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Closing Comments

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Closing Comments

Corn

Corn futures firm late, suggesting a range-bound market ahead of Tuesday’s USDA data release.

Rains continue to support good yields in Brazil’s safrinha corn region. Recently dry areas are picking up timely showers, supporting good crop development. The crop remains largely in the vegetative stage, so it is by no means out of the woods. However, the forecast to this point looks good for yields near to above trend levels.

Currency exchange rates favor good returns on that corn as well, which should be quite competitive on the global market from August forward. That suggests that the best window of opportunity for U.S. corn exports is over the next several months before Brazilian corn reaches ports, especially that grown in Brazil’s center-west district. U.S. corn exports could struggle in the last half of the year if the safrinha crop continues to do well. Unfortunately, a dime break in basis for Brazilian corn over the past week leaves us vulnerable to seeing weakness in the U.S. market even earlier if softness continues.

Corn futures started the week on an upward roll, reaching areas of significant chart resistance and turned lower to finish the week. The late week weakness doesn’t necessarily mean that the spring rally is over, but rather that traders want to see USDA’s highly-anticipated quarterly grain stocks and planting intentions reports on Tuesday. As such, that data will likely determine future direction, along with updated weather forecasts that take on increasing importance as we turn the calendar to April.

The lead May contract rallied above both the 100- and 200-day moving averages mid-week, but couldn’t sustain the move and quickly dropped back below both. The rally triggered an increase in farm sales, which caused processor bids to soften late-week.

The new-crop December contract followed a similar pattern. The mid-week rally took the contract to $4.1975, which is essentially the top of the predominant trading range seen through the winter. The new-crop soybean/corn price ratio slipped toward the 2.3 to 1 level this week, after trading close to 2.4 to 1 in recent weeks.

December corn rallied to $4.40 to complete the fall rally at the end of the year. I have felt that reduced acreage and a cool wet April could push the contract into the $4.50 to $4.70 level, and still believe that is possible. However, caution is needed, as a look back at the eight years in the past 25 that the red December contract posted a spring rally finds that it was never able to take out those fall highs in any of those years, at least not in the spring. Rather, that necessitated weather problems later in the summer.

Soybeans

Soybeans maintain a weaker bias as South American basis slides on rising supplies.

Soybean prices started the week with a strong Monday rally, but slide lower into late week from that point, allowing the new-crop soybean/corn price ratio to finish the week closer to 2.3 than the 2.4 to 1 level that it has been at in recent weeks. South American supplies are increasing and traders are increasingly focusing on expectations for a 2 to 3 million acre increase in the United States this spring, with some estimates even higher than that. Rising soybean supplies in Brazil are pressuring basis, with values dropping up to 13 cents over the last half of the week.

Many traders, especially fund managers who understand chart signals better than supply and demand fundamentals, are reluctant to be short (sold) soybeans at these price levels. They see soybeans as cheap relative to levels seen in recent years, and most farmers would agree. However, we are still increasing acreage in the United States at these prices in the face of burgeoning global surpluses, despite strong demand, and currency exchange rates suggest that we’ll see more expansion in South America six months from now if we fail to see prices drop to much lower levels.

Tuesday’s USDA data will likely be important for providing direction for traders. Will it confirm bearish expectations, or will it show tighter stocks and lower acreage than currently expected? Look for traders to increase their comfort level being short soybeans if the data confirms bearish expectations, unless the weather turns threatening. In that case, we could see selling interest restrained until traders gain a better grasp of how the weather is going to play out for planting and the growing season ahead.

November soybeans have a couple of layers of key support just below the market; near $9.45, and again near $9.39. Breaking below those levels would suggest increased comfort among speculators building short (sold) positions in the market on expectations of rising global supplies.

Wheat

Wheat futures post technical bounce after Thursday’s collapse.

Chicago May wheat has traded more than a 62-cent range in March thus far, reaching its peak on Monday, before posting a bearish reversal that saw prices fall more than 42 cents in four days, before bouncing into late week. The Kansas City May contract traded a 63-cent range during the month thus far, falling 37-3/4 cents off that high posted on Monday before rebounding late-week.

The Kansas City/Chicago spread started the month at 26-1/2 cents, but now sits closer to 45 cents, providing some lingering hope that a spring rally can be sustained. Dryness in the Plains, along with emerging evidence of winterkill damage sustained over the past several months, provides fundamental support for further strength, but rallies have struggled amid poor export demand. The dollar is well off its 12-year highs set on March 13, but still  remains an obstacle for rebuilding demand.

Longer-term, traders are focused on crop conditions in Europe, the Former Soviet Union (primarily the Black Sea region) and in China. Dryness in Russia and China had been a concern, but recent showers have eased those concerns, with follow-up rains expected in the days ahead. Global wheat stocks are expected to shrink a bit this year, but remain sufficiently large to meet world demand as long as we don’t see another significant crop threat in a major producing area of the world.

The trade sees no big threats to Northern Hemisphere production at this point, with U.S. problems not mattering to traders as long as export demand is so poor. That could change if the dollar continues its downward trek, but so far it has not declined enough from 12-year highs to significantly impact exports.

Open interest grew by roughly 10,000 contracts on Thursday’s big sell-off, suggesting that speculators were building short (sold) positions. Friday’s gains tested the strength of those short positions, but provided little additional fresh direction.

Beef

Live cattle futures firm on expectations of steady to higher cash trade.

Live cattle futures rallied sharply Monday on surprisingly strong cash cattle trade that took place the previous Friday afternoon at mostly $163 to $165 per cwt on a live basis and up to $261 on a dressed basis. Prices then consolidated in sideways action Tuesday through Thursday, before moving higher again to close out the week.

Feeders are growing increasingly bullish as they see upward momentum building, with chart signals suggesting much stronger prices possible in the weeks ahead. Slaughter-ready numbers are expected to remain tight until at least late April, with retailers having to pay up to stock up for the anticipated barbecue season. The first real test of barbecue demand will come next weekend with the Easter holiday.

The bottom line is that beef fundamentals by themselves look bullish. The problem that continues to haunt the market though is the increasingly large supply of cheap pork and poultry available to the consumer. The beef industry can ill-afford to lose market share that it would take years to reclaim.

Friday’s kill was estimated at 95,000 head, up 12,000 from the previous week, but down 15,000 from the previous year. Saturday’s kill is pegged at 17,000, up 12,000 from the previous week and up 9,000 from the previous year. That brings the past week’s estimated kill to 531,000 head, up 13,000 from the previous week, but still down 57,000 from the previous year. That brings calendar-year slaughter to 6.623 million head, down 109,000 head or 7.1% from the previous year.

Boxed beef movement slipped to 137 loads Thursday, down from 152 loads the previous day and down from 157 loads the previous week. Choice cuts added another $0.16 to $250.67 per cwt, while Select cuts dropped $0.18 to $246.96 per cwt. That firmed the Choice/Select spread to $3.71 per cwt, up from $3.37 the previous day and up from $1.82 the previous week. Movement at mid-morning today was sluggish at just 58 loads, with Choice cuts down 24 cents and Select cuts down 34 cents per cwt.

Pork

Lean hogs firm ahead of USDA data.

Lean hog futures consolidated sideways for much of the past week, with an upward bias to close out trade ahead of USDA’s quarterly hogs and pigs report. The cash market continued to trend roughly a half-dollar lower each day, although the closely watched Iowa/Southern Minnesota market managed to firm to steady to 50 cents higher to close out the week. The supply of hogs continues to grow, although the industry is getting current, with weights now close to year ago levels, occasionally coming in below those a year ago.

Avian flu talk slowed dramatically over the past week, as expansion of the disease slowed. However, it has not yet been eradicated and remains a threat to the pork market. The greatest fear would be if avian flu would find its way into poultry flocks in the top producing states of Alabama and Georgia. That would likely dramatically increase export restrictions, backing up supplies of cheaper poultry at the retail level next to pork supplies.

Friday’s kill was estimated at 422,000 head, up 7,000 from the previous week and  up 61,000 from the previous year. Saturday’s kill is pegged at 115,000 head, up 15,000 from the previous week and up 92,000 from the previous year. That puts the week’s estimated kill at 2.270 million head, up 33,000 from the previous week and up 239,000 from the same week last year. Calendar-year hog slaughter is estimated at 27.663 million head, up 1.112 million or 4.2%from the previous year.

Product movement on Thursday totaled 292 loads, down from 478 loads the previous day and down from 400 loads the previous week. The composite pork product price rose $0.43 to $67.25, but that is still down $1.49 from the previous week. Movement at midday today stood at a mere 179 loads, with the composite price down $1.17 to $66.08 per cwt, a new low for the move.

USDA released its quarterly hogs and pigs after the week’s trade had closed. The data is bearish near-term, with more pigs than anticipated, while it shows some encouraging signs that breeding herd expansion and farrowing intentions are slowing for the future due to low prices.

March 27 Quarterly Hogs & Pigs

USDA

Trade Est.

Range

percent of previous year

All hogs March 1

107

106.8

105.0-108.5

Kept for Breeding

102

103.6

102.4-104.6

Kept for Market

108

107.2

105.0-109.0

Pig Crop

December to February

109

109.0

104.7-111.2

Weight Groups

Under 50 lbs.

109

108.6

104.2-110.3

50 to 119 lbs.

107

106.6

104.0-109.1

120 to 179 lbs.

106

106.0

103.0-108.4

Over 180 lbs.

109

107.3

105.0-108.2

Farrowings

December to February

102

103.7

103.0-104.0

Farrowing Intentions

March to May

102

103.2

102.9-103.8

June to August

98

102.9

102.0-103.8

Pigs per Litter

December to February

107

105.1

101.1-107.0

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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