new generation of traders continue to jump into some of these markets.

Michelle: Since we're talking about demand, exports, this morning, still very good. Stellar first for the corn market. Marketing year low for soybeans, not so great for wheat. Is that typical this time of year?

Darin: It is typical this time of year, and what we have to remember, it's the accumulation. Yes, we still have a large accumulation of corn exports, but what we're seeing is if we take those total shipments and we project them out based on the average of what we normally have shipped this point of year, that pace projection for corn continues to come down. The trend since basically last fall has been for that pace projection to come down.

Yes, we still have solid demand. Yes, it's still going to come in above last year's reported shipments by the time we get to the end of the marketing year, but we have to acknowledge that, again, we've built in the biggest, most likely the most bullish case scenario for US export demand. At this point, the future spreads and basis are still weak. If we look at national average basis, it's still running at or below the previous 10-year low weekly closes. It just tells us that available supplies are still adequate to meet demand.

Michelle: Let's talk about the wheat market because it was the first one that really technically broke out here to two-year highs about a week and a half ago on ideas that the crop was getting smaller. We're continuing to see the market correct here. How much lower do you think we go here, and do we have all of the production concerns priced in already?

Darin: That is an interesting topic. You and I could probably talk an hour on this. There was chatter. The reality is that the hard red winter crop has been hurt. We know that. I've talked to folks from the southern plains that the 2026 crop has been hurt. Again, if we look at new crop future spreads, they're still covering a neutral, at best, level of calculated full commercial carry. The commercial side of the market was saying, "Look, we may have smaller production this year, but, at least right now, it's not that dramatic. It's not going to change the supply and demand situation all that much."

Plus, basis versus the July and September futures contracts is incredibly weak at this point, heading into harvest across the far southern plains. If we look at that same two to three-week timeframe, that was the same time that the story started coming out in financial media that these predictive market websites were bringing more bettors, gamblers, investors in, and one of the markets they were highlighting was wheat.

This money flow, particularly in the Chicago market, that's the more heavily traded futures market, was coming into wheat for no reason whatsoever. We've got Chicago. We've got soft red winter spreads covering 90%-plus calculated full commercial carry. That's not bullish. That's not fundamentally bullish, yet the money was pouring in. That money's probably starting to come back out. Regardless of how much damage has been done to the hard red winter crop, if we continue to see selling coming into the soft red winter crop, it's going to spill over into hard red winter, particularly as harvest starts rolling along.

Michelle: It was interesting yesterday because we got news out of the Oklahoma crop tour. Their crop was only 47.8 million bushels, versus 106.4 last year. The market didn't care, did it?

Darin: Let's be honest, the crop tours, I never took part in one, but I was a grain merchandiser in Kansas, and we had a good time chuckling as the cars went through. Sometimes they go off, and they look at an alfalfa field, or maybe they may be looking at soybeans, or who knows what. Then we all know that the guesses are basically just that. I know there's mathematical formulas they're supposed to use and all of this, but the reality is there isn't much correlation to what these crop tours find and ultimately what the crop actually is.

If there is, it still comes down to what does the market think? Does the market think that we're going to run out of wheat, corn, soybeans, whatever, due to these crop production predictions? The answer is simply no. It's a lot of fun for the folks that like to do it, but in the end, it's not market-moving at all.

Michelle: All right. Let's talk about cattle just quickly because we were back up yesterday, trying to retest the highs again, and today, we're down a little bit, but certainly, there's been a lot of talk about supply hasn't changed. The one thing that people are concerned about is that demand might finally see some sticker shock here because of high gas prices. Have we seen any evidence of demand destruction yet, though?

Darin: Not that we could point to the finger and say conclusively, "This is it. This is finally the top that we're looking for, that that road has to diverge." The choice has to be made between fuel or high-priced beef. Yes, we've seen gasoline crumble this week, but again, I don't think it's permanent. I think there is some concern. There's still some concern in the livestock industry, in the cattle industry, in the beef, that these prices just simply aren't sustainable, that at some point, US consumers are going to have to make that choice.

They're going to have to make the choice to pay more for gasoline and less for beef. We haven't really seen it yet. I've been anticipating, I've been looking for it, for this change to less expensive proteins, but we just aren't seeing those signs yet. It's been resilient, but I still think it's coming.

Michelle: Thanks so much. That is Darin Newsom, Senior Market Analyst with Barchart in Markets Now.