Historic Cattle Supply Holes & Crop Market Volatility

About this episode

In this episode

1. 0:25Setting up a volatile winter
2. 1:35Cattle: the lowest September placements on record
3. 3:46Packing capacity and the price ceiling
4. 4:39Protecting a $1,200-a-head margin
5. 5:29Corn: the NASS correction and the 181.2 yield
6. 8:01The $9.6 billion margin-call math
7. 9:17Soybeans: China buys as Brazil plants early
8. 12:01Wheat: a 50-year low, and still falling
9. 14:40Hogs: a seasonal glut and the crush spread
10. 17:12Wrapping up, and the $8 billion diesel aid

Episode summary

1. 0:00Speaker AWelcome to the Ag Optimus Market update, brought to you by Ag Optimus at www.agoptimus.com. Please remember that OTC products, futures and options trading involves substantial risk of loss and are not suitable for all investors and producers. Past performance is not indicative of future results, and all trading, marketing and hedging decisions are the sole responsibility of the producer.
2. 0:21Speaker BYeah, and with everything going on right now, those risk management decisions are more critical than ever.
3. 0:25Speaker AAbsolutely. So imagine a theoretical nine point six billion dollar margin call, uh, hitting the commercial grain industry all at once.
4. 0:34Speaker BIt's a terrifying number to even think about, right?
5. 0:36Speaker AToday we are looking at how a massive liquidity gap in corn, a fifty year supply low in wheat, and a historic biological hole in cattle placement, are setting up an incredibly volatile winter across the agricultural sector.
6. 0:52Speaker BA very volatile winter, yeah.
7. 0:54Speaker AWelcome to this deep dive into the latest USDA WASDE reports, the recent NASS data revisions and the underlying mechanics driving five key ag commodities. Our mission today is to unpack the data for you and figure out what it potentially means for your basis, your placements and your hedging strategies.
8. 1:10Speaker BAnd it really is a critical period to be analyzing these mechanics. We're looking at a landscape defined by just stark contrasts. Totally. We have record profitability in specific livestock sectors, historically tight domestic supplies and others, and then global trade dynamics heavily dictating local cash prices.
9. 1:27Speaker BThe goal here is to connect these broader macroeconomic forces directly to the risk management decisions you're making on the ground.
10. 1:35Speaker ALet's start with the most dramatic biological supply shift on the board right now. We are watching a massive supply hole forming in the beef sector that is fundamentally altering the math for feedlot managers and buyers.
11. 1:48Speaker BOh, without a doubt.
12. 1:49Speaker ALooking at the October Cattle on feed report, the data is just heavily skewed. Placements plunged twelve point one percent in September compared to last year. Right. And to put that in context, that is a record low for the month of September since this specific data series began.
13. 2:03Speaker AYou know, back in nineteen ninety six, the total on feed inventory is hitting zero point four percent below last year, and marketings of fed cattle were down six point six percent.
14. 2:14Speaker BThe magnitude of that placement drop is really what stands out to me. We aren't just looking at a blip here. We are looking at the delayed biological consequence of multiple factors converging all at once. Yeah. The Feeder Cattle Futures Board is reflecting this tightness to trading up near three hundred and forty eight dollars, with live cattle hovering between that two twenty nine and two thirty five dollars mark, which is huge.
15. 2:35Speaker BIt is for the cow calf operator. We are seeing estimates from places like North Dakota projecting profitability up to one thousand two hundred dollars per head, which is phenomenal. But I think it's critical to look at the mechanics of why that placement number dropped so severely.
16. 2:50Speaker BDefinitely, we are dealing with an overall smaller calf crop down about half a million head. But beyond that, the earlier drought conditions across the plains severely degraded pasture conditions, right, which forced producers to move early. Exactly. They were forced to pull yearling placements forward off grass much earlier in the summer than they traditionally would.
17. 3:12Speaker BThat early movement essentially hollowed out the availability for September. Furthermore, you have to factor in the slight increase in heifer retention when operators start keeping a few more females back to rebuild the breeding herd, those heifers are immediately removed from the feeder supply chain.
18. 3:41Speaker BThat makes sense. Yeah. Combine that biological retention with the slower pace of Mexican imports we are tracking at key southern border ports, and you create a severe deficit in feedlot ready animals. In our opinion, this data could indicate a very tight fed cattle supply hole extending well into the first and second quarters of twenty twenty seven.
19. 3:46Speaker BI do want to push back on the ultimate price ceiling, though. Okay. Sure. We know that packing capacity has been substantially reduced over the last year due to plant closures and margin compression at the Packer level. Does this massive drop in placements actually guarantee a run back to all time high cash prices?
20. 4:03Speaker BThat's a fair question, because doesn't the reduced slaughter capacity effectively act as a hard cap on how high the Packers are willing to bid, simply because they can't physically process the volume.
21. 4:14Speaker AThe reduced slaughter capacity will likely temper the absolute ceiling. Yes, it creates a technical resistance level near the top. We might not eclipse previous all time highs simply because that processing bottleneck limits peak throughput, right? However, historically we've seen this exact type of supply setup provide a very solid sustained spring rally.
22. 4:34Speaker AThe underlying shortage of animals remains the dominant fundamental driver, even with tighter shackle space.
23. 4:39Speaker BWhich brings us to the risk management strategy. When you are looking at a potential one thousand two hundred dollars per head margin, you have to actively protect that historic profitability because headlines can whipsaw this market in a heartbeat. Oh, absolutely. A sudden macroeconomic shift or a geopolitical event and the board just drops.
24. 4:57Speaker AExactly. Locking in downside price risk is absolutely critical right now. Producers should strongly consider hedging via put options or short futures. You pay the premium or manage the margin to leave your upside open, but you establish a strict floor under that historic margin.
25. 5:15Speaker BIt comes down to basic asset protection. When the valuation of those calves reaches these historic percentiles, leaving them unhedged is an outsized risk. Protecting them on paper ensures the physical operation can weather any sudden technical sell offs.
26. 5:29Speaker AYeah. Well said. Now, while the pasture dynamics are generating record profits, the feed side of the livestock equation is telling a completely different story. Totally different. Let's look at corn where a vast domestic supply is completely altering the liquidity requirements for commercial storage.
27. 5:44Speaker AWe have to start with the recent data correction.
28. 5:48Speaker BRight? The October update.
29. 5:50Speaker AYeah. Following the October crop production report, NASS identified a processing error regarding September. Corn plant populations and ear counts in Kansas and Nebraska.
30. 6:00Speaker BThe error specifically involved the acreage weights used to combine the irrigated and non-irrigated objective yield observations in those two states.
31. 6:08Speaker AAnd I think it's worth noting here that when you aggregate millions of complex field level objective yield measurements on a national scale, mistakes happen. Statistical anomalies are going to occur.
32. 6:20Speaker BExactly. It's a massive undertaking,
33. 6:21Speaker ARight. And the NASS system is designed precisely to catch these things. The anomaly was flagged, reviewed and revised transparently. The process worked exactly as it should. Yep. Following that revision, the October WASDE report held the national yield forecast at a very strong one hundred and eighty one point two bushels per acre, but surprised the market by bumping planted area up by one point four million acres to ninety eight point seven million acres,
34. 6:47Speaker BWhich is huge.
35. 6:48Speaker AYeah. Prices have been facing intense harvest pressure as a result, With December futures grinding down around four fifty,
36. 6:55Speaker BThat acreage bump is adding a massive amount of physical bushels to an already heavy balance sheet. But the one hundred eighty one point two bushel per acre yield number is really what continues to heavily influence the board.
37. 7:07Speaker AI have to challenge that national yield number, though, based on what we are seeing in the field. Okay. We are looking at crop ratings where seventeen percent of the corn is actively rated poor to very poor. Farmers on the ground, especially those who ran early, have been reporting five to ten percent yield drops in drought stressed areas.
38. 7:26Speaker AMechanically, how are we potentially looking at a national average pushing past one hundred and eighty one bushels per acre with those localized failures?
39. 7:35Speaker BIt comes down to the physiological timing of the weather in the highest density production zones. While the broader drought maps look severe. States like Nebraska and South Dakota received extremely timely rains precisely during the critical grain fill stages in August. Oh, okay. Yeah.
40. 7:50Speaker BThat late season moisture maximized kernel depth and test weights in those high production areas. And that specific heavy test weight is mathematically offsetting the yield drag from the drought stricken areas.
41. 8:01Speaker ASo the heavy test weights in the good zones are carrying the national average. Exactly. Looking at next week's outlook, the physical grain movement is creating a massive financial dynamic. Corn currently offers a favorable carry structure, meaning the market is willing to pay you to store it in the bin, right?
42. 8:20Speaker AHowever, commercial grain merchandisers and elevators are currently holding massive net short futures positions to hedge this incoming physical inventory.
43. 8:30Speaker BAnd this is where the macroeconomic risk really escalates. A theoretical one dollar rally in the grain complexes right now could potentially generate nine point six billion dollars in margin calls across the commercial grain industry. It's wild. The physical grain in the elevator gains cash value, but that gain is illiquid.
44. 8:47Speaker BIt isn't realized until the grain is physically shipped and sold. Meanwhile, the loss on the short paper position has to be paid in cash to the clearinghouse immediately.
45. 8:55Speaker AThat creates an incredible liquidity gap. So for a producer managing their post-harvest storage strategy, it isn't just about finding bin space. You have to factor in the rising costs of interest drying and potential margin requirements. Definitely, hedging your own physical inventory with futures can help manage that liquidity gap, allowing you to stay flexible while navigating the costs of carrying physical bushels into the new year.
46. 9:17Speaker BBalancing your physical storage constraints with your financial exposure is just paramount. Right now, the carry structure is a tool, but it requires capital to execute properly. Very true. While corn's favorable carry structure encourages producers to lock the bin doors, the soybean market requires a completely different logistical approach.
47. 9:37Speaker BYeah. Night and day difference. The short term storage calculus for soybeans has radically shifted due to a sudden influx of international buying.
48. 9:45Speaker ASoybean futures recently bounced back from a two month low, moving back toward twelve dollars fifty six cents and effectively snapping an eight session losing streak. The major catalyst was a two point one eight million metric ton purchase by China, which puts China at over sixty percent of their twenty five million ton U.S.
49. 10:00Speaker APurchasing target. But we are still staring down a massive domestic crop. The WASDE projected US soybean production at four point five six billion bushels.
50. 10:12Speaker BRight. It's a huge crop.
51. 10:14Speaker ASo we have this tension between massive harvest supplies and a sudden violent spike in export demand.
52. 10:20Speaker BTo add to that tension, the field work is crossing the sixty four percent completion mark. So the peak harvest pressure is beginning to ease. However, the window for U.S. export dominance is potentially narrowing faster than usual because of South America.
53. 10:34Speaker AExactly. South American planting is progressing incredibly fast this year. Brazil is already twenty six percent planted, which is well ahead of last year's pace.
54. 10:43Speaker BLet's look at the mechanics of why that Brazilian pace matters so much right now for our listeners. I always think of this soybean market like a high speed conveyor belt.
55. 10:52Speaker AThat's a good way to look at it.
56. 10:53Speaker BUnlike corn, the lack of carry in the soybean market means you can't comfortably store it and wait for better basis. You have to keep those bushels moving down the conveyor belt, either straight to the domestic crushers or onto a vessel at the export terminals.
57. 11:07Speaker AYeah, and the soil moisture profiles and key states like Mato Grosso were highly favorable early on, allowing Brazilian producers to deploy their seeders rapidly. Right. If their crop gets established this quickly and the weather holds, global buyers will shift their origination focus south much earlier in the calendar year.
58. 11:25Speaker AYou just cannot afford to let the U.S. conveyor belt back up while waiting on a price rally that might not materialize once South American beans hit the water.
59. 11:33Speaker BSo for risk management, producers really need to capitalize on this current export momentum and expanding domestic crush margins. Consider using futures to potentially lock in prices on these temporary harvest time demand rallies? Absolutely.
60. 11:47Speaker ABecause once the South American crop is securely in the ground, the velocity of this conveyor belt could slow down significantly. In our opinion, being proactive on paper during these specific demand spikes is crucial to managing the lack of carry in the market.
61. 12:01Speaker BYeah. Now, while U.S. soybeans are currently capitalizing on a tight export window, the wheat sector is suffering the exact opposite fate. The global dynamics here are proving that severe domestic supply friction does not always translate to higher cash prices.
62. 12:18Speaker AIt's a tough situation.
63. 12:20Speaker BThe U.S. wheat balance sheet is historically tight. The latest WASDE report showed US wheat production dropping to one point five three billion bushels,
64. 12:28Speaker AWhich is the smallest U.S. wheat crop since nineteen seventy.
65. 12:30Speaker BExactly. We are looking at a fifty year low in production. We also have an active drought, stressing the winter wheat seeding in the plains right now. If we rely solely on domestic supply and demand fundamentals, this market should be highly supported.
66. 12:45Speaker AYou would think so, yeah.
67. 12:46Speaker BYet futures have been falling with Chicago Soft Red Winter trading around six dollars twenty two cents and Kansas City hard red Winter down around six dollars sixty. The USDA even reduced our export forecast by twenty five million bushels. Why the drop?
68. 13:01Speaker AThe domestic fundamentals are bullish, but the global mechanics are overriding them. Strong harvests in Russia, Turkey and Ukraine are just flooding the global market. Russia in particular is aggressively pushing exports to maintain cash flow, heavily discounting their free on board offers out of the Black Sea.
69. 13:18Speaker ATheir sheer volume is easily offsetting the production drops we are tracking in places like Australia and Pakistan. Because of this, US hard red winter wheat is currently uncompetitive in global tenders.
70. 13:29Speaker BThis is a prime example of how markets naturally have their ups and downs. Fundamental bad news domestically doesn't guarantee a rally if algorithmic selling and offshore supply take over. Very true. We are seeing trend following funds heavily shorting the wheat market. Once the charts break below key technical support levels, those algorithms accelerate the selling pressure entirely, ignoring the fifty year low in the US harvest.
71. 13:53Speaker AYou also have to consider the currency impacts, where a strong US dollar further penalizes our export competitiveness against those Black Sea origins. So to manage that risk, growers must consider forward hedging opportunities. You can use futures to manage your risk. In a market where technical algorithm driven selling is outweighing domestic fundamentals, right?
72. 14:13Speaker AIf the global geopolitical landscape is dictating your local elevator price, you must utilize paper protection to insulate your balance sheet.
73. 14:22Speaker BRelying on a domestic drought to save your basis is a dangerous game. When Russia is dictating the global floor, forward hedging removes that specific geopolitical exposure. Definitely. Let's transition from the highly technical, globalized wheat trade back to the strict biological cycles of the livestock sector.
74. 14:40Speaker BLooking at lean hogs, The pork industry is navigating an inverted setup compared to cattle. Yeah, quite the opposite. Instead of a supply hole, they are grinding through a massive seasonal supply glut.
75. 14:53Speaker AThe physical market is incredibly heavy right now. Daily slaughter is running aggressively around four hundred and sixty two thousand head.
76. 14:59Speaker BThat's a lot of inventory.
77. 15:01Speaker AIt is. But despite that volume, pork cutout values are holding resiliently around seventy four oh nine, heavily supported by strong export trade momentum. However, December lean hog futures are sitting down at sixty five fifty seven, reflecting the weight of this immediate Q4 supply.
78. 15:19Speaker BThe nearby market feels heavy, but the leading indicators are signaling a shift. The recent USDA Quarterly Hogs and Pigs report showed a lower June to August pig crop, paired with reduced farrowing intentions for the September through November period.
79. 15:33Speaker AThose reduced farrowing intentions are the critical metric to watch, right? While the market is currently clearing massive inventory, those cutbacks in the breeding cycle could indicate much tighter supplies and potential upward price pressure by the first half of twenty twenty seven,
80. 15:46Speaker BWhich makes auto margin protection vital for feedlot managers who are staring at volatile corn and soybean meal input costs alongside this heavy nearby hog supply. Can you break down practically how a manager calculates their protection on paper?
81. 16:03Speaker ASure. This is where executing the hog crush spread becomes standard operating procedure. You lock in the gross feeding margin, which is your return per hundredweight, above the cost of feeder pigs, corn and soybean meal. Months before the physical animals go to slaughter. Okay.
82. 16:19Speaker AYou accomplish this by buying corn and soybean meal futures to cap your feed costs, while simultaneously selling lean hog futures to floor your carcass value.
83. 16:28Speaker BSo historically, we've seen this specific ratio trade executed as a seven three one spread exactly seven three one, meaning selling seven lean hog contracts against buying three corn contracts in one soybean meal contract.
84. 16:42Speaker AThat's it. It allows producers to lock in a mathematically favorable feeding margin on paper, totally removing the risk of feed costs spiking or cut out values collapsing during the physical feeding cycle.
85. 16:54Speaker BIt's an essential strategy precisely because it takes the guesswork out of the biological timeline. You aren't speculating on flat price. You are locking in the specific relationship between your inputs and your final product,
86. 17:06Speaker AWhich is exactly what sound risk management should be protecting the margin, not guessing the market direction.
87. 17:12Speaker BAbsolutely. Well, we've covered a tremendous amount of ground today analyzing how a historic drop in cattle placements, massive short positions in commercial grain, and aggressive Black Sea wheat exports all directly impact local profitability.
88. 17:24Speaker AA lot of moving parts.
89. 17:26Speaker BYeah. And navigating these underlying mechanics requires strict discipline and a willingness to separate physical bin space from financial exposure. Which brings me to a final thought for you to ponder. This week we discussed the massive liquidity gap commercial grain merchandisers and farmers might face this winter regarding storage costs and margin calls.
90. 17:44Speaker BYeah, well, with the newly announced eight billion dollars diesel farm aid arriving in November, how might this sudden influx of cash change the way the industry handles those liquidity gaps?
91. 17:55Speaker AThat's a great question.
92. 17:56Speaker BWill it provide the capital bridge needed to comfortably hold physical inventory deeper into the new year, or will it simply delay the inevitable market clearing? Something to mull over as you monitor your storage costs and your feed bunks this week?
93. 18:08Speaker ADefinitely something to watch if you were looking to build customized strategies to navigate these specific market dynamics. Visit www.agoptimus.com. Welcome to the Ag Optimus Market Update, brought to you by Ag Optimus at www.agoptimus.com. Please remember that OTC products, futures and options trading involves substantial risk of loss and are not suitable for all investors and producers.
94. 18:32Speaker APast performance is not indicative of future results, and all trading, marketing and hedging decisions are the sole responsibility of the producer.