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Closing Comments

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Closing Comments

Corn

Corn chops sideways ahead of next week’s USDA report.

Data released this morning shows that more progress was made planting safrinha corn than anticipated this week. Planting progress is now seen at 85%, which is just slightly behind year ago levels, as well as the five-year average pace. North-central areas of Mato Grosso are still 6 to 8 days behind normal, while many other areas are at or exceed the normal pace. However, the north-central region accounts for nearly half (47%) of Mato Grosso’s safrinha corn production, where roughly 25% of the crop remains to be planted, the slowest since 2011.

USDA currently pegs Brazil’s corn production for this year at 75 mmt. Previous delays suggested a drop to 70 mt, but this data would suggest that perhaps we’re looking at something closer to 72 at this point. That’s based on previous years with similar delays and yield reductions due the crop not maturing before the dry season arrives. The focus now shifts to April weather patterns, when we need to see above normal rains, as normal is only an inch or two in some of these areas.

The trade expects USDA to make few changes to its domestic balance sheet on Tuesday. Brazil’s corn crop is expected to slip modestly lower , while Argentina’s crop gets bigger. We should see a greater focus on planting intentions past Tuesday’s report, but the feed grain’s greatest vulnerability would probably be a collapse of the soybean market, although I’m not expecting that short-term.

December corn tested the bottom of its chart wedge formation at $4.0825 and it held to close out the week. That encouraged some late-session buying to push prices off support going into the weekend. The top of the wedge will be at $4.1675 on Monday.

Soybeans

Soybeans remain under pressure as South American new-crop supplies hit the market, but a late-session recovery suggests that this market may be near a short-term low, although it remains vulnerable longer-term.

Soybean prices dropped more than 50 cents over the past week as the flow of South American new-crop supplies increased, settling 46-3/4 cents lower on the week. Yes, rains hampered the harvest efforts, but Brazil’s soybean belt is a big one. As such, there was usually some place between the storms where farmers could harvest soybeans.

Roads and highways also opened up for trucks to haul soybeans over the past week. A few problems remain, but Brazil finally had enough of the truckers strike and stepped up enforcement to the point that most highways opened up for soybeans to flow to the ports and processors once again. The bottom line is that traders simply saw little evidence that rain delays and trucker strike’s had any notable impact on extending the U.S. export season for soybeans. Soymeal demand remains strong, but the sales and shipments of whole soybeans continue to decline seasonally.

So how far can soybean prices fall? Fundamentally, I would argue that soybean prices should be much lower than they are now, led by November, in an attempt to try to discourage production here in the United States. “Elevated” prices last fall encouraged acreage expansion in South American five months ago in the face of surplus supplies and we may be on the verge of repeating the same over the next 60 days.

Psychologically, many fund managers, whose presence is dominant at times in this market, do not understand supply and demand fundamentals. They simply look at where today’s prices are relative to a couple of years ago and figure that bearish data has been “baked into the market” already. Therefore, they see little reason to take prices lower, which is how the Wall Street environment they are accustomed to works.

As such, I do not expect to see this market fall apart this spring, although current weakness in the charts suggest that we could see prices go a bit lower. The real vulnerability of this market may not come until we get into the growing season and see the predominant weather pattern.

Even so, I still believe the market will try to narrow the new-crop soybean/corn price ratio. That leaves soybeans more vulnerable to downside risk than corn in the weeks ahead, but also necessitates that corn be able to hold onto chart support.

May soybeans held above key chart support at $9.705, finishing Friday’s trade near its session high. I’m not sure the market has the stomach to push soybean prices sharply lower at this time, although I still believe prices are vulnerable down the road if the weather cooperates. November is most vulnerable longer-term, with first key support at $9.40.

Wheat

Wheat finds value, again. Traders simply didn’t want to push prices lower ahead of the weekend and next week’s crop report, believing that current levels could spur end user buying.

The story this week has been the collapse of the wheat market as the dollar surges higher. Export sales data released this week looked pretty good, except it was artificially inflated due to a $100 million grant to Egypt subsidizing sales of hard red winter wheat. Other than that, U.S. wheat struggle to compete into any market unless we have a freight advantage due to location or a particular quality advantage in the case of hard red wheat.

As such, prices plummeted to new contract lows for Chicago soft red winter and Kansas City hard red winter wheat as the two classes sought to uncover demand. Disappointing crop ratings from individual states were not enough to support prices because they held no surprises. The focus going forward will be the direction of those ratings as many states begin releasing data on a weekly basis going forward, particularly in the Plains, but that area has been receiving good moisture of late.

Wheat prices found some firm footing to close out the week. Part of that was because traders were reluctant to extent large short (sold) positions ahead of the weekend and part of it was on the idea that current price levels may be enough to uncover some end user buying on the chance that the winter wheat crop could face threats as we move through the spring that elevate prices.

Kansas City May wheat found support at Thursday’s low, holding fractionally above it. It gained several cents on Chicago. We’ll likely need to see greater strength in Kansas City in the days ahead to confirm a near-term low, or we could see prices overall leak lower again.

Beef

Stronger cash helps produce best finish for live cattle in two months on the weekly chart.

The mystery of the cattle market continues to unfold. Cattle supplies are among the tightest of modern-day history, but cash cattle prices are more than $10 below November highs and futures prices are at an even greater discount. The latter suggests that futures traders remain skeptical of the cash market, believing that it cannot hold current levels. Yet, we closed the week with the highest weekly close for the lead April live cattle contract in two months, boosted by reports of cattle trading at $162 in Nebraska, up $2 on the week.

That suggests the opportunity to work the market higher in the weeks ahead. This week’s slaughter total came in a bit higher than expected, suggesting higher product supplies as packers take advantage of modest profitable margins. Recent strength in the product market helped erase negative margins that had peaked over $100 per head this winter, but traders question whether product prices can maintain current levels amid cheaper alternative meat supplies. Pork prices continue to trend lower, providing an attractive alternative for retailers and consumers alike.

Friday’s slaughter was estimated at 102,000 head, matching both the previous week and the previous year, with Saturday slaughter estimated at 3,000 head. That puts the week’s kill at 537,000 head, up 14,000 from the previous week, but down 10,000 from the first week of March last year. The past week’s slaughter was down just 1.8% from the previous year, but year-to-date slaughter remains down 6.4% to this point.

Product movement rose to 157 loads Thursday, up from 148 loads the previous day, up from 123 loads the previous week and the largest daily total since February 20, but still not overly impressive. Choice cuts rose $0.62 to $249.20 per cwt, while Select cuts dropped $0.65 to $246.58. Movement at mid-morning today was slow at 72 loads, while Choice cuts were down $0.21, while Select cuts were down $0.95 per cwt.

That firmed the Choice/Select spread to $2.62 per cwt, up from $1.35 the previous day and up from $2.13 the previous week. The spread normally turns higher this time around as retailers stock up on steaks for the grilling season. The next 10 days see warmer conditions spread across much of the Midwest and the East. It still won’t be balmy by any means, but it may be warm enough relative to the harsh winter to tempt many people to dust off the barbecue grill. Unfortunately, cold weather is expected to return again in late March, so any bump in demand may be short-lived.

Positive chart signals encouraged additional buying in the feeder cattle futures market, aided ideas that the spring grazing season could improve demand at the sale barn. Ironically, the lead March contract is now trading at a premium to the cash market, reflecting its optimism. The latest CME cash index came in at $207.66 per cwt, up $1.00 on the day, up $1.42 over the past four trading days, but down $0.06 over the past week. However, traders see the late upward trend with spring grazing season just getting started and think that justifies better chart signals. Now it’s time to confirm it or not with this week’s action.

Pork

Too much pork weighs on the market.

Today’s kill is estimated at 410,000 head, down 9,000 from the previous week and down 4,000 from the previous year. An estimated Saturday kill of 104,000 puts the week’s slaughter at 2.222 million head, down 33,000 from the previous week, but up 150,000 from the same week last year.

Therein lies much of the problem. We saw cash hogs push higher through much of the week due to adverse conditions slowing the movement in the eastern Midwest and East, although prices were steady to $1 lower in the western belt where conditions were better. However, overall year-to-date slaughter remained 2.3% above year ago levels and at higher weights. Demand for pork has been pretty good, but the supply of pork has been even larger.

The latest CME cash index finished the week at $68.09 per cwt, or nearly a $2 premium to the lead April contract. Traders expect the price to drop once again as temperatures warm and road clear. The latest cash index was up $0.36 on the day, up $4.71 over the past week and up $7.82 per cwt over the past 9 consecutive trading days.

Simultaneously, the product market continues to struggle, which casts doubts about the sustainability of the cash rally longer-term. Product movement on Thursday dropped to 293 loads, down from 473 loads the previous day and down from 391 loads the previous week. The composite pork product price dropped $1.71 to $68.27 per cwt. Movement at midday today was routine at 177 loads, with the composite price up 31 cents from Thursday.

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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