Dollar weakness sparks grain short covering while cattle stall

Howdy market watchers! 

How is it already near the middle of March?  While temperatures have been unseasonably warm, the wetter weather it brought was welcome after flash droughts in several areas.  Dryness persists across much of the corn belt that is expanding in Iowa and neighboring states as well as New Mexico that is also spreading back into southern parts of Texas.  

The moisture was particularly welcome for the wildfires that have recently devastated parts of Oklahoma and Texas.  In a matter of days, these fires overwhelmed livestock, ranching infrastructure and communities creating their own winds that only accelerated already high winds to rapidly spread across tens and hundreds of thousands of acres.  The losses are still being tallied as the situation has only just been contained. If you would like to donate funds or supplies, contact the Oklahoma Cattlemen’s Association to help those in need. 

There’s been a lot of new content for markets to consider this past week with more on the way this month.  This week alone, we’ve had the Super Tuesday Presidential primaries that set up a rematch between Trump and Biden, the State of the Union address, US payroll data for February at 275,000 new nonfarm jobs that came in higher than the 198,000 expected, but saw unemployment climb to 3.9 percent from the 3.7 percent expected.  The downward revisions in December and January were partly to blame. Wages rose 0.1 percent month-over-month, below estimates.  Overall, this was a mixed report, but starting to show some slight changes on the weaker side.  

The S&P 500 managed to still make new, all-time highs early in Friday trading despite closing lower on the day along with the Dow Jones that made its record high just below 39,400 on February 23rd.  Could profit taking to end the week be the start of the long-forecast correction? It is possible although unlikely with every recent dip being met with renewed buying as we’ve also seen in the cattle complex.  AI-stock NVIDIA has defied gravity, surging 85 percent this year alone, closed lower on Friday.  

Fed Chair Powell’s 2-day testimony to Congress this week indicated that the Central Bank continues to watch the data and will be cautious to cut, but prepared to intervene when the signs appear.  The market interpreted this as a cut could be expected in June if not May, but unlikely sooner.  

The US dollar plunged from Wednesday to Friday filling the lower chart gap before recoiling off the lows to finish the week around 102.70.  This was the best news for commodity markets that have been long awaiting a supportive catalyst.  Gold made a new, all-time high above recent December 2023 highs reaching above 2,200 as did crypto currency Bitcoin surging to the 70,000 mark for the first time.  Money is on the sidelines ready for the right opportunity to ride volatility in any market, but I think that may favor commodities in the coming months and possibly years after recent weakness has pushed several segments to multi-year lows.  

The grain and oilseed markets could be ripe for buying should this move of a weaker US dollar continue.  While South American weather continues to dominate nearby trading, traders are beginning to shift focus to planting conditions in the US that is starting on the dryer side.  Indeed dryer weather supports earlier corn planting that could result in more corn being planted, but it also sets up additional weather risk for needed moisture during the growing season.  

China has quietly returned to the global grain markets in recent weeks providing some underlying support.  Previous purchases of US soft red winter wheat by China that provided fuel for the Chicago wheat contract were largely cancelled this week in two successive announcements totaling 240,000 metric tons.  

Wheat contracts sold off on Wednesday in anticipation of the news.  Another bearish move that the market shook off was Egypt tendering for wheat and then cancelling purchases with Russia surprisingly not being the cheapest after holding prices at higher levels.  After the USDA reports were released on Friday at 11 AM, the wheat markets priced in all the bearish news extending early session gains. 

This short covering has been long overdue.  Chicago contracts put in a key reversal, lower low and higher high, while Kansas City contracts broke above the 20-day moving average closing well above it and near session highs.  

If you are watching one market to anticipate movement in grains, it should be the US dollar.  If we continue to see weakness in the US dollar, I believe we will continue to see wheat and corn press higher.  The next stop for May and July Kansas City wheat contracts could very well be $6.00.  

USDA’s Crop Production and WASDE reports raised 2023/24 US wheat ending stocks to 673 million bushels from 658 million bushels versus trade guesses for a 1.0 million bushel cut. World ending stocks were expected to come in 0.4 million tons lower, but came in slightly lower at 0.6 million tons lower than previous USDA figures.  Australian wheat production and exports were raised as was Argentine and Russian wheat production.  Ukraine wheat exports were also raised.  

The USDA left corn and soybean ending stocks unchanged in the US from previous estimates while corn was expected to be cut while beans were expected to be raised.  Brazil corn production was left unchanged that was expected to be cut while Argentine corn was raised while expected to be unchanged. World ending stocks of corn were expected to be cut and came in less than traders thought, which was relatively supportive.  

Brazil soybean production was cut 1.0 million tons to 155.0 million tons, but less than the 151.6 million tons expected.  Brazil soybean harvest is currently in line with the average.  Brazil safrinha corn planting is reaching conclusion and ahead of average.  Brazil 1st crop corn harvest is also in line with trend.  Argentine soybeans were left unchanged at 50.0 million tons though a slight increase was expected.  

Global soybean ending stocks were reduced, but slightly less than expected.  Short covering ensued and helped corn and soybean contracts close near session highs above 20-day moving averages and look set to move higher.  

The Commitment of Traders showed a new record net short in soybeans last week after a new record net short was reached in corn the week prior.  CPI data is due out next week and we will see what that holds for the outlook for interest rates that in turn will impact the US dollar. 

The cattle markets have continued to be resilient.  Each time we look set to start a spring selloff, the market finds support and rebounds higher.  After a higher open on Friday, feeder futures lost momentum and sold off into the close putting in an outside day, higher high and lower low.  This could be a key reversal lower, but it depends on Monday’s action and how the grains start the week.  However, I advise producers selling cattle off wheat pasture to be very cautious here as we could be in for a $5-6 per cwt corrective move.  I hope I’m wrong, but it seems that conditions are setting up for this type of weakness into next week with pressure from stockers coming to market.  

LRP coverage is out 13 weeks as a minimum and so near-term options are protection from March or April put options.  If the market sells off before you’re able to get protection in place and you sell your cattle, there is always the approach to buy call options to position for a market rebound.  

April live cattle nearly filled the chart gap at $190.275, but remains unfilled.  We could see more strength in the fats than the feeders and I believe that gap will fill soon.  

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!  Let us know if you'd like to join our daily market price and commentary text messages to stay informed!

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. 

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