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Closing Comments

Corn

Corn traders mark time ahead of harvest.

USDA’s weekly crop progress report Monday indicated that 71% of the nation’s corn crop had reached the dough stage as of August 16, up 21 points on the week and up 5 points from the five-year average for the week. Delays of 6 to 8 points were seen in Indiana and Iowa respectively, while Minnesota at 71% was 19 points above normal and North Dakota at 57% was 13 points ahead of normal, with Wisconsin up 9 points from the five-year average for the state.

However, the crop remains slow to move into dent state. USDA reports that 21% of the crop was in the dent stage by August 16, up 12 points on the week, but still down 7 points from the five-year average for the week. Delays in key states included 11 points in Indiana and Iowa, 9 points in Kansas, 10 points in Michigan and 13 points in Nebraska. Heat units are needed to continue moving the crop toward maturity, but heat would also be expected to reduce the crop’s yield potential.

The crop rated a condition index score of 374 (500=perfect crop), versus 377 the previous week, 383 the previous year, 380 in 2010 and the 10-year average for the week of 350. These condition scores tend to over-state the condition of the crop in excessively wet years.

For example, the crop rated a score of 380 in the same week in 2010, with USDA estimating the crop’s yield at 165 in August of that year, but it finished at 152.8 bushels per acre. A condition score of 380 at this point with today’s genetics would suggest a yield of 172.6 bushels per acre. Instead, the yield model suggests a yield of 170.6 bushels per acre, down 0.6 bushels from the previous week.

In reality, I believe the crop is at least 9 bushels smaller at 161.5 bushels per acre, based on our state-by-state analysis. Keep in mind that such a yield is just 2% below a 30-year trend yield, which is a trend that I believe has worked the best over the years. It’s amazing to see how many people find a 2% drop difficult to swallow following USDA’s bearish report on August 12 and in light of the exceptional 2014 crop, but that’s human nature. In reality, the drop may be more than 2%.

Condition score lost ground in Illinois, Iowa, Kentucky, Missouri, North Carolina, North Dakota, Pennsylvania, Texas and Wisconsin over the week, while raising modestly in Indiana, Michigan, Nebraska and South Dakota. The best Midwest corn continues to be primarily in the northwestern third of the belt, with the biggest problems in the southern half of the belt.

Today’s Pro Farmer crop tour numbers were interesting to say the least. If anything, observers saw a more “average” crop than expected in Nebraska on the western leg, while seeing better than expected corn in central and northern Indiana, where some of the fields they looked at were quite good; at least at 35 paces from the road. Disease presence is high in some areas hampered by excessive rains earlier this growing season, while more sporadic elsewhere as expected. In the end, little has surprised me from the tour thus far, with the bigger risk at this point still being toward a lower yield, rather than higher.

Corn felt the pressure of the broader commodity sell-off overnight, but weathered that storm fairly well. It benefited from being on the long (bought) side of corn/soybean spreads amid the China news today. Midwest rains will do more to boost soybean yields than they will corn at this date, although some corn will benefit as well. Corn charts are also a bit healthier than are soybean charts. In the end, traders are marking time until they see harvest results. Based on some of the disease reports speeding plant death in the southern Midwest, those harvest reports could start in the next 10 days.

There are reports today that China has injected another $48 billion into the state-owned policy lender China Development Bank to boost the markets tonight. However, commodity traders will be watching developments in China very closely in the overnight markets.

Soybeans

Soybeans feel the pain of China’s economic problems, with added pressure from western Midwest rains.

USDA’s weekly crop progress report indicated that 93% of the soybean crop was blooming as of August 16, up 5 points on the week, but down 2 points from the five-year average for the week. One state stood out as a concern. Missouri reported that just 71% of its crop was blooming, up 13 points on the week, but still down 17 points from its five-year average for the week.

The agency reports that 79% of the soybean crop was setting pods on August 16, up 10 points on the week, but matching the five-year average for the week. Minnesota was 11 points ahead of its 5-year average at 94% setting pods, while North Dakota was up 5 points at 94%. However, Missouri came in at just 38% setting pods on August 16, up 11 points on the week, but still 23 points from the five-year average for the week.

The crop rates a condition index score of 363, unchanged on the week, down from 381 the previous year, up from the 10-year average for the week of 352 and still below the same week in 2010 which was at 365. Condition scores dropped 11 points to 380 in North Dakota, lost 9 points in Wisconsin, down 7 points in North Carolina and down 4 points in Iowa and Minnesota with Mississippi losing 2 points and South Dakota down one point. Scores rose modestly in Arkansas, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Nebraska and Tennessee.

My seasonally adjusted yield model puts the crop at 45.4 bushels per acre, up from 45.1 bushels the previous week. USDA is currently putting the crop at 46.9 bushels per acre, while my state-by-state analysis puts it closer to 44.4 bushels per acre. That number could still fluctuate some, depending on disease and pod fill weather, but it’s becoming more likely that we’ll see acreage slip a bit lower.

The Pro Farmer crop tour continues to yield a mixed bag of reports. Soybean yields are challenging to calculate yet at this early date. Disease presence is increasing, but one cannot yet say the scope of the impact. Some areas will likely see impressive yields, while others will see increased abandonment. In the end, I still haven’t seen anything to make me waiver much from our yield estimate at this point.

Soybeans are one of the commodities that are most vulnerable to talk of China’s problems. That combined with Midwest rains to created added pressure on the oilseed, which appeared to be getting the short (sold) end of corn/soybean spreading. Bearish charts from last Wednesday’s post-USDA collapse make it easier for fund managers to be sellers of soybeans near-term as well.

November soybeans continue to look weak on the charts, with market bears eyeing a test of support at $9. A break below $9 would suggest a test of $8.80 per bushel. Fundamentally, we probably will not have supportive data to prop the market up before combines begin rolling in the southern Midwest next month, leaving this market vulnerable short of a widespread outbreak of Sudden Death Syndrome in the crop.

Wheat

Wheat succumbs to pressure from the outside markets amid its own large supply/low demand problems.

USDA reports that 53% of the spring wheat crop was harvested as of August 16, up 25 points on the week and up 22 points from the five-year average for the week. Harvest progress stood at 55% in Idaho, 78% in Minnesota, 43% in Montana, 45% in North Dakota, 71% in South Dakota and 88% in Washington; all above the normal pace for this time of year.

The crop rated a condition index score of 375, versus 373 the previous week, 375 the previous year and the 10-year average for the week of 359. The score ties for the fourth highest on record for the week. Washington’s score fell another 14 points to 247, while Idaho was down 1 point to 376. Minnesota was unchanged at 399, Montana was up 1 point at 348, North and South Dakota were both up 2 points to 399 and 361 respectively.

Wheat needs help from the other markets to sustain a rally and it did not have that today. The dollar was higher for much of the session, while commodities were under pressure. That’s not an environment in which wheat can sustain strength amid its largest domestic and global supplies and poor domestic demand. As such, prices spent the bulk of today’s session in the red.

Beef

Live cattle rally falters as showlist and carcass weights grow.

Last week’s cash trade was disappointing, with cattle moving at $148 to $150 and a few at $151; mostly down $2 from the previous week. Volume was quite low on the negotiated market, leaving this week’s showlist about 21,000 head larger than the previous week, with carcass weights trending higher.

October live cattle tried to push higher on hopes of steady to firm cash trade this week, but the contract could not muster the strength to push through chart resistance just above $148. Failure to do so, resulted in a mid-morning collapse back down to the 20-day moving average, where the market again found support and modest buying interest. In the end, today’s market was all about marking time while waiting for further direction, with rallies difficult to sustain.

Feeder cattle found a bit more strength today, but they struggled as well. The mid-morning collapse in the fats pulled feeders under, but the nearby contracts were able to firm again on the steady cash market that is trading at a premium to the board. Today’s cash index came in at $216.54 per cwt, up $0.04 on the day, but down $0.34 on the week.

Today’s kill is pegged at 110,000 head of cattle, down 2,000 from the previous week and down 5,000 from the previous year. Week-to-date slaughter is pegged at 215,000 head, down 4,000 on the week and down 8,000 from the same period last year.

Boxed beef movement on the spot daily market totaled 132 loads on Monday, which is a strong total for a Monday. The total was up from 90 loads on Friday and up from 107 loads the previous week. Choice cuts were up $0.80 to $245.52 per cwt, while Select cuts were up $0.95 to $236.39 per cwt. That dragged the Choice/Select spread to $9.13 per cwt, down from $9.28 the previous day, but up from $6.60 the previous week. Movement at mid-morning today was routine at 77 loads, with Choice cuts down $0.06 and Select cuts down $0.17 per cwt.

Pork

Large kills keep a lid on hog rallies.

Today’s Midwest cash hog market was steady to 50 cents weaker in the closely watched Iowa/Southern Minnesota market, while mostly steady elsewhere. Packer margins are good, providing them good incentive to operate at full chain speed. However, the supply of hogs remains high as well, with last week’s kill total at nearly a four-month high.

Today’s 2-day lean hog index came in at $78.70 per cwt, up $0.17 on the day, but down $0.20 on the week. The cash index has spent the entire summer hovering near the $80 level, while futures traders continue to anticipate lower cash trade in the weeks and months ahead. The real test comes as we move into next month, when demand is expected to soften and carcass weights rise.

Product movement rose to 283 loads Monday, up from 248 on Friday, but down from 301 loads the previous week. The composite pork product price rose to $89.57 per cwt, up $0.21 on the day, but down $0.63 on the week. Demand for bacon remains strong, keeping belly prices elevated at high levels. Movement at midday today was good at 257 loads, with the composite price up $1.47 to a new 2015 high of $91.04 per cwt.

Today’s kill is pegged at 428,000 head of hogs, up 5,000 on the week and up 19,000 on the year. Week-to-date slaughter is estimated to be 851,000 head, up 2,000 on the week and up 34,000 head from the same period last year.

October lean hogs found trend line support at today’s low of $65.25 per cwt, but buying interest slows dramatically above $66. Traders are simply afraid of larger numbers of heavier weight hogs as temperatures cool next month, at a time when demand is expected to ease.

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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