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All eyes on the Black Sea

Chances of rain, then snow and then rain followed by snow it was this past week. Regardless, the precip totaling anywhere from 0.8 to 1.5 inches, was needed and welcome. Additional chances of a wintery mix return next week along with freezing temperatures that supported the wheat market to close out the week of trading.

Markets seemed to add some nervousness mid-session Friday that effected wheat and energy contracts, in particular. While wheat futures saw profit taking into the close, KC wheat made a new recent high at $8.50 above the Valentine’s Day high at $8.44 ¼ reversing the bear channel, defined as lower highs and lower lows, in place since Thanksgiving. Such reversal is also supported by the higher low on February 3rd versus the previous low on January 14th.

Escalating tensions on the Russia-Ukraine border are adding upside risk premium to grain, energy and gold markets while downside pressure to equities and cattle. President Biden has been warning daily that a Russian attack is imminent although yet to materialize. I still maintain that the conclusion of the Beijing Olympics on Sunday, February 20th, is one of Putin’s hold ups that will soon be behind us.

US markets are closed Monday in observance of President’s Day meaning that any reaction to military advancements will have to wait until the Monday evening open at 7 PM. That only seems to play into Putin’s hand of a prime time to escalate. Now I’m the one speculating, but I think we will see the situation peak in the coming 10 days.

All eyes are now on the Black Sea. Ukraine is the world’s third largest corn exporter and the top exporter of barley and rye. Russia is the world’s largest wheat exporter and supplies one-third of Europe’s natural gas. Suffice it to say that the Black Sea is one of the most single strategic areas for wheat and corn exports and these trade flows are sure to be impacted should military action ensue.

This past week’s action in the KC wheat market with an inside day, lower high and higher low, on Wednesday followed by the break higher and new recent highs suggests there is more upside in store. The Black Sea conflict and cold US temperatures may be just the catalyst. I have long been saying that $9.00 wheat could become a reality. Having said that, expect volatility and any surge higher could soon be followed by a sell off if tensions ease and recent moisture is seen to improve wheat conditions. July new crop KC futures settled the week at $8.28 while July Chicago wheat closed just above $8.00 also putting in a recent higher high.

Friday was also expiration day for March grain options. In-the-money options will exercise into futures come Monday evening. December new crop corn futures also managed to eek out a slightly new recent high on Friday at $5.99 ½ before closing at $5.97 ¾. Wednesday was an inside day on front month contracts followed by breaks higher suggesting more potential upside. November new crop soybeans also made a new recent high Friday at $14.72 before closing at $14.63 ¾. Continued South America crop conditions declines for corn and soybeans provide additional support for the row crop contracts. Meanwhile, China keeps buying beans. This week’s US export sales were solid again for old and new crop for soybeans, within expectations for corn and at the bottom of trade guesses yet again for wheat. China has been shopping for wheat from Australia and India that I suspect is a short-term strategy should exports be hauled from Russia and the Ukraine.

The annual USDA Outlook Forum takes place in Washington next Thursday and Friday. This forum discusses a number of topics, but forecasts planted acres and trade by crop type over the next year. Markets will especially be watching the corn and soybean acre mix. Next week’s column will discuss those outcomes.

The cattle market felt the pressure of rising grain prices, rising inflation and nervousness over geopolitical conflicts. On Tuesday, the Labor Department released its January Producer Price Index, which measures inflation at the wholesale level, that surged 9.7 percent versus a year ago. This was slightly below the 12-year high of 9.8 percent we saw in November and December of last year, but continues to demonstrate a red hot economy. These January numbers did jump a full 1.0 percent above December’s 0.4 percent monthly increase following the recent CPI release showing inflation at the highest level since February 1982. Amid such data, the equity markets are beginning to price in a higher rate increase by the Fed at next month’s meeting. Minutes from the January FOMC meeting were released this week and were seen as more dovish that led to an equity rebound, but this market remains vulnerable to uncertainty.

The cattle market reflected this as well with feeder contracts posting a 3-day losing streak to finish the week. March feeders traded down to the 50-day moving average while deferred feeder contracts and fat cattle futures traded sideways. USDA’s monthly cattle-on-feed report will be released Friday at 2 PM after the close. With large runs of cattle off wheat this time of year, I think front month feeder futures are susceptible to further weakness. I do maintain that these feeder futures will rebound in the coming months and advise clients to buy call options after selling physical cattle off wheat. Give me a call if you would like to implement this strategy should markets remain under pressure when you sell your cattle.

12:47 - 2022/02/21    /    Number : 20772    /    Show Count : 123

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