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Closing Comments

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Closing Comments

Corn

Corn futures break key chart support, suggesting lower prices likely ahead.

The Federal Reserve updated its policy statement at 1 p.m. CST today. There were no major surprises, but a few word alterations did have market implications. The Fed no longer says that interest rates will remain low for a “considerable” time. It says it will be patient. However, it also said that economic growth is on “solid” ground. Overall, the wording suggested to Wall Street that the Fed is on schedule to raise interest rates later this year.

However, Wall Street also noted that the statement passed on a 10-0 vote; the first that has happened at quite some time. That suggests that Fed members who had been pushing for higher rates may have pulled back on fears that the economy is starting to stagnate.

The Department of Energy reports that ethanol stocks rose to a two-year high of 20.6 million barrels in the week ending January 23, up from 20.4 million the previous week and up from 16.9 million the previous year. Ethanol production during the week slipped to 978K barrels per day, versus 979K barrels in the previous week and 900K barrels per day in the same week last year.

The data suggests that ethanol production used 103.8 million bushels of corn during the past week, down from 103.9 million the previous week, but up from 96.9 million in the same week last year. Estimated corn usage for the marketing year to date total 2.108 billion bushels, up 81 million or 4% from the previous year. Corn usage to date exceeds the seasonal pace needed to hit USDA’s target by August 31 by 17 million bushels, versus 12 million the previous week.

March corn futures pushed lower today on expectations that farmer sales will increase this spring amid improving South American production estimates. Once that occurs, it shouldn’t take long for supply to overwhelm demand, possibly leading to both lower futures and much weaker basis. Additional pressure came from talk that Ukraine is taking business away from us.

The lead contract bounced above key support at $3.76 early in the day, but a retest late in the session just as the dollar was rallying on the Fed statement saw the support gave way. Preset sell-stops were triggered, accelerating losses into the close. Today’s close suggests that we could see much lower prices in the weeks ahead, particularly if the commodity sector remains in a deflationary mode amid a stronger dollar with fund managers shorting (selling) the commodities.

Soybeans

Soybeans grind lower, reaching new three-month low as South American harvest gains momentum.

Soyoil prices dropped to new contract lows early in today’s session after the U.S. Environmental Protection Agency indicated that it will allow Argentine biofuel makers to qualify for U.S. biofuel credits, which could crowd out domestic producers. Crush is still primarily driven by soymeal, but the drop in soyoil still hurts margins.

Soymeal prices did firm today, partly due to spread trading that pressured oil and partly due to lingering strong export demand ahead of the availability of South American supplies. Strength in soymeal helped prop up soybean prices, even allowing them to trade above unchanged at times.

However, the primary driver continues to be approaching South American harvest. The crop may not be as big as some estimates originally pegged it, but rains over the past week, along with more coming, should help it still reach high levels. The first cargo has been loaded, with momentum expected to grow over the next couple of weeks. Meanwhile, traders fear more cancellations of previous purchases by China.

March soybeans fell to a fresh three-month low. Strong demand for soymeal, both domestically and on the export market, continue to slow the decline, but few are arguing for the overall trend to turn higher. Rather, there’s a sense that downside risk will quickly accelerate as we move through February.

Wheat

Wheat can’t find a friend as a strong dollar hurts demand amid ample supplies.

Trade chatter indicates that southeastern mills have adequate supplies of soft red wheat to meet their needs well into the summer, when new-crop supplies will be available. The reports spurred speculation that we will see large deliveries against the March contract a month from now, as export demand remains sluggish due to the strong dollar.

The above talk combined with a stronger dollar, poor export demand and expectations for good rains later this week in dry areas of the Plains winter wheat belt to pressure prices. Buyers stepped aside to let prices come to them, allowing the market to hit an air pocket.

Chicago finds its next support at $5.00, but few are confident that we will see the market bottom at that level as long as the trade remains focused on big supplies, a strong dollar and poor demand. We could see a rally unfold this spring if crop ratings remain poor, but that’s still a big “IF” and we still do not know from what level that rally would occur. Meanwhile, wheat remains victim of the larger deflationary sentiment that is present throughout the broader commodity sector.

Beef

Bounce continues for live cattle as collapse of Boxed Beef market spurs demand.

The boxed beef market collapsed on Tuesday, but that weakness stimulated some demand, which is what the market needed to see. Futures were already at a sizeable discount to the cash, giving room for a bounce to correct oversold conditions. Re-energized volume in the product market provided some impetus to help that happen late Tuesday, with follow-through buying today. I still do not feel the energy needed to sustain a rally in the live cattle market, but we may be able to pull a bit more out of this bounce yet, with $154.95 a key level to watch for February.

This week’s kill on Monday and Tuesday was estimated at 112K & 111K respectively for a total of 223K for the week so far. That’s down 1,000 from the previous week, but matches slaughter in the same time period last year.

Boxed beef movement totaled 172 loads Tuesday, up from 133 loads the previous day and up from 162 loads the previous week. Choice cuts were down $3.71 to $247.70, down $16.11 per cwt in less than two weeks. Select cuts were down $4.53 per cwt to $240.26, pushing the Choice/Select spread to $7.44 per cwt, up from $6.62 the previous day, but down from $9.41 the previous week. Movement at mid-morning today was strong at 132 loads, with Choice cuts up $0.33 and Select cuts up $0.46 per cwt.

The collapse in product prices pulled estimated packer margins down to losses of $23.50 per head, down from profits of $1 per head the previous day and down from profits of $12.45 the previous week. This week’s cash trade will be closely watched, particularly in light of expectations that packers have large supplies of contracted cattle available to them starting next week. Those trade expectations haven’t always been right, but the current bounce has still done little to prove the overall down trend wrong.

Feeder cattle futures followed the live cattle market today, with prices trading both sides of unchanged. Demand at the sale barn remains tepid, with some sales beginning to show up below $200 per cwt. The latest CME cash index came in at $215.36 per cwt, down $2.25 on the day and down $19.86 over the past 12 trading days.

Pork

Lean hog futures bounce, but cash and product markets suggest that the market is still vulnerable.

Lean hog futures resumed Monday’s bounce today on ideas that a seasonal rally in the cash market may be near. Thus far we haven’t seen that strength, with Tuesday’s sell-off leading to some apprehension on today’s rally as well.

The cash market was mostly steady today, although the Illinois and closely watched Iowa/Southern Minnesota markets were steady to $1 lower on the day. The latest CME cash index came in at $72.51 per cwt, down $0.40 on the day and down $2.34 on the week. It was the 32nd consecutive trading day with a lower cash index, with losses over that period totaling $16.00 per cwt.

Product prices broke sharply on Tuesday, but the break stimulated fresh demand. Movement totaled 423 loads, up from 272 loads the previous day and up from 381 loads the previous week. The composite pork product price broke $2.86 per cwt to $81.61, its lowest level since April 2013. Movement at midday today totaled 320 loads, with the composite price down another $0.31 to $81.30.

Slaughter for Monday and Tuesday combined is estimated at 852K head, up 22K from the previous week and up 40K from the same period last year. Kills continue to exceed year-ago levels, and at higher weights as well, making it difficult to sustain rallies in the lean hog complex.

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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