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Sidwell Strategies Week-in-Review CommodityBuzz: Cattle-on-Feed neutral while wheat remains weak


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Happy Memorial Day weekend market watchers! It is the time of year we honor those who have gone before and especially those that have served our great country and given the ultimate sacrifice. It is an unofficial start to summer like no other, thats for sure. Parts of the country have reopened while others continue to have strict guidelines in place limiting human interaction. My cousin from Dallas came up Friday and commented how out-and-about the town of Enid was and so I consider ourselves lucky to be in a town of our size. The economy continues to suffer as seen in the weekly jobless claims that rose 2.438 million this week, slightly above estimates. Washington continues to grapple with the decision whether to pump more stimulus into the US economy and how. Democrats are pushing for a broader package while Republicans are angling for a narrower approach supporting businesses. No doubt this debate will continue to get more partisan as the election approaches. News of coronavirus payments for agriculture were finally announced this week. Payments include a CARES Act stimulus for price losses from mid-January through mid-April as well as a smaller Commodity Credit Corporation (CCC) Charter Act payment partially offsetting the ongoing losses after mid-April. While news of the payments was welcomed, the timing window for the larger initial payment makes little sense, especially for cattle. Disruption to the feeder cattle market started in early-to-mid March, not mid-January. Given the huge market swings and lower cash prices through late March and April, producers held on to cattle and grazed out wheat in hopes of a market recovery that has still only partially come back. Thus, the biggest losses for cattlemen occurred after mid-April, not before. For feeder cattle over 600 pounds, the payment for cattle sold between mid-January to mid-April is $139 per head while cattle held until after mid-April are only getting a $33 per head payment. It could be that the USDA comes back with a supplemental payment for cattle sold after mid-April, but one would have thought they would have allocated the majority of the funds to reflect the time of actual loss between early March through end of May. Go figure. I understand signups begin at local FSA offices on May 26th. While it is difficult to gauge the recovery timeline of this market amidst all the uncertainty, we have been working with producers selling cattle to reposition with call options in case the market should rebound. The Live cattle contract may be the one to consider versus Feeder cattle with that spread still not in line. Fridays monthly cattle on feed report released at 2 PM, after the close, was considered neutral with numbers reported in line with expectations. May 1st cattle on feed were slightly lowered than expected at 94.9 percent of last year while April placements were slightly higher than expectations, but down massively from last year at 77.7 percent and April marketings were modestly higher than expected, but down solidly from last year at 75.7 percent. Were not expecting much reaction from this report alone next Tuesday when markets reopen after being closed Monday for Memorial Day. Overall red meat production for April plunged 23 percent as US meat packers ran at nearly 75 percent capacity due to the COVID-19. Boxed beef cutouts this week were off their peaks as high retail prices have curbed some demand. This pricing balance is going to be delicate to maintain in order to keep demand levels for beef with the large supply of cattle that need to be processed timely or risk a multi-year structural disruption in the supply chain. I do not think the set-aside program to maintain cattle weights is a good idea as it only prolongs the problem. May feeder futures and options expired on Thursday finishing at $126.025. August is now the front month. Finally, the rain chances have proved accurate this past week and were thankful for much needed rain although we could have done without the wind. Trees were split and we also heard of some green snap in newly planted corn. Mother Nature continues to be in charge although weve had a relatively light storm season so far, touch wood. The wheat welcomed the precip and so cooler temps as the filling period continues. Yields are going to be variable across the state as parts of central and southern Oklahoma were impacted by freeze and some hail while northern parts of the state are looking to have a decent crop. The same goes for Kansas that finished the annual wheat tour virtually this past week. While we shouldnt place too much weight on these numbers given the scaled down nature of the tour, the overall average Kansas yield was 44.5 bushels per acre (bpa), slightly below USDAs 47.0 bpa forecast. However, this tour does tend to underestimate the final number. Over the last five years, the tours average estimate for Kansas was 43.0 bpa versus the 5-year actual at 46.4 bpa. Time will tell. In the agriculture stimulus released this week, there is no payment for hard red winter wheat given it didnt meet the 5 percent price change threshold. HRS and Durum wheat qualified for 18 and 19 cents, respectively, for CARES and 20 cents for CCC. Corn is paid at 32 cents for CARES and 35 cents for CCC. Soybean payments are 45 cents for CARES and 50 cents for CCC. More can be found at www.farmers.gov. On the international front this week, the Ukraine is nearly to reach the government set export quota for wheat that extends through June 30th. Russian ag consultant IKAR also lowered estimates for Russias wheat crop this year to 76.2 million metric tonnes (MMT) from 77.2 MMT compared to USDAs 77.0 MMT. With the recent selloff in wheat prices, we definitely need a trigger to turn the charts around. The mid-week rally showed signs of hope that faded Friday after rains across Oklahoma and Kansas are thought to improve conditions that remain at 52 percent Good-to-Excellent overall and the US dollar firmed. I considered the trade above $4.57 in early trading Thursday morning as a sign of renewed strength, but we couldnt hold the gains. Unless we get a move in corn or China buying, I dont expect much out of this wheat market until harvest gets underway. July KC wheat closed the week just below $4.45 with $4.40 remaining a support level. In the corn market, continued negative news, including planting progress at 80 percent, just cannot seem to press this market lower leaving us to believe that the worst is priced in as funds remain a significant net short. With a trigger that could be weather related over the coming summer months or China buying that showed optimism all week, a meaningful short covering rally could take place. With low volatility, option prices are quite reasonable. Weve been getting more active in the September contract with call options. September corn settled Friday just under $3.23. Soybeans have had a difficult time breaking out of these levels despite continued China buying. November new crop beans finished the week at just under $8.45. News that the P.R.C. is imposing its national security laws in Hong Kong bypassing the local legislature dealt a blow to the soybean market as tensions rise. I spent nearly 10 years in Hong Kong, becoming a permanent resident, and its difficult to watch a place that I know and grew to love face what many of us always thought was the Special Administrative Regions fate, a Chinese takeover. Ive been actively trading energy contracts recently including crude oil, RBOB gasoline and NY Harbor heating oil that serves as a proxy for diesel. If youre interested in trading crude or other energy contracts, just know that I am very active in this market in addition to the ags. Give me a call at (580) 232-2272 or stop by our office to get your account set up and discuss strategies to protect your exposure to these markets. 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 ahead!

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.



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About the author


Brady Sidwell is the Founder and President of Sidwell Strategies, Enterprise Grain Company, Enterprise Grain Malt, Sidwell Solutions, Sidwell Seed, 81 Feed and Seed, Sidwell Transport, Arbitrage αlpha Solutions and co-founder of Enid Brewing Company. Mr. Sidwell is also a Limited Partner and member of the Advisory Board of Germin8 Ventures, a Food Tech Venture Capital firm based out of Chicago, and a founding partner of Ninja Ag, LLC, a precision agriculture technology business that creates variable-rate nutrient applications from corrected NDVI imagery. Mr. Sidwell was recently appointed to the Board of Directors of the Kansas City Federal Reserve Bank, Oklahoma City Branch.
 
Prior to his recent change in becoming an entrepreneurial business owner and commodity broker, Mr. Sidwell was Vice President of Global Strategy, Mergers & Acquisitions for the OSI Group, based out of its headquarters near Chicago. He first joined the company as VP of Corporate Strategy and Business Development for the Asia Pacific, Middle East and Africa (APMEA), based in Hong Kong. At OSI, Mr. Sidwell was responsible for spearheading global strategy and M&A.
 
Before joining OSI, Mr. Sidwell was Head of Food & Agribusiness Research and Advisory for Rabobank in North East Asia. He was responsible for cross-border F&A strategies for companies and investors across various sectors in the supply chain. While at Rabobank, Mr. Sidwell appeared regularly on Bloomberg, CNBC and Reuters TV to discuss the impacts of global and regional food & agriculture developments on Asian and global markets.
 
Prior to Rabobank, Mr. Sidwell worked on project teams at the U.S. Embassy offices of the U.S.D.A. in South Korea and Thailand. He holds a Bachelor of Science degree cum laude in Agricultural Economics with a focus on International Marketing from Oklahoma State University and a Master of Economics degree from the University of Hong Kong where he studied as a Rotary International Ambassadorial Scholar to China. Mr. Sidwell was raised on a family farming operation in Goltry, OK, where he lives with his wife Emily and their dog, Daisy. He is active in his community as a Rotarian, Ambucs member, Advisory Board and Investment Committee Member of the Cherokee Strip Community Foundation, Class 31 of Leadership Oklahoma and the Board of Governors of the Oklahoma State University Foundation.

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