MARKET SUMMARY 07-26-2022
The recent USDA Cattle Inventory report confirmed the ongoing trend of an overall tighter cattle supply. The report was fairly in line with expectations but still showed that any expansion in the cattle numbers is still not in producers’ plans. All cattle and calves inventory was down 2.0% from last year to 98.8 million head. In beef cattle breeding stock, beef cow inventory was at 97.6% of last year, and the animals kept as replacement heifers was at 96.5% of last year. This keeps the annual calf crop shrinking with the 2022 crop at 98.6% of last year or approximately 34.6 million head, a trend that has been in place since 2017. The ongoing battle with weather, high input costs, and low margins have kept the cattle industry in this contraction mold, and current conditions suggest this trend will continue into 2023. This will stay supportive overall for beef cattle prices, as long as concerns regarding consumer demand and potential economic recession fears don’t limit the market potential.
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CORN HIGHLIGHTS: Corn futures gapped higher on a larger than expected decline to crop ratings and another set of forecasts for both the 6-10 and 8-14 day indicating above normal temperatures and below normal precipitation for most of the Midwest. Sep gained 17 cents on the session closing at 5.97 and near the day’s high price of 5.99-3/4. Dec added 17 cents to close at 6.00-3/4. The 21-day moving average held prices in check.
61% of the crop is now rated good to excellent, down from 64% last week. Corn in the silk stage is 62% versus a 5-year average of 70% confirming the crop is about 7 to 10 days behind normal. Perhaps even more interesting than the drop in the good and excellent categories is a 4% increase in the poor and very poor levels, now at 14%. Those acres are not likely to improve moving forward. It is now a challenge to argue to record yield near 177. Is momentum starting to change? Based on closing prices, this week’s trade is nearly the opposite of last week. Dec futures at 6.00 are at a pivot point. Concerns regarding crop maturity will likely add additional upside price potential. While basis has slipped some, historically high basis level suggests good demand, lack of supply, or both. Rainstorms currently and later this week in the Southern Corn Belt are beneficial and welcome. Bottom line, weather is bullish, but Brazil’s second crop (over 60% harvested), and high dollar may keep prices in check.
SOYBEAN HIGHLIGHTS: Soybean futures settled sharply higher as the market turns its attention to weather. Strong gains in meal lent support as well. Aug soybeans gained 59-3/4 cents to end the session at 15.32-3/4 and Nov was up 37-3/4 to 13.83-3/4
Aug soybean meal gained 24.90 to a new contract high of 472.40. Crush margins for meal are strong and are incentivizing processors to buy soybeans. Additionally, yesterday afternoon’s crop ratings showed a decline in soybean condition by 2% to 59% good to excellent. This was perhaps more of a decline than expected and traders are beginning to take notice. The USDA also reported that 26% of soybeans are setting pods, down from an average of 34% which. The 6-10 day weather forecast calls for above normal temperatures and below normal precipitation for much of the Midwest, with August just around the corner, a greater amount of beans will be filling pods during this warm and dry period. Some crop analysts are reportedly lowering their soybean yields already, down half a bushel to 51.0 bpa. Globally, there are rumors that China bought 25 cargoes of Brazilian soybeans last week; October-November they are only about 40% covered at this time. There is still general concern over China’s economy and import demand, but today the market did not seem to care. As for the U.S. economy, the Fed meeting this week is expected to result in a 75 basis point rate increase as they continue to try to battle inflation.
WHEAT HIGHLIGHTS: Wheat futures closed sharply higher as Russia continues its bombings of Ukraine port areas. Sep Chi gained 33-3/4 cents, closing at 8.03-3/4 and Dec up 33-1/2 at 8.22. Sep KC gained 37-1/4 cents, closing at 8.77 and Dec up 37-1/2 at 8.84-1/4.
Russia’s attacks on Ukrainian ports just days after signing a deal to allow grain exports do not bode well for the prospect of actually shipping that grain. Reports suggest that there was a new bombing of ports south of Mykolaiv (though this was not one of the ports in the aforementioned deal). Escalation of the war continues and the Ukrainians are putting up a good fight. Here in the U.S., the winter wheat harvest is now 77% complete. The spring wheat crop ratings were lowered 3% to 68% good to excellent. Spring wheat ending stocks are anticipated to be reduced to their lowest level in 15 years. Globally, Paris milling wheat futures also gained sharply today with increases of roughly 10-12 Euros per metric ton as Europe remains hot and dry and they are also impacted by the Ukraine situation.
CATTLE HIGHLIGHTS: Today’s jump in grain brought feeder cattle down hard and live cattle down as well. Aug live cattle closed 0.875 lower to 136.875, and Oct lost 0.975 to 142.375. Aug feeders lost 1.875 to 177.425 and Sep lost 2.250 to 180.425.
The cattle complex was dragged lower today after grains continued their rebound, and while feeders took the brunt of the sell-off, they dragged live cattle lower too. Boxed beef was mixed this morning with choice up 1.66 but select down 0.30. Cash will likely be steady to lower this week as asking prices have started popping up in the South around 138, but nothing yet out of the North. The packers are likely to be less aggressive this week due to the large number of cattle already booked for the week. In feeder cattle, higher grains are in control of the trade at this point, but with calf inventory shrinking and growing more expensive if corn stops surging higher feeders could be expected to rally. Aug feeders gapped lower this morning and face resistance at the top of their Bollinger Band around 182.50 but remain in an uptrend. Live cattle are in an uptrend as well and have been hugging resistance at the top of their Bollinger Band near 138.34. Boxed beef has been steadily climbing, which is supportive, but rallying grains may keep cattle lower for the time being.
LEAN HOG HIGHLIGHTS: Hog futures were lower with the rest of the livestock complex today as cash gained but the cutout fell. Aug lost 0.250 to 116.975 and Oct lost 0.475 to 93.65.
This morning’s direct hog report showed cash gaining 1.73 to 116.05 while Aug futures fell and remain just 90 cents above the cash average. As August approaches first notice day, the contract has stayed very much in step with cash, so the question is what happens after expiration when Oct, which is at a 23-dollar discount, becomes the new front month. The cutout was 0.93 lower this morning which weighed on futures as hogs have mostly been trading based on moves in the cutout, which has trended significantly higher. Cash trade will likely pick up tomorrow as the packers have been the most active buyers on Tuesday, and the increasing cutout values are signaling the strength of demand. Slaughter pace continues to lag but the issue seems to be more on the supply side than demand, and with falling weights, packers will need to buy hogs in greater numbers. Oct hogs remain in an uptrend and the 50-day moving average has acted as support for the last two weeks, with resistance at the top of the Bollinger Band, near 97.30.
DAIRY HIGHLIGHTS: After five weeks of heavy losses for Class III futures and cheese prices, the market is attempting to stop the bleeding and get some upward momentum going again. Although the August Class III contract is still well off its contract high above $25.00 from early June, the close at $21.17 today represents a nice bounce off a short-lived push under $20.00 in the middle part of the month. A strong butter trade kept Class IV prices close to their highs during the hefty Class III selloff, but those charts are also turning north after a setback as well. While the technical action was getting oversold and due for a bounce, the shift to more bearish fundamentals in recent weeks should keep dairy producers on the defensive.
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Author
Brandon Doherty