Market Analysis: Shawn Hackett

Market Analysis: Shawn Hackett

Jul 19, 2019  | Ep4448 | Podcast

Podcast

For the week, September wheat fell 21 cents while the nearby corn contract plummeted 24. Bulls are fighting over a struggling U.S. crop and cheaper South American options in the soy complex. The August soybean contract decreased 12 cents. August meal declined $3.60 per ton. December cotton improved 39 cents per hundredweight. Over in the dairy parlor, August Class III milk futures improved 13 cents. The livestock sector was mixed. October cattle lost $1.48. September feeders sold off $2.75. And the October lean hog contract rose $5.70. In the currency markets, the U.S. Dollar index gained 43 ticks. August crude oil fell $4.35 per barrel. COMEX Gold added $8.20 per ounce. And the Goldman Sachs Commodity Index dropped 21 points to finish at 413.95. Joining us now to offer insight on these and other trends is market analyst Shawn Hackett. Shawn, welcome back.

Hackett: Thanks, Delaney. Great to be back in Florida style weather here in Iowa.

Howell: Yes, and happy belated 50th birthday.

Hackett: Thank you. I've even got the gray hairs to prove it.

Howell: Well let's talk about the markets because maybe it's time to not have gray hairs over the markets anymore. You can tell us. Let's talk first off here with the wheat contract, the Chicago September contract broke below $5 on the chart. Is it just harvest pressure or something else causing this?

Hackett: I think it's primarily harvest pressure. It's not unusual for that to happen. We had a lot of concern about this heavy rain and what it might mean and the yields have been coming in albeit low quality but better than expected. So it's just kind of the farmer doing what he has to do, getting it off the field, selling it and clearing the market out. But I do think most of that is behind us. And with some of the production in Russia, for example, coming down we think that we're ready for some kind of a turnaround here later in the summer.

Howell: Okay. Let's continue that discussion in Market Plus. We've got to talk about the corn contract. Yesterday we saw a drastic drop in open interest in the corn markets. What was causing that selloff?

Hackett: Well, I think we're at a place right now where there's tremendous uncertainty. The market is trying to figure out is the USDA right? What's going on with pollination? The weather, are we going to have an early frost? And when you don't know what's going on, when you're not confident, people withdraw from the markets. So lowering of open interest is saying that the money is withdrawing from the market saying we're going to take a wait and see approach until we get something to get our hands around where we're just not sure what to do. And that is just indicative of the uncertain times that we have in this really, really unusual year that was really unprecedented.

Howell: And I think it's safe to say it's a wait and see game for the corn markets and soybean markets in this rangebound pattern here until we get to harvest and really see what's in the ground. Shawn, are we going to be expecting some sort of post-harvest or during-harvest rallies with that being said?

Hackett: We believe that we are. Our idea is that the market was going to have this top in late June on weather kind of subsiding, we're going to have a period of confusion, like 1993 we've talked about many times where we correct into August, and then we get some clarity, maybe we tidy up what the acres actually were and then we get an idea of early harvest results and we match them against USDA and determine where from that 166 are we going to come from. And so that's really where the 1993 market really took off. And we do think there's a bad ending to the crop but we just need time to get there.

Howell: And if we're going to see similar to a 1993 pattern when can we expect to see that harvest or post-harvest rally?

Hackett: Well, no two years are the same but in 1993 we did bottom in early, the first half of September, and then it was a moon shot when everyone realized oh my gosh, this crop really isn't there, we didn't pull a rabbit out of the hat and so we would really look for that first half of September as an ideal time to be looking for some kind of a bullish reversal in the corn market and grains in general.

Howell: I've got to ask though, Shawn, we started off the year very rough, now we're starting to see normal temperatures, we're starting to see normal precipitation levels. Are we going to still see as much of a harvest rally as what we were originally expecting to see?

Hackett: Well, much is going to depend upon, right now obviously the corn is starting to pollinate, we're going to be setting pods in soybeans here very, very shortly in August. August weather is really, really important and so as we found out last week we get a little hot and dry, they run the market up, they pull back and it's cooler and wetter and they run the market back down. This is usual and normal. We think that we're moving away from cool and wet to more of a warm and dry pattern based upon the weakening El Nino and some upper atmosphere changes that we think could offer some additional hot and dry risks that could still worry the market here and provide kind of a resurgence of interest like we saw last week.

Howell: And it seems like it's definitely doing that weather trend in the soybean markets as well. We touched $8.93 on Thursday's trading session, Friday we had strong gains up 20 cents I think to close the day. What was going on there?

Hackett: Well, we always wonder if that's China buying the soybean market. They talked on the phone yesterday, maybe it's a good will purchase. We don't really know until after the fact. It also could just be we're getting so close to mission critical now in soybean yield determination that the market is just getting a little uncertain because the acreage number that the USDA came out with whether you believe it or not is a low number and should that number be verified or even get a little lower you could easily see the soybean ending stocks of a billion drop down to 600 or 700 million on a 5% or 10% decline in yields. And so while that's not running out it's certainly a much more bullish scenario than we've been trading for quite some time.

Howell: Because you touched on the Chinese thing, Shawn, I want to ask, until we really know what is in the ground, what is being harvested this fall, are we going to trade on news of a U.S./Chinese trade agreement?

Hackett: I think right now the market is simply not really paying much attention. It's saying look, we've been doing this for so long, we don't know what's going on, we're going to assume nothing is going to happen, we're going to trade weather, we're going to trade the fundamentals that we know and we'll let the trade deal take care of itself.

Howell: Okay. Shawn, you're kind of our resident cotton expert. We've got to talk about cotton. We've been seeing a lot of downtrend. We saw finally a slight gain this week, I think 39 cents improved from last week. What is really causing the cotton to have suck lackluster markets?

Hackett: We talked about this in prior shows that it's a very economically sensitive commodity. It's an industrial ag commodity and because the global economy has been showing a lot of weakness, a lot of concern, there's a lot of fear that cotton demand globally is going to be on the decline. And so that on top of the fact that the trade war has meant lower exports to China has just continued to pressure this market. As of yet we have not found enough weather reasons to turn the price around but I think with the Indian monsoon failing in Gujarat, which is northwest India, and it looks like some hotter, drier weather coming in for Texas and maybe again in the southeast, we do think there could be a weather related rally that kicks in and provides some upside to the cotton market as we move into August.

Howell: How much upside are we talking, Shawn?

Hackett: I don't think there's any problem with the market going back to say 70 cents from where you are in the low 60s. That would be a reasonable, rational weather premium to put back into the marketplace.

Howell: Okay. I want to talk about the cattle on feed report which came out on Friday. But first I'm going to take an important question we got in this week on social media from Linda in South Dakota. She said, do feeders have a sustained rally yet this summer?

Hackett: So much depends on what the corn market does. The corn market runs up to five, five and a half, it's going to be very, very difficult for the feeder market to do much. Also determines how high cattle prices start to move because there is a yin and a yang and there's a relationship there too. So really impossible to say if we're ready to dig our heels in on feeders yet until we know more about the prospects for the corn market.

Howell: Okay. And is the same the case in the live cattle market?

Hackett: Well, not as much in the live cattle market. The live cattle market can move higher. We believe the live cattle market is being more driven by the idea of export demand, of some reduction, so for example, the fourth quarter to the first quarter we're seeing the third largest reduction in beef production in history. So the market has a supply reason why it can start working higher and there's some prospect that maybe African swine fever demand will finally start to come in and maybe on the Market Plus segment we can talk a little more about what's going on with commitments versus deliveries.

Howell: Okay. I'm going to write that down. We're going to save that for Market Plus, Shawn. But I've got to say the cattle on feed report that came out on Friday, it seemed like it was what the trade expected. Did you see anything different in there?

Hackett: If you look at the estimates it almost came in exactly, almost to the point of what most analysts were expecting and it didn't look like there was any surprises. Hard to see the market trading that on Monday the way I see it. I think it's just one of those reports that you just look at it and you move on to what we've been doing before.

Howell: Long-term here for the cattle market you mentioned African swine fever could be a factor there. We've been talking about this wall of cattle that really never came to the market. Is it safe to say that this following six months trading pattern here will follow what we've been doing for the first half of this year? Or do you expect something different?

Hackett: I expect something different. I think we're going to start kind of a persistent higher high, higher low kind of a rally into the first quarter. When we have situations where future beef production out into the first quarter shows those kinds of declines the market demand tends to get ahead of that and doesn't wait for that hole to be seen and so we're pretty optimistic that the cattle markets, cattle price can start to see kind of an orderly move higher from here. We don't think it's going to be more of what we've seen in the first half, it will be more of a bullish environment.

Howell: Okay. And talking then about the African swine fever going on in the lean hog markets, how much longer, Shawn, are we going to continue to trade this story of African swine fever and Chinese demand?

Hackett: Well, I think we're going to continue to trade because the market feels and thinks it's a really big problem. We think it's a really big problem. And what’s interesting is that we have commitments, that is export sales committed in pork that is up over 100% so far this year and up 200% to Asia, but it hasn't been delivered. So what has been happening is we’ve been booking the sales but not actually delivering the production and I think what is going to be the trigger here is we start moving the physical and start really moving it out and we see that these commitments aren't going to be cancelled or delayed then the market I think starts to see tightness in the U.S. market and takes off. So the orders are there, we just need to see them shipped.

Howell: I know this is a hard question to answer, but when do you think we will see those orders ship? Do you think it's all contingent upon a Chinese/U.S. trade deal?

Hackett: I don't. And the reason I say I don't because the Chinese a few months back set up an exemption program where you could go to an exemption to import pork from the U.S. into China tariff free which started in July. So for those that have been approved there's absolutely no reason now to stop importing pork for a tariff reason. That has been removed. So we think from July onward, it's free game, the trade deal is really not an impact right now.

Howell: Shawn, final question for you, as you look at that and hopefully that does come to fruition where China does start bringing in those shipments and needing the pork, how much of a premium are we going to build into the lean hog market?

Hackett: Well, we already know where we went before, we went up to that 90 cent area and of course a few years back when we had the $1.20, $1.30 area. If this is what we think it is and we're done with the period of uncertainty there's no reason why we shouldn't go back and retest the highs over some three to six month period. We're pretty bullish if that takes place.

Howell: All right. Shawn Hackett, thank you so much.

Hackett: Thank you.

Howell: That wraps up the broadcast portion of Market to Market. But we will keep this conversation going on Market Plus where we’ll answer more of your questions. You can find it on our website at Market-to-Market.org. This week corn fields were the featured item on our Instagram page. Give Iowa PBSMarket a follow for other behind-the-scenes images. Join us again next week when I’ll sit down with the U.S. Secretary of Agriculture to get a status report from Washington, D.C. So until then, thanks for watching. I’m Delaney Howell. Have a great week!

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