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Closing Comments

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Closing Comments

Corn

USDA’s daily export reporting system today reported that Mexico has been buying more corn. Exporters sold 2.3 million bushels of this year’s corn crop to Mexico in the past 24 hours, while Mexico also bought 1.9 million bushels of next year’s crop. Mexico appears to be managing its risk exposure, buying some of next year’s needs at this year’s harvest slump, just in case acreage drops and the U.S. has weather problems next summer, producing higher prices next year. However, it’s not buying all of its needs, understanding that prices will likely continue to be low if next year’s crop is another good one.

Corn futures continued to erode lower, along with basis, as harvest slowly gains momentum. We saw additional pressure late in the day, likely due to pre-hedging of anticipated harvest deliveries. Harvest progress is expected to pick up significant momentum over the next couple of weeks. A rain event the last half of next week is expected to slow progress, but the midday GFS model pulled back some on expectations for that event. Overall, the weather pattern looks generally favorable for harvest going forward.

Monday’s USDA crop progress report is expected to show less than 15% of the corn crop harvested. We’re still on the front end of supplies coming to town. Big crop years seldom post a bottom before the crop has finished stretching storage facilities. That, combined with the strong dollar, is expected to keep pressure on corn prices for at least a few more weeks unless the dynamics significantly change.

Soybeans

Trade chatter focused on comments out of China to close out the week that it would not approve a particular GMO trait in soybeans due to the will of the people. That was an unusual comment for China, which rarely refers to the wishes of the people. It comes at a time when crush margins are poor in China, largely due to its own high subsidized prices and amid cheapening U.S. prices.

In the end, the burgeoning U.S. crop will likely remain the primary market mover, but we’ll need to monitor these developments in China. Gulf basis surged at the Gulf today on strong export demand, leading to some doubt about the statements. However, that basis is expected to soften in the days ahead as a flush of new-crop supplies arrive.

The trade is seeing the size of soybean yields where harvest has begun and is building in expectations that Brazil will have a crop roughly 10% above this year’s crop. The combination would overwhelm demand, even though that demand is quite impressive in its own right. Thus, it’s difficult to conceive that we could put a bottom in the market this early in the harvest, even with that strong demand.

Wheat

Minneapolis wheat continues to feel harvest pressure as the last of the crop makes its way out of the field. The protein content is disappointing this year, but that’s not to be unexpected where yields are good. The U.S. Wheat Associates reports that it has tested about three-fourths of the anticipated samples to come in, with protein averaging 13.5% thus far, compared to 13.6% the previous year. Minnesota protein is coming in at 12.9%, with Montana at 13.6% and North Dakota at 13.7%. Levels drop again to 13.4% protein in South Dakota.

The wheat market as a whole continues to attempt to carve out a bottom. It’s tried and failed several times already over the past several months, with rising competing supplies, a strong dollar and a general outflow of money out of the broader commodity sector weighing on the food grain. Wheat prices are particularly sensitive to changes in the value of the dollar, especially relative to the euro.

I do expect to see spread unwinding to support wheat against corn at some point this fall. That doesn’t mean that wheat necessarily puts together a significant rally, but rather that could help hold wheat steady amid dropping corn prices. Exports out of Russia are starting to slow as domestic prices rise, but Black Sea and European wheat is still expected to remain a competitive factor.

For now, wheat prices continue to consolidate just above recent contract lows. Speculative hedge fund managers hold large short (sold) positions that could support a sharper rally if they were scared into quickly covering those short positions. That reason simply doesn’t exist at this point.

However, wheat will be vulnerable to fear-related selling Sunday night. Reuters reports this afternoon that USDA confirmed after the markets closed for the week the discovery of an unapproved GMO wheat variety in Montana. The discovery was made in July, with resistance to Roundup, but it was just made public today. In this latest case, the volunteer GMO wheat was found at a research facility where testing had approved over a decade ago.

The incident is unrelated to a previous discovery of a different variety of unapproved GMO wheat in Oregon. That discovery hurt wheat exports out of the Pacific Northwest until buyers could be assured that all was okay. However, this time we should benefit from the work done since that discovery to reassure our customers of the purity of the exported supply.

Beef

This was the week of turning sentiment in the cattle industry. Packer margins dropped to estimated losses of nearly $90 per head, after a largely profitable summer, as product prices tumbled. However, those lower prices stimulated strong demand, with the past week’s boxed beef movement the strongest of the year thus far. The increased movement came in the face of National Pork Month in October, when retailers tend to feature pork.

The increased movement was accompanied by a slowing of losses on the price side as well. That stimulated talk that the product market may be carving out a bottom, several weeks before we tend to see a seasonal increase in demand. Packers appear to have effectively slowed the bleeding by slowing chain speed. That tends to back up cattle, which is reflected in higher weights, but supplies overall continue to tighten as the industry attempt to rebuild the cowherd.

The problem for packers is the small number of negotiated cattle. Formula cattle make up a larger share of their weekly need, but there are fewer cattle outside of that supply from which to draw; all of which must be fought over by the packers trying to maintain market share. That tends to translate into higher cash prices for those cattle at stake.

That doesn’t necessarily mean that we are headed to new highs, but it has provided good underlying support for the market, which it now appears may keep this fall’s lows above this summer’s low of $153 per cwt on a live basis. Futures prices surged higher this morning on emerging talk that cattle were beginning to trade in Kansas at $161 per cwt on a live basis, up $2 to $3 from the previous week.

Feeder cattle demand was strong over the past week, with rains in the Southern Plains increasing the expectation of good wheat pasture this winter, and cheap corn in the Northern Plains improving profitability for feeding cattle. The Northern Plains is seeing corn prices approach $2 per bushel, due to rail logistics problems. Cheap corn is the best cure for cheap corn, creating demand. Ethanol margins are good, but producers also face problems moving the ethanol away from the plant on rail. However, cattle can make good use of that cheap corn.

Live cattle futures locked the $3 daily limit higher through December at the end of the trading day to close out the week. Feeder cattle futures touched the $3 daily limit at times for the first several contracts as well, strengthened by weaker corn prices and strength in the fat cattle market. The latest CME cash feeder cattle index came in at a record $230.48 per cwt, up $0.15 on the day and up $0.20 on the week.

Product movement over the past week totaled a 2014 high of 1,064 loads, up from 922 loads the previous week. Choice cuts finished the week at $237.66 per cwt, down $1.45 on the day and down $6.05 on the week. Select cuts finished the week at $225.48 per cwt, up $0.14 on the day, but down $4.13 on the week. The Choice/Select spread fell to $12.18 per cwt, down $1.92 on the week.

Pork

The primary focus to close out the week was USDA’s quarterly hogs and pigs report, which was released at the end of the trading day. This led to a choppy day, with prices generally erasing the previous day’s losses, and even adding a bit of a premium ahead of the report.

Product prices continue to trend higher at a faster pace than the cash market, pushing packer margins deep into the black. Estimated packer margins at the end of the week were at a 2014 high of $18.70 per cwt. Thus far the supply has been adequate to meet that demand, but those supplies are expected to soften this fall.

Packers pushed 256 loads of product through the back door Thursday, down from 427 loads the previous day and down from 287 loads the previous week. However, prices continued to firm. The composite pork product price rose another $1.48 to $118.91 per cwt. The composite price is up $18.73 per cwt since August 27.

Today’s cash market was mostly steady, with a few spots steady to $1 higher. The latest CME 2-day lean hog index was up $0.54 on the day to $107.08 per cwt. The index has been higher each day for the past three weeks, with gains over that period totaling $11.63 per cwt. Gains over the past week accounted for $2.49 of that total.

The data below from the USDA quarterly hogs and pigs report shows the anticipated hole in supplies with hogs above 180 pounds at 94% of year ago levels. That’s been priced into the market. However, it also shows that the industry is starting to get a handle on the disease. Furthermore, those operations not battling the disease are responding to cheap corn prices by expanding their breeding herd. As such, I have already seen some calls for lean hog futures to be down the $3 daily limit Monday morning.

September 26 Quarterly Hogs & Pigs

USDA

Trade Est.

Range

percent of previous year

All hogs September 1

98

96.7

95.6-97.5

Kept for Breeding

102

101.7

99.8-104.7

Kept for Market

97

96.2

94.9-97.0

Pig Crop

June to August

99

97.8

96.9-99.0

Weight Groups

Under 50 lbs.

98

97.6

96.1-99.5

50 to 119 lbs.

98

96.6

94.9-97.7

120 to 179 lbs.

97

95.0

94.0-96.2

Over 180 lbs.

94

94.0

91.8-96.6

Farrowings

June to August

101

100.4

100.0-100.7

Farrowing Intentions

September to November

104

103.2

102.0-104.3

December to February

104

101.7

98.2-103.6

Pigs per Litter

June to August

98

97.4

96.2-98.9

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

 

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