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Closing Comments

Corn

Money reverses flow in the grain pits.

A dramatic move by China overnight amplified what probably would have been a more modest turnaround Tuesday sell-off. China devalued its yuan against the dollar by 1.9%, its biggest downward adjustment in more than two decades. That peaked fears that China’s economy might be in worse shape than previously know, leading fund managers to sell the major commodity indices, of which the grains are a part.

A large sell-off to nearly five-month lows in crude oil added selling as well. Data released overnight revealed that Iranian output is already at its highest level since 2012, dumping more oil onto a world facing a glut of supply. Crude oil is a trigger point for fund managers making decisions on the broader commodity sector.

Finally, additional weakness came from some farmer selling on Monday’s rally. Farmers are like everyone else with skin in the game ahead of an USDA report. They’re nervous. The agency has previously surprised the trade with a bearish report in a wet year and may do so tomorrow once again. High yield estimates coming out from a plethora of firms wanting to be noticed adds to that fear.

USDA’s weekly USDA crop progress report indicated that 96% of the U.S. corn crop had reached the silking, or pollination, stage as of August 9, up from 90% the previous week, but matching the five-year average pace for the week. No significant delays were seen on a state-by-state basis.

The agency pegged corn in the dough stage at 50% as of August 25, up from 29% the previous week and up slightly from the five-year average for the week of 49%. Iowa was 10 points ahead of normal, while Minnesota was up 23 points, while Indiana trailed the 5-year state average by 7 points, as did Kansas, while Nebraska was down 9 points, as was Ohio. Other key states were generally close to their normal pace for the date.

Nine percent of the crop was dented, down 6 points from the five-year average for the week. Illinois and Missouri led the way among the core Midwest states at 17% dented and 31% dented respectively, but both also trailed the normal pace for those states. That’s a product of a relatively mild summer.

The crop rates a condition index score of 377 (500=perfect crop), versus 377 the previous week, 385 the previous year, 378 in the same week in 2010 and the 10-year average for the week of 351. Modest losses were seen in Colorado, Missouri, North Carolina, North Dakota, Pennsylvania and Wisconsin. All other states were either stable or posted modest gains. Once again, the best corn is generally in the northwestern Midwest, where record yields are possible, with the major states with the poorest ratings across the southern half of the Midwest.

My seasonally adjusted yield model is at 171.2 bushels per acre. While very close predictors in recent years, these yield models tend to overstate the size of the crop in wet years. For example, our yield model in early August overstated the final size of the crop by 8.5% in 2010. Adjusting this year’s estimate by a similar amount would put the crop at 156.6 bushels per acre. My estimate submitted ahead of USDA’s crop report was 161.5 bushels per acre, resulting in new-crop ending stocks of 1.178 billion bushels.

Tomorrow’s market will likely all be about USDA’s estimate. The annual Pro Farmer tour will take place next week, capturing a lot of attention, but we won’t really have good data on this year’s crop until the combines provide ground-truth in a few weeks. There’s a lot of money in the markets looking for an asset class with a story to chase, but that money is very nervous and can’t decide whether corn and soybeans offer that story or not. That will likely lead to continued choppiness a bit longer until harvest results begin to roll in.

December corn ended the day with double-digit losses and just above session lows. However, the contract’s ability to hold above $3.85 leaves the door open for higher prices if USDA cooperates on Wednesday. That’s now the big question before the market.

Soybeans

Big losses fail to take out Monday’s bullish island reversal, but in the end it will all be about yield.

Monday’s USDA weekly crop progress report revealed that 88% of the U.S. soybean crop was blooming as of August 9, up 7 points on the week, but down 4 points from the five-year average for the week. Missouri was the only state lagging its state five-year average for the week by more than 4 points. Just 58% of Missouri soybeans were blooming, versus the normal pace for that state of 80%.

Soybean pod setting was pegged at 69%, up from 54% the previous week and up from the five-year average for the week of 66%. Five states stood out in the data. Pod setting in Missouri on August 9 stood at 27%, down from that state’s five-year average for the date of 45%. However, Minnesota was at 90%, versus the normal pace of 69%. North Dakota at 86% versus 78% normally, South Dakota at 71% versus 63% normally and Wisconsin at 72% versus the normal pace of 58%.

The crop rated a condition index score of 363, versus 362 the previous week, 378 the previous year, 371 in the same week in 2010 and the 10-year average for the week of 352. Modest declines were seen in Arkansas, Kentucky, Louisiana, Mississippi and Wisconsin, while all other states were stable to higher during the week. Nebraska stood out with the biggest weekly change, with its index rising 11 points to 382 during the week. Once again, the best Midwest soybeans tend to be in the northwestern areas, while the poorest ratings were in the southern half of the Midwest.

My seasonally adjusted yield model puts the soybean crop at 45.1 bushels per acre. Again, I believe this is a weakness of the model. Although it has been close the past two years, I believe that it overstates the size of the crop in wet years, although not so much as for corn. My submitted yield estimate ahead of the USDA crop report was 44.4 bushels per acre, resulting in new-crop ending stocks of 241 million bushels.

Today’s sell-off was nearly as painful as Monday’s rally was beneficial, but not totally. November soybeans held above Monday’s chart gap, keeping a bullish island reversal on the chart. In the end, it will come down to yield and we won’t have good harvest data yet for at least another month. I continue to believe that soybeans have the greatest upside potential, but that’s contingent on data to confirm those expectations that will not be available for quite some time, leaving lingering uncertainty leading to choppy trade in the meantime.

Wheat

Wheat loses the support of the other markets.

Monday’s weekly crop progress report revealed that the winter wheat crop is essentially harvested at 97%. Meanwhile, the spring wheat crop was 28% harvested as of August 9, up 20 points on the week and up 8 points from the five-year average for the week. Progress was ahead of each state’s five-year average pace for the week, except in North Dakota where it trailed the normal pace by one point. Progress stood at 35% in Idaho, 33% in Minnesota, 29% in Montana, 16% in North Dakota, 53% in South Dakota and 79% in Washington.

The spring wheat crop rated a condition index score of 373, versus 376 the previous week, 378 the previous year and the 10-year average for the week of 359. It was the sixth highest condition score for the week on record going back to 1986, with the highest score for the same week coming in 2010 at 396.

Condition scores rose modestly in Minnesota, Montana and North Dakota during the week, while falling in other states. The greatest problems were in Washington, where 46% of the crop is rated in Poor to Very Poor condition, giving a condition index score of 261. The best scores were in Minnesota and North Dakota with scores of 399 and 397 respectively. Those are the two primary production states.

I commented Monday that wheat was trying to carve out a bottom, but that its big gains were largely due to help from the outside. It lost that support today, and quickly reverted to fears of over-supply. Today’s losses illustrated the weakness of U.S. wheat fundamentals until/unless we see sufficient losses in competing areas of the world. Wheat needs help from the outside markets.

Global weather patterns appear to be slowly shifting to a less-desirable production pattern in major growing areas of the world, but not yet to the point of creating a concern about tightening stocks. That’s going to take some time, which is why wheat needs help to sustain rallies near-term.

Beef

The cattle markets consolidated in quiet trade today while waiting for fresh direction.

Contrary to the other markets, trade was very quiet in the cattle complex. October live cattle consolidated primarily just above support at $149, while waiting to see if this week’s cash trade can hold the impressive upward trek it posted over the past couple weeks. Packers continue to operate the chains at a slow speed to prop up product prices amid a flood of imports due to a strong dollar.

Supplies of slaughter-ready cattle are tight, and will likely get even tighter as the impact of holding back heifers is totally felt. However, rising carcass weights suggest that they are not tight enough near-term relative to the flow of imported beef. Beef 90s are in decline as supply exceeds demand, which in turn is reducing demand for some of the chuck and round fed cuts as well. As such, we’ll likely continue to see weekly kills of 530K to 540K head for the foreseeable future, with product prices coming under renewed pressure again for a few weeks in September.

Beef movement in the week ending August 7 totaled 6,292 loads, up 20 loads from the previous week. Trade on the spot daily market totaled 682 loads or 11% of the total during the week.

Movement on the spot daily market at 107 loads was good for a Monday yesterday, up from 87 loads on Friday, but down from 128 loads the previous week. Choice cuts traded $2.18 higher to $238.52 per cwt on Monday, while Select cuts were up $1.78 to $231.92 per cwt. That pushed the Choice/Select spread to $6.60 per cwt, up from $6.20 the previous day and up from $5.16 the previous week. Movement at mid-morning today was sluggish at 64 loads, with Choice cuts up another $0.61 and Select cuts up another $1.16 per cwt.

Packer margins are generally slightly positive and packers want to maintain that. Today’s kill is pegged at 112,000 head, up 3,000 from the previous week, but down 5,000 from the previous year. Week-to-date kill is pegged at 219,000 head of cattle, up 3,000 from the previous week, but down 11,000 from the same period last year.

September feeder cattle are forming a bull flag on the charts, but I’m skeptical that the market will be able to execute the chart formation to higher prices unless we get a significantly bearish report from USDA on the size of the corn market Wednesday. The September contract is generally crawling along just above the 20-day moving average, currently at $210.33 per cwt. The latest 7-day cash index came in today at $216.68 per cwt, up $0.02 on the day, but down $0.70 on the week.

Pork

Lean hog futures break with product prices and on bearish chart signals.

October lean hogs saw follow-through selling today after Monday’s chart breakdown. The October contract pushed to three-week lows on supply concerns, with traders worried about easing demand as USDA completes school lunch program purchases. A sharp break in product prices added to that pressure today.

Today’s Midwest cash market was mostly steady to up to $1 lower. The latest cash index came in at $78.90 per cwt, down $0.20 on the day, although still up $0.22 on the week. Packer margins are estimated at north of $25 per head, but traders fear that eroding product prices as demand eases will erode those margins at a time when carcass weights begin to rebound.

Product movement totaled 301 loads Monday, up from 263 loads on Friday, but down from 308 loads the previous week. The composite pork product price came in at $90.20 per cwt, up $0.03 on the day, up $2.26 on the week and its highest level since December 15. However, the composite price dropped $2.29 to $87.91 per cwt on a sharp drop in ham values, as well as weakness in loin and butt cuts. Movement was routine at 187 loads.

Today’s kill was pegged at 423,000 head of hogs, down 1,000 head from the previous week, but up 13,000 head from the previous year. Week-to-date kill is estimated at 849,000 head of hogs, up 52,000 from the previous week and up 64,000 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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