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Closing Comments

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Closing Comments

Corn

Corn lacks direction ahead of harvest after USDA dashed bullish hopes near-term.

December corn traded a 34-cent range over the past week, hitting its high on Monday as fund money searching for an asset class with a story began buying into the possibility that USDA would cut its yields for this year’s crop due to excessive rain that damaged the crop. Fund managers were naïve to USDA’s tendency to release bearish reports in which it raises yields in its August estimate in wet years (1993 being the exception), before lowering yields in follow-up reports.

As such, USDA caught fund managers leaning the wrong way, leading to a collapse of the market as they rushed to short (sell) the market. Those holding short positions pocketed nice profits when they unwound their positions on Thursday, providing a nice bounce. However, data to support a sustained rally will likely be lacking until combines roll a few weeks from now.

The Pro Farmer tour of the Midwest will be closely watched by the trade. It’s the last of the major tours, and the most closely followed of the tours due to its long history. However, its methodology is similar to the other tours and we should not expect any earth-shattering results that differ from past tours. Even so, the tour provides our best opportunity to date to assess disease presence in the crops. A number of experienced agronomists are expected to be on the tour, providing insight on whether disease presence is above normal, and if so, the scope of any potential disease problems.

Otherwise, look for this market to continue to chop around searching for direction. Traders appear reluctant to push prices to new lows ahead of seeing harvest results. However, sustaining a rally needs bullish fodder on crop problems, which is currently lacking ahead of harvest. Corn prices received a boost at times to close out the week from spread unwinding with soybeans, but energy was otherwise lacking, albeit with a bit of an upward bias for much of the session.

Soybeans

Soybeans struggle following USDA’s crop report.

It wouldn’t take much of a decline in yields to make soybean fundamentals turn friendly with some energy. Some fund managers were counting on that ahead of USDA’s crop report, desperately looking for an asset class with a story amid struggling commodity and equity markets overall. They had spread soybeans against corn and wheat ahead of the report, believing that the oilseed had the best chance at a bullish story due to early-season weather problems.

USDA caught these traders leaning the wrong way Wednesday, with many traders not understanding the agency’s tendency to raise yields in its August report in wet years. The market sold off hard, touching the 70-cent daily limit lower at one point. A bounce ensued on Thursday as traders holding short positions took profits on those positions. They closed out the week by unwinding some of those soybean/corn and soybean/wheat spreads, producing double-digit losses once again, although the November contract held above Thursday’s low.

The trade will be watching the Pro Farmer crop tour closely over the coming week. Tour participants will be merely touching the northern fringes of the area with perhaps 5 million acres of short-undeveloped soybeans due to late planting as they stick to their normal route for consistency purposes. Soybean yields otherwise are difficult to calculate, but the trade will be watching for pod counts emerging from tour participants. I’ll be listening for reports of Sudden Death Syndrome, white mold and other diseases that can threaten pod fill.

Otherwise, soybeans will likely struggle to sustain gains ahead of combines rolling in a few weeks. However, I don’t see a lot of interest among traders at this point in pressing November soybeans below support near $9.00 per bushel.

Wheat

Wheat tries once again to confirm a bottom.

U.S. wheat continues to be over-priced on the global market, with the exception of those market where we have a clear freight advantage. However, end users within that scope tend to step up their coverage when prices break, providing an increase in demand near recent lows. As such, traders are reluctant to push prices lower, but sustaining a rally also becomes difficult without help from corn or elsewhere.

Global wheat stocks are more than adequate to meet demand, with no major weather threats currently capturing the trade’s attention. Domestic stocks for U.S. hard red and soft red winter remain large as well. Demand has been good for hard red spring for the most part, but a good crop is expected to be more than enough to meet that demand. As such, look for wheat to chop around in a volatile sideways pattern while waiting for further direction and or lead from the other markets. Wheat needs a rally in the corn market this fall.

Beef

Live cattle futures remain under pressure while waiting for cash trade.

Live cattle futures took a roller coaster ride over the past week, but with a downward bias. The high point came on Monday, after stronger than expected cash trade the previous Friday for the second week in a row. However, worries about waning demand amid heavy sustained beef imports capped buying interest in the October contract above $149. That led to a sharp sell-off on Wednesday. Prices reversed higher again on Thursday when chart support held at $146 amid the discount in futures to the cash, but follow-through buying was limited, with the October contract dropping below $146 to close out the week.

Futures took a hit late morning Friday when news reached the market that Tyson will be closing its Denison Iowa plant. Prices plummeted more than $2 per cwt in a matter of minutes, with traders interpreting the announcement at bearish for the industry. Prices recovered from their lows, but the probe below $146 basis October did some damage. Even so, the recovery was based on the realization that recent expansion at two other plants in the region will likely be sufficient to absorb the business.

The bottom line is that domestic supplies remain tight, but a strong dollar continues to limit exports while encourage active imports. Exporters sold 12.3K metric tons of beef in the week ending August 6, up from 5.9K tons the previous week and up from 9.4K tons in the same week last year. Actual shipments slipped to 10.4K tons during the week, down from 10.5K the previous week and down from 14.0K metric tons in the same week last year.

Beef imports rose to 22,290 metric tons in the week ending August 8, the latest data available. That total was up from 21,623 tons the previous week and up 18% from the 18,861 tons imported in the same week last year. The total brings 2015 year-to-date beef imports to 747,438 metric tons, up 30% from the previous year’s pace. Beef production year-to-date is down 4.5% year-to-date, while beef imports to date are up 30%. A sharp drop in the dollar could rapidly change these dynamics, putting the focus back on tight supplies of slaughter-ready cattle, but thus far no such drop is seen.

Total beef movement on the market in the week ending August 7 totaled 6,292 loads, up 20 loads from the previous week. However, the total remains below the 7,385 loads that moved four weeks prior.

Product movement on Thursday fell to just 102 loads, down from 137 loads the previous day and down from 136 loads the previous week. Choice cuts were up $1.07 to $245.09 per cwt, while Select cuts were down $0.32 to $235.13 per cwt. This pushed the Choice/Select spread to $9.96 per cwt, its highest level since June 2. Movement at mid-morning today was quite slow at just 58 loads, with Choice cuts down $0.48, while Select cuts slipped $0.35 per cwt.

Packer margins are believed to be near $50 per head, but packers continue to keep the chain speed slow to protect their margins, anticipating declining product prices beyond the last week of August. The Friday kill was pegged at 103,000 head, down 4,000 on the week and down 11,000 head from the previous year. Saturday’s kill was estimated to be 8,000 head, up 7,000 on the week, but down 2,000 head from the previous year.

The week’s total slaughter is estimated at 540,000 head of cattle, up 5,000 head on the week, but down 40,000 from the same week last year. That brings estimated cattle slaughter for the year-to-date to 17.505 million head of cattle, down 1.301 million or 6.9% from the previous year’s pace.

Cash feeder cattle have been hovering either side of the $215 level in recent weeks, while futures trade at a discount on expectations of weakening values. Feeders remain worried that USDA has printed its largest corn estimate, with higher prices down the road that would suppress margins. As such, the charts continue to suggest additional weakness.

Pork

Lean hog futures remain range bound on supply concerns.

Lean hog futures have been on a roller coaster over the past week as well, but the pattern has been opposite of that seen in the live cattle futures market. Follow-through selling pulled futures below chart support to start the week on signs of a softening cash market amid fears that carcass weights will rise next month as demand wanes. Currently we’re seeing product prices remain near 2015 highs due to seasonally strong demand for bacon and USDA purchases for the school lunch program, both of which are expected to decline as we move into September.

October lean hogs held support at $62 per cwt, which was already at a considerable discount to the cash market, leading prices to rally much of the remainder of the week, but run into resistance at $66 per cwt. The deferred contracts though ran into a roadblock on Wednesday when USDA released a bearish corn report.

The sharp break in corn prices led to fears of future supply expansion in the hog industry, leaving the deferred contracts under pressure for much of the remainder of the week. The biggest discount had been in the December contract, with demand expected to be strong enough relative to supply to support higher prices beyond that level. Now traders aren’t so sure about that recovery if corn prices are going to be cheap enough to encourage higher farrowings.

Exporters sold 16.4K metric tons of pork in the week ending August 6, up from 14.2K tons the previous week, but down from 30.3K tons sold in the same week last year. Actual shipments during the week totaled 17.0K tons, up from 16.8K tons the previous week, but down from 22.6K tons in the same week last year.

Pork imports in the week ending August 8 totaled 7,804 metric tons, down 1,018 tons from the previous week, but still up 187 tons from the same week last year. Year-to-date pork imports stand at 263,034 metric tons, up 25,894 tons or 11% from the previous year’s pace.

Hog slaughter numbers are 10 to 13% above year ago levels this summer, with year-to-date slaughter numbers up 7.6% over the previous year. Pork production is up 7.1% year over year, although some of that is being absorbed by demand shifting from higher-priced beef. Even so, traders remain worried by the industry’s tendency to quickly over-expand during times of cheap feed.

Packer margins hovered primarily between $20 and $30 per head over the past week, giving them an incentive to pull hogs forward. However, they were not wanting for supply, leading to cash prices that were generally steady to slightly weaker. The latest 2-day cash index came in at $78.45 per cwt, down $0.22 on the day, down $0.65 over the past four consecutive trading days and down $0.63 over the past week.

The Friday kill was pegged at 409,000 head of hogs, up 14,000 on the week and up 17,000 head from the same period last year. Saturday’s kill is pegged at 108,000 head of hogs, up 23,000 on the week and up 84,000 on the year. That brings the week’s total kill to nearly a four-month high of 2.218 million head of hogs, up 92,000 on the week and up 202,000 head from the same period last year. Year-to-date slaughter is then pegged at 69.920 million head of hogs, up 4.974 million or 7.7% from the previous year.

Product movement Thursday totaled 264 loads, down from 376 loads the previous day and down from 324 loads the previous week. The composite pork product price slipped to $89.42 per cwt, down $0.66 on the day, but still up $0.42 on the week. Movement at midday was weak at 120 loads, but we saw the composite price rebound $0.46 to $89.88 per cwt on strong belly demand that more than offset losses in picnic and butt cuts.

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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