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Closing Comments

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Closing Comments

Corn

Corn has limited upside potential, but finds good support beneath the market.

One of the major factors in grain prices to close out the week of USDA’s September jobs report. That report was so bad that it pushed off expectations for a Fed rate hike to March, if not the end of 2016. The dollar broke sharply lower and is generally expected by many to continue trending lower in the weeks ahead, making commodities a better buy at these multi-year lows. As such, we saw the Friday grain markets rise and fall with the major indices, with a bias toward finding support as the dollar outlook weakens.

December corn spent the bulk of the past week chopping around between $3.85 and $3.95. Buying emerged to support corn prices whenever they approached $3.85 on ideas that corn yields overall are disappointing. Selling emerges just below $3.95 on ideas that it will still be a relatively good crop, with weak export demand, even though exports are just 13% of total demand. The other 87% of the demand looks good at this point.

The garden spots appear to be in south-central Nebraska, northeast Nebraska, portions of northern Iowa and some of the southern tier areas of Minnesota. Good yields are seen elsewhere, but many areas are seeing disappointing yields. This is most evidenced in the eastern Midwest, which looks to be a corn-deficit area. As such, we’re seeing some relatively strong basis offers emerge as end users try to pull corn in before it goes into the bin. The cash market is attempting to pull corn from surplus western areas to deficit eastern areas, but that means competing with river movement for the export market.

Soybeans

Soybean traders are still seeking direction.

The bulk of the volatility for the soybean market occurred in the last half of the week following USDA’s quarterly stocks report, which showed tightening supplies on better-than-expected demand. The lead November contract rallied to a high of $9.0225, but that’s where producer cash sales picked up. The selling coincided with prices being just below trend line resistance off the July and August highs and near the psychological $9 level.

Strong yield data coming in from the harvest added pressure, sending prices as low as $8.6825. Buying interest emerged just above chart support near $8.65 on ideas that soybeans are well-valued at that level. The bottom line is that we have a market still searching for its area of value. It’s my contention that we are near a bottom, but we need to see the soymeal market find support before I’ll have confidence in that. Traders would also like to see if USDA lowers its yield and acreage estimates in next Friday’s monthly crop report before moving outside the predominant recent trading range.

Wheat

Wheat consolidates following nice September run.

Chicago wheat rallied 60 cents off its early September lows in the face of a bearish environment for much of the rest of the commodity sector. It did so despite domestic stocks being projected a nearly a five-month supply, while global stocks are at historically high levels as well. Very poor export data didn’t stand in its way, not did a stronger dollar.

Fundamentally, traders point toward dry conditions in many areas of the winter wheat belt, combined with developing dryness in Australia, Russia and Ukraine. The most serious situation at this point is probably in the Former Soviet Union wheat belt area because it is already getting late for the crop to get established ahead of the region’s typically harsh winters. Making matters worse, abnormally cold readings are expected over the next couple weeks, making it even more difficult for the crop to develop a root system ahead of going dormant in late October and early November.

In the end, the above problems could be sufficient enough to tighten the global balance sheet, but for the time being Russia is still lowering its export tariff to encourage larger export shipments following a big crop in 2015. As such, it is yet to be seen whether the impact will be great enough to draw down big U.S. stocks. History says this rally could have more life for a few more weeks, but then struggle through the winter while traders wait for indications of spring growing weather in the troubled area.

Egypt released a snap tender to buy wheat for early November shipment soon after the markets closed for the weekend. The results of that tender should provide direction for prices to start the week, although U.S. wheat is not expected to even be competitive.

Beef

Cattle market licks its wounds after historical weak of declines.

The past week will go down in infamy for cattlemen across the country. It hopefully culminated a $20 drop in just 15 calendar days for the spot fat cattle contract. Prices bounced to close out the week, but more solid support is still a couple dollars below the week’s lows, leaving the market vulnerable in the near-term.

Fear drove traders to liquidate positions as buyers stepped aside. A combination of sagging demand, large imports and slow exports stimulated by a resurgent dollar and record high carcass weights. Those carcass weights were highest on the Corn Belt side of the feedlot region. Packers sped up the chain speed over the past several weeks attempting to get the region more current, but that simply pushed more product onto the market.

The Friday kill was pegged at 112,000 head of cattle, up 1,000 from the previous week and up 5,000 from the previous year. Saturday’s kill is estimated at 14,000 head, matching the previous week, but up 2,000 from the previous year. That puts the week’s estimated slaughter at 571,000 head of cattle, down 3,000 from the previous week and down 6,000 head from the same week last year. That brings year-to-date slaughter to 21.389 million head of cattle, down 1.434 million or 6.3% from the previous year.

Feeder cattle futures followed the fat cattle market lower, but also bounced when given the chance to do so. Unfortunately, the cash market has trended sharply lower as well, with feeders worried about projected margins deeply in the red. The latest cash index came in at $187.89 per cwt, down $1.04 on the day, down $6.92 on the week and down $17.44 per cwt over the past 14 consecutive trading days.

Total beef movement in the week ending September 25 reached a three-week high of 6,958 loads, up 180 loads or 2.7% from the previous week and up 614 loads or 10% over the past two weeks. Movement on the spot daily market during that same week surged to an 11-month high 970 loads, which was 14% of total movement. As such, retailers took advantage of the sharp $35 to $40 break in prices to extend coverage into the fall, but unfortunately it came as imports were strong as well, while exports fell due to the resurgent dollar.

Beef imports in the week ending September 26 totaled 21,994 metric tons, down 1,315 tons or 5.6% from the previous week, but still up nearly 20% from the previous year’s pace. Year-to-date beef imports total 905,799 metric tons, up 28% from the previous year’s pace.

Exporters sold a six-week low of 8.8K metric tons of beef in the week ending September 24, down from 16.5K the previous week when the dollar had broken and down from 12.0K tons in the same week last year. Actual shipments during the week were 11.0K metric tons, down from 12.3K tons the previous week and down from 13.7K tons in the same week last year.

Product movement on the spot daily market dropped to 187 loads on Thursday, down from a strong 243 loads the previous day and down from 194 loads the previous week. Choice cuts were down another $1.07 to $207.55 per cwt, while Select cuts were down $0.99 to $203.21 per cwt. That put the Choice/Select spread at $4.34 per cwt, down from $4.42 the previous day, but up from $3.23 the previous week. Movement at mid-morning today was routine at 80 loads, with Choice cuts down another $0.80 and Select cuts up $0.17 per cwt.

Pork

Lean hogs enjoy strong month of growth.

Lean completed nearly a $10 rally off late August lows over the past week, dropped sharply on profit taking Thursday, but then firmed to close out the week after bouncing off significant areas of chart support. The cash market trended higher through the bulk of the week, providing underlying support, while pressure came from fears that we’ll see supply overwhelm demand if slaughter numbers remain high as demand wanes later this month.

The latest cash index came in at $72.65 per cwt, up $0.42 over the past day, up $0.84 over the past four consecutive trading days and up $1.68 over the past two weeks. That suggests a market with good balance between supply and demand. The supply continues to exceed expectations, but are starting to drop off, coming in at 9% above the previous year the past two weeks, rather than the 10 to 13% we saw through the bulk of the summer.

The Friday kill was pegged at 420,000 head of hogs, down 2,000 from the previous week, but up 14,000 from the previous year. Saturday’s kill was estimated at 134,000 head, down 25,000 from the previous week, but up 95,000 from the previous year. That put the week’s slaughter at 2.270 million head, down 6,000 from the previous week, but up 186,000 from the same week last year. Year-to-date kill is estimated to be 85.435 million head of hogs, up 6.459 million or 8.2% from the previous year.

Pork imports in the week ending September 26 totaled 9,285 metric tons, down 607 tons from the previous week and down 902 tons or 9% from the previous year. That’s a positive trend, considering expectations of waning demand in the weeks ahead. Year-to-date imports total 326,207 metric tons, up 24,794 tons or 8% from the previous year.

Fortunately, exports have rebounded as well in recent weeks to help absorb the large supply of pork hitting the market. Exporters sold a four-week high 26.1K metric tons of pork in the week ending September 24, up from 20.7K tons the previous week and up from 22.8K tons in the same week last year. Actual shipments slipped to 16.9K metric tons, down from 18.2K tons the previous week and down from 23.2K tons in the same week last year.

Pork product movement dropped to 311 loads on Thursday, down from 396 loads the previous day, but up from 294 loads the previous week. The composite pork product price rose to a five-week high $86.41 per cwt, up $1.55 on the day and up $3.99 on the week. Movement at midday today was sluggish at 138 loads, with the composite price up a dime to $86.51 per cwt.

Closing Market Snapshot

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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(r) | www.waterstreet.org
(316) 729-4599 | asuderman@waterstreet.org

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