This is the SFN Market Report with Brooks Schaffer of Palmetto Grain. Reach him at brooks@palmettograin.com or 843-540-4540.
The news cycle continues to be dominated by the turmoil in the Middle East. The grain markets were not really sure which way to react for much of the week. Higher energy prices are bullish for corn and soybeans now, since so much of them are used to produce energy. But if China slows or cancels soybean purchases in retaliation, that could be bearish.
Keep in mind we are still in the very, very early stages of this, but so far there has been no indication of much of a Chinese response. They have condemned the actions but have not taken much action themselves, other than to try to protect what domestic energy supplies they have.
The biggest effects so far have been in the energy markets, as the Strait of Hormuz remains effectively closed. Every day the shipping channel remains closed causes bigger and bigger ripple effects through the energy and fertilizer markets. Earlier in the week, Trump said the U.S. would provide insurance, and the Navy will escort ships through the strait. The energy markets dropped well off their highs right after the announcement came out, but then later resumed the uptrend when there were questions about how effective that would be.
The market is not going to be convinced until we see ships begin to flow. The Saudis are also preparing to use a pipeline to carry oil flow over land to avoid the strait, but it cannot replace all of the shipments that normally go through Hormuz. So far, the goals of the U.S. operation are also not clear, which adds to the uncertainty, and the energy markets do not like that.
Corn and soybeans are rallying as energy prices rally, since they are both used for energy. But also, part of the rally in the ag space comes from spec money flow. As energy prices rally, it reignites the inflation trade, bringing spec money back to the long side. No one wants to be short commodities with so much uncertainty.
Next week, on Tuesday, March 10, we get USDA’s March Supply and Demand update, but we do not expect many changes. They will not give us any new crop numbers yet. The only numbers they may adjust are U.S. demand and South America supply. The next big report will be the March 31 Planting Intentions report, but those numbers may already be obsolete. Those intentions are as of March 1, and a lot has already changed since March 1. I think the market will greatly discount whatever numbers come out.
This rally may go higher if the uncertainty and disruption to energy flows continue. But the market has given us a gift with this rally, and we need to be taking risk off the table. You can sell small, but we need to sell often.