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Closing Comments

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Closing Comments

Corn

Corn tries to hang on against a tide of selling in the broader commodity and equity sectors.

The Midwest crop tour provided traders with a steady flow of data, much of it supportive, through Thursday, but that flow then dried up. Traders had little else to look to but the outside markets, which were in a major rout. Pro Farmer estimates the U.S. corn crop at 13.323 billion bushels on a yield of 164.3 bushels per acre, down from USDA’s estimate of 168.8 bushels. They actually came in lower than I expected, which adds confidence that our 161.5 bushel yield may be too high.

Global equity markets had seen more than $3.3 trillion of value lost since China devaluated its yuan the previous week before U.S. trading desks opened up on Friday. That rout continued to close out the week, with fund managers shorting (selling) both the commodity and equity markets on fears that the global economy will tumble into recession once again. Fund managers were active sellers of the major commodity indices that include grain and livestock, adding pressure to those markets.

Corn prices tried to hang on amidst the flood of selling, but struggled to do so. Traders are reluctant to build large short positions in the corn market after the past week’s tour highlighted some of the problems with the crop. Those problems appear to be highlighted by satellite imagery that shows rapidly declining photosynthetic activity across all of the Midwest, but especially and specifically in those areas that experienced excessive rainfall in the first half of the growing season. Farmers in those areas are reporting pre-mature death in their corn, bringing the crop to rapid maturity.

Fundamental news will largely be lacking next week, leaving prices vulnerable a bit longer. Some harvest reports from the aforementioned southern and eastern areas will likely be seen next week, but that momentum will likely increase in the first week of September, providing better guidance for the market.

December corn settled more than a nickel lower to close out the week, but was still better than a penny higher on the week. As such, little damage was done by the Friday sell-off, but it remains vulnerable to the outside market forces. Look for reports of prematurely dying corn to increase next week, largely focused on those areas that had excessively wet weather in the first half of the growing season.

Soybeans

Soybeans are hit hard by worries about China’s economy.

Worries about China’s economy are particularly concerning for soybean traders, with China being the world’s largest importer of the oilseed. Yet, data released overnight showed that China’s soybean imports hit a record high in July, with the month’s shipments topping 9 million metric tons at 9.5 mmt (350 million bushels) for the first time on record. South America accounted for the bulk of the shipments to China in July, as they do virtually every July.

Even so, sentiment in the market remains very bearish toward Chinese demand as its economy slides. It’s true that hog numbers are down in China as end users get tired of paying for high-priced reserve corn and liquidate their sows. That should reduce China’s demand for soybeans in the coming year, but I had that built into my balance sheet months ago.

The question is whether China’s economic problems have yet become great enough to cause consumers to back away from pork to return to a starch-based diet. So far the data doesn’t seem to show that. Pork prices are up more than 16% year-on-year, with consumers willing to pay up for meat. As such, soybean demand should continue to surprise the trade’s deflated expectations in the months ahead.

For now, it’s all about caution. Money managers are fleeing the commodity and equity sectors for the relative safety of government bonds. That leaves soybean prices vulnerable in the near-term. I remain confident that USDA’s yield estimate is too high for this year’s crop with acres likely to drop as well. However, many of these factors likely won’t be available to traders in the way of data for several more weeks.

Pro Farmer estimated the soybean crop at 3.887 billion bushels on a yield of 46.5 bushels per acre, just below USDA’s yield of 46.9 bushels. The estimate assumes USDA’s August harvested acreage estimate as well as “normal” weather the remainder of the growing season.

November soybeans finished the week down 27 cents on the week and just above Thursday’s low of $8.88. This market remains vulnerable in the near-term due to extreme pessimism over Chinese demand. Fear is usually worse than reality, and I believe the evidence suggests this the same this time as well.

Wheat

Hard wheat markets hits new contract lows, lacking anything to hold them up.

I’ve well-documented the surplus of global wheat, with U.S. supplies even larger. Wheat prices can still rally this fall, but will likely need help from the outside. That help wasn’t present to close out the week, removing any support from beneath the wheat market.

Chicago September wheat held above key support at $4.90; really not even coming close to testing it amid the broader commodity sell-off. That was certainly encouraging, suggesting that wheat is believed to have value near $5. However, the hard wheat markets tumbled to new contract lows.

Kansas City September wheat traded at roughly a 30-cent discount to Chicago, which is amazing considering the severe quality problems of the soft red crop in the bin, relative to that of the hard red crop. However, speculative traders love trends and they have a solid trend going in the inter-market spreads, keeping them sellers of hard wheat versus soft until proven wrong.

Beef

Feeders tumble the daily limit on economic concerns.

The commodity markets are the closest thing we have to a pure supply and demand market over time. Global markets have been selling off in recent days on fears that a slowing world economy will slow demand for raw commodities. Those fears reached the beef markets to close out the week.

Live cattle futures tumbled Wednesday when cash cattle moved in the northern Plains feedlot belt at $145 to $149, down as much as $6 from cash trade in that region the previous week. Volume was relatively good with feeders holding a larger number carried over from the previous week at higher weights began to panic about slowing demand. Feeders further south in Kansas and Texas held on, with fewer cattle being fed in that region. They were rewarded with sales at $147 to close out the week in relatively light trade, down $3 from the previous week.

The lower cash gave a weaker bias to futures trade. The collapse in the equity markets added fears that demand for steaks will ease in the months ahead if the economy continues to slide. Feeders buying lighter-weight cattle were most concerned about margins, considering that questions linger over the size of this year’s corn crop as well. Feeder futures tumbled the $4.50 daily limit lower as buyers stepped away from the market. The latest 7-day cash index came in at $215.25 per cwt, down $0.72 on the day and down $1.46 on the week.

The Friday kill was pegged at 105,000 head, up 2,000 from the previous week, but down 11,000 head from the previous year. Saturday’s kill was estimated at 6,000 head of cattle, down 2,000 from the previous week and down 15,000 from the previous year. Slaughter for the week is put at just 540,000 head of cattle, matching the previous week’s slow chain speed, but down 56,000 head from the same week last year. Year-to-date slaughter is estimated at 18.045 million head of cattle, down 1.355 million or 7.0% from the previous year.

The dollar plummeted to its lowest level since June to close out the week. That should encourage more exports, while starting to slow imports, especially if that trend holds. However, it will take a couple of weeks to identify those trends should they occur.

Exporters sold just 8.3K metric tons of beef in the week ending August 13 as the strong dollar continues to be a problem. The week’s total was down from 12.3K tons sold the previous week, but was up from a dismal 7.3K tons sold in the same week last year. Actual shipments during the week totaled 9.9K metric tons, down from 10.4K tons the previous week and down from 13.5K tons in the same week last year.

Beef imports rose to 26,916 metric tons in the week ending August 22, a period when the dollar was strong, up 4,626 tons from the previous week and up 8,169 tons or 44% from the same week the previous year. Year-to-date beef imports total 774,330 million metric tons, up 30% from the previous year’s pace.

Domestic movement slowed to 5,846 loads in the week ending August 14, down 446 loads or 7.1% from the previous week. Movement in the spot daily market that week slowed to 565 loads or 9.7% of total beef movement. All of these numbers speak to slowing domestic demand, sluggish exports and a surge in imports that have undermined the cash cattle market. Hopefully, the sharp break in the dollar to close out the week will help reverse some of these trends, but that also necessitates a healthy economy here at home.

Product movement on Thursday slowed to 135 loads, down from 157 loads the previous day, but up from 102 loads the previous week. Even so, it’s been a better week for movement on the spot daily market. Choice cuts slipped $0.32 to $246.46 per cwt, while Select cuts fell $0.86 to $235.58 per cwt. That pushed the Choice/Select spread to a new summer high of $10.88 per cwt, up from $10.34 the previous day and up from $9.96 the previous week. Movement at mid-morning today was routine at 78 loads, with Choice cuts down another $1.69 and Select cuts down $0.76 per cwt.

Pork

Lean hog futures slide as products turn lower seasonally.

Product prices are gaining momentum to the downside, led by a two-day slide in belly prices after setting the pace toward more than one-year highs in recent weeks. Futures prices are already at a big discount to the cash market, but that hasn’t eased the fears of traders worried about rising carcass weights, increased slaughter numbers and slowing demand in the weeks ahead.

Packer margins remain just below $20 per head, encouraging packers to push animals through the plant, running slaughter near four-month highs and increasing the supply of pork at a time when demand is expected to wane.

Friday’s slaughter was pegged at 406,000 head of hogs, up 2,000 head from the previous week and up 63,000 head from the previous year. Saturday’s kill is pegged at 132,000 head, up 24,000 head from the previous week and up 101,000 from the previous year. That puts the week’s slaughter at 2.226 million head, up 13,000 from the previous week, up 224,000 head from the previous year and the largest total since the week ending April 18. Year-to-date kill is pegged at 72.139 million head, up 5.192 million or 7.8% from the previous year.

Midwest cash hogs were mostly steady to close out the week. The latest 2-day cash index came in at $79.09 per cwt, up $0.16 on the day and up $0.64 over the past week, but that follows the previous four days when the index fell $0.65 over a four-day period. The cash index has been incredibly stable over the past several months, while futures traders continue to fear the next crash in prices. Yet, the industry seems to expand every time the market gives it a glimpse of optimism.

Exporters sold a solid 20.7K metric tons of pork in the week ending August 13, up from 16.4K tons the previous week, but down from 24.4K tons sold in the same week last year. Actual shipments during the week totaled 15.6K metric tons, down from 17.0K tons the previous week, but matching the pace seen in the same week last year.

Pork imports during the week ending August 15 totaled 7,984 metric tons, up 180 tons from the previous week and essentially matching the same week the previous year. Year-to-date imports total 271,018 metric tons, 25,884 tons or 10.6% from the previous year.

Product movement slid to 293 loads on Thursday, down from 465 loads the previous day, but up from 264 loads the previous week. The composite pork product price slipped to a three-week low of $87.30 per cwt on Thursday as belly prices lost their strength, down $0.97 on the day and down $2.12 on the week. Movement at midday today was sluggish at 151 loads, with a big drop in belly prices pulling the composite price down another $1.52 to $85.78 per cwt.

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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