4 things you need to know about August grain markets

The bullish sentiment may be shifting in the grain commodity world. For the past two years commodity futures have rallied in part due to strong global demand, and in part due to tightening supplies of many grain commodities. The rally was also linked to fund money buying many commodities as a means to hedge against inflation.

However, over the past two months, the Federal Reserve has been aggressively increasing interest rates as a means to battle inflation. The end result was many hedge funds sold off long positions in grain markets, opting instead to jump to the sidelines in grain futures markets.

• READ MORE: U.S. soybean harvest threatened by August weather outlook

Was this recent mid-summer grain price sell off enough to tame the inflationary talk? With higher interest rates and still high inflation, is demand for grains starting to falter? Now we know that demand will not fully stop, but could U.S and global demand slow down enough to offset a potentially smaller U.S. crop? On the global scene, consider that China has been on various Covid lockdowns, which has kept an estimated 17% of its population at home. This means they’re consuming as many commodities as they normally would have, potentially.

• READ MORE: Columns by Naomi Blohm

Looking ahead here are four market factors I’m watching in the approaching weeks that may shed light on the potential future direction of grain prices.

1. Recession evidence

Is the recession here? Will the U.S. dodge a recession? The economy contracted at a 1.6% annual rate in the first quarter. Last week the Commerce Department’s Bureau of Economic Analysis reported that U.S. gross domestic product fell 0.9% in the second quarter. Coming on the heels of that 1.6% contraction in the first quarter, the two straight declines meet the most widely used definition of a recession.

Going forward, if further evidence of a recession is seen, that alone might trigger another sell off in commodity prices as trade assumes commodity demand will fall. That’s if businesses may not need to purchase many raw commodities on the assumption that the consumer will not be interested or able to buy the end product. 

Looking abroad, the global economic scene is teetering as well. German retail sales slumped 8.8% in June compared with the same month a year ago, according to preliminary data from the country’s Federal Statistics Office released on August 1. While the European Union’s economy grew by an unexpected 4% in the second quarter compared with last year, this slowdown in Germany could weigh on the overall EU economy. Germany is viewed as the manufacturing center of the European Union, as Germany accounts for about a quarter of the EU’s gross domestic product.

Trouble could also be brewing in China. Beijing has set a GDP growth target of 5.5% in 2022, which is modest by historical standards. Even the Party now seems to hint the country is not going to hit that target, as growth was only 2.5% in the first half of 2022.

2. Goldman Sachs Commodity Index

I’ve written before about the Goldman Sachs Commodity Index, and if you’re heard me give speeches across the Midwest, I often incorporate a chart image of this index into my presentations. This index is important because it measures the value of 24 different commodities, all into one index number. The metric is a mix of precious metals, energies, grains, livestock, and softs (i.e., cotton, sugar, coffee and cocoa).

During the month of June, this index posted a bearish key reversal on monthly charts. To me that says for now, commodity markets have likely topped, and need to take a further breather. During the first week of July, commodity prices sold off, with prices now testing long term uptrend lines in many of those individual commodity markets in addition to the long term uptrend on the index itself. Which had bottomed in April of 2020 right after the Covid-19 sell off.

In the past, the index has flashed this potential topping signal six times throughout the past 16 years.

1. The first time was back in August of 2006, and the price setback lasted for five months.
2. The next was the infamous 2008 commodity sell off when the market peaked in July of 2008 and crashed lower for seven months.
3. In May of 2010, the index showed a short term peak which actually did not lead to a crash, but rather a four month sideways consolidation phase.
4. The next peak occurred during May of 2011, with the index then falling lower for five months.
5. In October of 2018, was the next bearish technical signal, with prices then falling for three months.
6. January of 2020 was when the reality of COVID-19 was beginning to awaken the globe, with the index falling for four months, and also when we learned that commodity prices could indeed trade negative, with crude oil futures walloping lower into a negative price abyss.

The next question bears, how long will this potential sell off last? Three months? Or closer to five months or even seven months like 2008?

3. August 12, 2022 USDA WASDE Report Production Estimates

Traditionally, the August USDA report is not a tremendous market mover, as the only bit of “fresh news” that trade is anxious to see is an update to production estimates. The August report is often times when the USDA will provide a yield estimate update. This year, an update to yield is not the only bit of information that trade will be anxious to see, as an update to planted acres could also be revealed. It is not normal for the USDA to adjust planted acres on the August report.

Why the change? Back on the June 30, 2022, Planted Acreage report, the National Agricultural Statistics Service (NASS) announced a “special note” that the planted acreage estimates released on June 30th were “based on data provided by respondents who were contacted between May 28 and June 16. Nationally, corn left to be planted was 4.03 million acres. Soybeans left to be planted for the United States was 15.8 million acres.”

They went on to say that, “In July, NASS will collect updated information on 2022 acres planted to barley, canola, corn, dry edible beans, oats, sorghum, soybeans, sunflowers, and Durum and other spring wheat in three states. Excessive rainfall had delayed planting at the time of the survey, leaving a portion of acres still to be planted in Minnesota, North Dakota and South Dakota. ... If the newly collected data justify any changes, NASS will publish updated acreage estimates in the Crop Production report to be released at noon ET on Friday, August 12.”

Trade will be curious to know if planted acres will increase, decrease, or remain the same. Currently all wheat planted acres are pegged at 47.1 million acres. Planted corn acres are estimated to be at 89.9 million acres, with soybean planted acres at 88.3 million acres.

Global production will also be monitored. Looking abroad, trade also is anticipating the corn production in the European Union might be lowered due to the heat across the region, while the Brazil corn production might be increased, due to a large second crop corn also known as the Safrinha crop. And who knows how the USDA will account for Ukraine grain production.

4. August 12, 2022 USDA WASDE Report Demand Estimates

The demand categories for grain may be in question. While some would site the need to increase exports of U.S. grain due to lower production in Ukraine. Others say because China has locked down various cities within the country for COVID off and on for the past few months, that demand for some grains might be marginally lower due to less use within China. In addition, with Brazil growing a large corn crop, they may have more to offer to export than initially thought, which could compete with U.S. export demand.

Thinking of the livestock sector, with more cattle coming to market recently due to poor pasture conditions and higher feed values, will the upcoming WASDE report show a reduction in grain needed for feed for the latter part of 2022 and into 2023?

One bright note for corn and soybean demand is the recent spending deal reached last week between Senate Majority Leader Chuck Schumer and Senator Joe Manchin, which would extend a $1/gallon tax credit for biodiesel and renewable diesel through 2024, according to the bill's text. Demand for renewable fuels looks to be strong.

Is the Bull Market Over? Or is this just a pause?

With the mix of outside market news clashing with the uncertainty of grain fundamentals, the month of August could prove to extend volatile trade for grains. Will grain market fundamentals remain strong enough to keep grain prices in a long term upward trend that prices have enjoyed for nearly two years?

Unfortunately, this may be one of those times when commodity prices bow to the pressure of outside market influence, rather than the true supply and demand fundamentals of the commodity itself. For grain farmers, this can be nerve wracking, as they witness the crops in their field wither from flash drought concerns, as we still are unsure what official planted acre numbers are in this country for crops growing in the fields, or if Ukraine will be able to harvest the reduced crop growing in their fields right now.

I can tell you this, I take heed in that Goldman Sachs Commodity Index chart posting potential topping signals, and I also fear the possibility of a U.S. recession to become a reality. While the United Sates may not have a record crop growing in the fields, it might not matter if global demand is tempered.

Be advised, my “bullish” horns have been retracted, with my “bearish” claws coming out.

If you have questions, you can reach Naomi at naomi@totalfarmmarketing.com or visit TotalFarmMarketing.com for more information.

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