Four markets to watch in February
As we head into the month of February, there are four commodities that have my keen interest and attention: hogs, rice, soybeans, and corn. Due to a combination of lower supplies and potential for steady to higher demand, these are commodity markets that may have the potential for prices to ignite higher in the coming months.
Taking a step back to look where prices have been over the past two years, hog futures have experienced a very dramatic price range. In the pit fall aftermath of COVID disruptions in early 2020, hog futures traded as low as $37.00 to as high as $123.07 in June of 2021. Currently front month February 2022 hogs are trading near $88.10, while the deferred contracts are up near $100.00 to $106.00.
Hog futures have both strong demand and tighter supplies into next year as aspects of price support going forward. On the supply side, according to the most recent Hogs and Pigs report from the USDA, all hogs and pigs in the United States are down 4% from the year prior.
Two events occurred in 2021 which contributed to the reduction of supplies. Porcine reproductive and respiratory syndrome (PRRS) affected the American hog in 2021. PRRS is a disease that has two major outcomes: reproductive impairment and respiratory disease in pigs of any age, ultimately leading to increased death loss.
Something else that popped up on the Hogs and Pigs report was the fact that there was not an increase in the breeding herd. Meaning that after dealing with PRRS, and even with an increase in prices, U.S. producers elected to not expand the herd.
Now heading into 2022, PRRS is already again rearing its ugly head on hog farms across the Midwest, which may lead to additional reductions of supplies. From a global perspective, African swine fever remains a potential threat. Even without the issue of disease, first quarter hog production in the United States is already expected to be down 3.9% from last year, with second quarter hog production is also expected to be lower, down 2% from last year.
From a technical chart perspective, continuous monthly hog futures charts posted a bullish key reversal in December. This can be viewed as a technical bottoming signal; however, fresh bullish news is needed to now keep that upward momentum going.
If you remember the initial market reaction to COVID in early 2020, rice futures screamed higher as consumers raced to the grocery store to buy toilet paper and other grocery staples like rice. Store shelves were emptied, and prices peaked due to a combination of sudden demand and market euphoria. Since peaking at $23.56 per cwt in June of 2020, rice futures bottomed at $11.21 per cwt just one month later. Over the past year rice futures have been inching higher with prices most recently near $14.50 per cwt.
A few things in rice have my interest, technically speaking. On a continuous monthly chart, prices posted bullish reversals in both September 2021 and November 2021. This signifies that potentially a large price low might be trying to occur, with a potential upside target of closer to the $17.00 per cwt area in the coming months should the fundamentals dictate.
Fundamentals are starting to lean friendlier to rice futures. According to the most recent USDA report, ending stocks are now pegged at 33 million cwt, down 1.5 million cwt from the month prior, and down a whopping 24% from year-ago levels. Global ending stocks are starting to slowly trend lower as well due to lower production in Mali and Sri Lanka while global consumption continues to trend higher at 510 million tons which, according to the USDA, is a record.
And I have a sneaking suspicion that demand for U.S. rice will increase in the coming months by the country’s consumers as grocery bills are up dramatically from year-ago levels due to inflation. If the consumer is on a limited budget for groceries, substitutions will need to be made and creative tweaks will be made in the kitchen to accommodate. I feel rice will be the recipient of increased demand due to its overall lower cost, ease in use of cooking, and ability to fill plates of hungry children and families.
Lastly, planted rice acres in the United States seem to hover between 2.5 and 3 million acres. Converting a field to rice production is a process due to the unique irrigation methods, water management, and levees involved in the growing process. Therefore, if demand increases, supply may be slow to follow on an increase simply due to the nature and extent that encompasses rice production.
The January USDA report set the supportive tone for soybean futures for first quarter of 2022. On the report, for the 2021-22 crop year, the USDA lowered 2021-22 harvested acres to 86.3, down from 86.4 million acres while increasing yield to 51.4 bushels per acre (up from 51.2). The result was an increase in production to 4.435 billion bushels, up from 4.425 billion in December. There was no change to the demand categories on the report. The ending result was a slight increase in ending stocks, now pegged at 350 million bushels, up from 340 million bushels in December.
Impressive at the time was the fact that the USDA did acknowledge the challenging growing conditions in South America by reducing production for both Argentina and Brazil. Yet, without any immediate bullish news from the report, March 2022 soybean futures had a 50¢ pullback after the January report was released. With hindsight, that 50¢ break was the location where buyers stepped in. Soybean futures then rallied over $1.50 in just two weeks’ time.
While the USDA report showed little fresh news to spur bullish momentum, traders quickly turned their focus instead on the adverse weather conditions in South America. Images surfaced on social media to suggest that the mid- to late-January rains were not going to fix the dire condition of the heat and drought-stressed crop. Many traders and economists are suggesting that the South American crop might actually be smaller than year-ago levels. With global ending stocks already trending lower, any hint of further demise in South American soybean production will reduce global supplies and global carryout.
How high soybean prices can go is a question that many producers are pondering. For March 2022 the next technical upside target is $15.00. A close above $15.00 points to a final potential technical “swing objective” to $16.00 for front month futures contracts. Additional news is needed to justify $16.00 futures, and that news would have to come in the form of confirmed smaller South American soybean production and an increase in U.S. exports of soybeans, soymeal, and soybean oil.
Switching to corn, since digesting the January 12 USDA report, March 2022 corn futures found support at $6.00 with short-term resistance at $6.40. For March 2022 corn futures price to rally substantially higher than $6.40, a combination of four factors would likely need to occur:
- A lower U.S. dollar to help attract export business
- Stronger exports to actually occur then
- Continued poor weather in South America
- Continued fight for acres in the U.S. this spring
Let’s take a closer look.
Corn exports are now pegged at 2.425 billion bushels, down from 2.5 billion in the December 2021 USDA report. But will this change now that South American weather is in question? What if Ukraine is tied up with Russia, and not available to export any corn to feed hungry China? Will U.S. exports of corn increase more than expected in the weeks to come?
China corn prices remain very high, near a record $11.00 per bushel and this might encourage more imports of corn soon. So far for this marketing year, China has imported an estimated 13 million metric tons of U.S. corn. According to the USDA, China will likely be importing nearly 26 million metric tons of corn this year, primarily from the United States and Ukraine.
Looking to South America, the first crop corn grown in Brazil is likely needed to stay IN South America and will likely not be available to export. Hence, the focus then shifts to second-crop corn in Brazil. Remember that the Safrinha crop accounts for 70% of total Brazil production, and this is the crop that’s exported in late July or early August.
The world will be watching China in the weeks to come. Will they be importing more U.S. grain due to the smaller South American crops? February will be a busy month in China. Be aware that the Chinese New Year begins in early February, and traditionally the Chinese do very little grain buying during that time as they are celebrating. Next is the Olympics, which will consume China’s attention for the duration of the month. We have no idea if China will solely focus on the Olympics or make time for other political events. What happens when the Olympics are done and China doesn’t have to put on a good face to the world anymore? These are unknowns for grain prices.
This week it was said that U.S. corn is still some of the cheapest in the world. Spot European cash corn is said to be near $7.40, while Brazil spot cash corn is near $7.80. This should also help increase exports in the near term.
Lastly, it is important to note that a close above $6.40 on the March chart, from a technical standpoint, does potentially point to $7.00 futures prices. The question would be if there is enough time for the March 2022 contract to achieve that before expiration, or is it something that the May 2022 contract will do? Looking at a continuous weekly chart of only the May 2022 corn futures, there is a gap on the chart that would be filled if May 2022 corn prices could rally to $6.85.
It is again exciting times for American agriculture, friends. Stay vigilant of the pricing opportunities in front of you. While the outlook is currently friendly, many political events could occur in February that could change the tone of the market quickly. Expect volatility, dramatic price ranges, and many twists and turns in the weeks to come. Ultimately, time will tell. Yet rice, corn, soybean, and hog futures may have some serious potential.
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