Market Analysis with Arlan Suderman

The flood of grain into the Black Sea eroded support while domestic drought added early dents to the corn crop. For the week, the nearby wheat contract dropped 51 cents, while the September corn contract sold off 14 cents. China’s buying despite rhetoric over Taiwan helped stabilize the soy complex. The nearby contract sold off 46 cents. September meal decreased $16 per ton. December cotton surged again, this time $7.42 per hundredweight or 7 percent. Over in the dairy parlor, September Class III milk futures weakened 18 cents. The livestock market was mixed. October cattle added 75 cents. September feeders put on $1.37. And the October lean hog contract shed $6.90 or 7 percent. In the currency markets, the U.S. Dollar index jumped up 252 ticks. September crude oil lost $1.31. COMEX Gold contracted by $56.10 per ounce. And the Goldman Sachs Commodity Index dropped by more than 8 points to finish at 669.15.

Yeager: Joining us now to provide some insight is Arlan Suderman. Hey, Arlan.

Suderman: Good to be back with you, Paul.

Yeager: Good to have you here. Let's start right in your back yard. This wheat thing with Russia -- the wheat fields of Kansas, they're watching what goes on in the Black Sea. Why is that such a drag because all this grain is coming to market? Is it any more difficult than that?

Suderman: Actually there's been very little wheat move out of there. That's the perception that there's been a lot of wheat moving out but there's been little wheat now that is going to start increasing in the weeks ahead. Most of what has been coming out to this point under the agreement has been corn and other crops. But if you look back to the marketing year that started July 1 they have exported through their ports just a little over three, actually total exports have been just a little over 3 million, a little under 3 million metric tons. That is half of what they did a year ago -- it's about a fourth what they need to be doing and what they can be doing. And so we're still seeing a real limit. If a year ago we would have told you this is all they're going to be able to export over the coming years at the current pace it would have been considered very bullish. So prospective changes I think it's still not enough. And if you really look at it longer term, yeah we have a big crop in Russia but it's very poor quality and they're having trouble exporting it. I think USDA is way too high on their export target. And farmers there are very upset. They're getting a cheap price. They're having trouble shipping it. And they're talking about reducing what they plant for next year. Ukraine officials who have been very optimistic, they've been eternal optimists since this war started, but they're saying wheat acres for the 2023 crop will probably be down 30% to 60%. So we're talking about the bread basket of the world now. I know we like to think we're the bread basket of the world but not anymore. Ukraine is the big wheat grower in the world. And we're going to see probably a sharp reduction in what is planted for next year in addition to the export problems.

Yeager: I'm sitting there listening to what you're saying and I haven't heard anything -- that to me sounds like this market should be reacting in a different way. Are we factoring ahead? Is that what has happened here?

Suderman: I think the markets -- for the last six weeks prior to this past week we traded sideways because the trade was trying to figure out okay, what is our supply situation? We know we have a drought in Argentina, we have a short crop in the United States, we pretty much know what that is. We have some problems in Europe. We have the export problems in the Black Sea with the war associated. But everything seems to be in balance. And I left out the problems in India as well where they may actually start importing wheat instead of exporting. So the market was just kind of going sideways trying to bide some time trying to figure it out and then all of a sudden we broke lower and we broke through support and it became largely technical selling in nature. And the algos just piled on with sell orders and drove it down. And then coming into the weekend we found some support in a bounce and really profit taking on that technical short covering as reports start coming out about this nuclear plant in Southern Ukraine, the largest nuclear plant in all of Europe, and it's the central focus of a skirmish between Ukraine and Russia right now. Now, we don't know that anything bad is going to happen there but all it would take is one misfiring and you could have a leak like what we had with Chernobyl back in the 1980s.

Yeager: We've got more geopolitical to get to in soybeans but I need to get to corn for a minute because you've been talking global stories here so far. Is corn only dominated by what's going on in the United States right now?

Suderman: It's getting some support from the short European crop, USDA came down 8 million metric tons, they probably have that much more to go down if not more than that. So that raises the stakes with the U.S. crop and the trade is starting to hear more reports of ears not filling as well as what we'd like to see. I think this next week's industry crop tour will go a long ways towards giving us a feel of how widespread are those anecdotal reports of problems and how widespread are those anecdotal reports of good crops? But I think we're probably looking at a shorter crop than USDA currently sees.

Yeager: Anecdotes are one thing, private estimates are another. You kind of have the pulse on one big private estimate. I can't make you give all the company secrets away. But do you agree with the thought the privates are going to be a little lower than what the USDA is saying on how big this corn crop is?

Suderman: I think USDA is going to eventually come down as well. I had no problem with the August 1 estimates. The corn crop usually looks good on August 1. It comes down to how does it fill during the month of August? And one of the big things I'm concerned about this year with the weather pattern we've had west of the Mississippi River were the over half of the crop is grown is seed size. I think we're going to end up with small seed size. I'm saying that as a former agronomist. How small is still the question. So I'm not looking for a crop failure overall for the national crop but I do think we're going to end up closer to that 170 and somewhere in there, maybe even below it depending on how we finish the month of August. And if we do that that leaves us with a very tight balance sheet for the next year, especially with Europe having a short crop.

Yeager: Right. I need to get to the algos of soybeans that you talked about. I believe at one point we dipped below the 200 day moving average. Was that the big indicator of a selloff or a reason for a selloff in soybeans this week, technical only?

Suderman: Yeah, we had the rally early in August. I never was convinced of the conviction of the funds. And you can't sustain a rally in this market without the conviction of the funds and it just wasn't there. So as soon as the temperature is moderated in the Midwest they started selling once again and there are concerns about Chinese demand for the year ahead and those are legitimate concerns. But this crop, if we just shrink it about 5% we basically use up USDA's surplus for the coming year and the market can't allow that to happen, the pipeline has to still have something in it. So the trade found a little bit of support to end the week just trying to make sure that let's see what the pod counts are in next week's tour.

Yeager: So again looking at that. You mentioned a little bit of some historic things. I'm going to ask you a historic perspective question here that came in via social media this week and it's from Evan in Devils Lake, North Dakota. He wants to know, what are your thoughts on chart comparisons of ag commodities now versus '08 going into the housing crash? We talked about the housing numbers off the top of the show. Do you think outside macro markets could do the same currently?

Suderman: Well, they certainly could. The big problem, it's much more complex than what it was in '08. We were talking about the possible global collapse of the financial system. We're not looking at that now. Our problems are too much stimulus created demand that exceeded the supply and even if you look at the drop in home sales the supply of homes is still very tight. The problem is with interest rates going up and with the uncertainty and near record low consumer confidence the consumer simply is backing off. Money supply is still very high so this economy could back off. But we've got to restore confidence in the consumer. The problem is if that happens there's still a lot of money in the system that we could reignite inflation once again.

Yeager: Real quick I need to slip in cotton here because we've had a big run the last couple of weeks and I see another big amount of rain headed to some of that cotton area now. Is that going to further impact prices?

Suderman: Yeah, two extremes, one to another. First drought, we're looking at abandonment of around 43% according to USDA. That is going to result in a tremendous amount of wheat being planted after these rains. But these rains are not going to be good for the cotton that is in the field because the bulls are starting to open and so if we get the heavy rains that they're calling for that is going to do additional damage to the crop.

Yeager: All right. We had a cattle on feed report that came out just before we started rolling. On feed 101% of a previous year, placed way above trade estimate at 102. What did you see in that report?

Suderman: More evidence of the drought in the south. Like I said, we're going to have a lot of wheat pasture here soon over the next six or eight weeks once this rain ends if it verifies in that region that will help. And then we're looking at a shortage, cow slaughter remains very high. We're finally going to start seeing these on feed numbers drop off in the fourth quarter of this year. We're looking at beef production next year down about 6.5%.

Yeager: So are you in the buying mode of a feeder right now if you can, if you have the ability?

Suderman: Yeah, I think that's going to be the challenge is the tight supply of feeders as we go forward. Right now we're not looking at the record highs that we set back in 2014. But we're certainly moving higher as the supply tightens up. Feed is really the problem. We're looking at tremendous new crop basis a buck fifty or more over December futures right now in the southwestern plains and there's tight supplies of wheat in that region as well. So they're having trouble coming up with feed.

Yeager: And that was a story I heard a lot at the Iowa State Fair this week, a lot of people asking about feed and directions of that. The hog market though very converse to the rest of the meats there. Much more damage to come?

Suderman: Yeah, and if you look at the feedlot belt where we feed our cattle we're going to be down about 450 million bushels of corn and grain sorghum productions from last year. That is going to have to flow from the east to west so there's a lot of grain in Iowa that is going to be wanting to flow west.

Yeager: All right, Arlan, I appreciate it. We'll expand a little bit more on livestock. Sorry to short that again. I got chewed out at the Fair for that. I'm sorry. So I'll put you on the spot in just a minute, okay?

Yeager: Thank you, Arlan. We are going to put a pause on this analysis and continue with Arlan and answer more of your submitted question in our Market Plus segment. You can find it on our website of MarketToMarket.org. It's both in podcast form as well as YouTube. And all of these resources, they're free. Now, whether one social media platform falls in or out of favor we always leave the inbox open. Send us any story ideas or feedback to the program in an email to markettomarket@iowapbs.org. Next week, we look at the Native Americans taking more control over how their food dollars are spent. Thanks for watching. Have a great week.

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