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Closing Comments

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Closing Comments

Corn

Corn can’t be held down, but neither can it sustain rallies near-term.

The Department of Energy reports that crude oil stocks declined by 4.3 million to 461.4 million barrels in the week ending July 10. However, stocks remain near the highest seen this time of year for the past 80  years. Gasoline stocks are in the upper end of the average range for this time of year, while distillate stocks (includes diesel) are near the middle of the range. Furthermore, President Obama’s nuclear deal with Iran is expected to add to burdensome crude oil supplies on the world market, adding to selling pressure for the energies.

The Department of Energy reports that ethanol stocks slid to 19.7 million barrels in the week ending July 10, down from 19.8 million the previous week, but above the 17.9 million barrels seen in the same week last year. Ethanol production slipped to 984K barrels per day during the week, down from 987K barrels the previous week, but up from 943K barrels per day in the same week last year. While slipping from the previous week, the past week’s total is only slightly below record production levels set at 994K barrels per day seen three weeks prior.

The data suggests that ethanol processors utilized 104.4 million bushels of corn in the week ending July 10, down from 104.8 million the previous week, but up from 101.6 million in the same week last year. That brings estimated corn use to date for ethanol production to 4.534 billion bushels, up 139 million or 3% from the previous year. Corn usage to date exceeds the seasonal pace needed to reach USDA’s target by August 31 by 2 million bushels, versus falling short of the pace by 1 million bushels the previous week.

Corn prices added to their losses today, but buyers emerged to buy the feed grain. End users are growing concerned about prices later this year, while some speculators see opportunity, lacking another market that really shows opportunity. Reports of this year’s problems led to massive covering of speculative short (sold) positions, but now they must decide if they want to build long (bought) positions when corn ratings are above average for this time of year.

Corn prices erased their losses, pushing higher late in the session after the updated American GFS model turned hotter and drier for the Midwest. This model has a track record for having a heat-bias that projects warmer temperatures in the summer than is typically verified. Yet, that provided support for today’s close because this crop would be quite vulnerable to a flash drought if it were to turn hot and dry.

Look for prices to remain quite choppy over the next several weeks until we get deep enough into the growing season to get a handle on the crop’s actual yield. I remain friendly corn prices longer-term based on the damage already done to the crop in the southern Midwest, but history indicates that the market will not have a grasp on those losses and how they offset good crops in the west for another four to six weeks.

Soybeans

August weather matters more to soybean traders.

The National Oilseed Processors Association reports that its members crushed a record 142.473 million bushels of soybeans for the month of June, down from 148.4 million the previous month, but up from 118.7 million the previous year. The trade was looking for NOPA June crush at 141.4 million bushels, while my submitted estimate was 141.9 million bushels. NOPA processors typically account for 95% of total soybean crush activity.

The June crush total brings NOPA crush for the current marketing year to 1.498 billion bushels, up 74 million from the previous year. NOPA crush to date exceeds the seasonal pace needed to reach USDA’s newly revised target by 19 million bushels, up from 12 million the previous week and one more reason to expect old-crop stocks to further tighten before the end of the marketing year.

NOPA soyoil stocks were pegged at 1.574 billion pounds at the end of June, down slightly from 1.578 billion the previous month. However, stocks were down significantly from 1.847 billion pounds seen in the same month last year.

Adverse weather to this point created many problems in the southern Midwest, but forecasts are improving and traders believe that it is August that really matters. The above crush report was supportive, further tightening stocks, but we’re not going to run out of soybeans ahead of this year’s harvest. Traders believe that improving weather gives the crop the opportunity to improve, keeping supplies at more than adequate levels over the coming year. I see tighter supplies going forward, but history confirms that it could take two to three months for that to be verified.

Wheat

Surplus stocks of high-priced U.S. wheat weigh on the market.

U.S. hard red winter wheat surplus supplies are estimated to be a 165-day supply; rather large for a market comfortable with “just-in-time” supplies. Soft red winter wheat supplies aren’t much better at a 163-day supply. That means that stronger exports are needed. We can achieve stronger exports with rising global production problems elsewhere, or with cheaper prices that make our supplies more competitive on the global market.

Prices rally when the focus is on weather problems elsewhere, but then fall when the focus shifts back on the need to price U.S. wheat more competitively. The focus was on Russia at first, but harvest thus far has revealed better yields than last year’s good crop. Europe remains hot and dry overall, but most of the crop is mature, limiting the impact on production, with harvest advancing northward.

That puts bullish hopes on Canada and Australia. One-third of Canada’s crop remains under stress, but increased showers elsewhere have eased the market’s focus on problems north of the border. Australia has found itself in a similar situation, with roughly a third of the belt remaining under stress, while other areas see near-term relief.

As such, wheat prices remain under pressure. Prices did rally off their lows, leaving just modest losses on the screen at the end of the day. However, this market needs to see the bulls receive a steady ration of supportive weather headlines and/or strong corn prices to sustain a move higher. The timing doesn’t appear right for that in mid-July.

Beef

Demand for feeder cattle ebbs and flows with corn price.

Feeder cattle were front and center in the beef complex today. They were under pressure when corn prices were rallying as demand at the sale barn waned. However, demand has returned in recent days on signs of a possible near-term high in corn prices. A big discount in feeder cattle futures to the cash market gave the market some room to move to the upside. Unfortunately for the bulls, corn prices kept battle back, showing great resiliency and taking some of the steam out of the feeder cattle market. The latest 7-day cash index came in at $224.12 per cwt, down $0.23 on the day, but up $3.73 on the week.

Fat cattle tried to move higher, particularly when the feeders were posting big gains. However, traders remain skeptical amid bearish chart signals and signs of weaker cash, with any strength disappearing over the noon hour. There are reports of packers offering $144 per cwt on a live basis, suggesting that we will see much weaker cash trade this week. This leaves August live cattle vulnerable at $146.

Packer margins are estimated at more than $50 losses per head, although recent analysis of P&L statements suggest that they are doing better than that. Regardless, they would like to pressure prices to get those margins back into the black. Today’s kill is pegged at 104,000 head of cattle, down 5,000 head from the previous week and down 13,000 head from the previous year. Week-to-date kill is pegged at 322,000 head of cattle, down 1,000 from the previous week and down 26,000 head from the same period last year.

Product movement Tuesday slowed to 122 loads, down from 159 loads the previous day and down from 172 loads the previous week. Choice cuts firmed $0.04 to $236.04 per cwt, while Select cuts rose $1.26 to $233.96 per cwt. That dropped the Choice/Select spread to a nearly two-week low of $2.08 per cwt, down from $3.30 the previous day and down from $3.58 the previous week. Movement at mid-morning today was good at 132 loads, with Choice cuts up $1.07 and Select cuts also up $1.07 per cwt.

Pork

Lean hog future run out of buyers near recent highs amid ample supplies.

Today’s Midwest cash hog market was mostly steady to 50 cents higher in the closely watched Iowa/Southern Minnesota market, mostly steady to 50 cents weaker in Illinois and mostly steady elsewhere. The cash index today came in at $80.26 per cwt, up $0.51 on the day, up $2.83 over the past week and up $3.22 over the past seven consecutive trading days.

Product prices are finding some stability, with the composite price hovering above $80 per cwt, allowing packer margins to remain near $1 to $2 per head. Product movement rose to 349 loads Tuesday, up from 275 loads the previous day, but down from 365 loads the previous week. The composite price slipped to $81.83 per cwt, down $0.20 on the day, but up $0.23 on the week. Movement at midday today was good at 238 loads, with the composite price up $0.58 to $82.41 per cwt.

Today’s kill is pegged at 420,000 head of hogs, up 2,000 from the previous week and up 23,000 head from the previous year. Week-to-date kill is estimated at 1.253 million head, up 20,000 from the previous week and up 94,000 head of hogs from the same period last year.

August lean hogs appear to be carving out a sideways trading range between $72 and $77 per cwt near-term. However, the abundance of supplies leaves this market vulnerable to additional weakness longer-term. A longer-term rise in corn prices could slow expansion, but that has yet to be determined, with USDA still calling for a large crop.

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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