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Closing Comments

Corn

Corn futures push to new 2015 highs as traders build risk premium back into the market after leaning hard to the short (sold) side last month.

Exporters sold 32.8 million bushels of corn in the week ending June 25, including 23.4 million old-crop bushels. The old-crop sales are up from 19.6 million sold the previous week and up from the five-year average for the week of 14.8 million bushels. China was largely absent from buying U.S. corn, but we did see a reduction of 9.7 million bushels previous sold to “unknown destinations” due to cancelations and primarily transfers to other buyers.

Marketing year sales to all destinations total 1.798 billion bushels of corn, down 61 million or 3% from the previous year. Exporters typically sell 96% of final corn shipments by this point in the year, whereas they had sold 97% by this point last year. Thus far this year they have sold 98% 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 39 million bushels, but that is down from 42 million the previous week.

Exporters sold 3.3 million bushels of grain sorghum in the week ending June 25, including 1.1 million old-crop bushels. The old-crop sales were up from 0.008 million bushels sold the previous week, but were down from the five-year average for the week of 1.3 million bushels. The past week’s old-crop sales went to Chinese end users, while the new-crop sales were listed as sold to “unknown destinations.”

Marketing year sales to all destinations total 331 million bushels, up 138 million or 92% from the previous year. Exporters typically sell 81% of final grain sorghum shipments by this point in the year, whereas they had sold 81% by this point last year as well. However, this year they have already sold 94% of USDA’s target for the year. As such, sales to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 47 million bushels, but that is down from 50 million the previous week.

The balance sheet for corn is tightening after this week’s USDA quarterly stocks, acreage and declining crop rating reports. The balance sheet is not bullish at this point. That would likely take hard evidence of a national average yield of 157 or lower and we don’t have that yet, and we may not. Producers in Illinois and Indiana think that we do, but farmers in Minnesota, Wisconsin and northern Iowa would quietly argue that we are well above that level.

However, this past week found a trade that was leaning very hard to the short (sold) side suddenly recognize that the door has been opened to the possibility of a bullish balance sheet. As such, some speculative shorts were trapped in a rising market and are buying the breaks to get out. End users are also interested in buying the breaks, just in case adverse weather continues to be a problem.

July/August weather will go a long ways toward determining how good crops are in the good areas and to what extent they will offset losses in the poor areas. Continuing the June pattern through July would increase the odds that losses in bad areas exceed gains in the good areas. A drier pattern would have the opposite impact at this point.

History argues for a significant setback at some point; perhaps around the July 10 USDA monthly crop report, but it’s possible that adverse weather in the week ahead keeps the buying coming. If we do have a setback, history would argue for it to continue into August when we get actual yield checks.

Soybeans

Soybean prices consolidate on strong demand and crop fears, with gains limited by the belief that August matters more for soybean production than June and July.

Exporters sold 4.3 million bushels of soybeans in the week ending June 25, including net cancellations of 0.4 million old-crop bushels. The old-crop total compares to net sales of 4.4 million bushels sold the previous week and the five-year average for the week of 2.9 million bushels. The past week’s total included net cancellations by China of 2.4 million old-crop and 2.0 million new-crop bushels previously on the books.

Marketing year sales to all destinations total 1.856 billion bushels of soybeans, up 183 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’s sales equal 102% of USDA’s target thus far. As such, sales to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 59 million bushels, down from 70 million the previous week.

Another significant factor in this year’s market has been the unusually strong export demand for soymeal due to problems in Argentina. Export sales in the week ending June 25 totaled 87.1K metric tons, down from 106.3K tons the previous week, but close to the seasonal pace of 88.7K metric tons. Actual shipments during the week totaled 162.9K metric tons, down from 185.3K tons the previous week, but up from the five-year average for the week of 148.0K metric tons. This continues to support crush margins and therefore demand for cash soybeans.

The dynamics for soybeans are similar to corn. Demand for soymeal is using up more old-crop than expected and wet weather threatens the new-crop. However, traders typically don’t want to get ahead of themselves to trade soybean weather problems.

The key yield that shifts the balance sheet bullish right now is at 43 bushels per acre. Again, the situation is very similar to corn, in that crops look quite good in the northwestern Midwest, but have significant problems in southern and eastern areas. The balance sheet is not bullish at this time, but the door has been opened to that possibility. As such, traders are building risk premium into the market just in case. That case gets additional support if export soymeal demand remains solid, further tightening old-crop stocks. Weather becomes a much bigger factor in the minds of traders next month.

Wheat

Indecision characterizes the wheat market due to poor demand, but rising global weather concerns.

Exporters sold 13.4 million bushels of wheat in the week ending June 25, down from 16.0 million the previous week and down from the five-year average for the week of 18.0 million bushels. Brazil and China were largely absent from the wheat market during the week.

Marketing year wheat sales total 215 million bushels, down 73 million or 25% from the previous year. Exporters typically sell 24% of final wheat shipments by this point in the year, whereas they had sold 33% by this point last year. However, this year sales to date total 23% of USDA’s target. As such, sales to date fall short of the seasonal pace needed to reach USDA’s target by May 31 by 11 million bushels, versus falling short by 8 million the previous week.

Egypt released a snap tender to buy wheat following Wednesday’s sharp break in prices. It ended up buying just 2.2 million bushels of wheat from Romania. However, the price was just $5.78 per bushel cost and freight after converting for currency differences.

U.S. wheat export demand remains poor. Stocks are high, but we are too high priced on the global market. Thus, the big breaks in wheat prices during times when this is the focus. However, wheat traders tend to ignore that fact during times when headlines focus on global weather problems and they’ve done that more often than not in recent days. Heat domes are building in Europe, Russia, Canada and Australia.

That could all change without notice, but thus far forecasters expect the trends to continue near-term. Big swings in prices will likely remain with us, but current weather models would suggest that we will see increasing concerns about wheat production in Canada and Australia in the weeks ahead provide more headlines for fund managers to worry about, even though out supplies are large.

Beef

Cattle rally struggles amid fears that product demand will drop off after the Fourth of July holiday weekend.

Live cattle futures tried to push higher going into the three-day holiday weekend, following through on buying that pushed the lead August contract through some key moving averages on Wednesday. Support came from impressive movement on stronger cash trade on Wednesday that was $3 to $4 above the previous week’s level at mostly $150 to $151 on a live basis and up to $153 in the north.

However, the market continues to struggle to sustain gains. That’s largely because export demand is struggling and product demand at home is expected to soften seasonally in the weeks ahead. Exporters sold a three-month low of 6.6K metric tons, down from 11.5K the previous week, but up from 5.7K in the same week last year. Actual shipments during the week were routine at 10.9K metric tons, down from 13.8K the previous week and down from 14.1K in the same week last year.

As such, fat cattle prices remain vulnerable in the weeks ahead, based on those expectations of softer product prices. That will remain the expectation as long as August futures are below $152.425 per cwt. Significant support at this point remains at $148, but I wouldn’t be surprised if we drop a couple dollars below that in the weeks ahead. As a result, feeder cattle futures do not look as good, particularly with corn prices pushing higher. August feeder cattle are vulnerable to another test of support at the 100-day moving average, currently at $215 per cwt.

Product movement rose to 145 loads on Wednesday, up from 134 loads the previous day, but down from 166 loads the previous week. Choice cuts were down $0.44 to $252.29 per cwt, while Select cuts were down $0.09 to $249.26 per cwt. That narrowed the Choice/Select spread to a three-month low of $3.03 per cwt, down from $3.38 the previous day and down from $5.73 the previous week. Movement at mid-morning today was routine at 74 loads, with Choice cuts down $2.02 while Select cuts were down $0.84 per cwt.

Today’s kill is pegged at 113,000 head of cattle, up 1,000 on the previous week, but down 4,000 from the previous year. Week-to-date slaughter is pegged at 451,000 head, up 14,000 on the previous week, but down 17,000 from the same period last year.

Pork

Lean hog futures rally on robust export demand.

Export sales surged to a calendar year high of 39K metric tons in the week ending June 25, up from 20.5K the previous week and up from 12.3K tons in the same week last year. Actual shipments more than doubled from the previous week to 38.8K metric tons, up from 19.2K the previous week and up from 8.5K metric tons in the same week last year.

The surge in export sales explains the relative resiliency in product prices of late as supplies rise. USDA surprised traders when it showed that supplies over 180 pounds were up 13% from the previous year, but that’s what the slaughter numbers have been showing over the past month. As such, it had been somewhat surprising to see product prices hold as well as they have, but we now know that much of that has been due to favorable export demand.

Packer margins continue to hover around $10 per head on that product price strength, providing incentive to pull hogs through plants. However, deliveries have been more than ample to supply their needs, allowing packers to enjoy those profitable margins. Cash prices were mostly steady over the past week, with occasional weakness. The cash index is leaking lower, but the bleeding is slowing, suggesting some stabilization. The latest CME 2-day cash index came in at essentially a two-month low of $77.15 per cwt, down $0.17 on the day, down $1.78 over the past week and down $5.32 over the past 19 consecutive trading days with declines.

Today’s kill is pegged at 424,000 head of hogs, up 6,000 from the previous week and up 25,000 from the previous year. Week-to-date slaughter is pegged at 1.696 million head of hogs, up 21,000 from the previous week and up 65,000 from the same period last year.

Product movement rose to 413 loads on Wednesday, up from 380 loads the previous day and up from 405 loads the previous week. The composite pork product price firmed to $81.47 per cwt, up $0.03 on the day, but down $2.08 on the week. Even so, prices remain relatively close to 2015 highs. Movement at midday was slow at 160 loads, with the composite pork product price down another $0.99 to $80.48 per cwt.

Lean hog futures bounced in the week following the release of USDA’s quarterly hogs and pigs report, but bullish enthusiasm is limited. There’s simply too many hogs out there to suggest that the market can weather a significant increase in prices at this point.

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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