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Closing Comments

Corn

Corn hangs on amid pressure in the broader commodity complex.

China’s Shanghai Composite Index fell another 5.1% overnight, after falling 6.2% the previous session, before rallying back to close the day up 1.2% on expectations of more government intervention. However, Wall Street fund managers remain very concerned about a slumping Chinese, as well as global, economy that would reduce demand for commodities on the world market.

The Department of Energy reported this morning that crude oil stocks rose unexpectedly to 456.2 million barrels in the week ending August 14, up 2.6 million on the week. This keeps stocks at their highest level in 80 years for this time of year. Gasoline supplies fell 2.7 million barrels as the impact of the Midwest plant shutdown begins to be felt, but stocks remain in the middle of the typical range for this time of year. Distillate stocks (diesel included) rose 0.6 million barrels, but also remain near the middle of the range that is typical for this time of year.

The unexpected rise in crude oil stocks sparked a sharp drop in prices to new 6-1/2 year lows. Simultaneous, fund managers turned into active sellers of the broader commodity indices on ideas that the larger crude stocks were an indicator of a sinking global economy. That selling in the major indices then proved to be a drag for corn futures as well, as corn is a part of most of those indices.

Ethanol stocks rose slightly to 18.6 million barrels in the week ending August 14, up from 18.5 million the previous week and above the 18.3 million in the same week last year. Production of ethanol remained unchanged during the week at 965K barrels per day, while up from 937K barrels per day in the same week last year.

The data suggests that ethanol processors utilized 102.4 million bushels of corn during the week, unchanged from the previous week, but up from 100.9 million bushels ground in the same week last year. Corn grind for the marketing year to date totals an estimated 5.047 billion bushels, up 147 million or 3% from the previous year. Estimated corn usage to date exceeds the seasonal pace needed to reach USDA’s target by August 31 by 20 million bushels, up from 16 million the previous year.

A private crop tour in Ukraine pegged its corn crop at 21 million metric tons, down from USDA’s estimate of 27 million metric tons. The shortfall of 6 mmt or 236 million bushels is largely due to heat and drought in major producing areas within Ukraine this summer. Such a drop would significantly reduce exportable corn supplies that directly compete with U.S. corn on the global market. Brazil has large surplus supplies, but will likely reduce plantings of its 2016 crop. Argentina’s Buenos Aires Grains Exchange expects that country’s corn acreage to fall by 20% in the coming year.

December corn plummeted following the release of USDA’s crop report last Wednesday, but then quickly recovered back above key support at $3.65. Prices firmed a bit more each day through Monday, before pulling back a bit on Tuesday. The contract hit buy stops above Monday’s high this morning, propelling it to $3.83 per bushel, before the aforementioned bearish crude oil stocks report triggered broad commodity selling that quickly erased those gains.

Yet, the contract remains supported by reports of crop problems coming from the Pro Farmer tour, which continues to highlight problems in the east and conditions in the west that are not as exceptional as many expected. Gains however are limited by hard evidence of a significantly smaller crop, which probably won’t be seen until the combines roll in the southern Midwest.

Soybeans

Soybeans suffer double-digit losses at times amid demand worries.

The Pro Farmer crop tour continues to highlight production issues in the eastern Midwest. There are some very good soybeans out there, particularly in some western areas, but it’s very questionable whether there is enough good to offset the bad.

However, traders remain quite concerned about demand into China. New-crop bookings have been running at roughly half of the previous year’s pace, although that pace has picked up in recent weeks. China’s economic problems are on full display with big sell-offs over the past week in both its currency and stock markets, raising concerns about future demand.

November soybeans probed below $9 overnight, but found little selling interest at that point. The contract then firmed to $9.09, but that’s where buying interest dried up. Prices were hovering near $9.03 when the aforementioned crude oil stocks report triggered broad selling of the major commodity indices, of which soybeans are a part, which in turn pulled soybeans under water. The contract posted a low of $8.9075, with risk in the days ahead to $8.80 per bushel.

Fundamentally, we continue to point to variability in the crop combined with increasing disease problems as a risk, with expectations that this crop is closer to 44 bushels than it is 47 bushels per acre, with acreage likely to drop in future reports as well. However, it will likely be several weeks before traders have data to support building long positions, leaving the market focused on demand fears and bearish chart signals.

Wheat

Wheat futures hold support, but need help to avoid new lows.

We’ve documented wheat’s bearish fundamentals many times. Both domestic and global supplies are large and the strong dollar puts U.S. supplies at a significant disadvantage. A stronger dollar early in the session and broad-based selling of the major commodity indices of which wheat is a part weighed on the food grain.

However, selling interest at these low prices levels remains limited at this point. Prices at all three exchanges held key support. That allowed wheat prices to firm again late in the day when release of the minutes of the Fed’s July policy meeting were leaked to the markets 18 minutes early. The dollar broke sharply lower, making wheat a bit more competitive.

The major commodity indices remained at/near multi-year lows, but wheat prices bounced off support, with Chicago actually finishing the day with modest gains. Even so, wheat still needs help from other markets to sustain a rally until something changes the fundamentals.

Beef

Cattle futures tumble on weaker cash and rising economic concerns.

Weakness in cattle futures became more apparent on Tuesday when October live cattle failed to take out resistance just above $148 per cwt. That led to a weaker open today, although prices tried to bounce. Stronger product prices tried to support the market as retailers finish garnering coverage for the Labor Day grilling weekend, but ultimately it comes down to the cash market.

Selling accelerated this morning as word reached the market that low volumes of cash cattle were moving in Nebraska and Iowa at $232 to $233 per cwt on a dressed basis, with some reports of other areas passing on $234. Today’s kill is pegged at 107,000 head of cattle, up 6,000 head on the week, but down 10,000 head from the previous year. Week-to-date kill is estimated at 322,000 head, up 2,000 on the week, but down 18,000 head from the same period last year.

Product movement has been good through the first couple days of this week. Boxed beef movement on the spot daily market rose to 141 loads Tuesday, up from 132 loads on Monday and up from 123 loads the previous week. Choice cuts slipped $0.44 to $245.08 per cwt, while Select cuts fell $0.14 to $236.25 per cwt. That dropped the Choice/Select spread to $8.83 per cwt, down from $9.13 the previous day, but up from $6.13 per cwt the previous week. Movement at mid-morning today was routine at 78 loads. Choice cuts were up $2.05 to $247.13 per cwt, while Select cuts were up $1.17 to $237.42 per cwt.

A Reuters’ poll of trade participants revealed expectations that Friday’s USDA cattle-on-feed report will report that 9.996 million head of cattle were on feed August 1, up 2.5% from the previous year. July placements are expected to come in at 1.559 million head, matching the previous year’s level, while July marketings slip to 1.730 million head, down 3.2% from the previous year.

Feeder cattle futures tumbled as the fats fell and corn firmed. Selling in September feeders dried up just above the July low of $205.60. The 7-day cash index came in at $216.72 per cwt, up $0.18 on the day, but still down $0.11 on the week. Obviously, futures traders expect this market to break as feeding margins compress.

Pork

Hog futures recover from technical selling that broke chart support mid-morning.

Lean hog futures continue to trade at a double-digit discount to the cash market on expectations that the cash market will soon break. Producers continue to push hogs through the system on fears of lower prices in the weeks ahead. Both traders and feeders fear that supply will overwhelm demand as wholesale buying slows seasonally in September and carcass weights rise seasonally.

October lean hogs broke chart support after failing to sustain a move to test the August 4 high of $67.70. However, buying emerged near today’s low of $64.30 to push prices back higher once again, posting just modest losses at the end of the day. Traders simply felt that futures were already at a big discount to the cash and had priced much of the bearishness in to the market already.

Today’s 2-day cash hog index came in at $78.70 per cwt, up $0.17 on the day, but down $0.20 on the week. Today’s kill is pegged at 425,000 head of hogs, matching the previous week’s pace, but up 20,000 head from the previous year. Week-to-date kill is estimated to be 1.266 million head of hogs, down 8,000 from the previous week, but up 44,000 head from the same period last year.

Product movement rose to an impressive 409 loads Tuesday, up from 283 loads the previous day, but down from 438 loads the previous week. The composite pork product price rose to $90.12 per cwt, up $0.55 on the day, but down $0.65 on the week.

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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