Grains, Livestock, and Geopolitics: How to Read What the Ag Markets Are Actually Telling Us

In today's edition of Markets Now, I saw down with host Michelle Rook to break down the grain and livestock markets. We discussed the skepticism surrounding the White House’s unconfirmed $17 billion Chinese agriculture purchase agreement to the stark realities of a zeroed-out Hard Red Winter wheat crop in Kansas. In addition, we dove into the broader macroeconomic pressures facing ags, examining how a hawkish bond market signal points to a potential late-year interest rate hike that could ripple from farm lending directly down to consumer beef demand.

Michelle Rook: Welcome to Markets Now. I'm Michelle Rook with Darin Newsom, senior market analyst with Barchart. We're seeing quite a bit of red on the board in grain and livestock futures trade this morning, with the exception of the wheat market. Darin, let's talk about the 600-pound gorilla, first of all. News overnight that China is not necessarily confirming the $17 billion of ag purchase agreements that the White House put out in their fact sheet on Friday, or on Sunday, I should say. Are the markets drifting because of that, or just the idea that we need some proof of some sales?

Darin Newsom: Yes, a lot of interesting points in that question, Michelle, first, that the White House has something called a fact sheet makes me laugh right off the bat because, basically, anything, over the last decade, we've seen and/or heard coming out of the White House has generally been proven to not be true. Again, the fact that Chinese sources aren't confirming it also is no big surprise because they're not going to confirm this sort of thing. That would start this rush in the market. We would see all of the funds come pouring into soybeans (ZSN26), as we've had in the past.

The White House knows that it can rehash old stories, old social media posts, and get a reaction from algorithms. The fact that all it has to do is come out and say, "China's going to buy X amount of billion dollars or X amount of million metric tons and this sort of thing," basically rehashed from last fall, it gets a reaction. This time, it did get a bit of a reaction early in the week. Now, the market needs something else, as you say. It needs proof of sales. The actual market, the real market, needs proof of sales. We're just not seeing it in basis. We're certainly not seeing it in deferred future spreads or anything like this. The market's telling us nothing has really changed.

Michelle: Yes. China, as far as flash sales, we're not going to see that. China wouldn't tip their hand here early like this for fear of driving prices up, right?

Darin: Right. I know there's a good deal of the industry that's sitting there, "Oh, the president said this, so we have to watch. Every morning, we're going to get these big sales announced." It's not going to happen. What we have to watch is for all the little sales accumulated in the weekly export sales and shipment numbers. That's where we'll probably see the business. If it is immediate term here, then we'll see it also start to be reflected in the basis market.

Right now, it isn't happening because if we look at the national average basis market in soybeans, it's still running below previous five-year low weekly closes. Some of this is due to the rally in futures, granted. It also indicates that we are not seeing this run on supplies to meet demand. Merchandisers aren't backing away from the rally in the futures market, but they're also not pushing cash. I think that's an important thing. It's an important read on what's really going on beyond the social media posts that lead to headlines, that lead to fund activity on the non-commercial side.

Michelle: Yes. It seems likely if China's going to buy, they might wait closer to harvest when our prices are lower, but you think there's another reason that China might come in to buy, and it's tied to weather and Brazil, right?

Darin: Yes. This spring, we've seen a lot of chatter, a lot of hullabaloo about something called Super El Niño. Boy, that sounds scary, doesn't it? So far, it really hasn't matured. This has to be one of the wettest droughts I've ever seen across the US Midwest, but it is, again, only May. We've still got the summer season ahead of us. The real issue is what's going to happen in Brazil with the 2027 crop. As we look at the soybean futures, again, look at the future spreads.

We see the March-May spreads covering something like 3% or 4% calculated full commercial carry. That's very little carry in that spread. That's telling us there are a couple of different possibilities. Number one, just low trade volume, which is often what we see in the soybeans this time of year as we get further out. Two, if there is commercial concern over supply and demand, it's going to be with the 2027 Brazilian crop due to weather. That's the reason why we're not seeing a lot of carry being built into that spread. If there is a concern, that's where we'll see it. That's where we'll see it either increase or decrease over the coming weeks and months.

Michelle: A couple of other factors that might be weighing on corn (ZCN26) and soybeans this morning, fast planting, weather, really no threats to the crop yet?

Darin: Yes. If I want to pretend that my market rule number six, fundamentals winning in the end, is still valid in this day and age of headline-driven markets, we could sit back and say, "Look, the weather forecasts are showing, at least for the end of this week and into the weekend, that there's going to be plenty of rain over parts of the plains, particularly East Texas and so on, and the US Midwest."

We know by looking again at how the markets have been acting, new crop markets, particularly September corn, December corn, November beans, and so on, that we have had good planting pace. Now, if we get some of this weather that's in the forecast, it's a favorable situation. The markets really shouldn't be going up. Here, Wednesday morning, we're seeing some pressures. We're seeing some red numbers. Again, looking like, at least for the moment, that maybe fundamentals are playing a role, that maybe some of these favorable weathers in what used to be considered weather derivative markets is actually coming into play.

Michelle: Yes. I know there are some areas that obviously are too wet, that aren't going to get some planting done. There's some frost and freeze warnings that were out even this morning. There are some isolated instances. In sum total, the weather looks pretty good. The one exception would be in the HRW areas. Wheat (ZWN26) market is holding up here. Do you think that's because of a lack of rain in the forecast for those areas, or just this crop is getting smaller?

Darin: Yes, all of the above. I know the algorithms trade NASA's nonsense every week, or at least that's what we're told. Those numbers are basically irrelevant. As we talk to people, as we talk to actual producers in Southwest Kansas, much of this crop is getting zeroed out. It just hasn't had any rain. It's had every possible issue since it was planted last fall. I think there is a real issue that we're just not going to see a large hardwood winter crop this year. Is the market generally concerned that we're going to run out of wheat because of it? No. If we look at the hardwood winter future spreads, they're still neutral.

That's what I find interesting. Basis is still incredibly weak. If we can look at versus the July futures contract or even the September futures contract, we have an incredibly weak basis market. Again, this tells us there isn't a huge concern immediate term or even looking at longer term. Future spreads are still neutral. We haven't seen a real concern about having supplies to meet demand. Could it develop? Yes. Do we think that the hardwood winter crop is actually smaller than what's being predicted? Yes. It certainly looks that way, but it's just not enough to create a supply and demand scare.

Michelle: Got you. All right. We also have lower crude oil (CLN26) this morning, which doesn't necessarily make sense with what's going on with the Iran conflict, but it's lower. Is the market even trading at the grains right now or not?

Darin: You raise a good question because, as I looked at the headlines this morning, it didn't really seem to fit with what's going on in the markets. You have to take a step back and remember that this is Wednesday. It's the first positioning day of the week, meaning the CFTC pulled numbers for the next round of Commitments of Traders reports Tuesday afternoon and evening. Funds sometimes adjust on Tuesdays and then readjust on Wednesday. Sometimes we get some of this.

We know the funds are still long in the energy sector. This morning, Wednesday morning, we're getting some pressure. Is it fundamentally driven? I don't think so because the situation simply hasn't changed. It's quite possible, number one, markets just simply ran out of buy order short-term, or number two, there is a change in fund money flow. Is it going over into grains? No, because, again, we're seeing energies now. We're seeing the grains under pressure. If funds are going to change their market sector, it'll be interesting to see where this goes. I just don't think it's going to happen longer-term. I think this is more of just a short-term play.

Michelle: Got you. Well, there has been a little bit of buying in the grain space because of inflationary fears, but, really, when you look at the markets that are being bought because of inflation, the bond market is telling a big story, isn't it?

Darin: Yes. The Treasuries as a whole have been telling us an interesting story. We can go from the short-term Fed fund futures and that forward curve, indicating that the next move by the FOMC is going to be a rate hike later this fall, possibly early winter, to the 30-year Treasury bond. The reports are that yields are hitting the highest level in 20 years. Everything in the market is telling us that the next move not only is going to be a rate hike, but that long-term investors are expecting higher rates over time. This goes counter to what has been "promised" or dictated, however one wants to look at it, with the new Fed chairman coming into place for the next meeting, I believe, in June.

It's going to be an interesting situation because the FOMC basically sitting there looking at these inflation numbers that continue to go higher. One of their best weapons against this sort of thing, one of their best ways of managing inflation, is to raise rates, but yet the dictate is this cannot happen. Rates have to come down, which only adds fuel to the fire. It's going to be an interesting situation with the ripple effects being how long will US consumer demand continue to support US beef, and many other of these markets, particularly with energies, continuing to skyrocket.

Michelle: Yes. Is beef the only place where we could see the ripple or the trickle-down effect into agriculture? Will it affect money flow? We will see higher interest rates, probably for farmers, right?

Darin: Again, I would think so. I think that's what the 30-year is trying to tell us is we're going to see higher rates for long-term loans. As far as consumer demand, yes, I think the first bellwether market that we can look at is going to be US beef. This incredible cash market that we've got on one side, and boxed beef, which comes with a question mark because it's USDA-reported, and they also had a mandate to report lower numbers, lower prices. It's going to be difficult to navigate what's going to happen.

If we take a step back, yes, we should start to see US consumer demand for high-priced beef back off a little bit. How we will see this is going to be difficult. We'll have to watch the basis, obviously, in the live cattle (LEM26) market. Again, if I go back and look at the future spreads in live cattle, future spreads in feeder cattle, right now, they're still bullish. Right now, they're still indicating that we are not growing the herd. If these start to change, it's not telling us herd's starting to grow. It just means, possibly, it's the other side. It's not supply-driven. It could be demand-driven that starts to break these things.

Michelle: All right. Thanks so much, Darin. Darin Newsom, senior market analyst with Barchart and Markets Now.