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Closing Comments

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Closing Comments

Corn

Support gives way on corn charts in broad commodity sell-off.

Corn prices tumbled with the broader markets to close out the week as the dollar posted nearly 12-year highs, crude oil fell to one-month lows and fund managers dumped their holdings of a broad-spectrum of commodity and equity holdings. The VIX, Wall Street’s fear index, was up 7% and gold was up modestly, but it was otherwise difficult to find a market trading higher, other than the dollar.

Unfortunately, the weakness added damage to the charts, leaving the feed grain vulnerable to additional selling in the minds of fund managers who understand chart signals better than they do supply and demand fundamentals. December corn broke to its lowest level since February 3, taking out other key levels of support in the process. Next psychological support is at $4.00.

The drop in prices doesn’t help the crop gain acres needed to guard against a possible weather problem. Midwest farmers have more flexibility than normal to shift acres this year and are taking advantage of that to delay final planting decisions. High input costs for corn leave the feed grain at a disadvantage. A two-million acre drop would still be large enough to meet anticipated demand if a trend yield is achieved, but 4% drop in yield from trend would leave supplies tight.

One of the keys to the corn market this spring may very well be the currency market. Fund managers tend to see commodities as over-priced when the dollar is surging higher, but that view could quickly flip if/when the dollar were to start a significant correction. The dollar’s fundamentals are expected to remain strong for much of this year, while the lack of a significant correction in the past eight months simply increases the odds but does not guarantee a significant correction.

Soybeans

Soybeans post double-digit losses amid broader market sell-off and as world demand shifts to South American new-crop supplies.

Soybeans posted modest losses on the week, but the way they finished suggests that the oilseed is vulnerable going forward, although prices remain above key chart support. Protests continue in Brazil, but the flow of soybeans is strong. Rains continue to fall, but not enough to prevent harvest between storms. Loadings have been slowed at the ports, but not enough to send customers back to the United States to significantly extend our export season.

The strength of the market continues to be in soymeal, with many customers continuing to buy U.S. supplies until they grow more confident in South American availability. However, trade chatter in recent days of a European cargo purchase being shifted to South American origin seemed to pull the air out of the protein market.

The Brazilian real continues to tumble, relative to the dollar. The currency was priced at 3.28 per dollar to end the week, down 3.7% on the day. It’s current value compares to 2.85 to the dollar at the beginning of the month. Some analysts believe that it could drop all the way to 4.0 per dollar.

A weakening real has encouraged active producer selling in Brazil, although many are holding onto the final 30 to 50% of the crop to guard against further currency erosion until they get their next crop’s inputs purchased. Brazilian farmers sell their soybeans in dollars, while purchasing inputs in local currency.

CONAB, Brazil’s equivalent to our USDA, lowered its production estimate to 93.3 million metric tons this week, although other respected analysts put the crop at better than 94 mmt. Regardless, it’s a big crop compared to last year’s record 86.7 mmt. Lanworth, using satellite imagery and ground truth information pegged Argentina’s crop north of 60 mmt. Add it altogether, and this year’s South American crop will likely be 8 to 12% larger than last year’s big crop.

Yet, producer surveys continue to show that U.S. farmers want to increase acreage this year. Allendale’s survey of farmers in 30 states showed an increase of more than 2 million acres. Farm Futures is expected to release the results of its farmer survey on Wednesday of this next week. USDA is scheduled to release the results of its massive producer planting intentions survey March 31.

My sense is that we will end up with 2.5 to 3.0 million more soybean acres this year, with climatologists expecting growing season weather similar to that seen in 1994 and 2014, although they see a bit more risk of possible low levels of stress that could take the gravy off the crop in August.

Trend line support for the lead May soybean contract off the October and January lows is at $9.725. The same support for the November new-crop contract is at $9.44 per bushel.

Wheat

Wheat rally fizzles amid new highs in the dollar.

Wheat prices rallied through the week, until falling back to close the week. Overall, wheat Chicago still finished the week with nearly 20-cent gains, with Kansas City up 17 cents.

Much of the buying through the week was tied to speculative short-covering. Speculative hedge fund managers came into the week holding large short (sold) positions. That is risky in late March and April, when spring freezes can suddenly develop, creating sharp gains in the winter wheat markets.

Additional risk comes from lingering drought in the central and southern Plains hard red winter wheat belt. Short-covering continued through much of the week, despite forecast models turning wetter for next week in much of the dry region. This led me to question the sustainability of the rally once fund managers had lightened their load of short positions. Further evidence that the rally probably wasn’t sustainable long-term was the fact that Chicago was leading the rally. Surplus soft red winter wheat stocks are at nearly a half-year supply.

In the end, the strength of the dollar simply became too much going into the weekend. The strong dollar suggests that export sales will likely remain weak for quite some time; at least until stocks of alternative cheaper supplies overseas dry up. I still expect to see additional strength in the wheat market as fund managers unwind more short positions in the days and weeks ahead, but that possibility is at risk if the dollar remains strong and corn prices continue to fall.

Beef

The cattle complex comes under pressure from lingering questions about the impact of bird flu, as well as a rising dollar and sinking energy and equity values.

Skepticism in the cattle market continues to be the driving force, with cash cattle trading at huge premiums to the futures market. The tendency is for the lead contract to suddenly rally up to the cash market a day or two before expiration when most open interest is gone, with the next contract then stepping up to play the same role.

Cash trade again waited until late on Friday in a high-stakes poker game between packers and feeders. Packer margins are roughly $35 per head in the red once again, with continued deterioration expected. Feeders though continue to point to very tight supplies of slaughter-ready cattle, with the past week’s showlist down significantly.

Futures prices slowly crept higher through the week as expectations of cattle trading above last week’s $162 per cwt on a live basis countered skepticism that the market would be able to hold that strength amid cheap pork and poultry prices. Gains were also slowed by the past week’s news of bird flu in Arkansas, which is expected to result in export restrictions that back up supplies of cheap poultry at the retail level. Choice cuts appear to have completed their meager seasonal March rally and are turning lower, adding to packer red ink amid a flood of cheaper alternative meats.

However, the final blow for live cattle futures Friday came from the outside markets, with the dollar posting a nearly 12-year high, and the Dow Jones Industrial Average and crude oil both down sharply on renewed economic fears. Fund managers sold off the so-called riskier asset classes, including the meat sector.

This week’s slaughter is estimated at 524,000 head, down 13,000 on the week and down 50,000 from the same week last year. The slower chain speed should provide support for boxed beef prices, but the real question may be whether beef can compete with cheaper pork and poultry at those higher prices. Cash trade emerged late on Friday in Kansas at $161 per cwt on a live basis, which is essentially unchanged from the previous week. More significantly, it’s the price that packers had been offering for several days, but that feeders had been rejecting.

Feeder cattle buyers were a bit more reluctant to close out the week, wanting to see how the bird flu scare plays out impacting beef prices long-term. The latest CME cash index came in at $213.62 per cwt, down $0.31 on the day, although still up $5.96 on the week.

Boxed beef movement dropped to 152 loads Thursday, down from 165 loads the previous day and down from 157 loads the previous week. Nonetheless, this week’s product movement rose to three-week highs as retailers stock up for what could be a sluggish barbecue season.

Choice cuts were down $1.49 to $245.98 per cwt, while Select cuts were up $0.91 to $245.79 per cwt. That narrowed the Choice/Select spread to $0.19 per cwt, down from $2.59 the previous day and down from $$2.62 the previous week. This spread seasonally is expected to start turning higher over the next week or so. Movement at mid-morning today was sluggish at 64 loads, with Choice cuts down $1.91, while Select cuts were down $1.20, putting Select cuts at a $0.52 premium to Choice due to tight supplies amid strong demand for Select cuts.

Pork

Lean hogs sell off with much of the rest of the commodity and equity sectors, but traders are particularly worried about a possible flood of cheap poultry at the retail level.

The doom of the pork market this past week was the poultry industry. The hog industry was showing signs of finally getting current, with carcass weights closing the gap with year ago levels. Producers were pulling hogs forward, pressuring prices, but the industry appears to be ready to carve out a seasonal low.

However, confirmation of bird flu in Arkansas sent the market spiraling again, raising the prospects that cash prices could end up falling another leg lower. Many overseas customers are expected to block imports from Arkansas, which is the home of Tyson. No bird flu has been identified at Tyson facilities, but they are unfortunately inside the state where it was confirmed, leaving a large supply of poultry at risk of being dumped on the U.S. market, driving down prices for the product that most competes with pork at the retail level.

The latest SPMF average carcass weight was reported at 214.29 pounds, up 0.75 pound from the previous day and up 0.77 pound from the previous year. Carcass weights continue to trend lower, losing three to four pounds, depending on the day, since the first of the year.

Midwest cash hog prices were down mostly $1 to close out the week, although a few markets were steady. The latest CME two-day lean hog index came in at $66.37 per cwt, down $0.43 on the day and down $1.72 over the past five consecutive days of lower prices.

Product movement is slowly declining from strong levels seen in late February. Movement on Thursday was 310 loads, down from 432 loads the previous day, although up from 293 loads the previous week. The composite pork product price firmed $0.29 to $68.50 per cwt, which was also up $0.23 from the previous week, but the overall trend remains lower.

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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