CME Group permanently closes grain pits - Sidwell Strategies

Howdy market watchers!  The CME Group made history this week by permanently closing the grain pits in Chicago.  

While COVID no doubt accelerated this milestone, electronic trading already represented the majority of trades.  However, it is an end of an era that started with the Chicago Butter and Egg Board that became the Chicago Mercantile Exchange in 1919.  My clearing firm, R.J. O’Brien, then John V. McCarthy & Co., was one of the original founding members and the first to take delivery of the new Live Cattle contract in 1964 when it became the first live commodity traded on the CME floor.  I cherish the numerous times I had the opportunity to visit the pits.  The Eurodollar pits remain open.  

In the markets, another week and another round of printing new highs across the commodity complex.  While the new, expanded daily limits were not reached this week, we four days of higher grain and oilseed markets after some consolidation on Monday. Supported by a weaker US dollar late week despite softer export sales in USDA data until China’s large Friday purchase of US corn, markets reached new levels ahead of next Wednesday’s monthly WASDE and Crop Production reports.  Average trade estimates are calling for tighter US corn, soybean and wheat ending stocks for 2020/21 and slightly higher US ending stocks for corn and soybeans in 2021/22 versus last year yet lower wheat ending stocks.  

All wheat class production is expected to come in above last year with higher hard red and soft red winter output, but lower white wheat production.  Globally, average trade estimates are forecasting lower Brazil corn production, which is no surprise given drought stress for safrinha corn, slightly lower soybeans while Argentine corn output is expected to be just under previous estimates while soybeans are nearly 1.0 million tons below USDA’s previous estimates. World ending stocks for corn in 2020/21 are expected to be slightly lower than previous estimates along with soybeans and wheat.  For the following 2021/22 crop year, global ending stocks are expected to come in higher for corn and soybeans, but lower for wheat.  Price action this week may be pricing much of this expectation in ahead of the reports with markets building in continued concerns over tight stock levels this year.  July corn has been in the lead with spillover effect into the wheat and soybean market as competition for feed grains and planted acres continues to drive those willing to pay more.  Looking at a weekly continuation chart of corn, we have just made slightly new highs at $7.68 over the highs reached in June 2008 at $7.65, right before the financial crisis that started around September.  However, in June 2011, corn futures reached $7.99 ¾ followed by $8.43 ¾ in August of 2012.  Depending on US weather going into the summer, Brazil conditions for 2nd crop corn, the US dollar, fund positioning with an eye on inflation as well as China buying, we would be set to reach these levels again.  

Will planting pressure weigh on markets?  Not so far.  Over the prior week in USDA’s Monday crop progress reporting, farmers planted an additional 29 percent of the US corn crop at 46 percent complete, 2 percentage points ahead of expectations.  We’re expecting another big acceleration in this next Monday’s report although it may not do much to curb the bullish enthusiasm.  Soybean planting was 24 percent complete in the US versus 8 percent the prior week though slightly behind expectations. Winter wheat ratings were right in line with expectations at 48 percent Good-to-Excellent despite a reduction of 7 percent in Oklahoma and no change in Kansas.  

Rain chances return for the southern plains early next week.  During this fill period in winter wheat, cool weather with some precip is ideal though it has been spotty at best.  Stripe rust has been prevalent this year and producers haven’t been reluctant to invest further with prices on the move.  Basis levels have also been improving as producers have been more cautious to forward contract given a continued firmer tone in futures as well as contracts already secured at lower levels.  On the continuation chart for KC wheat, we are back to levels last seen in June of 2014.  

However, the wheat chart looks quite different than corn with the March 2008 highs at the $11.10 level.  At this point, anything is possible.  The wheat balance table is not as tight as others, but governments and companies are securing inventory that pulls forward demand and export restrictions to curb domestic inflation keep supplies off the global market.  Such actions happening simultaneously can itself create anxiety in markets that leads to perceived shortages.  

The exuberance in the grain markets has weighed heavily on cattle in recent weeks.  We did see life return to the feeder and fat futures on Friday, but as we’ve seen before, closes were well off the highs.  Although painful to highlight, the continuation chart for feeders in 2008 shows ranges between $0.90 and $1.20 per pound.  During the 2011/12 highs in corn, feeder cattle were in the area we are now, $1.45 per pound, up to $1.60 in June 2012.  Live cattle were around $105 in the summer of 2008 on a continuation chart rallying to the $130s in 2012.  As they say, higher prices cure higher prices.  Major rallies in grain are followed by production surpluses and rationing that see grain prices fall and livestock markets rebound.  Bottomline is that we’re expecting firmer livestock markets in 2022 and lower grain prices.  As you look at your 2021 marketing progress, don’t lose sight of the potential to lock in 2022 prices where KC wheat is at $7.07, Dec 2022 corn is at $5.25 and November 2022 soybeans are at $12.74.  

In locking in forward contracts, always be mindful to not overcommit bushels.  As mentioned in last week’s article, hedging your hedge by adding upside potential on either board hedges or forward contracts can be an important strategy in protecting oneself in such volatile markets. If you have on farm storage or looking for a way to lock in futures without choosing your delivery point until you can find the best basis bids, there are several risk management and marketing programs for wheat, corn, milo, soybeans and sesame to consider that will enhance your marketing efforts.  This is a very creative solution to lock in futures without having to pay margin calls, but also have the freedom to negotiate basis with delivery points once you are ready.  If you’re ready to trade commodity markets, give me a call at (580) 232-2272 or stop by my office to get your account set up and discuss strategies to pursue your objectives. Self-trading accounts are also available.  It is never too late to start and there is no operation too small to get a risk management and marketing plan in place.  

Remember, I am on-site at the Enid Livestock Market on Thursday, sale day.  Wishing everyone a successful trading week! 

Brady Sidwell is a Series 3 Licensed Commodity Futures Broker and Principal of Sidwell Strategies.  He can be reached at (580) 232-2272 or at brady@sidwellstrategies.com.  Futures and Options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at http://www.sidwellstrategies.com/disclaimer