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Closing Comments

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Closing Comments

Corn

Corn futures consolidate near July lows as traders wait for clarity on this year’s corn crop.

It was another rough week for the corn market, although the bulk of the pain was felt early on Monday, with prices trying to consolidate the remainder of the week. December corn lost 21-1/2 cents on the week amid more favorable weather.

Export demand remains solid; not impressive, but solid. Feed usage is solid and strengthening as avian flu concerns ease and the pork industry expands. Fewer heifers are moving through the feedlots, but that’s because they’re being held back to expand the cowherd, raising demand prospects for late 2016 and beyond.

Global corn supplies are estimated to be about 2-1/2 weeks above 40-year lows, as the world operates on “just in time” supplies. That means low prices until supplies are legitimately threatened. We’re not going to run out of corn ahead of this year’s harvest, so futures traders are primarily focused on the 2016 crop. Prices surged in late June on ideas that the crop was threatened, but they’ve plummeted in recent weeks on ideas that “favorable” weather suggests a bin-buster crop.

August is the month for walking fields, while combines do the talking in September and October. Analog years to this tend to suggest big crops in August, while September and October tend to disappoint, suggesting that masked problems from early-season wetness still mattered to the crop. The biggest question revolves around the scope of those masked problems.

December corn continues to consolidate above $3.75, giving that area significance on the charts. This summer’s low is near $3.62. I still believe that corn is close to carving out a near-term low, but a sustained rally will likely be difficult ahead of the trade having hard evidence of widespread losses in the Southern Midwest.

Soybeans

Soybeans fall on Chinese old-crop cancellations.

August soybeans performed well for much of the week feeding off seasonally strong export demand and seasonally strong soymeal demand. However, the first leg of that demand structure came under attack when USDA announced that China cancelled previous purchases of 7.3 million bushels of old-crop soybeans. As such, the lead contract lost 10-1/2 cents on the week, while new-crop prices lost ground nearly 25 cents.

China has really stepped up to buy new-crop stocks in recent weeks, after falling significantly behind its typical pace through the first half of this year. Some analysts believe that China will continue to buy South American supplies through the fall due to the strength of the dollar versus a very weak Brazilian real and Argentine peso.

That will likely contribute to weaker demand than we’ve seen in the past, but China likes the quality of our new-crop supplies. That should support continued demand. As such, I still believe that the dominant factor will be the size of the crop.

USDA projects this year’s soybean yield at 46 bushels per acre, second only to last year’s crop. Some in the industry expect a crop even larger than that projected by USDA. Soybeans can surprise. August really does matter. But I would also argue that May and June weather was so damaging in the southern half of the Midwest that it will be difficult for the crop to fully recover.

Unfortunately, we won’t likely know the impact of early-season weather on the soybean crop for several more weeks yet. The table is set for a bad disease year; diseases such as white mold and sudden death syndrome. We simply won’t know of that potential is realized for a bit longer. In the end, that will likely go a long ways toward determining whether we see a 45-bushel crop of a 43-bushel crop. The former would suggest stagnant prices, while the latter would be expected to be bullish.

Wheat

Double-digit losses cap another week for wheat amid large supplies and quality concerns.

The U.S. Agency for International Development sent 1.3 million bushels of U.S. wheat to Yemen as part of its donation program. The wheat is said to be enough to feed one million people for two months. Donations typically do not show up in the weekly USDA export inspection reports, but do show up in Census Bureau data that often is delayed by up to two months.

It was another week of double-digit losses for the wheat market. USDA reported big weekly export sales on Thursday morning, but traders treated it as an aberration. The strong dollar continues to make it difficult for U.S. wheat to compete into many markets, but the recent drop in prices does help our wheat work into several other markets, resulting in the big weekly rise.

U.S. supplies are large; near a half-year supply. As such, it would take a string of strong export sales weeks to draw those supplies down. Such a string is not anticipated by the market due to the strength of the dollar and quality problems with the crop; particularly the soft red wheat crop.

Wheat has and will likely again someday rally in the presence of bearish supplies, but it generally needs help in doing so. That means higher corn prices and/or perhaps reports of significant weather-related losses in a major producing area such as Australia, Argentina and/or Canada.

In the end, we will likely see wheat confirm a low once it gets help from the outside. That could be a sustained break in the dollar, rally in corn or rally in the broader commodity indices. For now, prices once again are consolidating at the latest lows, with Chicago hovering just above yet another area of chart support, while the hard wheat markets are consolidating above recent contract lows.

Beef

Cattle market struggles to sustain gains as beef supplies remain adequate.

It was a good week in the live cattle futures market, with prices pushing $2 to $3 higher on ideas that the market is carving out a seasonal low. Product prices typically turn higher from this point forward, rallying into the Labor Day holiday period. Packers slowed the chains dramatically in recent weeks to tighten supplies to encourage such a turn higher, with prices over the past week showing signs of a bottom.

However, it remains unclear whether prices can generate a seasonal rally. There certainly is a shortage of slaughter-ready cattle, but does not appear to be a shortage of beef available to the consumer. There is evidence of a moderate shift in consumer demand to cheaper pork and poultry, but I would argue that the greater problem continues to be large imports of beef.

Total beef movement in the week ending July 24, the latest week available, was 6,141 loads, down 691 loads or 10% from the previous week and down 1,244 loads or 17% over the past two weeks. Movement on the spot daily market tends to make up roughly 10% of that total, with volume dropping dramatically in recent weeks as the dollar traded near three-month highs.

The strong dollar continues to encourage beef imports while limiting our ability to compete with exports on the global market. Exporters sold just 6.2K metric tons of beef in the week ending July 23, the second lowest total of the year. The total was down from 10.1K metric tons the previous week and down from 17.4K metric tons in the same week last year. Actual shipments during the week slipped to 11.7K metric tons, down from 12.8K the previous week and down from 14.4K metric tons shipped in the same week last year.

Year-to-date we have exported 21,416 loads, compared to 23,562 loads last year and 28,155 loads the previous year. That means that we have exported 85 million fewer pounds of muscle cuts year-to-date than 2014 and 269 million fewer pounds than in the same period in 2013. The strong dollar is a major contributor to the decline.

Beef imports actually slowed to 22.817 metric tons in the week ending July 25, down 2,730 tons or 11%on the week, but it was still 12% from the same week last year. Looking beyond that week, beef imports total 703,525 metric tons, up 32% year-on-year. Year-to-date beef imports are more than a half-billion pounds above levels seen two years ago, which is more representative of normal beef import levels.

Live cattle futures surged on Tuesday as boxed beef prices showed signs of a bottom. However, futures struggled the rest of the week to sustain any upward momentum. There was enough conviction to take profits on a short (sold) positions, but not enough conviction in beef fundamentals to build long (bought) positions. As such, October live cattle continue to have a lid above the market near $148.

The Friday kill was pegged at 103,000 head of cattle, up 7,000 from the previous week, but down 12,000 from the previous week. Saturday’s kill is estimated at 2,000 head, down 5,000 from the previous week and down 6,000 from the previous year. Slaughter for the week is estimated to be 532,000 head of cattle, down 7,000 head from the previous week and down 43,000 head from the same week last year.

This slowdown in the chains is backing up cattle in feedyards. Carcass weights for the past week are not yet available, but the previous week’s weights were up 11 pounds over the past five weeks, adding more beef to the market to go along with all of the imported beef.

Feeder cattle futures reflected considerable concerns when corn prices were rising and fat cattle prices were falling, but futures found some footing over the past week as demand at the sale barn picked up on falling corn prices and firmer fats. Even so, futures continue to be capped by the 20-day moving average on the charts, even as they trade at a discount to the cash market. The latest seven-day cash index came in at $215.95 per cwt, up $0.17 on the day, up $1.12 over the past three consecutive days, but still down $0.14 over the past week.

Product movement on the spot daily market fell to 125 loads Thursday, down from 179 loads the previous day and down from 129 loads the previous week. Choice cuts rose $0.72 to $233.34 per cwt, while Select cuts rose $0.25 to $229.32. That firmed the Choice/Select spread to $4.02 per cwt, up from $3.55 the previous day, but down from $4.63 the previous week. Movement at mid-morning today was routine at best at 71 loads, with Choice cuts down $0.07, while Select cuts were up $0.37 per cwt.

Pork

Lean hog futures lose momentum late week on supply concerns.

This week’s cash market was mostly steady, tipping weaker at times and firmer at other times, finishing mostly stead to close out the week. Support came from favorable packer margins near $15 per head, encouraging packers to pull hogs through the plants. This follows the pattern in recent weeks of slaughtering 13% plus more hogs on a weekly basis than were slaughtered in the same week last year.

Carcass weights are several pounds below year ago levels, easing production concerns somewhat. As such, slaughter numbers are regularly topping 13% above year ago levels on a weekly basis, but total pork production is running 11 to 12% above year ago levels. That’s adding a lot of pork to the system.

Pork imports totaled 8,428 metric tons in the week ending July 25, down 663 tons or 7% from the previous week. Even so, year-to-date pork imports are up 9.6% from the previous year due to the strong dollar.

Fortunately, the strong dollar has been less effective at hurting pork exports. Exporters sold 22.1K metric tons of pork in the week ending July 23, up from 12.1K the previous week and up from 6.9K tons in the same week last year. The surge in sales was quite encouraging considering the strength of the dollar and firming product prices, but it came as prices were beginning to turn higher once again, suggesting that buyers may have wanted to extend coverage fearing higher prices down the road. Actual shipments during the week totaled 23.0K metric tons, up from 15.8K tons the previous week and up from 8.2K tons in the same week last year.

Even so, slaughter numbers remain adequate to meet demand, which prevented follow-through buying after a big short-covering rally mid-week. In fact, October lean hogs fell back into the predominant trading range between $62 and $66 per cwt that contained prices for much of the past six weeks.

The latest cash index came in at $78.51 per cwt, up $0.18 on the day, but down $0.42 over the past week. Friday’s higher index broke a string of 10 consecutive days with a lower index in which is lost $2.26 per cwt.

The Friday slaughter was pegged at 396,000 head of hogs, down 7,000 head from the previous week but up 135,000 head from the same period last year. The Saturday slaughter is estimated at 54,000 head of hogs, up 1,000 from the previous week and up 49,000 from the previous year. As such, the week’s kill is estimated at 2.137 million head of hogs, up 36,000 head from the previous week and up 267,000 head from the same period last year.

Pork product movement on Thursday totaled 301 loads, down from 486 loads the previous day, but up from 253 loads the previous week. The composite pork product price reached an eight-week high of $86.23 per cwt, up $0.26 on the day and up $1.48 over the past week. Movement at midday today was very slow at 104 loads, with the composite price down $0.85 to $85.38 per cwt.

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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