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Closing Comments

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Closing Comments

Corn

Corn futures bounce on weaker dollar, technical support and rising ethanol demand.

The Department of Energy reports that crude oil stocks dropped 2.8 million to 479.4 million barrels in the week ending May 22, slightly beating trade expectations of a 2.7 million-barrel decline. However, that still leaves stocks at their highest level on record (80 years) for the week. Gasoline stocks fell by 3.3 million barrels, but remain near the upper limit for the average range for this time of year. Distillate stocks (including diesel) increased 1.1 million barrels, but are in the lower half of the average range for this time of year.

The DOE also reported that ethanol stocks slipped to 20.1 million barrels in the week ending May 22, down from 20.4 million the previous week, but up from 17.5 million barrels in the same week last year. Ethanol production rose to a 17-week high of 969K barrels per day during the week, up from 958K the previous week and up from 927K barrels per day in the same week last year.

The above data suggests that ethanol production used 102.8 million bushels of corn in the week ending May 22, up from 101.7 million the previous week and up from 99.8 million bushels in the same week last year. That brings estimated corn usage to date to 3.805 billion bushels, up 122 million or 3% from the previous year. Corn usage to date to produce ethanol falls short of the seasonal pace needed to reach USDA’s target by 4 million bushels, versus being short by 3 million bushels the previous week.

Corn futures started to push lower once again this morning, but received a boost from data showing a resurgence in pending home sales in April. That dragged the dollar lower and sent money flowing into the major commodity indices, providing a boost for corn prices. Additional support came from the above ethanol data reflecting rising demand for corn amid a lack of farmer selling.

Both the July and December contracts found support just above their contract lows today, with traders taking profits on short positions ahead of the end of the month. Futures tried to bounce on a short-covering rally earlier this month, but that rally was cut short when the dollar started to surge. Can corn try a short-covering rally again?

The answer is, yes it can. Only time will tell if it will. Last year prices continued to slide right on through September. I looked back at the past 25 years and found 9 years in which the May high for December corn was lower than the April high, including last year. Those 9 years saw 4 June rallies and 4 July rallies. Of course the remaining year was 2014.

The average price bounce in those 8 years was close to 45 cents. Surplus old-crop stocks in a number of those years were surprisingly as big or bigger than we have this year. So yes, it can happen, but the currency market will likely play a role in determining whether it does happen.

Soybeans

Soybean futures turn soft on rumors of an agreement with the Argentine crushers union.

Data released from the Department of Energy confirmed that biodiesel production increased in March. The Energy Information Agency reports that biodiesel production in March rose to 98 million gallons, up 20 million or 26% from the previous month, increasing demand for soyoil. However, the March total was still 1 million gallons below the total seen in the same month last year. Soyoil used for biodiesel totals 998 million pounds to date in 2015, up from 929 million the previous year.

Crush margins spiked over the past week to 10 days as demand for soymeal increased. A series of strikes and threats for more strikes in Argentina raised concerns about delivery by buyers. Argentina is traditionally the world’s largest exporter of soymeal and soyoil. Fear that deliveries would be delayed made U.S. sources much more attractive, pushing premiums for U.S. soymeal higher.

That raised crush margins, providing an incentive for processors to pull more soybeans through their plants, but farmers were not selling, resulting in stronger basis offers. That in turn supported nearby futures. However, all of that strength gave way when soymeal bids broke today, and along with that crush margins fell. The source of that break appeared to be trade chatter that Argentina’s crush union was close to an agreement that would end its strike.

Soybean futures again pushed higher this morning, but then slipped into negative territory as soymeal futures broke on the reports of a possible labor agreement for Argentine crush workers. Old-crop prices didn’t collapse, as Argentina faces more strikes over the next couple of weeks. However, the weakness allowed the new-crop November contract to probe below $9.00.

It settled above it, but we wouldn’t be surprised to see the contract slip into the $8.80 to $8.90 area before finding near-term support. However, this market remains haunted by fears that new-crop stocks will rise above 500 million bushels in this El Nino growing season.

Wheat

Wheat futures remain soft on weak demand amid ample global supplies.

Egypt released another snap tender to buy wheat on Wednesday afternoon, seeking early July delivery. It purchased 8.8 million bushels this morning, made up of 3 cargoes of Russian and 1 cargo of Romanian wheat. The low purchase prices were near $5 FOB.

This morning’s weekly U.S. Drought Monitor changed dramatically, with virtually all of the drought designation disappearing from the Southern Plains following record rains in the region this month. We’re already seeing reports of wheat sprouting in the head in the region, with weeds expected to be the next problem. The region is expected to dry out for a couple weeks after more heavy rains this weekend, but then turn wetter again by mid-June.

A Lanworth consulting group tour of Russia’s wheat crop this week provided some insight into the regions crop. Dryness continues to be a concern; particularly in the Volga Valley. However, the group continues to believe that the nation’s crop could still reach, or perhaps exceed, the size of last year’s good crop. Tour participants noted a dramatic improvement in genetics and technology over the past 10 years that has significantly improved yield expectations for the region.

Wheat received a lift from increased money flow into the broader commodity sector today, but in wheat’s case, that increased money flow simply limited losses. Traders were reminded about the lack of competitiveness of U.S. wheat in today’s Egyptian purchase.

Speculative hedge fund managers still hold massively large short (sold) positions in wheat. They may try to cover a portion of those short positions at some point again, but simply lack the dollar weakness and/or supportive headlines to justify it at this point. The last trading day of the month on Friday could bring more volatility, but we may need to see harvest reports of problems in the Southern Plains to provide support.

Beef

Feeder cattle lead the beef complex higher.

Lush pasture and cheap corn are a winning combination for demand for light-weight cattle. As such, demand at the sale barn has been ratcheting higher of late, with supplies tightening as heifers are held back to rebuild the cowherd. The cash index appears to have re-established itself above $220, giving courage to the bulls to push feeder cattle futures higher as well.

As such, the August contract rallied to its highest level since January 6 today at nearly $225, providing a lift for fat cattle futures. It would take a move to $226.75 to create a new 2015 high for the contract. The latest CME 7-day cash index came in at $222.45 per cwt, up $0.34 on the day and up $2.67 on the week.

Live cattle futures remain at a large discount to the cash, which gives them some room to move higher. As such, they followed feeder cattle prices higher today, if not reluctantly. June rose to its highest level in nearly two weeks, but conviction was lacking, even at the big discount to cash.

Product prices firmed early in the week as expected as retailers restocked their shelves, but are now starting to weaken as we approach the end of the week. Packer margins were estimated at $29.00 per head.

Movement on the spot daily market rose to 178 loads Wednesday, up from 123 loads the previous day and up slightly above the 175 loads moving the previous week. Choice cuts averaged $261.11 per cwt, up $0.04 on the day, while Select cuts were up $0.68 to $249.88. However, movement at mid-morning today was routine at 88 loads at lower prices. Choice cuts were down $0.93 to $260.18 per cwt, while Select cuts were down $1.40 to $248.48 per cwt.

Today’s kill is pegged at 116,000 head of cattle, up 3,000 from the previous week, but down 3,000 from the previous year. Week-to-date slaughter totals 350,000 head, down 103,000 from the previous week due to this week’s holiday and down 14,000 from the same period last year.

Pork

Lean hog futures see follow-through buying, even as the cash market stagnates and the product market appears top-heavy.

Lean hog futures tried to follow the beef market higher, but struggled to do so amid waning demand. Today’s cash market was mostly steady across the Midwest, with the cash index slipping lower. The latest CME 2-day cash index came in at $82.51 per cwt, down $0.40 on the day, down $0.69 over the past three consecutive days and down $0.54 on the week. The weaker cash prices have helped to boost estimated packer margins to roughly $8 per head.

Today’s kill is estimated at 413,000 head of hogs, down 12,000 from the previous week and down 6,000 from the previous year. Week-to-date slaughter is pegged at 1.272 million head, down 425,000 from the previous week due to Memorial Day, but up 14,000 from the same period last year.

Product movement rose to 442 loads Wednesday, up from 348 loads the previous day and up from 404 loads the previous week. The composite pork product price rose to a new five-month high of $87.28 per cwt, boosting those packer margins. The composite price was up $0.61 over the previous day and up $1.15 over the past week. Movement at midday today was good at 216 loads, but prices were breaking lower. The composite product price broke $2.44 to $84.84 per cwt.

July lean hogs continue to face stiff resistance at $85 per cwt. I believe that demand will strengthen as we move into the last half of the year, but it has problems now. As such, we may need to see a deeper correction lower at some point to allow the demand to adjust, although demand should get a boost from retail features in June.

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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