Drought and Middle East conflict could support commodity volatility

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Howdy market watchers! 

Just another day in paradise as it seems so many are saying these days.  And we know full well that mainly means just getting by.  

While business seems to be bustling, everything is tighter everywhere and this week’s hotter than expected CPI rating suggests that it is probably going to get tighter before it will more accommodative.  March CPI rose 3.5 percent over last year, 0.1 percent higher than expected.  Energy and shelter costs were the primary drivers, which I don’t see taming anytime soon.  

Crude oil prices alone surged above $86 per barrel on concerns that an Iranian strike on Israel may be imminent but closed well off the session highs.  There is much to watch over the weekend.  Market anxiety is gaining from such headline risks as well as the growing fear that Fed rate cuts are becoming less certain. 

After a quiet start to the week, the US dollar index surged Wednesday after the inflation reading with continuation on Thursday and another breakout Friday near 106.00.  The stronger US dollar and nervousness has also pushed metals including gold and silver to new recent highs, but also closed well off Friday’s session highs.  The CBOE’s volatility index VIX surged near 20.0 while the Dow Jones tumbled from the 50-day moving average high on Wednesday at 39,345 to close Friday at 38,230, below the 100-day moving average.  

Food prices in the latest inflation read increased by only 0.1 percent for the month and 2.2 percent higher over last year.  Egg prices jumped 4.6 percent helping push the meat, fish, poultry and eggs category up 0.9 percent.  This is an area to watch monthly as demand rationing is a threat to supporting cattle and hog futures, but so far hasn’t seemed to be a material headwind with US consumers continuing to buy despite higher prices.  

The recent bird flu incidents in dairy cows, now named “Bovine Influenza A Virus (BIAV)”, that have now spread to New Mexico in addition to Kansas and Texas has caused near-term volatility.  The selloff in equities has also added downward pressure on the cattle complex, but I believe we’ve reached a support level if you’re looking to get back in on the upside, barring any major headline from the developing Middle East situation or bird flu.  

For my cattlemen followers, if you have recently sold your physical cattle off wheat pasture, I think this is an area to consider call options to remain in this market.  Depending on developments over the weekend, I believe this $235 level will hold despite lower lows on Friday.  We recovered off the lows into the close and could find stability, but again, barring any major developments from outside events.  

The USDA discouraged market participants this week with the announcement that several reports would be suspended due to “budgetary constraints,” specifically for livestock and cotton.  With this change, there will be no July Cattle Inventory Report that is bi-annual released at the end of January and end of July every year.  While this happened before in the summer of 2016, it comes at the most critical time to have such numbers on cattle inventory that will make new record lows yet again this summer and add further bullish support for cattle futures.  All county-level data collection for crops and livestock will also be discontinued starting with this production year.  

The monthly USDA WASDE and Crop Production reports were released this week providing fresh data ahead of US row crop planting really getting started.  Overall, this report had a bearish tilt with 2023/24 US ending stocks coming in higher than expected for corn, soybeans and wheat. 

While corn stocks came in lower than USDA’s prior forecasts, they were cut 20 million bushels less than expected. Soybeans ending stocks were expected to increase by 4 million bushels above prior USDA estimates, but came in 25 million bushels higher.  Wheat stocks were also expected to increase, but came in 7 million bushels higher than expected.  

Perhaps the biggest surprise was that the USDA did not cut Brazil soybean production from prior forecasts at 155.0 million tons while traders were expecting a 3.2 million ton cut.  Meanwhile, Brazil’s version of USDA called CONAB further lowered their estimate of the country’s soybean crop to 146.5 million metric tons although only slightly from the prior month at 146.9 million metric tons, but far below USDA’s forecast.  Despite this, the soybean market didn’t believe these USDA numbers and rebounded closed Thursday off the lows and rebounded Friday up to the 50-day moving average and closed nearly 13 cents off the lows.  

The USDA also left Argentina’s soybean crop at 50.0 million metric tons as well as Brazil’s corn crop unchanged at 124.0 million metric tons while CONAB further cut their estimates to 111.0 million metric tons from 112.8 million metric tons, again well below US agencies estimates.  The USDA did cut Argentina’s corn crop by 1.0 million metric tons to 55.0 million metric tons.  The local Rosario Grains Exchange in Argentina lowered their estimate of the corn crop to 50.5 million metric tons all the way from 57.0 million metric tons due to spiroplasma disease from leafhoppers.  This could also result in the reduction of exports.  

This all resulted in global ending stocks being cut for corn and soybeans, but less than expected.  

For wheat, average trade guesses were calling for a slight increase in ending stocks, while the USDA actually cut global wheat ending stocks from a reduction in EU and Argentine wheat exports despite increases in Russia, Ukraine and Australia. Despite these fundamentals, the wheat market looks set to make a move higher with drought conditions across the US southern plains continuing to worsen at a critical time of heading.  US winter wheat conditions overall held steady this last week at 56 percent Good-to-Excellent with Oklahoma decreasing 5 percent though still at 68 percent G/E.  Kansas improved by 1 percent, but still at 49 percent G/E.  However, 81 percent of Kansas hard red winter wheat area is in drought while Oklahoma wheat areas are 50 percent in drought and 45 percent in Texas. 

Chances of rain are in the forecast for early next week and is critical with hot and dry winds over the weekend further drying things out.  French wheat conditions are at the lowest level in four years.  US exports this last week were decent for corn and wheat coming in at the top of expectations while they were as expected for soybeans.  

Russian wheat export values have come in firmer as the ag exporter RIF faces financial issues and being overtaken by the State. The conflict in the Middle East will also likely support wheat prices with funds remaining net short across grain contracts.  

If the drought and Middle East conflict intensify, crude oil and grain markets are likely to see further upward volatility that could potentially be explosive.  

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

On the date of publication, Brady Sidwell did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.