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Closing Comments

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Closing Comments

Corn

Feed prices soar after another round of big rains in the Midwest.

Exporters sold 31.3 million bushels of corn in the week ending June 18, including 19.6 million old-crop bushels. The old-crop sales were down from 24.7 million the previous week, but were up from the five-year average for the week of 18.8 million bushels. China bought 2.4 million bushels of U.S. corn during the week, while “unknown destinations” reduced previous purchases on the books by 11.3 million bushels.

Marketing year sales to all destinations total 1.775 billion bushels, down 72 million or 4% from the previous year. Exporters typically sell 95% of final corn shipments by this point in the year, whereas they had sold 96% by this point last year. However, they have already sold 97% of USDA’s target for the current marketing year. As such, sales to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 42 million bushels, but that is down from 46 million bushels the previous week.

Exporters sold 0.01 million bushels of old-crop grain sorghum in the week ending June 18, down from 2.4 million bushels the previous week and down from the five-year average for the week of 1.0 million bushels. The minuscule amount sold went to Canada, with Chinese end users absent from the market.

Marketing year sales to all destinations total 330 million bushels, up 60 million or 94% from the previous year. Exporters typically sell 80% of final grain sorghum shipments by this point in the year, whereas they had sold 80% by this point last year as well. However, this year they have already sold 94% of USDA’s target for the marketing year. As such, sales to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 50 million bushels, but that is down from 52 million bushels the previous week.

Strong storms built in southern Iowa last night and dropped down into saturated areas of Missouri, dumping up to 7” of rain on the region. The storms then turned east to race across saturated areas of the eastern Midwest. Traders seized on the weather story this morning to justify a move to new highs for the move, with both July and December corn rising to two-month highs.

The market has absorbed increased farm sales very well to this point, but speculative traders are growing nervous ahead of tomorrow’s expiration of July options and Greek uncertainty going into the weekend. December corn posted a lower high in May than in April in nine of the previous 25 years. It found a reason to rally in June/July in eight of those years; last year being the exception. The average rally was roughly 45 cents. December corn has rallied roughly 30 cents in the past 10 days.

Soybeans

Heavy rains wash away planting hopes, sending soybean prices sharply higher.

Exporters sold 11.8 million bushels of soybeans in the week ending June 18, including 4.4 million old-crop bushels. The old-crop sales were down from 4.9 million bushels sold the previous week and down from the five-year average for the week of 7.4 million bushels. China actually cancelled previous purchases of 2.2 million old-crop bushels during the week, while “unknown destinations” bought 1 million bushels of old-crop and 4.4 million bushels of new-crop soybeans during the week.

Marketing year sales to all destinations total 1.856 billion bushels, up 185 million or 11% from the previous year. Exporters typically sell 99% of final soybean shipments by this point in the year, whereas they had sold 102% by this point last year. This year they have also sold 102% of USDA’s target for the marketing year. As such, sales to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 70 million bushels, down from 74 million the previous week.

Another indicator that needs to be watched in the soybean market is demand for soymeal, which drives crush margins that have remained strong this year. Exporters sold 106.3K metric tons of soymeal in the week ending June 18, up from 96.1K the previous week and above the five-year average for the week of 83.8K metric tons.

This suggests that crush margins will remain strong for some time yet, particularly as farmer sales of soybeans are easing basis costs for processors. Actual shipments of soymeal during the week totaled 185.3K metric tons, up from 169.5K the previous week and up from the five-year average for the week of 117.1K metric tons. Soymeal futures traded to nearly four-month highs on the data.

Heavy overnight rains provided the cover needed by speculative traders who wanted to push soybean prices higher. November led the complex higher, slashing through resistance at the 200-day moving average at $9.705 and through trend line resistance off the November and December highs. The market paused just below the April 2 high of $9.7875 as producer sales increase. However, the contract did manage to trade above it to its highest level since March 5.

The November contract has essentially completed more than an 80-cent rally at this point. The average in years when November was bearish in April and May was just over $1. The contract rallied as little as $0.82 per bushel in both 1996 and 2004, while rallying as much as $4.28 per bushel in 2010. Taking out the 2010 rally, the highest summer rally for November soybeans following a bear spring was $1.58 in 1993. That rally started in mid-June and continued into mid-July.

Option expiration on Friday and Greek uncertainty should make tomorrow’s trade interesting. July soybeans rallied to three-month highs on today’s rally, pushing through the 200-day moving average at $9.9625 and consolidating for some time on both sides of $10 as farmer sales matched up with speculative buying. July option open interest makes the $10 strike price attractive, but the $10.20 strike price is even more attractive if the bulls can maintain the momentum going into Friday’s expiration.

The new-crop soybean/corn price ratio lost ground today, trading at 2.49 to 1 at the end of the day. As friendly as the market is now, I still see no reason to back away from my expectations at this point that the ratio will trade down to 2.05 to 1 or lower at some point this year.

Wheat

Midwest harvest delays and quality concerns lift wheat prices, despite weak demand.

Exporters sold 16 million bushels of wheat in the week ending June 18, with all but 0.048 million of those bushels being for the current marketing year. The sales were up from 11.6 million bushels sold the previous week, but were well-below the five-year average for the week of 24.4 million bushels. Key buyers from Brazil and China were largely absent from the market over the week reported.

Marketing year sales to all destinations total 201 million bushels, down 65 million or 24% from the previous year. Exporters typically sell 23% of final wheat shipments by this point in the year, whereas they had sold 31% by this point last year. However, this year they have only sold 22% of USDA’s target for the marketing year. As such, sales to date fall short of the seasonal pace needed to reach USDA’s target by May 31 by 8 million bushels, which is unchanged from the previous week.

Overnight rains in the Midwest added to harvest delays in the soft red winter wheat belt, encouraging additional short-covering. Additional support came from a surge in corn and soybean prices. Wheat prices pushed higher, triggering additional buying that accelerated gains. Harvest pressure limited gains in Kansas City wheat, but it fought to keep up with the soft wheat market.

Nevertheless, the Chicago/Kansas City spread traded below a nickel at times, settling at 3-1/4 cents, which is not encouraging for those hoping to sustain this rally based on the fundamentals. Even so, today’s gains were impressive. The next objective for Chicago July is to take out the June high of $5.375, while Kansas City July faces the 100-day moving average at $5.37.

Beef

Feeder cattle tumble the $4.50 per cwt daily limit on weakness in the fats and rise in corn prices.

Beef export sales improved modestly in the latest week reported. Exporters sold 11.5K metric tons in the week ending June 18, up from 8.1K tons sold the previous week, but down from an average of 18.5K metric tons sold in the same week over the past two years. Actual shipments during the week totaled 13.8K metric tons, down from 14.2K tons the previous week and down from an average of 15.4K metric tons in the same week over the past two years.

The latest data available shows that we imported 22,704 metric tons of beef in the week ending June 13, down roughly 3,100 loads from the previous week, but still amounting to roughly 50 million pounds of beef. That’s the equivalent of more than 60,000 head of cattle for that one week alone. Year-to-date imports continue to run 35% above the previous year’s pace, which was already elevated by strong imports. These imports are supplying much of the 90% lean beef needed by the fast food industry.

Product movement on the spot daily market rose to 166 loads Wednesday, up from 125 loads the previous day, but down from 170 loads the previous week. Choice cuts rose another $1.99 to $256.12 per cwt, while Select cuts jumped $2.40 to $250.39 per cwt. That dropped the Choice/Select spread to $5.73 per cwt, down from $6.14 the previous day and down from $6.02 per cwt the previous week. Movement at mid-morning today was slow at 52 loads, with Choice cuts down $0.28, while Select cuts were up another $1.12 to $251.51 per cwt.

Today’s kill is estimated to be 112,000 head of cattle, down 1,000 from the previous week, but down 3,000 from the previous year. Week-to-date slaughter is pegged at 437,000 head of cattle, up 4,000 from the previous week, but down 25,000 head from the same period last year.

Live cattle prices came under additional pressure today on fears that demand for product will decline seasonally after Fourth of July buying wanes. Prices hit preset sell-stops below the 50-day moving average, leading them to drop sharply into an air pocket. Prices bounced off their lows without testing the 100-day moving average, currently sitting at $147.63 per cwt, but the move dramatically weakens the charts.

Feeder cattle followed the fat cattle market lower, as profit margins were further squeezed. Furthermore, a surge in corn prices added pressure to those margins as well, along with selling pressure in the market for light-weight cattle. The August and September contracts locked the daily $4.50 limit lower, finding near-term support at the 200-day moving average currently at $218.92 per cwt.

The cash index remains well-above the lead August contract, but the market is obviously saying that it expects demand for feeders to drop as margins are compressed. Today’s latest 7-day cash index came in at $231.80 per cwt, up $3.42 on the day, up $5.57 on the week and at its highest level since December 17 of last year. That’s more than a $12 premium to the lead August futures contract, which should test the conviction of the bears on Friday.

Pork

Hog futures sink ahead of Friday’s USDA crop report that is expected to show a 10% increase in the supply of hogs over 180 pounds versus the previous year.

Lean hog futures were soft for the bulk of today’s trading session in relatively quiet trade. However, prices continued to remain primarily within the trading range established on Monday, with traders squaring positions ahead of Friday’s USDA quarterly hogs and pigs report.

Packer margins are estimated at near $10 per head, providing an incentive to push hogs through the plants, but the supply is large enough to prevent packers from having to push their bids to get the supply. The market is very current with live weights running more than 5 pounds below year ago levels, while carcass weights are roughly 3 pounds below year ago levels. However, the hogs keep coming and prices keep slipping lower.

Today’s cash market was again steady to 50 cents weaker. The latest CME 2-day lean hog index came in at $78.93 per cwt, its lowest level since May 8. The cash index was down $0.20 from the previous day, down $1.64 over the past week and down $3.54 over the past 14 consecutive trading days. The market simply continues to leak lower.

Today’s kill is estimated at 418,000 head, down 2,000 from the previous week, but up 19,000 head from the previous year. Week-to-date slaughter is pegged at 1.675 million head of hogs, down 18,000 head from the previous week, but up 104,000 from the same period last year.

Product movement jumped to 405 loads Wednesday, up from 360 loads the previous day and up from 376 loads the previous week. The composite pork product price firmed to $83.55 per cwt, up $0.68 on the day, but down $1.68 from the previous week. Movement at midday today was slow at 149 loads, with the composite price down $0.92 to $82.63 per cwt on weakness in picnic, rib and ham cuts.

Exporters sold 20.5K metric tons of pork in the week ending June 18, down from 22.7K tons the previous week, but up from 17.1K metric tons in the same week last year. Actual shipments in the week totaled 19.2K metric tons, matching the previous week, but more than double the 9.9K metric tons shipped in the same week last year.

If you’re searching for a reason for why the trade has been hammering lean hog futures in recent week you need go no further than Reuters’ survey of trade participants on expectations for tomorrow’s USDA quarterly hogs and pigs report. The trade has priced into the market expectations that we’ve seen a dramatic rise in supplies, as shown by the chart below. Now traders hold onto their Dramamine while waiting to see if USDA confirms these expectations:

June 26 Quarterly Hogs & Pigs

USDA

Trade Est.

Range

percent of previous year

All hogs June 1

108.0

107.4 – 109.0

Kept for Breeding

102.0

101.3 – 102.6

Kept for Market

108.9

107.9 – 110.8

Pig Crop

March to May

107.7

106.1 – 109.0

Weight Groups

Under 50 lbs.

108.0

106.0 – 111.5

50 to 119 lbs.

108.6

106.1 – 110.2

120 to 179 lbs.

109.6

108.2 – 111.6

Over 180 lbs.

110.0

107.8 – 111.8

Farrowings

March to May

102.1

102.0 – 102.5

Farrowing Intentions

June to August

99.3

97.0 – 101.2

September to November

100.4

97.4 – 102.2

Pigs per Litter

March to May

106.0

105.0 – 108.0

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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