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Closing Comments

Corn

China triggers royal flush of commodity indices, sinking corn prices.

China’s main composite stock index dropped 8.5% overnight; its largest drop in eight years. That set a bearish tone for the global commodity and stock indices, with traders fearing that the world’s economy is slowing, reducing their demand for basic commodities. Aggressive selling of the broader commodity indices led them to gap lower to new six-year lows, while also pulling grain and oilseed prices below chart support levels, triggering preset sell-stops that accelerated losses.

Fundamentally, corn traders point toward more favorable weather and expectations that this afternoon’s USDA crop progress report will show that 69% of the crop is rated Good to Excellent, unchanged from the previous week at a time when ratings normally slip lower. However, that’s not unusual in a wet year and demand remains strong. The bottom line is that broad-based emotional selling of the commodity complex as a whole dragged the corn market below areas of chart support, triggering a selling frenzy.

Exporters shipped 43.6 million bushels of corn in the week ending July 23, down from 45.8 million the previous week, but up from the five-year average for the week of 29.4 million bushels. Japan was the primary taker of U.S. corn during the week at 16.2 million bushels, while there were no new shipments to China.

Marketing year shipments to all destinations total 1.582 billion bushels, down 64 million or 4% from the previous year. USDA data suggests that shipments to date are close to the seasonal pace needed to reach USDA’s target for the year, but official Census Bureau data suggests that USDA is under-reporting shipments. Accounting for the differences, shipments to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 58 million bushels, up from 52 million the previous week.

Exporters shipped 6.3 million bushels of grain sorghum in the week ending July 23, down from 6.6 million the previous week, but up from the five-year average for the week of 2.8 million bushels. Virtually all of the past week’s shipments went to Chinese end users.

Marketing year shipments to all destinations total 313 million bushels, up 151 million or 92% from the previous year. Exporters typically ship 84% of final grain sorghum shipments at this point in the year, whereas they had shipped 77% at this point last year. However, this year they have already shipped 90% of USDA’s target. As such, shipments to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 21 million bushels, up from 20 million the previous week.

December corn fell to its lowest level since June 25, falling to a low of $3.83 per bushel, down from its high of $4.5425 set just two weeks ago on July 14. Unfortunately, prices settled near session lows, setting a bearish tone for tonight’s trade as well.

Trade sources believe that the major funds sold 30,000 contracts of 150 million bushels of corn today. The selling is largely driven by emotions based on liquidation in the larger commodity indices amid a global slowdown, but corn traders have little fundamentally to go against the tide at this point. That could change as yield checks pick up momentum in the days and weeks ahead, but for now traders are reluctant  to get in front of this train.  I can’t say that we have hit the bottom, but when we do, it will likely look a lot like this.

Soybeans

Global commodity sell-off sends soybean prices sharply lower.

Exporters shipped 4.4 million bushels of soybeans in the week ending July 23, down from 11.3 million the previous week and down from the five-year average for the week of 6.9 million bushels. Shipments to China during the week totaled just 0.063 million bushels.

Marketing year shipments to all destinations total 1.789 billion bushels, up 208 million or 13% from the previous year. Exporters typically ship 94% of final soybean shipments by this point in the year, whereas they had shipped 96% by this point last year. Thus far this year they have already shipped 98% of USDA’s target. As such, shipments to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 74 million bushels, but that is down from 83 million bushels the previous week.

A Reuters’ survey of trade participants reveals expectations that USDA will rate the soybean crop at 63% Good to Excellent this afternoon, up 1 point from the previous week. This is the time of year when ratings are typically trending lower. This combined with improved weather patterns to provide fundamental pressure to the market, but the bottom line was really the broader commodity sell-off tied to China and other global economic fears.

Soymeal and soybean prices fell sharply as buyers stepped aside amid a global shorting (selling) of the broader commodity sector. Trade sources estimate that the major funds sold 14,000 contracts of soybeans and 7,000 contracts of soymeal. We could see a turnaround Tuesday if China managers to restore confidence overnight, but that is still a big “IF.”

Fundamentally, traders point toward the expectations of higher crop ratings this afternoon amid improving weather patterns in the Midwest, although the southern third of the Delta is drying out. However, I believe that soybeans have the most explosive upside potential if China stabilizes and if the crop comes in below 44 bushels per acre, which is a historically pretty good yield. USDA is currently at 46 bushels per acre.

Unfortunately, November soybeans sold off into the close, settling near the session low. That’s sets a bearish tone for this evening’s session as well, although traders will likely be keeping an eye on China’s stock market.

Wheat

Late losses in wheat test key chart support.

Exporters shipped 16.1 million bushels of wheat in the week ending July 23, down from 18.1 million the previous week and down from the five-year average for the week of 19.9 million bushels. The past week’s shipments included no bushels going to Brazil and just 0.058 million bushels destined for China.

Marketing year shipments to all destinations total 103 million bushels, down 31 million or 23% from the previous year. Exporters typically ship 13% of final wheat shipments by this point in the year, whereas they had shipped 16% by this point last year. However, this year they have shipped just 11% of USDA’s target. As such, shipments to date fall short of the seasonal pace needed to reach USDA’s target by May 31 by 24 million bushels, versus being short by 23 million the previous week.

Chicago September wheat prices spent most of the day consolidating near trend line support at $5.03. Unfortunately, that support gave way in the final minutes of trade, although it could still hold significance if it quickly recovers in the Tuesday session.

Kansas City September wheat managed to hold just above its contract low of $4.955. KC wheat also managed to gain a penny or so on Chicago. This spread needs to turn higher in the days ahead for this market to confirm a bottom. The fundamentals would suggest it is only a matter of time before that happens as we move into August.

Beef

Cattle remain weak behind USDA reports and general economic worries.

Last week’s cash cattle trade was generally $3 lower on the week. Product prices still have not confirmed a bottom, although the slide has slowed and seasonal indicators suggest they may be close to a low. Friday’s cattle-inventory report showed that numbers were slightly above expectations, but more importantly, the industry is well on its way toward rebuilding the cowherd, although it will take time to come back from six decade lows. The cattle-on-feed report Friday showed placements a bit higher than expected, but still low from a historical standpoint. In the end, the reports provided nothing to turn the direction of the market which was headed lower.

On a positive note, supplies will remain tight for some time. Beef heifer retention for cow replacement is up 7%, further aggravating this year’s tight supply of slaughter-ready cattle. Packers are already said to be out in the country offering $1.50 over this week’s tops as they try to secure the cattle they need without having to compete in the negotiated market. Yet, this week’s slaughter is still expected to remain slow near 540,000 head; close to recent weeks. That’s largely due to a modest shift of some demand to cheaper pork and poultry combined with aggressive imports to fill the remainder of the gap.

Packer margins are estimated at better than $60 losses per head, although there is reason to believe that they are actually smaller than that. Today’s kill is pegged at 108,000 head of cattle, down 2,000 from the previous week, but matching the same period last year.

Boxed beef movement in the spot daily market over the past week totaled 642 loads, down from 819 loads the previous week and a three-week low. Movement in the same week last year totaled 781 loads.

Choice cuts finished the week at $230.70 per cwt, down $1.89 on the day, down $2.60 on the week and down $22.42 per cwt over the past four weeks. Choice cuts have posted losses in 18 of the past 21 trading days. Select cuts finished the week at $228.23 per cwt, up $0.27 on the day, but down $1.16 on the week and down $19.92 over the past four weeks. The Choice/Select spread finished the week at $2.47 per cwt, down $2.16 on the day and down $1.44 over the past week.

Movement at mid-morning today was slow, even for a Monday, at 57 loads, although at higher prices. Choice cuts rose $1.43 to $232.13 per cwt, while Select cuts rose $0.74 to $228.97. This firmed the Choice/Select spread to $3.16 per cwt.

The nearby fat cattle contracts found modest support today from the current $2 discount to the cash market, although the charts suggests that they remain vulnerable to a possible additional $4 to $5 slide. Feeder cattle tried to rally on the break in corn, but turned lower again when the lead August contract was unable to take out Friday’s session high of $210.50. The latest 7-day cash index came in at $$215.70 per cwt, down $0.39 on the day, down $3.16 on the week and down $7.33 over the past six consecutive trading days that it has been lower.

Pork

Lean hog futures remain under pressure on concerns of over-supply.

Lean hog futures spent the bulk of today’s trading session in negative territory. The lead August contract set the tone, pushing lower after three failed attempts to sustain a move over the 100-day moving average last week. October failed to reach the previous high for the month of $66.525 per cwt, leading to a sell-off. More significant support is at $62 per cwt for the October contract.

Today’s cash market was mostly steady once again. The CME 2-day cash index came in at $78.72 per cwt, down $0.21 on the day, down $1.49 on the week and down $1.87 over the past seven consecutive trading days of losses.

Product movement slowed to 1,458 loads over the past week, down from 1,533 loads the previous week and a three-week low. The total compares to 1,296 loads in the same week last year. The composite pork product price finished the week at $84.66 per cwt, up $2.24 on the week, up $3.87 over the past two weeks, but down $47.13 per cwt from the same week last year. Movement at midday today was extremely slow at 98 loads, although the composite price rose $0.27 to $84.93 per cwt.

Packer margins are estimated at nearly $14 per head, but supplies remain ample enough to prevent packers from having to pay up. Today’s kill is pegged at 421,000 head of hogs, up 37,000 head from the previous week and up 28,000 head from the same period last year.

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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