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Closing Comments

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Closing Comments

Corn

Rally falls short in the corn market as traders fret about rising supply fears amid high crop ratings.

Futures tried to rally over the past week, but simply did not have the strength to sustain it. They found support from the soybean pit mid-week, but the bears emerged once again in the corn pit when soybeans failed three times to sustain a move above key chart resistance. July corn finished a quarter-cent higher on the week, while December was three-quarters of a cent lower. In other words, the market closed the week in indecision with a bias to the downside.

Fundamentally, the trade will look forward to a bit of a drier pattern over the next couple of weeks, once the remnants of tropical storm Bill have exited the region. The debate about denitrification and ponding will continue to keep farmers bullish, while traders will point to above-average weekly crop ratings from USDA that keep their anticipated yields high and balance sheets bearish.

Corn futures typically find an excuse to rally at some point in June or July when they slide lower through the spring, with last year being the exception over the past quarter-century. However, rallies have been quickly sold thus far by both farmers and speculators amid the ongoing bearishness toward the commodity sector as a whole. I do believe that the problems with the crop probably have eased the overwhelming bearishness that was in the corn market, likely limiting the downside risk somewhat, but a sustained rally would likely need to emerge from proof of significant production losses at the end of the growing season.

Soybeans

Soybeans fail third attempt at overhead chart resistance.

Soybeans posted the most impressive rally this week that we’ve seen since January, but in the end could not hold the rally into the close of the week. July gained 31.5 cents on the week, while November rose 45.5 cents. Yet, failure to hold strength into the Friday close leaves next week’s strength in doubt, as prices were pivoting around trend line resistance that has capped the market for the past six months. Technically, some traders begin to lose confidence in such a rally when it can’t muster the necessary strength to sustain a move through resistance, although increased cash sales were a factor on the rally.

Fundamentally, there’s been a lot of chatter about possible lost acres due to this year’s planting delays, particularly in the southwestern Midwest. A look back at similar years found considerable variation in the end results, obviously depending on weather patterns over the last half of June and into the early days of July. However, the predominant thinking of analysts at Commodity Weather Group, looking at both the analog years and weather forecast, is that most of the acres will get planted, with a possible loss of 300K in the area.

However, USDA’s June 30 acreage report is based on a survey of producers in early June, when most farmers would have still been optimistic about getting those acres planted. The same would be true for double-crop soybeans behind wheat in the southern Midwest, which are now in question. Furthermore, I among many believe that USDA under-counted acres on March 31 and expect it to pick up those acres in the June survey. As such, the June 30 report will likely result in an increase in soybean acreage of 1 to 2 million.

Traders will put those higher acreage estimates into their balance sheets with a yield of 45 bushels or higher based on above-average weekly crop ratings coming from USDA and project ending stocks approaching or exceeding 500 million bushels, depending on their demand estimates. In some cases, those estimates could be closer to 600 million bushels. That’s not a recipe for higher soybean prices, especially with Argentina and Brazil both expected to increase acreage later this year.

That, however, doesn’t preclude a bounce in the meantime. Historically soybean prices find an excuse to bounce at some point in the summer. The average bounce in the eight bear years looked at over the past 25 averaged just over $1. Fund managers love to trade soybeans. Nine dollars “appears” cheap to them, so they see that as a possible place to go long (bought). That’s what they tried this past week. They may not be done trying, but three-times they failed to take out resistance as farmer selling increased, leaving them shy of taking out overhead resistance. Some may want to give up. Those wanting to salvage this rally will likely need to put in an impressive performance to start the week.

Wheat

Prices stabilize to close out the week after big losses on rising supplies.

It was a hard week for wheat futures, with double-digit losses for all three major classes. In fact, Kansas City lost another 7.5 cents on Chicago over the week, even though the spread narrowed roughly 4 cents to close out the week.

Prices tumbled through much of the week on expectations of vastly improved harvest conditions over the next week to 10 days, with harvest results thus far showing less damage than feared in the Plains. However, export demand remains quite soft, with expectations of stiff competition from the Black Sea and Europe being heightened by a strong dollar again this year.

Kansas City led the way higher to close out the week, predominantly on pre-weekend profit taking. The profit taking was seen for both large short Kansas City positions, as well as inter-market spreads with Chicago. However, it’s difficult to justify a sustained rally with projected stocks remaining above 800 million bushels.

Technically however, prices can rise. History shows examples of times when wheat rallied in the midst of large domestic stocks. Typically those rallies came under the cover of bullish stories of adverse weather overseas, creating buying interest among fund managers. Several potential possibilities exist for such a scenario later this summer, but it’s too soon to tell which if any will gain traction. Those would include dryness in parts of Europe, although that is easing, as well as dryness in Russia.

However, the more likely possibility would be heat and dryness in the Canadian Prairies and eastern Australia. Even so, those would more likely be developing stories in July and August, IF they occur at all.

Beef

Cattle bounce despite weaker cash prices.

Choice cuts broke hard in late May and early June following a surge in packer kills on good margins last month, dropping more than $21 from their mid-May record highs. The corresponding slowdown in packer kills this month has only been able to manage a recovery of roughly one-third of that drop, which is a big disappointment to feeders, limiting strength in the cash market.

This week’s cash slowly emerged in the Plains at $150 per cwt, down from mostly $152 to $155 the previous week. Futures prices broke mid-week in anticipation of the weaker prices, but firmed into the end of the week ahead of USDA’s cattle-on-feed report.

USDA Cattle-on-Feed

% of Previous Year

Trade

Trade

USDA

Estimate

Range

On-Feed

101.0

100.7

99.2 – 101.9

Placements

90.0

92.8

86.5 – 97.3

Marketings

92.0

92.2

91.4 – 95.8

 

The data showed that on-feed numbers were a bit higher than expected at 101%, but generally close. Placements in May however fell short of expectations by nearly 3%, coming in at 90% of the previous year, suggesting strength in the deferred contracts as supplies tighten. Marketing were near expectations at 92%.

Product prices typically slump in July, so the trade will anticipate the same this year. Cattle numbers are expected to remain tight as the industry holds back heifers in an attempt to rebuild the smallest cowherd in the past six decades. However, imported beef will likely continue to fill the need with mostly 90% lean hamburger than fills the need for much of the fast food industry. This will likely remain the case until Australia and New Zealand start rebuilding their cowherd and/or we see a substantial drop in the dollar so as to make imports too expensive.

Feeder cattle have been following the fat cattle market, as well as monitoring corn prices. Demand for feeder cattle had been strong, but is now beginning to wane as fat cattle optimism collapses. August feeders need to hold support at $220 to avoid chart sell signals. The latest 7-day cash index came in at $225.64 per cwt, down $0.09 on the day, down $0.76 on the week, but still a couple of dollars premium to the lead futures contract.

The Friday kill was pegged at 109,000 head, up 2,000 on the week, but down 8,000 from the previous year. Saturday’s slaughter is estimated at 7,000 head, down 1,000 on the week and down 27,000 on the year. That puts the week’s estimated kill at 549,000 head, up 7,000 from the previous week, but down 65,000 or 10.6% from the previous year. Slaughter for the year to date is estimated at 13.187 million head, down 1.047 million head or 7.4% from the previous year.

Movement on the spot daily market dropped to 118 loads Thursday, down from 170 loads the previous day and down from 133 loads the previous week. Choice cuts firmed $0.43 to $250.83 per cwt, while Select cuts rose $0.35 to $244.73 per cwt. That firmed the Choice/Select spread to $6.10 per cwt, up from $6.02 the previous day, but down from $6.53 the previous week. Movement at mid-morning today was slow at 55 loads, with Choice cuts up $0.01 while Select cuts were up $1.06, pushing the Choice/Select spread down to $5.05 per cwt.

Pork

Lean hogs break lower with product prices as the lift from bacon demand wanes.

Lean hog futures dropped sharply in follow-through selling Monday, but then the August contract bounced off a 2-1/2 month low at $74.35, near chart support, suggesting that an exhaustion low was in place. Prices spent much of the rest of the week consolidating upward within Monday’s trading range, before crashing to new lows again to close out the week. The late-week collapse held a dime above the March 24 low of $73.55, but market behavior does not yet provide confidence that the lows are in.

Prices have been trending lower since late May as product movement, both domestic and export, slowed dramatically as prices rose to calendar-year highs. Suddenly export sales became more sensitive to the dollar at the higher product prices and domestic consumers began eyeing alternative poultry supplies.

Traders are also well-aware of the industry’s tendency to expand too far too quickly when hog prices rise and feed costs drop. USDA’s March quarterly hogs and pigs report showed intentions to slow farrowings this summer. However, the rise in prices after that point combined with a drop in corn is believed to have changed producer plans. USDA will update its data next Friday, June 26. Furthermore, the slowdown in product movement is believed to have backed up supplies in the freezer. USDA will update that data on Monday with its cold storage report.

Weakness in the nearby contracts reflects expectations for a bearish cold storage report. Recent weakness in the deferred contracts, already at a significant discount, reflects bearish expectations for next Friday’s quarterly hogs and pigs report.

The cash market has consistently been steady to 50 cents weaker most days this month. We closed out the week with the cash market mostly steady, although Illinois markets were up to 50 cents weaker. Estimated packer margins sit at $7.35 per head. The latest CME 2-day lean hog index is $80.11 per cwt, down $0.46 on the day, down $1.80 on the week and down $2.36 over the past 10 consecutive trading days.

The Friday kill is pegged at 407,000 head of hogs, down 2.000 from the previous week, but up 54,000 from the previous year. Saturday’s kill is estimated at 40,000 head, up 9,000 on the week, but matching the previous year. That puts the week’s total estimated kill at 2.140 million head, up 12,000 on the week and up 254,000 from the same period last year. That would put year-to-date slaughter at 53.221 million head, up 3.193 million head or 6.4% from the previous year. Actual pork production for the year to date is running near 6% up from the previous year, due to lighter carcass weights.

Product movement totaled 293 loads Thursday, down from 376 loads on Wednesday, but up from 281 loads the previous week. The composite pork product price dropped to a five-week low of $83.94 per cwt, down $1.57 on the day and down $2.56 on the week as bacon demand eased and butt cut prices collapsed. Movement at midday today was slow at 173 loads, with the composite price down another $1.76 on weakness in loin and butt cuts.

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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