Market Analysis with Shawn Hackett

These are the markets as of Thursday’s close as we had an earlier than usual production schedule this week. For that shortened week, the nearby wheat contract added a nickel, while September corn lost a penny. The soybean complex acted like much of the commodities and moved sideways ahead of Friday’s USDA report. The September contract closed down 35 cents and September meal shed $7.60 per ton. December cotton expanded by $1.94 per hundredweight. Over in the dairy parlor, September Class Three milk futures improved 13 cents. The livestock market was lower. October cattle cut 37 cents. September feeders dropped $1.87. And the October lean hog contract declined $2.75. In the currency markets, the US dollar index rose 58 ticks. September crude oil improved 40 cents per barrel. COMEX gold lost $28.90 per ounce. And the Goldman Sachs Commodity Index declined more than 3 points to settle at 590-even.

Yeager: Joining us now is regular Market Analyst Shawn Hackett. Hi, Shawn.

Hackett: Hi, Paul. How are you? Always good to be back. And I have my family here today.

Yeager: And we're going to give them a quick tour of everything commodities. Let's start with wheat. Dry for so long, the rain happens, then storm chances are happening. That's the domestic story. Then we have the Black Sea issue. What's the biggest weight on wheat in your eyes right now?

Hackett: The biggest weight continues to be the ability for Russia to sell wheat and low bid the market, low offer the market. Until they back away we continue to struggle to get ourselves a rally that can last and we go up and we come back down. Having said that, I really feel this time reminds me of the trade war we had back with China where we got so exhausted that we gave up that anything good was going to happen. Then when something good did happen the market took off and no one was prepared. The geopolitical instability is starting to escalate and I believe we're moving towards a point where we're going to see that override that bearish Russian factor. And everyone has given up that it's ever going to happen again because they're exhausted from it. I really feel we're moving away from U.S. weather to an escalation of geopolitics for wheat, which drives the whole grain sector into the fall.

Yeager: Wheat, though, last week hugely impacted by the losses in corn and soybeans. Did wheat make some independence this week?

Hackett: If you look at the charts, the wheat market has been breaking away from corn and soybean charts, meaning it has been basing all summer long whereas the soybean and corn market have been working itself back to lows. And I think that that is going to continue to show itself as the wheat market leading the charge back out once we make harvest lows.

Yeager: So, if I'm a producer of wheat and I'm listening to what you're saying about geopolitical, A, what am I looking for, for a signal? And B, how do I protect myself?

Hackett: Well, if you're coming into this situation aggressively sold we think the current environment really argue for protecting upside price risks right now. We think the upside price risks are tremendous right now and we would want to make sure you could add some cents to your bushels that you've already sold if we get another wild ride higher, which we think is escalating at this point.

Yeager: Rain makes grain, but it doesn't make a good market. What do you do in corn?

Hackett: Right now, under $5 we're not excited about selling the market here. We do think weather is kind of off the table. We're having some good cooler wetter weather into mid-August, we're getting some good grain fill. I just don't see the reason why weather is going to drive the corn market higher. Having said that, having said that, China flooding is a problem. They've had a big, big typhoon. The corn price futures in China have spiked considerably in the last week and they're getting ready for harvest. I think there's something going on with China's flood of a corn crop that they might come up short. That's something to watch in terms of them starting to aggressively buy corn either from us or from Brazil more aggressively going forward.

Yeager: But, get back to geopolitical, the Biden administration this week, another tough act, at least in their eyes, when it comes to China. China might not be interested in buying our grain, but are you telling me they might be forced to if there is this flood?

Hackett: There's what the politicians say and then there's what they're actually going to do. China will buy corn when they need to from who they need to at the price they feel is in their best interest and politics will not drive their decisions to buy or not buy U.S. corn despite the ongoing conflict that we have.

Yeager: All right, in December corn we have this rain that falls. If you are in an area that has rain and maybe you're going to get better fill what do you do? But what if you're in the dry area that it's not going to fill like you want and you're caught a little short?

Hackett: Well, if you're going to have a short corn crop you have to look at how much you've already sold. You've probably maybe sold more than you thought as a percentage of your crop production. Under $5 with the geopolitical risks that we just discussed and with this possible issue with corn crop in China, I think I'm sitting here wanting to protect some upside price risks as we go into what is going to be likely an early harvest low. I think if you're short you need extra cents on those bushels to make up for the lost production. You can't miss a dollar move higher in corn if it's going to occur.

Yeager: You slipped a phrase in there, mister, early harvest low. How early?

Hackett: Late August, early September is what our belief is that we're going to make early harvest lows, whatever those lows will be in corn and soybeans, we think it's early because we think the Chinese weather and the geopolitics are going to get the market going a lot sooner than typically late September early October when we would normally expect those harvest lows to occur.

Yeager: Same story in soybeans?

Hackett: Yes, same story in soybeans.

Yeager: Any change to soybeans that can break them in a different direction or different from these other two?

Hackett: Well, the geopolitics affects soybeans the least because we're not dealing with selling soybeans out of Ukraine or selling soybeans out of Russia. But the flooding in China, even though they don't grow as much soybeans as they do corn, is a factor. The other thing is we're looking at post-ASF pork shortage later in the year. Dry weight prices taking off. Bean meal prices in China taking off. The hog price in China taking off. It's suggesting the herd liquidation is over and where they need to feed piglets, dry whey and meal sounds to me like they might come in for more soybeans sooner rather than later.

Yeager: What do I do if I'm a producer right now given what you just said?

Hackett: I think it's the same strategy in soybeans. I'm not that excited in selling soybeans let's say under $13 a bushel. I just don't think that that's going to be a good move with what we're seeing going forward with all these different factors coming to play.

Yeager: Dairy market, cheese, that's the big story, right?

Hackett: Big, big story. We got down to $13.50 hundred weight in July, the worst margins in the history of the U.S. dairy industry and now we're sitting here at $17, $18 a hundred weight, massive, massive reversal higher. We got a cow cull rate in dairy in the U.S. the lowest since 1986. And, by the way, that culling is going on everywhere in the world, in Europe, in New Zealand, and so we're looking at a synchronous decline in the dairy herd globally that is going to start to show a significant contraction in production later this year just as the Chinese are going to be looking for cheap pork, cheap chicken, and milk powder, which is another big protein source for them. So, I really think this reversal off the July low is an important mark, low mark that is going to trigger a much more prosperous period ahead for dairy.

Yeager: Culling of the herd also has been a story, live cattle and feeders, hold backs. What's the biggest story for live cattle right now?

Hackett: Well, live cattle the way I see it is because all of these dairy cows are being culled we're getting this extra supply coming into the low end of the market. Australia dealing with El Nino related drought, their cattle prices have been crashing. They're going to be selling a lot more beef to us. The cold storage beef supplies in Asia, they're at record levels to the brim, meaning they're probably going to have to push back in importing beef for a little while to work those levels down. Everything says we might be entering a period of indigestion here. If I draw a line from the 1970s on the live cattle price looking at October and you go all the way to now, there's a line that every time we get to that line we have tended to make an important top around the end of the third quarter to the end of the fourth quarter. I'd be a little worried here that maybe we get a little more upside, but I'd be a little worried that we might need some backing and filling and indigestion to kind of work this high price off that has been with us for quite some time.

Yeager: Do you think the industry can handle another volatile turn like that?

Hackett: I think it can handle it if it's not too long in duration and I don't think it's going to be long in duration. I think it's more of a move from here to the fourth quarter. When we look at next year if we actually start rebuilding the cattle herd in the U.S. supplies are going to get even tighter and if we have any kind of demand for beef at all, which we suspect will continue to be there, I think next year looks fine.

Yeager: But, I look at feeders, the chart is on the screen now. Through July and into August we have been up at that $250, $255 range. Same story there like in live cattle? Are we getting to that we're going to stall out here soon?

Hackett: The chart is almost identical. We draw this line from the '70s, it's almost a similar chart of when it tops, there's an overhead resistance line. What's interesting is cattle prices have really been going sideways for the most part for the last couple of months kind of developing some kind of a distribution pattern it looks to us. We might see one final spike on maybe some holiday, early demand for holiday demand, but I'm just worried that the cattle market might be ready for some give back here.

Yeager: Do you want to talk hogs? Hogs on the brain, Mr. Hackett? What do you know in the hogs?

Hackett: Wow, whipsaw from the Supreme Court decision, oh they're going to delay it so we had panic buying in the market to get some of those supplies and then now we're coming off of that, there's herd liquidation in the market because the margins have been so bad like dairy. Having said that, what does herd liquidation mean if you're not replacing it? It means we're going to have much lower supplies later in the year just as China is going to be looking for significant supply to bring into their country to handle the pork shortage. So, short-term the next 30 days could be a little ugly as we deal with this herd liquidation post panic buying from the Supreme Court decision. After that I'm very constructive hogs from the fourth quarter on where I think we could see some much, much better margins in '24.

Yeager: Let's finish with cotton, shall we?

Hackett: Yes.

Yeager: What is happening there? I see an uptrend. That's a surprise, right?

Hackett: Everyone is bearish, everyone has been bearish and the market is in an uptrend, surprise, surprise. Demand is terrible. Exports are missing the USDA mark by about 500,000 bales. But, Texas weather horrible. Gujarat in India, weather terrible. The weather in China, terrible. In our estimation the losses in production in those three key countries for cotton production are so severe it's going to override the loss of demand that has been keeping the market bearish. We think prices are going to work higher. We're very constructive the market right now based on supply, not based upon demand.

Yeager: And based on everything you've said, we're out of time. Thank you, Shawn.

Hackett: Thanks, Paul, always glad to be here.

Yeager: Shawn Hackett, everyone. We're going to pause this analysis and discussion and continue to talk about the markets in our Market Plus segment. We're going to have a bunch of your questions to ask, by the way, and you can find both Analysis and Plus on our website of MarketToMarket.org. All of these resources are free. We have been watching corn harvest in Texas and hay cuttings in the Midwest this and last week on our Instagram. We love sharing your images in our stories section. Follow our feed @MarketToMarketShow. Next week, we look at getting help to process meat in shifting markets. Thank you so much for watching. Have a great week.

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