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Closing Comments

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Closing Comments

Corn

Corn futures rise with the rest of the commodity sector as the dollar tumbles.

It was the week of the greenback for the grain and oilseed markets, with corn following in line with the rest of the broader commodity sector. That meant that corn prices tended to rise when the dollar fell and sink when the dollar rallied. It was a very volatile week for the dollar, so corn prices traded quite a range as well. The dollar traded a 3,642-point range during the week, while corn traded a 20-cent range. The good news is that it finished the week near the top of that range.

Fundamentally, we’re seeing an increase in private acreage estimates that are reminding the trade that USDA’s March 31 planting intentions report is just around the corner. Farm Futures’ survey pegged corn acreage at 88.3 million, while Informa reportedly told its client to expect 88.5 million. As such, the trade is starting to settle on expectations that we will see corn area shrink by a couple million acres this year if the market doesn’t do anything to change the farmer’s mind.

That means that corn needs to rally relative to corn to drop the new-crop soybean corn price ratio closer to 2.2 to 1. It traded near 2.4 early in the week, but finished the week trading closer to 2.3 before settling at 2.34. High input costs for corn mean that the feed grain needs to look more appealing than normal relative to soybeans to reverse the current expectation of shifting acres to the oilseed.

Farmers are leaving the door open for shifting acres longer than normal this year, but prices need to do their work to get the corn acres. Historically, traders start worrying about corn having enough acres this time of year, but this year strength in the dollar has encouraged major fund managers to be short (sold) the commodity sector, causing traders to see corn through more of a bearish filter, at least until the dollar showed signs it could break this week.

December corn posted an impressive reversal this week with a strong finish, probing back into its old trading range largely between $4.10 and $4.20, while settling just below it at $4.0925. The longer-term bias remains lower, but that can change if we see follow-through strength in the days ahead. Two factors that will be critical going forward will be continued weakness in the dollar as it corrects lower and supportive data from USDA’s quarterly stocks and planting intentions reports on March 31.

Soybeans

Soybeans follow the rest of the commodity sector higher, but with less enthusiasm as new-crop supplies flood the market from South America.

Soybeans followed a similar path to corn over the past week, rallying when the dollar sank and sinking when the dollar rallied. The greenback’s collapse to close out the week pushed soybeans higher again, but enthusiasm wasn’t as strong for soybeans as it was for corn and wheat.

That’s because U.S. supplies remain big and South America is now well into a bumper harvest that will likely end up near 10% above last year’s record harvest. Furthermore, private acreage estimates suggest that we will see soybeans expand another 3 to 4 million acres in the United States this spring, with currency exchange rates encouraging more expansion in South America six months from now.

As such, soybeans firmed to close the week, but without the kind of conviction that market bulls would like to see. Fundamental support comes from lingering strong demand for soymeal, but that is expected to wane in the weeks ahead as well. Longer-term, traders will likely maintain some premium in the market until they gain confidence in the summer weather pattern, but downside price movement remains the greatest risk without a significant weather problem this summer.

The lead May soybean contract tried to climb back above trend line support off its October and January lows, but failed to close above it. Ironically, the November contract did manage to do so though, holding above it throughout trading sessions on both Thursday and Friday to close out the week. This suggests a bit more strength near-term in the new-crop contracts as traders assess growing season weather outlooks.

Wheat

Wheat prices surge as the spring rally gains energy from a falling dollar.

Wheat prices rallied for the second week in a row, rising to one-month highs on Friday’s strong gains. Prices have been heavily influenced by developments in the currency market, but the path of least resistance continues to be higher as speculative hedge fund managers unwind what had been record short (sold) positions in Kansas City and large short positions in Chicago.

Traders are very nervous holding those large short positions as we move into the spring growing season, which holds the greatest risks for the winter wheat crop. Drought continues to stifle growth in the Southern Plains, while winterkill is increasingly becoming apparent in the northwestern third of Kansas and southcentral Nebraska. This is also the time of the year when the crop is most sensitive to freeze damage from Canadian fronts dropping south, as well as insects and diseases.

These production risks don’t mean much to the market when exports are sharply curtailed by a strong dollar, but they would likely mean much more if the dollar continues to correct lower. As such, speculative hedge fund managers used days when the dollar was dropping this week to unwind short positions, while other bargain hunters bought the market. Prices merely consolidated lower on days when the dollar rallied.

Chicago July wheat sees its next significant resistance at $5.485, while the same is true for Kansas City July wheat at $5.86. Minneapolis September wheat is eyeing the February high of $6.0675. I still believe that the dollar remains too strong to sustain a rally significantly above those levels without more headlines of problems, but that can change quickly this time of year, especially if the dollar keeps breaking.

Beef

Live cattle futures consolidate below the 100-day moving average while waiting for cash trade and for USDA’s cattle-on-feed report.

Live cattle futures had a good week overall, with contracts narrowing the massive gap with the cash market. The cash market continues to trade at a significant premium to futures as skepticism remains strong, but open interest is rising and the charts are improving, garnering a bit more confidence in the current rally.

However, optimism remains capped by cheap pork prices at the retail level, with threats of additional weakness from the poultry industry as avian flu spreads to more states. Avian flu threatens to significantly curtail poultry exports if it reaches major production states of Alabama and Georgia. Exporters were simply able to divert their sources to the Southeast when Arkansas was confirmed positive for avian flu, using that state’s supplies to meet domestic demand. However, the risk of cheaper alternative meats will remain a concern as long until the disease is brought under control.

USDA’s cattle-on-feed report showed 10.658 million head of cattle were on feed March 1, which was only slightly below pre-report estimates of 10.662 million. February placements totaled 1.523 million head, 92% of year ago levels and 24,000 head below the 1.547 million expected by the trade. February marketings totaled 1.516 million head or 98% of year ago levels, up 13,000 from pre-report trade expectations.

Cash cattle trade waited once again until the end of the week to move. Movement quickly emerged following USDA’s release of its cattle-on-feed report, with packers paying $163 per cwt in Kansas, up $2 on the week. In the end, that will likely have more impact on this next week’s trade than will the USDA numbers.

Friday’s slaughter was estimated at 83,000 head as more plants turned off the lights amid negative margins approaching $50 per head. The total was down 13,000 from the previous week and down 28,000 from the previous year. Saturday’s slaughter was pegged at 5,000 head. As such, the week’s kill was estimated at 518,000 head, down 6,000 from the previous week and down 61,000 from the same week last year. This brings estimated slaughter for the year-to-date to 6.088 million head, down 456,000 or 7% from the previous year.

Boxed beef movement increased to 745 loads this week, up from 704 loads the previous week, up from 622 loads the previous year and a four-week high. Choice cuts finished the week at $244.51 per cwt, down $2.10 on the day, but up $0.39 on the week. Select cuts finished the week at $243.28 per cwt, down $1.51 on the day and down $0.79 on the week. The Choice/Select spread finished the week at $1.23 per cwt, which was actually up $1.18 on the week.

Feeder cattle followed the fat cattle market, but also ran into stiff resistance at the 100-day moving average, which for the March contract was at $215.59 per cwt. The latest CME cash index came in at $213.97 per cwt, up $1.36 on the day and up $0.35 on the week.

Pork

Lean hogs consolidate big losses for the week.

The April lean hog contract traded a range of $5.275 per cwt this week, settling at $58.45 near the bottom of that trading range. Prices finished the week consolidating modestly higher, but not even challenging a chart gap between $60.25 and $60.425. This suggests that the market remains vulnerable to additional weakness going forward, led by fears that poultry export restrictions will flood the market with cheap alternative meat supplies.

The cash market fell at a slower pace, which helped facilitate modest strength in the lead contracts to close out the weak to narrow the gap. The latest cash index came in at $63.56 per cwt, down $0.53 on the day, down $2.81 on the week and down $4.53 over the past 10 consecutive days of lower prices.

Friday’s slaughter was estimated at 415,000 head, down 6,000 from the previous week, but still 57,000 above the previous year. Saturday’s kill was estimated at 100,000 head, up 20,000 from the previous week and up 50,000 from the previous year.

That brought the week’s estimated slaughter to 2.237 million head, up 10,000 from the previous week and up 200,000 from the previous year. As such, estimated year-to-date slaughter sits at 25.393 million head, up 873,000 head or 3.6% from year ago levels. The good news is that the industry is getting more current, with weights now near year ago levels.

Product movement over the past week totaled 1,812 loads, up from 1,662 loads the previous week and up from 1,392 loads in the same week last year. The composite pork product price finished the week at $68.03 per cwt, down $0.71 on the day, but up $0.55 on the week. It was the first week with net gains in the composite price in some time, breaking a streak of seven down weeks when the composite price lost $16.90 per cwt.

The cash and product markets are once again showing signs of a possible near-term low. This could provide some stability to the futures market as the trade positions for USDA’s March 27 quarterly hogs and pigs report. Traders will likely spend much of this coming week focused on expectations for that report.

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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