This morning, I spoke with Michelle Rook of Markets Now about headline-driven selling out of Brazil, how the Fed impacts ag markets, and how long we have to wait until fundamentals start mattering again for commodities. Watch our conversation on YouTube, and read the full transcript below.
Michelle Rook: Thanks for joining us for Markets Now. I'm Michelle Rook with Senior Market Analyst for Barchart, Darin Newsom. We are seeing mostly lower prices here on a Thursday morning, with the exception of the hog market.
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Darin, thanks for being with me. Let's talk about the grains. We've continued to see pretty relentless fund selling pressure here in the entire grain complex, a lot of new lows for the move day after day. Did the funds let their foot off the sell pressure gas here maybe as we get into a new month or not?
Darin Newsom: I don't know why they would, because again, the fundamentals of the markets haven't really changed. You're right. A lot of this looks to be coming from the fund side, and we have to keep in mind – particularly in the two bigger markets, corn (ZCZ26) and soybeans (ZSF27) – that the non-commercial futures positions have just recently, over the last month, month-and-a-half, have recently posted new record largest, both in long and net long futures.
Without the extraordinarily bullish supply and demand situation that it usually takes to do such a thing, it looked like the market got out of line with itself, got out of line with what might be its true intrinsic value. Now we've got liquidation going on. Now we've got the markets just free-falling, trying to find where that actual cash value might come in, and it might start to build some support.
Michelle: In fact, the support that we need comes from demand, right? We did see a little bit better exports this morning here on a weekly basis across the board, but in particular, wheat (ZWZ26), which has had a $2 sell-off. Are we finding the kind of demand that we need to bottom the market? Is that what it's going to take?
Darin: If we're just looking at wheat, it could, but I think we're so far away from actually tightening the US supply and demand situation. There's plenty of wheat worldwide, and there's certainly plenty of wheat in the United States. We can see that in spreads and basis and so on. While the fund selling could start to slow, I don't know that it's going to turn around and, all of a sudden, move back, particularly, say, in the soft red ($CSWI) market, the largest of the markets as far as being traded.
I don't know that we're automatically going to see funds start to move to a net long. I just don't think it's going to happen because there's – even though [chuckles] I know funds don't necessarily look at fundamentals, but there's just no supply and demand reason for it.
Michelle: This feels very similar to what we saw in June when the funds had built up that big position in May after the war broke out in Iran, and then came in and started just selling in June.
Are we selling at all here because of the algorithm headline-following trade that looks at the fact that we could have the Black Sea War, maybe some peace talks going on? Not that we have any war premium, but is that part of the pressure?
Darin: Yes, I think so. The change in dynamics in these markets has been interesting to watch, particularly over the last decade. Where it started off as a game, watching these funds actually learn how to be triggered by the headlines, and now it is a daily occurrence. Those that do the triggering know exactly what words to say. When you have AI writing the headlines, that then trigger the algorithm trading programs, it's almost a spooky scenario to think about that there really isn't any room at this point for human logic or any of these sorts of things.
I remember back in the day, algorithms were supposed to take the emotion out, but it seems now like they're more reactive probably than they used to be because there's no one to apply the brakes. There's no one to step in and say, "Look, that just doesn't make sense." Peace talks between Ukraine and Russia, that simply doesn't make sense, so it's most likely not real, but it's in the headline. The headlines are fed to the algorithms, and the algorithms react. This is the situation we're into now, and we could see it across the board nearly in every sector of the commodity complex.
Michelle: Yes, absolutely. You mentioned headlines. Yesterday, the new Black Sea headline that came out was that Russia was moving wheat through the Kerch Strait and that they're also moving wheat through some Arctic channel that we haven't heard about since – or they haven't moved grain through since World War II.
Why are we so far away from the fundamentals? Is it just because the funds are such a big part or too big of a part of our ag markets now?
Darin: Yes, they are. I've argued for decades that funds set the direction of the trend. That's why rule number one is don't get crossways with the trend because you'd be getting on the wrong side of the funds. Now, we used to be able to fade the funds back in the day because they didn't know anything. The pit traders, they had the depth, they had the knowledge, and this sort of thing, but we got away from that.
Now, we are left with dynamics where there's more money coming into the commodity complex all the time. It's just larger and larger casinos. We've got predictive websites that have opened to trade. These are basically, again, unregulated casinos. We've got more money coming in all the time. We could see this, particularly on report days. This is one of the reasons why the government needs to come up with new types of reports to release because it increases the trade volume, and that makes the exchanges quite happy.
Michelle: Another good example of that, look what happened with the real this week, plunging to the US dollar after the Polymarkets in that country, in the stock market in Brazil, had predicted Bolsonaro was going to win the election. They had to unwind that thing, didn't they?
Darin: They did. That's all that was about. It wasn't that the situation in Brazil had actually changed. We have to remember Lula was the incumbent. It's just that all of the betting, and I'm not even going to say investing, but all of the betting was – again, I can't use the word "all." There is no such thing as "all," but most of the betting was leaning towards Bolsonaro.
When it didn't happen, as you said, they had to unwind these things. We saw these collapses, even though, again, fundamentals didn't change. Again, this puts a big asterisk by one of my rules, Rule Number 6: Fundamentals Win in the End. That's something I've talked about recently. Do they really? How long do we have to wait? Are we having to look longer-term now for fundamentals to actually win in the end?
Michelle: Let's go back to one fundamental that maybe we can prove, and that is, one, we're in the middle of corn harvest yet. You may be getting some harvest and hedge pressure in the corn market. Soybeans, maybe a little better yield than we expected. Could those factors fundamentally be weighing on corn and beans right now?
Darin: Yes, I think they are as we make our way through, and we have been able to see that. We've got that real selling going on from the commercial side. Again, we could see that in the trends of spreads and basis really hasn't done all that much. We also have to remember that in both corn and soybeans, the funds had recently moved, I think, as recently as early September, moved to record large, long, and net long futures positions. There really wasn't anything left for them to do.
When money starts coming out and moving to other, because headlines change and other market sectors become more interesting, and money starts coming out, we have nothing underneath. I want to say it's a classic vacuum, but it's more like a collapsing market where there's just no one left to buy. All the money that was going to buy had done it already. You've got commercial selling. You've got some producers who took advantage of the situation, took advantage of the rally, and priced some 2026 production and so on. Now you've just got a collapsing market where there just really aren't any buyers.
Michelle: Yes, and you had both farmers and funds selling at the same time. That is a double whammy on that market. Where do we find support? I guess from a technical standpoint, we're below the 200-day moving average in both corn and all three exchanges of wheat. We're barely holding onto it in soybeans. Then, where do you go?
Darin: Back in the day, I used to use the joke, well, we've always got zero as a bottom line, but we know now that's not necessarily the case. We also know, if we look at the spreads, they aren't hugely bearish. We've seen corn and soybeans. There's still some concern about Brazil's 2027 crop, and I think that's going to underpin the soybean market as a whole.
I have no idea how much further down these markets could go. Again, algorithms are based not only on headlines and being triggered that way, but they also look at statistics. Statistically, both corn and soybeans and wheat are sharply oversold given the sell-offs that we've seen. It would not be surprising to see them possibly start to stabilize given the type of move that we've seen here over the last couple of months.
Michelle: All right. So let’s talk about the Fed decision yesterday. They are going to leave interest rates unchanged. Now expectations are we’ll see a rate hike in December. Obviously interest rates are going up in the actual market. So do you continue to see the dollar index ($DXY) going higher here and maybe making us less competitive in the export market – is that the key here for ag?
Darin: Yeah, couple of interesting points about that. As far as key for ag, it’s just going to be more expensive to have loans, both short-term and longer-term.
Should it support the US dollar? Historically, interest rates have been the key fundamental for any country’s currency, and this is one of the things that was interesting about the meltdown in the real on Monday, is it still looks like Brazil is going to have to – even though they’ve got higher interest rates, and they’ve been doing some cutting – it looks like they were going to have to start raising their rates again because of inflation, which is a similar situation to what the US is facing.
As I talked about on Wednesday, it looks like the US is in line for 3 more rate hikes over the coming year. Now what this means for agriculture, again, I think we have to kind of forget the old idea that export sales and all this is done for economic reasons. It’s more of a political game at this point, and I don’t think that a country’s currency’s strength or weakness has as much to do with the final decision as political policy, tariffs, trade wars, and these sorts of things.
Michelle: One last quick question. Cattle futures (LEZ26) down yesterday and continuing today. Is this just profit-taking because cash trade is starting lower?
Darin: I don't think so because what we've seen starting on Tuesday, Monday was pretty flat, but starting with Tuesday, we've seen some pressure, some commercial selling pressuring the futures spreads.
This is telling us that maybe this was hinting that the cash market (LEY00) could come under, could be a little bit weaker this week, and it certainly seems – we've still got time. As my friend likes to say, "We've still got a lot of week left in the next couple days." We could still see some more pressure on the cash market.
Michelle: All right. Thanks so much. That is Darin Newsom, senior market analyst for Barchart and Markets Now.
On the date of publication, Darin Newsom did not directly have a position in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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