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Closing Comments

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Closing Comments

Corn

March corn posted a 31-cent range over the past week, while December corn posted a 27-cent range. Prices tried to rally after USDA’s final 2014 yield came in below expectations, resulting in tighter stocks than expected by the trade. However, prices turned lower when the rally showed little ability to move above recent trading ranges.

Yet, consecutive attempts to drop the lead March contract below the 100-day moving average at $3.77 failed. Corn refused to go lower, at least for now. Much of that underlying support comes from an ongoing belief that we will see a significant reduction in corn area in South America, as well as the U.S. Midwest this year, with record ethanol production keeping basis propped up as the farmer (both the North American and South American) remains the biggest long (own corn) in the market.

Additional support comes from a continued attempt by the market to push the new-crop soybean/corn price ratio lower to reduce corn acreage losses. That ratio drew near to 3.0 last year as we swept soybeans clean looking for supplies. However, soybean supplies look most burdensome currently, with a big monstrous South American crop following a big U.S. crop, with surveys suggesting that U.S. acres could rise by 4 million this spring.

A look at history finds that the ratio dropped to 2.05 or lower in each of the eight years prior to 2014 at some point in the growing season. That means that corn prices would have to rally, soybean prices fall, or some combination of the two to do the same this year. Corn prices have already shown a reluctance to sustain a rally without a weather story, so soybeans may need to fall. Reaching such a ratio at today’s December corn prices would necessitate the oilseed trading below $8.50. However, trading that low could eventually pull corn prices lower as well.

USDA’s daily export reporting system on Friday showed that “unknown destinations” bought another 4 million bushels of U.S. old-crop corn. It was the fourth such big sale of corn announced over the past week. Those in the grain trade report that export demand is picking up following the recent break in prices as ocean freight rates drop, helping to offset the strong dollar.

Today’s rally was impressive in the corn market, settling just a penny below the session high of $3.88. However, the inability of the lead contract to take out Thursday’s high of $3.88 leaves this market vulnerable. I’m not as worried about corn fundamentals as I am about soybeans pulling corn down, with limited upside potential short of a currently unknown weather problem.

Soybeans

March soybean prices dropped more than 78 cents over the past week, while November soybeans lost more than 60 cents. Soybeans took the biggest blow in Monday’s USDA crop report when the agency raised the soybean yield and failed to substantially raise demand estimates, keeping projected ending stocks above 400 million at 410 million bushels.

Furthermore, the agency raised its production estimate for Brazilian soybeans to 95.5 million metric tons, up from 94.0 mmt the previous month. It’s unusual for USDA to make a significant increase in Brazilian production in January, particularly for a late-planted crop. That would be similar to USDA making a significant increase in the U.S. crop in July. It simply doesn’t like to do so. USDA’s estimate assumes yields roughly 4% above trend. A Commodity Weather Group study of 6 similar rainfall years found a range of 1% to 8% above trend in those years.

We also saw weakness in the soymeal market during the week, with the lead March contract trading nearly a $32 per ton range. Cash basis has also begun to weaken in the Midwest as production begins to catch up with strong demand.

The lead March contract broke below the December low of $9.91 this week, suggesting that this market remains vulnerable to additional selling. Meanwhile, open interest in growing, suggesting that fund managers are building short (sold) positions, even as producers begin to sell. Furthermore, the Brazilian real dropped to a one-month low against the dollar, providing more incentive for farmers there to sell soybeans.

Soybeans finished the day mixed, with fractional gains in the near-by contracts on strong demand and 1-cent losses in the deferred on expectations of a big South American harvest followed by expanding U.S. acres. A bounce is possible, but the charts continue to suggest vulnerability to the downside.

Wheat

Chicago March wheat dropped $1.49 off its December high over the past week, while this week’s low in Minneapolis March wheat was $1.0425 off its December high. That reflects two things. First it says something about the U.S. wheat market’s efforts to become relevant again on the global market as the dollar soars to 11-year highs. U.S. wheat wasn’t even offered in a mid-week snap tender by Egypt because we simply weren’t competitive.

However, the difference between Chicago and Minneapolis also reflects a change in market spreads reflecting changing demand patterns. The world has plenty of lower quality wheat, with which soft red winter wheat competes. Yet, global supplies of quality protein wheat are becoming a big tighter, leading the hard wheat markets to gain on soft wheat, particularly for higher protein wheat.

Of course, the more dominant theme has been the high price of U.S. wheat relative to much of the rest of the world. As a result, the trend has clearly been lower in recent weeks, despite talk of winterkill in the winter wheat crop.

Crop conditions will be a viable topic as the crop breaks dormancy, but for now the focus is the sluggish export pace. Prices managed a bounce going into the weekend, correcting an oversold condition, but stronger demand is needed to sustain a rally. That will likely require lower prices.

Beef

February live cattle dropped to their lowest level since late August early on Friday, trading down to $153.25, which was $13.725 off the contract’s January 8 high. The industry is in a tailspin. The drop in futures came at a time when Choice cuts set an all-time record high of $263.81 per cwt.

Index fund portfolio from January 8 to 14 was a major contributing factor this year. However, another contributing factor was this overall fear among major fund managers that the commodity sector is vulnerable to deflation as the global economy slows.

The cash trade was slow this week, with some cattle moving in the Southern Plains feedlot region at $164 per cwt on a live basis, down $2 to $4 from the previous week, and $264 to $265 per cwt on a dressed basis in Nebraska. We saw a few clean-up sales in Kansas at $163 on a live basis. Movement was relatively light this week, with feeders refusing to give in for the most part.

Product market slowed from its sizzling pace to start the month and prices for boxed beef began to moderate toward the end of the week. The combination of softer cash and softening product prices gave courage to the bears, particularly with the bulls afraid to come out of hiding now that the charts are giving strong sell signals.

In other words, the fundamentals are going to have to prove to traders that higher prices can be sustained to change current market sentiment, now that the February contract  has taken out the December low. That typically means cheaper prices into spring, although last year was an exception.

Live cattle futures are oversold and due for a correction. However, that correction can occur by chopping sideways as well as by rallying, with buyers wary of taking long positions into a three-day holiday weekend.

Boxed beef movement dropped to 100 loads Thursday, down from 150 loads the previous day and down from 158 loads the previous week. Choice cuts were down $0.93 to $262.88 per cwt, while Select cuts were up $0.39 to $254.07. This dropped the Choice/Select spread to $8.81 per cwt, down from $10.13 the previous day and down from $9.23 the previous week. Movement at mid-morning today was slow at 83 loads, with Choice cuts down another $1.75 per cwt and Select cuts down $1.87.

Pork

February lean hogs lost roughly another $5 this week, after chart support gave way without support from either the cash or product markets. Both of the latter show signs of stabilizing, but still hold weaker undertones as supply rises and demand pulls back some. Export demand has held impressively, considering the strength of the U.S. dollar, but domestic demand has also softened after a robust start to the year.

Packer margins are good, finishing the week at an estimated $19.15 per head, up from $16.60 the previous week. However, packers don’t have to chase supplies to maximize returns, as producers continue to bring them all the hogs they want, and at higher weights.

Carcass weights are 1.8 pounds or 1% above a  year ago and 8.0 pounds or 4% above two years ago. Packers allowed/encouraged heavier weights initially to help offset the drop in slaughter numbers due to the PED virus. However, slaughter numbers are now exceeding the previous year’s level, but the consumer is still worried about spending money.

The latest cash index came in at $75.98 per cwt, down $1.63 over the past week, but now at a premium to the February futures contract. The index has been lower for the past 24 straight trading days, with losses over that period totaling $12.53 per cwt.

Product movement dropped to 312 loads Thursday, down from 492 loads the previous day and down from 383 loads the previous week. The composite pork product price dropped to $83.89 per cwt Thursday, down $0.42 on the day. Movement at midday today was slow at 136 loads, but the composite price firmed $0.19 to $84.08 per cwt.

Lean hog futures are oversold and due for a bounce, which would be facilitated with futures now trading below the cash index. However, downside price risk remains the greater concern in the near-term.

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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