Will Wheat, Soybean, and Corn Prices Continue to Rally? Or is This Just Short Covering?

Wheat - beautiful landscape of sunset over corn field

Today I was interviewed by Michelle Rook on AgWeb's Markets Now. I discussed the recent action in the wheat, soybean, and corn markets. In addition, we discussed the cattle prices and gold.  WATCH THE INTERVIEW HERE.


Michelle Rook: Welcome to Markets Now. I'm Michelle Rook with Darin Newsom, Senior Market Analyst with Barchart. Livestock leaning lower on Wednesday. The grain trade mixed with wheat to the plus side, so let's start off with that here, Darin. We've had a five-day run in that wheat market. Is this still just short-covering, or is this market really concerned about production issues? We've been hearing headlines even in India with some shortages there.

Darin Newsom: Yes, you bring up a good point. India is not going to buy from the United States. Egypt's not going to buy from the United States. They're buying the cheap wheat from Russia. Russia is just filling, is shipping out as fast as it can, not only its own wheat but also what it's taken from Ukraine. The world isn't going to all of a sudden turn towards the US. If they're short, I don't see it as a big adjustment on the global supply and demand table. We're not going to run out of wheat, certainly not going to run out of wheat here in the United States. Given that, and looking at our three reads on real fundamentals, which is the cash index, national average cash price, basis, and future spreads, they're all incredibly bearish, particularly in Chicago.

We can see that the commercial side of the market is not getting overly excited about this. This does look like a fund move. It doesn't mean that it's not rallying. It's been a strong rally, as you pointed out. They had a lot of short future positions to cover. No real reason to continue to hold them at this point. As we get closer to harvest, we'll see what happens. What I find most interesting is that with the freezes that we've seen across both the US plains and Midwest the last weekend or so, we still see the carry in the new crop spread strengthening. That tells us commercial traders aren't overly concerned.

Michelle: Did we get above technical areas, though? Even the Kansas City wheat, I think, is above the 100-day moving average. Are we above areas that are going to trigger more fund short-covering? Are we about done, you think?

Darin: I think there's probably still some room to go because early this week, I can't remember if it was Monday or Tuesday session, like July, Kansas City popped above its previous series of highs. That does open the door to an extended rally. We'll see how much further it wants, how much more buying it can find. It has done some interesting things technically. Again, what I find most interesting here is that we've got a divergence going on between the technical side of the market, the fundamental side of the market. That can last for a little while. Eventually, markets tend to snap back. The rubber band tends to break, and markets snap back to their fundamentals, what I call the rubber band disposition.

Michelle: Corn and soybeans, the last three sessions have been following the wheat market. Did not do that today. In fact, soybeans ended about steady corn lower. Do you think we just ran up into chart resistance there? Are the funds done covering shorts in those markets, too?

Darin: That's a possibility. They've been pretty active over this last week. Wednesday is the first day of the new positioning week for non-commercial traders with data pulled for the next round of CFTC reports after Tuesday's close. That's always a possibility that they start to reposition a little bit on Wednesday. Could there still be some more covering to come? Absolutely. There just really wasn't any reason to buy. Now here it's interesting, unlike wheat where basis really hasn't been doing anything, we have seen basis firming in both corn and soybeans to a certain degree.

Again, this isn't anything to get overly excited about. In the corn market, it's seasonal. In the soybean market, we're just holding near average where we usually are this time of year. Again, there's nothing extraordinary about it, but it could provide a little bit of commercial support to both markets looking forward at new crop. I think the traders are going to be keeping a close eye on these weather forecasts, they're are calling for some nice rains across both the plains and the Midwest, not only through this weekend but into next week.

Michelle: Actually, you see that as bearish, whereas some are saying, "Hey, we're going to get too much rain. We're going to get planters out of the field," but man, it is too early to be talking about that, isn't it?

Darin: Oh, yes. I always have to laugh at people that start squawking about planting delays. The US is going to get the crops planted and doesn't take very long. The biggest issue is where the heaviest of this rain is expected to fall are the driest areas according to US drought monitor maps, and has been all winter and early spring. I think it's going to be met with a great deal of relief if these rains materialize. I don't think there's going to be any great hand-wringing or anything like that over the rain. I think it's going to be welcomed, and it'll be interesting to see how new crop markets react.

Michelle: Is there any concern right now about South America? From a weather perspective, Brazil is getting into their dry season, so it's getting hot and dry there for the second crop, corn, and then we've been hearing about production issues on corn and soybeans in Argentina. Is the market taking note of that at all?

Darin: It's possible because we still see in those deferred spreads in the future spreads, there's not a lot of carry out there. it's neutral at worst, leaning towards the bullish side in both corn and soybeans, and so there's a reason for that, and that is there is concern longer term about supply and demand. A lot of it would be tied possibly to next year's Brazilian crops. We've also watched the coffee market. It has screamed higher. I know coffee's not grown exactly where corn and soybeans are in Brazil and so on, but if the weather situation in Brazil has not been favorable for coffee, there's a possibility that we could see some of that same situation start to develop for next year's soybean crops. Yes, I think the markets are paying attention to it. I think it's one of the reasons why we're not really seeing a collapse at this point, and it's why we see the future spreads not showing much carry further out.

Michelle: We could use a shot in the arm, though, in terms of demand. Not saying that even demand for corn is bad, but we need to pick up the pace to get through and chew through supplies, right?

Darin: That is correct. because, again, if we just boil it down to looking at the cash, the cash index, national average cash price, and correlate that to an available stocks to use, not the silly ending stocks to use that everyone wants to talk about, tied to USDA's imaginary numbers. If we actually look at cash price and available stocks to use, we see we have plenty on hand and we've had plenty on hand. The further we get into the next growing season, as long as demand stays strong, we're going to have more carried over into the next crop. Again, that's a bearish combination.

Michelle: The selling pressure that we saw at the end of February, are we going to see the same scenario here as we go into option expiration this week and first notice day coming up next week?

Darin: It's always an interesting development. Once you get through the option expiration, it seems like markets have, at least back in the day, markets liked to go where they could cause the most pain. That's always a possibility when we come up on option expiration. As for delivery, I'm not thinking that's going to be much of a player right now. What's happened, I think we've seen most of the rolling in both commercial and non-commercial traders. They've already moved out to the July. You can see it in how the cash indexes are coming out every evening. I'm not looking for delivery to have a huge impact, but there's always that chance with option expiration that certainly could.

Michelle: Levin feeder cattle futures seeing some pressure on Wednesday. Is that some routine profit-taking because we did get up into some resistance areas on the charts, or were we chasing these HPAI headlines again?

Darin: Probably a combination of both. I think the headlines came out, and those who were foolish enough to try to play the cattle on feed numbers which the market actually knew back in March, they jumped. They jumped in on Monday, early Tuesday, and then they see these headlines come out on Wednesday. They probably start getting out. What I found most interesting was the commercial side who was selling on Monday and Tuesday didn't really have much to do with Wednesday session as the market started to fall back.

Now we'll turn our attention to the cash markets this week. The other thing that stood out to me about Wednesday session, if we look at percentage change, the largest loser, the largest sell-off, excuse me, the largest sell-off came in the Class 3 milk. Again, not a huge surprise given the headlines, and we'll see how long that lasts.

Michelle: Yes, no doubt. Let's talk about some outside markets. Gold, silver, crude oil, all have had a pretty good correction here, especially the metals. Are we taking out some of that geopolitical risk or concern that we had?

Darin: Yes, and it's crazy to me that, again, just as with the folks who are saying the rain's going to be bullish in the grains, the fact that the US House passed a bill and then the US Senate passed it as well, for aid to Ukraine, Israel, and so on, the fact that this was perceived to be a lessening of geopolitical chaos strikes me as odd just to me it's just going to up the ante, the agents of chaos around the world now say okay so the US is going to come down on the side of Ukraine, going to come down on the side of Israel and so in order to continue to push this economic destabilization and political destabilization everything around the world they're going to have to up the ante.

I think we should be looking for more headlines, more increases in violence, more increases in occurrences of violence. I think really at some point, I think you're going to see the investors step back into the gold market for that very reason.

Michelle: Speaking of some outside market headlines, of course, we do a PCE out this week. Are we going to start the whole inflation talk again? You think?

Darin: Yes, it's been what, two or three days since we had the last round of inflation talk. I think it's going to heat up again and with gold coming down and the dollar holding firm, I think from a commodity side, from a market side, that's going to add a little bit of fuel to the fire. Again, we'll see if investors react to that, if they step back into the gold market, or if they're just going to let it come down. This is what happens when you go straight up. You don't leave yourself anything to come back down to. There's a huge vacuum under the market and we're certainly seeing that play out in gold and silver at this point.

Michelle: Yes, no doubt. Thanks for joining us. Darin Newsom, Senior Market Analyst with Barchart. That is Markets Now.

More Livestock News from Barchart
On the date of publication, Darin Newsom 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.