The main drivers of the market direction for this week have been South America weather and the outside markets. The outside markets have been very bearish this week capped off by Fed comments yesterday that really added to selling pressure on stocks and commodities. The markets wanted Chairman Powell in his comments yesterday to make strong statements stemming the rise in bond yields. When he did not make any promises (or what the market perceived as promises) to do so, the stock market sold off hard after a lot of downside already this week. A lot of other commodities also sold off including metals and softs. The grains had been on a very strong run but then gave up most of their gains as a result of the selling pressure. Crude oil was one of the only commodities to keep most of its strength and was able to do so after comments from OPEC indicate they are going to keep production artificially low despite rapidly rising prices.
Over the last few months I have been writing about how there are three things driving the grain markets: less supply, more demand and macroeconomic forces. All that I just wrote above about the Fed and outside markets is starting to reduce the macro forces driving the market. Bond yields are going up and it takes away some of the attractiveness of stocks relative to other asset classes. For a commodity like copper, that could spell real trouble to the rally. Copper only needs to keep going up if fund money continues to pour in looking for returns. If the economy cools off, copper may no longer need to be at such inflated prices and may have significant downside risk. Crude oil may be in the same boat if OPEC were not artificially keeping production low to help support energy prices. Luckily for us in the grains, we also have less supply and more demand no matter what happens with the economy. Copper needs these macro forces for higher prices because there was no big loss of copper in the last year. The grains have had huge losses of production in the last year (and more demand) so they have much better support on price breaks.
To double down on my metaphors: Copper is on a one legged stool: just macro forces. Crude oil is on a two legged stool: macro forces and OPEC artificially keeping production low. The grains are on a three legged stool: macro forces, less supply, more demand.
If you want to know what the weather in South America is doing, look at corn and soybeans. If you want to know how the outside markets are pushing the market, look at cotton. Wheat is trapped in the middle. Some days it trades more on the outside markets, some days it trades more with the weather. Argentina remains very dry threatening their production and Brazil is way too wet which is delaying harvest and second crop corn planting. China has ships lined up waiting for Brazilian beans. USDA will give their March supply and demand update next tuesday and the main thing the market will be watching for is South America production estimates. Exports have slowed down considerably from the US but that is normal this time of year. We are still well ahead of pace for the estimates that USDA has been using.
There are rumors of another strain of African Swine fever in China. If we lose the macro forces and some demand that would take two legs of our stool out. It is hard to get a clear idea of what is happening anywhere in the world, but especially China so I am looking at incentives here. After the disease outbreaks that have come through the Chinese hog herds, they are forcing almost all their production into biosecure confinement operations because they knew more diseases were coming. When they lock down their people, they can really lock them down. But they cannot lock people down and not feed them. The very survival of their government depends on them managing this and they have had some good practice at it after the last few years. It needs to be monitored and watched, but i am not worrying about it yet.
Corn and Soybeans
I am still being very patient on corn and beans. New crop contracts are starting to show a lot more strength. When the market is up, they are not up as much but when the market is down, they are not down near as much. They are going to keep marching slow and steady. It is always wise to have something working so if you want to have something working put some corn in at $4.99 and beans in at $12.99. We may not get there next week, but we have a very good shot to get there.
Wheat
Wheat is in a weird spot. It tried to build the fundamental story on weather and acres but just cannot quite get enough traction yet. There is more of a buffer in wheat than in the rest of the grains but if corn gets tight enough, it will take wheat as a feed. That limits the downside in wheat and lets us be more patient to let this story play out. Corn should be tight enough this summer that we can sell 5.50-6.00 feed wheat. We can wait and see what kind of crop we have instead of feeling rushed to get our space locked in.
Cotton
Cotton has seen a brutal week. It is always more subject to the winds of the outside markets and this week has really illustrated that. Its correlation with the stock market has been very apparent this week. Do not panic on cotton. With corn at $4.80, cotton will give up too many acres if it does not find some support.
