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Closing Comments

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Closing Comments

Corn

Exporters sold a strong 40.6 million bushels of corn in the week ending October 16, down from an impressive 75.7 million the previous week, but up from the five-year average for the week of 9.1 million bushels. The past week’s total included 22.7 million bushels going to “unknown destinations.” That probably represents sales to several regular buyers, such as Mexico, Japan, South Korea, etc.

Marketing year sales to all destinations total 719 million bushels, which is 41% of USDA’s target for the year. That compares to sales at this point last year that were 39% of final corn shipments. The long-term average is also that exporters have sold 39% of final shipments by this point in the marketing year that ends August 31. Sales to date exceed the seasonal pace needed to reach USDA’s target by 38 million bushels, up from 25 million the previous year.

Exporters sold 9.2 million bushels of grain sorghum in the week ending October 16, up from 2.1 million the previous week and up from the five-year average for the week of 0.7 million bushels. Sales to China accounted for 7.1 million bushels of the total, while another 2 million went to “unknown destinations,” which very well may be a Chinese buyer.

Marketing year sales to all destinations total 112 million bushels for the year ending August 31, which is essentially twice the previous year’s pace at this point, largely due to China. Exporters have already sold 51% of USDA’s target for the marketing year, whereas they had sold 26% of final shipments at this point last year and the long-term average is 32%. Sales to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 41 million bushels, up from 34 million the previous week.

Ethanol margins remain good, despite a collapse of prices and DDGS values in recent weeks. Domestically, we continue to bump up against the 10% blending wall with gasoline. However, good export demand has kept margins profitable. That will likely continue to be the case, with increased exports to Brazil, in addition to Europe. A Brazilian analysts notes that imports of U.S. ethanol have resumed, due to drought there that has reduced the sugar cane crop. The analyst expects this marketing year’s imports of U.S. ethanol to double to 600 million liters.

Weather conditions are improving in the central and eastern Midwest, after showers in central areas overnight. Where dry enough, farmers are focusing on harvesting soybeans first, providing ongoing support for corn basis in many markets. However, expectations are that we will see that change dramatically once corn harvest progress picks up.

An increase in money flow into the broader commodity sector combined with big gains in soybeans to lift corn prices as well. Yet, December corn continues to struggle at the $3.60 level, which adds significance to this level of resistance.

That could mean that prices will break from this level once cash corn supplies increase and soybean prices break, or it could mean one more leg higher if buy stops are tripped above $3.60. Time will tell, but I can say that fundamentally, it’s difficult to justify holding prices at this level or higher if corn fundamentals play out as expected. Meanwhile, the rally has pushed December 2015 above $4 again.

Soybeans

Exporters sold an impressive 79.6 million bushels of soybeans in the week ending October 16, up from 34.4 million the previous week and up from the five-year average for the week of 33.4 million bushels. Sales to China accounted for 62.5 million bushels of the weekly total.

Marketing year sales total 1.204 billion bushels, which is already 71% of USDA’s target for the entire year that ends August 31. Sales at this point last year equaled 68% of final soybean shipments, while the long-term average is 49%. As such, sales to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 376 million bushels, up from 341 million the previous week.

Soymeal demand has been supporting profitable crush margins, and ultimately the soybean market in recent weeks, due to Argentina’s ongoing economic problems. That spurred soymeal buyers to come to the United States to book their needs early. As such, soymeal sales for the marketing year that began October 1 already total 52% of USDA’s target for the year, whereas the long-term average is 28%.

However, sales in the past week dropped off dramatically to just 23K metric tons, down from the five-year average for the week of 172.3K tons. Some buyers have cancelled previous sales over the past couple weeks, suggesting that soymeal demand may have peaked, although I still expect overall demand to remain solid.

It was a perfect storm for soybeans today. First, it was “risk-on” for the financial markets, which meant that fund managers were looking for both commodity and equity market opportunities, with both sectors pushing higher. Second, USDA surprised the trade with export sales of nearly 80 million bushels for the week ending October 16, even though no flash reports were seen during the week from USDA’s daily reporting system to warn the trade. USDA later admitted that was a mistake.

Finally, option expiration for November put and call options is tomorrow. Open interest is high at the $10 strike price. Traders frequently like to take prices to the strike price with the biggest open interest, but lacked the impetus to do so until the above factors came together today. They now appear to have the necessary dynamics to do so in tomorrow’s trade, assuming that outside factors remain the same.

Longer-term, good soaking rains are expected across dry areas of Brazil starting tonight and extending through much of the next two weeks. This should allow the crop to get off to a good start with high yields anticipated, assuming a favorable pattern holds. If that verifies, it will be difficult to justify these prices fundamentally.

Wheat

Exporters sold just 11 million bushels of wheat in the week ending October 16, as they focus on shipping soybeans and corn over the next several months, and amid strong competition from Europe and the Black Sea. The past week’s total was down from 16.7 million sold the previous week and down from the five-year average for the week of 18.5 million bushels. Brazil was largely absent during the latest week reported.

Marketing year sales to all destinations total 540 million bushels, which is up roughly 27% from the previous year. Last year’s data is absent due to the government shutdown a year ago. Sales to date exceed the seasonal pace needed to reach USDA’s target by May 31 by 9 million bushels, but that is down from 14 million the previous week.

Chicago wheat saw additional short-covering, with the broader commodity sector lifting the market. However, U.S. wheat supplies are more than ample, with prices well-above the global market. However, wheat is now becoming a follower.

Beef

All eyes are on the cash market this week, after cash traded at mostly $164 per cwt on a live basis last week and $258 on a dressed basis. We started the day with packers offering $162, while feeders asked for $168. Feeders apparently held the better hand, as packers continued to raise their bid through the morning, with reports that they were already offering up to $166 in Kansas at midday.

The strength of the cash market held up futures contracts, but traders were also reluctant to test the bearish double top just below $170. They want proof that the cash market is going to sustain this rally, particularly since red meat supplies are increasing again in the freezer and pork prices are dropping dramatically.

Product movement increased to 233 loads Wednesday, up from 136 loads the previous day and up from 212 loads the previous week. Choice cuts were up $1.16 to $251 per cwt, while Select cuts were up $0.14 to $235.07. This raised the Choice/Select spread to $15.93 per cwt, up from $14.91 the previous day and its highest level in nearly a year. Boxed beef movement at mid-morning today was strong at 133 loads, with Choice cuts down $0.66 and Select cuts down $0.49 per cwt.

Wednesday’s USDA cold storage report showed a surprising rise in beef and pork supplies. Total red meat supplies were up 3% on the month, although still down 8% year-on-year. Total beef supplies in the freezer on September 30 were up 8% from August 31, but still down 16% from the previous year.

Beef export sales were impressive amid this fall’s rise of the dollar, but have fallen off dramatically over the past couple of weeks. USDA reports that exporters sold 7.6K metric tons of beef in the week ending October 16, down from 8.0K the previous week and a nine-week low. Actual shipments of previous purchases remains solid at 14.6K tons, up from 14.4K the previous week.

Feeder cattle respected the strength in the fat cattle market today, lacking much fear of higher corn prices. However, the charts suggest that this market remains vulnerable if fat cattle fail to take out the bearish double-top. The latest CME cash feeder cattle index is currently at $240.46 per cwt, down $0.34 on the day and down $3.58 from this month’s record high.

Pork

Lean hog futures continue to consolidate, with December sitting on top of support at $88. Meanwhile, the cash market continues to drop toward the lead contract, suggesting that futures prices are vulnerable to additional weakness. The latest CME 2-day lean hog index came in at $104.17 per cwt, down $1.28 on the day. The index has posted losses for nine consecutive trading days with losses over that period totaling $6.43 per cwt. The Midwest terminal market was mostly $1 to $2 lower again today.

Product prices have been in a free-fall, but showed signs of finally stabilizing today. Product movement was decent for a Wednesday at 435 loads, up from 400 loads the previous day and up from 425 loads the previous week. However, the composite pork product price was down another $2.88 to $101.16. It’s the lowest level for the composite price since late August. The composite price has been down for the past 11 trading days, with losses over that period totaling $20.41 per cwt. Movement at midday today was good at 240 loads, with the composite price up $0.69 per cwt.

Pork product prices have been falling hard suggesting that supply was overwhelming demand. That was confirmed by Wednesday afternoon’s USDA cold storage report. The data indicated that pork in the freezer were up slightly from the previous month, although still down 4% from the previous year. Holiday hams will be the feature over the next couple of months. Ham supplies in the freezer were up 8% on the month, but down 12% from the previous year.

Exporters sold a solid 19.7K metric tons of pork in the week ending October 16, up from 18.5K the previous week. Actual shipments rose to 18.4K tons, up from 18.0K the previous week.

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

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