Has the Market Already Seen the Highs? Crude Oil and China Doubts Pressure Grain Prices

As went the weekend news of progress with peace talks and reopening the Straits, the recent trend of lower crude and lower grains and soy followed suit to start the holiday shortened week. While overnight prices proved to be the lows of the session, even new bombing against an Iranian mine ship only rallied prices to what proved to be the mid-range of the day. The corn and bean markets are too fundamentally tied with gas prices to have much independent trade on days of big moves in the energy markets, and it will continue that way until a peace agreement is signed and the Straits reopen. China has been absent from any trade news and the longer that goes on the more skeptical the demand bulls will be of the promise of expanded Chinese demand.

News and Notes:

- Heading into the last week of May, the Delta and SE are excessively wet after a week of 8”-12” of rain while the Midwest and ECB were mostly dry and happy about it. There is a larger system projected to pull through the WCB in the next 5-7-days and then warmer and drier weather for most of the Corn Belt and Delta. The US forecasts are non-threatening outside of some small regional challenges seen every year. SA weather remains a non-event as safrinha pollination nears.

- The daily July bean chart is on Page 2 and shows the slow bleed out of premium and technical deterioration of the chart. Today’s close below the 50-DMA (green line) is concerning as the funds are still long roughly 925 MBU and a weekly close under the daily 50-DMA ($11.89) and below last week’s low of $11.72 ¼ will kick out a big leg of support for the bean market. With the corn fund net long position over 1.3 BBU, upcoming fund decisions will have any oversized effect on price if they decide to head to the exits.

- The weekly crop condition report shows 86% of the corn crop was planted through Sunday while bean planting progress hit 79%. Both were slightly behind expectations, but still above their respective 5YAs. Emergence for both crops is ahead of average as well. Initial crop conditions, potentially released next week, are expected to be above average. Wheat crop conditions fell 2% to 26% G/E.

- Last week’s sharp cattle losses and Friday’s allegedly bearish Cattle on Feed report, led to a mixed feeder and live futures trade where early gains faded to small losses by the close. Cattel are stuck in a different place than usual (taking out the record high prices) as fed cattle are taking longer to make it to market but are heavier to make up for the lower numbers. Historically when the stock markets are going well (new highs across the board again today) beef demand is strong, but high gas prices have cut into most family's weekly budgets and higher priced beef sales appear to be slowing. The market is not bearish, but the 2-year plus runaway bull market does have some headwind.

The markets continue to trade with significant indecision regarding the Straits reopening, where is the US crop as we head into June, and was the announcement of $17 billion in additional US ag purchases by China just another puff of smoke out of Washington. If you are bullish and are waiting for higher levels to make or start sales, you should be rooting for several of these factors like an extended closure of the Straits leading to much higher crude prices, China walking in one day and confirming a new era of trade cooperation with the US, and the US crop being in trouble from the unforeseen impact of high fertilizer prices. If you are bearishly leaning, you expect the Straits to reopen, crude oil prices fall back into the mid-$70s, China is not going buy anything except the bare minimum, and the US crop is going to be better than expected. As with all complicated situations, the outcome is most likely in the middle. If half the bullish factors unfold against half the bearish factors, a stalemate and a grinding trade in corn and beans is the outcome and the highs of the spring/summer were both made on May 13th with Dec corn at $5.06 ½ and Nov beans at $12.14. Both were just a few days after the surprise $17 billion Chinese trade announcement. Regardless of which side you are on, today, the downside risk is growing larger than the upside potential.