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Closing Comments

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Closing Comments

Corn

Corn futures slash through support amid broad-based selling in the commodity sector.

Cheap prices stimulate demand and we’ve seen that in recent days. USDA’s daily export reporting service reports that Mexico bought 9.1 million bushels of new-crop corn. Furthermore, “unknown destinations,” likely Chinese end users, bought 4.6 million bushels of U.S. grain sorghum, split evenly between old- and new-crop supplies.

It was another bear week for corn prices, with December corn sliding all the way down to $4.02 ahead of the weekend, down from the previous week’s close of 4.3125. Weather over the past week improved, with even some talk in the trade that it was “ideal.” Sentiment turns quickly in the trade when many participants lack an understanding of the agronomics. Wet areas began to dry out, while some pristine areas of the western belt did as well. Regardless, traders are no longer seeing as many pictures of corn covered by standing water and believe that lost yield is being recovered.

We won’t truly know the size of this year’s crop until we harvest it, but a futures market’s job is to anticipate it based upon the information given to it. That flow of information tends to run dry this time of year, but should begin to increase again as we turn the calendar to August.

Crop tours are scheduled on almost a weekly basis in August. Expect widely different results due to the huge variability found even within fields; not just in the southern Midwest, but also in good areas of the western Midwest as well. This year’s variability suggests that a person could spend hours in one field of corn to get an accurate yield estimate, while these tours are trying to make 15 to 20 stops in a day over hundreds of miles of territory. Even so, yield checks followed by early harvest in the southern Midwest should increase the flow of fundamental information in the weeks ahead.

Bottom-picking began to lift corn prices off their lows Thursday after the market came within a stone’s throw of the 50% retracement level for the mid-summer rally at $4.08. It appeared that the market might be trying to carve out a bottom at that point, coinciding with evidence that the broader commodity indices may be doing the same.

However, those indices turned sharply lower again to close out the week on negative economic news from China and elsewhere, dropping to new six-year lows and dragging the grains into sell-stops once again. Now December corn is trying to carve out another low near $4. Trade over the next few sessions should help determine whether it will be able to do so. The Friday close near session lows did little to provide courage to the bulls, suggesting that buying will likely be tepid in early trading on Sunday evening.

Soybeans

Soybean futures succumb to broader commodity selling as upfront demand eases.

Abiove, Brazil’s vegetable industry, estimates that this year’s soybean exports will reach 50.3 million metric tons or 1.848 billion bushels in the current marketing year. That is well above USDA’s latest estimate of 46.8 mmt or 1.720 billion bushels. Even so, USDA’s daily export reporting service revealed that the late-week price break stimulated more demand. The agency reports that China bought another 8.1 million bushels of new-crop soybeans to close out the week.

China and other end users see good value for soybeans at these price levels, after seeing the November contract drop to $9.6325 ahead of the weekend, down from the previous week’s close of $10.0675. The Thursday/Friday collapse slashed through support at $9.70, which represented a 50% retracement of the mid-summer rally.

The sell-off came on trade impressions of improving crop conditions as Midwest weather moderated. Losses in November soybeans accelerated on Thursday after losing support from the soymeal market in the old-crop contracts on a disappointing USDA weekly export sales report. Additional tailwinds came from a collapse of the major commodity indices that include the grain and oilseed markets.

End user buying is seen on this break, suggesting an area of value. In the end, it comes down to the size of this year’s crop and it will be many weeks before that is truly known. The risk in the short-term however, is the risk of disease.

Conditions were ideal for the development of disease this year, but you never know with soybeans whether those diseases will actually develop or not. However, we should start to see an increase in disease incidence over the next couple of weeks if in fact they are going to be a problem. The scope of the disease development will significantly impact the scope of price strength we see over the next several months.

Soybean futures looked like they might be trying to carve out a seasonal low late morning, but selling returned in the final 15 minutes of trade ahead of the weekend to throw cold water on those hopes. A move of November soybeans to $9.52 would represent a 62% retracement of the mid-summer rally. This market needs a shot in the arm quickly to avoid a total collapse. Watch for disease reports over the next two weeks.

Wheat

Wheat continues to seek value on export market amid large supplies.

USDA’s daily export reporting service revealed that Taiwan bought 3.8 million bushels of wheat for delivery in the current marketing year late this week. The total included 2.1 million bushels of hard red spring, 1.3 million hard red winter and 0.4 million bushels of white wheat.

Surpluses of hard red winter and soft red winter wheat are approaching a half-year supply. There are two ways to improve demand in such a situation. Adverse weather can threaten the supply of your major competitors or you can drive prices lower to become competitive with these alternative supplies.

The focus during the mid-summer rally was on the former. A heat dome set up over Europe during grain fill, threatening supplies there. However, yield results have generally been better than average from this year’s harvest, although down from last year’s high levels. The worst drought in decades plagued the Canadian Prairies, but recent showers have removed that threat from the trade’s focus. Even so, this week’s industry tour of the region pegged the spring wheat crop at 38.9 bushels per acre, down 15% from last year’s estimate of 45.7 bushels. The durum crop was pegged at 27.8 bushels per acre, down 32% from last year’s tour estimate of 40.9 bushels per acre.

Even so, trade focus on Canada has been minimal in recent days due to the lack of demand for U.S. wheat. Export demand has been the real problem this summer. Demand for hard red winter and soft red winter has been nearly nonexistent, although demand for hard red spring wheat has been good as end users focus on problems in Canada and anticipated problems in the months ahead in Australia.

Chicago September wheat showed signs of uncovering bargain-hunter buying as the contract approached chart support at $5.02 per bushel. Chicago continues to trade at a premium to Kansas City, although I expect improving demand for hard red winter relative to soft wheat to turn that around as we move into the late summer/fall period.

Poor quality for this year’s soft red winter wheat combined with ample European and Black Sea supplies will likely keep demand for Chicago wheat poor for some time to come. However, global supplies of quality hard wheat are tighter and that should start to improve demand for hard red winter wheat later in the year, although supplies are expected to remain ample.

In the end, we could get a bump in wheat prices if headlines begin to focus on problems in Australia and Canada once again, but an extended rally will likely need to be rooted in strength in corn prices this fall. That’s because planting conditions in the Plains hard red winter wheat belt are expected to be good amid already ample supplies.

Beef

Cattle remain under pressure on supply concerns.

August live cattle finished trade in the week ending April 17 at $146.65 per cwt. Some thought a low was in place. We remained worried that lower prices lie ahead. This week’s cash trade took place at mostly $145 per cwt, with a few at $146 on a live basis. Other cattle moved in Nebraska at $232 on a dressed basis. The weaker cash trade added more energy for the bears, with this week’s trade in the lead August contract dipping below $143, with market bears eyeing support at $138 per cwt.

USDA’s cattle inventory report indicated that all cattle and calves numbers 97.920 million head as of July 1, up 2% from the previous year, but very close to trade expectations. Beef cows are up 3%, but again that was near expectations. Heifers held back for the beef cow herd were up 7%, but that was only slightly above expectations. Dairy producers might take note that heifers held back for the milk herd is up 2%, when the trade was looking for numbers similar to a year earlier.

USDA’s cattle-on-feed report indicated that there were 10.236 million head of cattle on feed June 30, up 2% from the previous year, up slightly from trade expectations. June placements totaled 1.481 million head, up 1% from the previous year, slightly above expectations of 99.6%. June marketings totaled 1.747 million head, down 5% from the previous year, which matched trade expectations.

In the end, supplies of slaughter-ready cattle are tight from a historical standpoint and will likely remain that for quite some time as producers hold back heifers to rebuild the cowherd. However, the supply of beef is not tight. We’ve seen some demand shift to cheaper supplies of pork and poultry, but the strong dollar has also hindered exports while encouraging imports.

The latest data available shows the beef imports totaled 25,547 metric tons in the week ending July 17 as the dollar was rallying toward three-month highs, down a bit from 25,980 tons the previous week, but up 26% from the same week last year. Year-to-date imports total 680,707 metric tons, up 32% from the previous year’s pace, which was higher in its own right as beef prices here soared.

Total beef movement in the same week slipped to 6,832 loads, down from 7,385 loads the previous week. That suggests that total beef movement was easing at a time when imports were rising, indicating that we are meeting a larger portion of shrinking consumer demand with imported beef. As such, I remain concerned about additional downside price risk for fat cattle.

Feeder cattle demand is dropping off sharply on the realization that margins are deteriorating for feeding cattle. Fears of higher corn prices combined with declining fat cattle prices have feeders moving away from the sale barn. August feeders are trading just below $210 per cwt, but could see significant additional losses if corn prices rise again this fall as I anticipate. The cash index is at a premium to the board, but it is dropping quickly. The latest 7-day index came in at $216.09 per cwt, down $0.72 on the day and down $6.94 over the past five consecutive trading days in which the index has fallen.

The Friday kill is pegged at 96,000 head of cattle, down 6,000 had from the previous week and down 11,000 head from the previous year. The Saturday kill is estimated at 7,000 head, up 4,000 from the previous week and up 1,000 from the same period last year. That puts the week’s estimated slaughter at 539,000 head of cattle, up 1,000 from the previous week, but down 33,000 from the same period last year. As such, year-to-date slaughter is pegged at 15.898 million head, down 1.178 million or 6.9% from the previous year’s pace.

Product movement on the spot daily market dropped to 129 loads Thursday, down from 188 loads the previous day and down from 186 loads the previous week. Choice cuts were down $0.33 to $232.59 per cwt, while Select cuts were down $0.39 to $227.96 per cwt. That pushed the Choice/Select spread to a four-week high of $4.63 per cwt, up from $4.57 the previous day and up from $3.13 the previous week. Movement at mid-morning today was slow at 51 loads, with Choice cuts down another $1.59 to $231 per cwt, while Select cuts firmed $0.64 to $228.60 per cwt.

Pork

Hog market seeks an areas of value while waiting for clearer direction from the corn market.

Midwest cash hogs were mostly steady to soft this past week, although they finished the weak steady across the region. The cash market shows signs of value with supply and demand in good balance, but traders must discern future value.

The latest CME 2-day lean hog index finished the week at $78.93 per cwt, down $0.33 on the day and down $1.66 over the past six consecutive trading days in which it has been in decline. Yet, packer margins are estimated at roughly $13 per head, double where they were the previous week as product prices firm. That provides incentive to pull more hogs through the plant, but packers have not had to pay up because the supply being brought to them is ample.

The Friday kill was pegged at 409,000 head of hogs, up 34,000 from the previous week and up 105,000 head from the same period the previous year. Saturday’s kill is pegged at 53,000 head, up 21,000 head from the previous week and up 52,000 from the same period the previous year. As such, the week’s slaughter is estimated at 2.107 million head of hogs, up 25,000 from the previous week and up 244,000 head of hogs from the same period last year. Year-to-date slaughter is pegged at 63.467 million head, up 4.335 million or 7.3% from the previous year’s pace.

Product demand overseas is slowing as the dollar rises, while domestic demand is supported by a modest shift in consumer buying away from beef. As such, product prices have trended higher over the past couple of weeks, even though the strong dollar encourages more imports as well.

Pork imports in the week ending July 18 totaled 9,091 metric tons, up from 8,275 tons the previous week and up 12% from the 8,127 tons imported in the same week last year. Year-to-date imports total 237,979 metric tons, up 23,915 tons or 11% from the previous year.

Product movement slid to 253 loads, down from 368 loads the previous day and down from 270 loads the previous week. The composite pork product price rose to $84.75 per cwt, up $0.76 on the day and up $2.10 on the week. Movement at midday was very slow at 112 loads, with the composite price up another $0.74 at $85.49 per cwt.

August lean hogs continue to consolidate just below the 100-day moving average while seeing whether the cash market can turn higher and sustain some momentum in doing so. The December contract is already at roughly a $17 discount to the cash market, reflecting expectations of supply overwhelming demand in the months ahead.

However, the price of corn will likely play a much more significant role going forward. Continued lower prices would suggest broader expansion of the hog herd putting pressure on prices, but we would likely see the deferred contracts turn higher if corn prices go higher as I expect over the next few months.

Closing Market Snapshot

 

All opinions expressed in this commentary are solely those of Water Street Advisory. This data and these comments are provided for information purposes only and are not intended to be used for specific trading strategies. Although all information is believed to be reliable, we cannot guarantee its accuracy or completeness. There is significant risk of loss involved in commodity futures and options trading and may not be suitable for all investors.

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Arlan Suderman | Senior Market Analyst
WATER STREET ADVISORY® | www.waterstreet.org
(316) 729-4599 | asuderman@waterstreet.org

Past performance is not indicative of future results. The information contained in this report is intended for informational purposes only and is the opinion of the writer and may change at any time. This information was compiled from sources believed to be reliable but accuracy cannot be and is not guaranteed. There is no warranty, expressed or implied, in regards to this information for any particular purpose. There is SIGNIFICANT RISK involved in trading futures and or options on futures and may not be suitable for all investors. Investors should consider these RISKS and evaluate their suitability based on their financial conditions. No one should ever consider trading futures or options on futures with anything other than RISK CAPITAL. This information is provided freely and is NOT in the capacity of a trading advisor. NO LIABILITY on the part of the author exists for any trading loss you may incur in the use of this information. Information provided is not to be construed as an offer to sell or solicitation to buy any commodity or security named herein.

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