Grains and Meats – Q2 Overview – Q3 Outlook 2021


Grains and Meats Weekly Component Report PDF-07.28.2021

Grains and Meats Weekly Component Report Spreadsheet-07.28.2021.docx

Grains

After moving higher last week, the volatile grain and oilseed futures markets corrected lower since July 21 during the heart of the growing season. Prices move higher and lower with the weather reports. The higher level of corn, soybean, and wheat prices in 2021 only exacerbates the daily price moves.

November soybean futures dropped 2.07% since July 21 and were at $13.6100 per bushel on July 28. The price of new crop soybeans reached a new high of $14.80 on June 7. The continuous contract reached $16.7725 in May, an over eight-year high. Support on November futures stands at $13.005, the July 6 low. Technical resistance at $14.18, $14.80, $16.2350, $16.7725, and $17.9475 per bushel, the all-time 2012 high. Soybeans are now in the heart of the 2021 growing season in the northern hemisphere, where the weather conditions will dictate the path of prices.

Open interest in the soybean futures market moved 3.54% lower since July 20. Daily price momentum and relative strength indicators were below neutral readings on Wednesday.

The December synthetic soybean crush spread was 0.50 cents higher since July 14 to $1.2425. The December crush reached a high of $1.5025 on June 30 and a low of 91.25 cents on January 19, 2021. Volatile conditions in soybean futures translated to high price variance in the crush spread. Keep an eye on the processing spread as it is a barometer of demand for soybean products. Port and logistical issues in Brazil caused supply shortages. Chinese demand for soybeans and soybean products remains robust. Soybean oil futures reached a new record high in June on rising demand for biofuels and cooking oil in China.

December corn futures were trading at $5.4900 per bushel on July 28, which was 3.43% lower since the previous report in highly volatile trading conditions. The continuous corn futures contract rose to a new high of $7.75, which is a new chart point for the coarse grain. Open interest in the corn futures market fell 0.77% since July 20. Corn’s new high at $7.75 on May 7 was the highest price since October 2012. Expect lots of price volatility in the corn futures market over the coming weeks and months. While the weather is the primary factor driving corn prices, rising energy prices are bullish for corn.

Technical metrics were at neutral readings in the corn futures market as of Wednesday. Support on December corn futures is at the $5.07 level, the July 9 low. Resistance is at $5.73, the July 21 high. Corn will continue to be sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop.  The price of the illiquid September ethanol swaps moved 3.70% lower over the past week to the $2.0800 per gallon level. The spread between September gasoline and September ethanol swaps was at 20.20 cents per gallon on Wednesday, with gasoline at a premium to ethanol. The spread moved 16.79 cents higher since July 20. The prospects for ethanol prices are a function of gasoline, crude oil, and corn prices over the coming weeks.

Nearby CBOT wheat futures rose to a new high at $7.73 per bushel in late April, the highest price since February 2013. September CBOT wheat futures fell 3.10% since July 21. The September futures were trading at the $6.8875 level on July 21 after failing at over the $7 level. Open interest increased by 2.07% over the period in CBOT wheat futures. Technical resistance on September is at $7.1800 per bushel, the July 20 high, $7.73, and $9.4725, the 2012 peak. Support is at $6.095, the July 9 low. Price momentum and relative strength in CBOT wheat were still over neutral readings on Wednesday.

As of July 28, the KCBT-CBOT spread in September was trading at a 29.25 cents per bushel discount, with KCBT lower than CBOT wheat futures in the September contracts. The spread moved 12.75 cents lower since July 21. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers.

As I have been writing:

“at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”

Any sudden problem in the wheat market that causes consumer hedging to increase could dramatically change the spread between the hard and soft winter wheat futures contracts. We may see consumer hedging increase if wheat prices continue to make higher highs over the coming weeks and consumers get nervous. The potential for a continuation of even higher prices could cause consumers to hedge their requirements. Consumers tend to panic when the price moves higher. However, the correction could be causing an increase in consumer hedging after they watched wheat prices soar over the past weeks. The KCBT-CBOT spread moved towards the long-term norm over the past week. Keep an eye on the spread as it could be an excellent barometer of hedging activity and panic buying by consumers over the coming weeks and months. Wheat production from Russia and a new tax or even a ban on exports could push wheat higher this year. Deteriorating US-Russian relations could impact the wheat market over the coming weeks and months if the crops in the US or Russia provide an opportunity for one side to squeeze the other when it comes to exports. As always, the weather conditions will be the most influential factor during the 2021 crop year.

Spring MGE wheat was at $9.0375 per bushel on the September contract on July 28, up 6.0 cents over the past week. Hot and dry conditions in the Pacific Northwest had caused explosive price action in spring wheat futures. The rise of MGE wheat futures is an example of how the weather conditions can wreak havoc with the agricultural commodities during the critical growing season. MGE wheat moved over the $9 level. Over the past week, coffee futures offered another example of the wild price action that can occur on the weather as a frost in Brazil pushed the price to a seven-year high.

I expect elevated volatility to continue over the coming weeks as the 2021 crop year is now in the all-important growing season. I had been a buyer of grains in the futures and ETF markets over the past months.

Over the past months, I have written:

“From the 2008/2009 lows through 2012, the prices exploded higher in the aftermath of the global financial crisis, which could be a model for 2020 and the coming years.”

As always, the weather conditions determine supplies and are the most significant fundamental factor each year. Bull market corrections can be severe. I will be following trends in the grain sector at this critical time of the year.  

The weather in July and August will be the most significant factor for the grain futures. Expect lots of volatility that come with the ever-changing weather reports. Approach the grains with a clear risk-reward plan on all positions over the coming week. The weather is far more significant for the grains than the USDA reports, which are only a snapshot of the supply and demand fundamentals, which will be ever-changing over the coming weeks and months. Mother Nature and the fickle nature of the weather conditions will create lots of excitement in grain and oilseed futures as prices remain at multi-year highs. A whiff of drought could cause explosive rallies in the current environment, as we have seen in the MGE spring wheat futures market.

Meats

Cattle prices moved higher since July 21, with the fat edged out the feeders. Lean hog futures edged lower but the price for August delivery remained above the $1 per pound level. We are now entering the final month of the 2021 peak grilling season, so prices will adjust to offseason conditions over the coming weeks as roll to the next active months and the market anticipates declining demand over the coming months.

August live cattle futures were at $1.23075 per pound level, up 2.52% from July 21. Technical resistance is at $1.239750 per pound on the August contract, the July 27 high. Technical support is at $1.18850 per pound level, the July 9 low. Daily price momentum and relative strength indicators were above neutral readings and rising on Wednesday. Open interest in the live cattle futures market moved 0.46% lower since the last report. The disconnect between cattle prices in the futures market and consumer prices at the supermarket created dislocations in the market in 2020. Beef and pork markets are now coming into the late part of the 2021 grilling season. Live cattle had made higher lows and higher highs from October 2020 until early April. Markets rarely move in a straight line. I was a buyer of cattle during the weak price in April and May. I remain cautiously bullish despite softer prices since mid-June.

August feeder cattle futures rose since July 21, moving 2.17% to the upside. August feeder cattle futures were trading at the $1.601750 per pound level with support at $1.54100, the July 19 low, and resistance at the $1.63150 per pound level, the July 16th high on the August contract. Open interest in feeder cattle futures moved 5.64% higher since the previous report. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs. Price momentum and relative strength metrics were above neutral conditions on the daily chart on Wednesday. Feeders moved higher on weakness in corn prices.

August lean hog futures edged lower to $1.0570 per pound on July 28, which was 0.82% below the level in the previous report. Price momentum and the relative strength index were above neutral territory and turning lower. However, hogs have continued to make higher lows and higher highs since June 24. Short-term support on August hogs is at the July 15 $1.03225 low and 99.775 cents, the July 8 low. Technical resistance on the August futures contract is at the $1.081250 July 27 high and $1.20550 per pound level, the June 7 peak. Open interest rose 4.84% since July 20. Lean hog futures traded at the highest level since August 2014 at $1.23075 per pound on the continuous contract in mid-June. The all-time high was in 2014 at $1.33875 per pound.

Meanwhile, there are reports that African Swine Fever made a return in China, causing some supply concerns. If ASF destroys Chinese pigs, we could see an increase in the demand for US pork, which would push lean hog futures higher over the coming weeks and months. China is the world’s leading pork-consuming nation. At the recent G-7 meeting, leaders put additional pressure on the Chinese, which only exacerbates tensions with the US.

The Chinese own the leading US hog processing company, Smithfield Foods. A Chinese company purchased the Virginia-based company in 2013. Smithfield could divert some of its pork and pork products to China if shortages develop over the coming weeks and months. China has faced substantial challenges with pork supplies over the past years. China is very secretive about its food supplies. Hog and cattle futures are now moving towards the offseason, which begins on the Labor Day weekend.

The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. The August spread rose over the past week as live cattle outperformed the lean hog futures.  

Source: CQG

Based on settlement prices, the spread was at 1.164400:1 compared to 1.12640:1 in the previous report. The spread rose 3.80 cents as live cattle rose and lean hog futures declined over the past week. The spread moved towards the long-term average as pork became less expensive than beef over the past week. The April cattle-hog spread hit the high at 1.4971 on August 12, 2020. The spread made a new low at 0.9887:1 on June 1, with August live cattle’s price under August lean hog prices.  Hogs dropped far more than cattle in 2020 during the pandemic and corrected, sending the spread well below the long-term average. The October spread was at the 1.4356:1 level, just above the long-term norm, with October feeders settling at $1.28525 and the October lean hogs at 89.525 cents per pound.

Hogs remain historically expensive compared to cattle in August. Soybean and corn prices will continue to impact cattle and hogs over the coming weeks and months as they are the main ingredients in animal feed products.

The COW ETN is illiquid but can be an acceptable substitute for those who do not venture into the futures arena. I am neutral on the meats. As with all commodities, the higher prices climb, the more the risk of pullbacks becomes. Protect those profitable positions so profits do not turn into losses. The $1 level remains a pivot point in August lean hogs, with the $1.20 level the pivotal level in August live cattle futures. $1.60 is the level in the August feeders. I will begin covering the October contracts in the next report.