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Closing Comments

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Closing Comments

Corn

Strength in broader commodity sector pushes corn through chart resistance.

Bearish economic news out of Germany overnight raised caution flags in the markets. As a result, the commodity sector came under mild selling pressure overnight. However, that caution was thrown out again as U.S. trade desks opened, with money flowing once again to the major commodity indices, whose charts are turning higher as well.

Trade volume in the ag commodities has been quite thin, making it easy for movement in the major indices of which they are a part to move the grains around. Thus far this week that has been a positive. The buying again pushed corn prices higher today, taking out the triple top near $3.95 on the December chart. Selling capped prices at $3.99, just below resistance at $4.00, but today’s action certainly makes the chart look a bit healthier going into Friday’s USDA crop report. The trade expects that report to show another modest reduction in the size of the crop, but still keep ending stocks above 1.5 billion bushels.

USDA’s weekly crop progress report indicated that 86% of the U.S. corn crop was mature on October 4, up from 71% the previous week, but above the five-year average for the week of 83%. Most noted were states that were significantly ahead of normal for maturity. The agency reports that Minnesota was 91% mature, while North Dakota was at 79% and Ohio at 82%, up 13, 6 & 17 points respectively from normal.

Harvest progress was pegged at 27% as of October 4, up 9 points on the week, but down from the five-year average for the week of 32%. Fifty percent of Illinois was harvested, while just 13% of Iowa had been picked and 9% of Minnesota and 6% of North Dakota. Most states lagged the normal pace as producers focused on soybean harvest.

The crop rated a condition index score of 375, versus 374 in each of the past five weeks, 389 the previous year, 374 in the same week in 2010 and the 10-year average for the week of 350. The score fell by 1-point in Colorado, Michigan, North Dakota, Pennsylvania and Wisconsin, while rising 3 points in Ohio, 2 points in Kansas and Minnesota and 1 point in Illinois, Iowa, South Dakota and Tennessee.

My seasonally yield model puts the crop at 170.8 bushels per acre. However, yield models have a tendency to over-estimate yields in years facing the types of stresses seen this year with excessively wet conditions early in the growing season and better growing conditions in the second half. For example, I recognize that 2010 was warmer, but it also had a lot of similarities to this year.

The yield model would have pegged the crop at 159.1 bushels per acre that year, but it ended up at 152.8 bushels as later harvested fields disappointed. As such, I’m continuing to put the crop at 161 bushels per acre, with harvest data showing a pullback in yields as harvest progress advances.

Soybeans

Soybean rally runs into selling near overhead chart resistance.

USDA reports that 85% of the U.S. soybean crop was dropping leaves on October 4, up 11 points on the week and up 2 points from the five-year average for the week. Most states were above the normal pace for the week, while Missouri at 51% lagged the five-year average pace by 13 points.

The agency reported that 42% of the soybean crop was harvested by October 4, doubling the previous week’s pace and 10 points ahead of the five-year average for the week. Harvest progress in some states of interest included 49% in Illinois, 41% in Indiana, 32% in Iowa, 35% in Michigan, 69% in Minnesota, 17% in Missouri, 31% in Nebraska, 70% in North Dakota, 45% in Ohio, 46% in South Dakota and 21% in Wisconsin.

The crop rated a condition index score of 366, versus 362 the previous week, 386 the previous year, 367 in the same week in 2010 and the five-year average for the week of 353. Condition scores fell by 23 points in North Carolina, while dropping 5 points in Mississippi and 2 points in Arkansas. Meanwhile, the score rose 11 points in Illinois, 6 points in Minnesota, 5 points in Ohio, 3 points in Michigan, 2 points in Indiana and Iowa and 1 point in South Dakota.

My soybean yield model rose to 47.1 bushels per acre, on the past week’s crop ratings. The same model has would have pegged the 2010 crop at 44.9 bushels per acre. That year’s crop ended up at 43.5 bushels per acre. The bottom line is that this year’s soybean crop is good with stocks likely to remain adequate to get to next year’s harvest. That appears to have already have been priced into the market.

November soybeans surged higher on the broader commodity index fund buying of which soybeans are a part today, pushing to $8.955. Producer selling has been increasing near $9, but speculative selling emerged as prices hit their high that coincided with a test of trend line resistance off the summer highs on the charts. That trend line has contained the November contract since mid-July. The indicator’s strength also suggests that a solid move above it would likely signal a change in market sentiment.

Wheat

Wheat benefits from weaker dollar and broader commodity buying.

USDA reports that 49% of the U.S. winter wheat crop was planted as of October 4, up 18 points on the week, but still 2 points behind the five-year average for the week. Progress in closely watched states includes 46% in Kansas, 46% in Oklahoma and 37% in Texas, down 3, 4, and 10 points respectively from the normal pace. These are states that have been battling dryness issues. Meanwhile, progress is generally ahead of normal in the eastern Midwest.

Crop emergence was pegged at 20% as of October 4, up 13 points on the week, but down 2 points from the five-year average for the week. Emergence matched the five-year average of 20% in Kansas, while it came in at 17% in Oklahoma and 8% in Texas, down 3 and 12 points from the five-year average for those states respectively. Progress in the eastern Midwest was largely at or a bit above the normal pace.

Wheat found broad-based support from commodity index fund buying today, leading the Chicago December contract to settle above the 100-day moving average for the first time since July 20. Yet, I was even more encouraged that Kansas City was able to gain several cents on Chicago. It’s still at a double-digit deficit to Chicago, but it needs to lead the way higher if we’re going sustain this rally longer-term.

Fundamentally, wheat continues to find support from intensifying dryness in portions of the U.S. winter wheat belt, Australia, Russia and Ukraine. Roughly half of the wheat belt in the Former Soviet Union is at significant risk due to lingering drought, and now unseasonably cold temperatures.

Beef

The wild ride in the cattle market continues.

Live cattle futures surged to the $3.00 daily limit higher today as buyers returned to the beef sector. This market has been trying to find a bottom for months. Each time has been painful as prices plummeted to new lows. A $20 drop in two weeks once again raises the hopes of some traders that a bottom may be behind us.

Last week’s cash came in at $118 to $124 per cwt, but the lead October contract traded to $125.125 today, up the $3 limit from the previous day. That suggests that traders expect the cash market to firm again. Optimism spurred from buying in the broader commodity indices, of which the beef sector is a part. Other support came from good movement of boxed beef this morning on the spot daily market, and at higher prices. Choice cuts have been lower on 30 of the past 32 trading days, so an update gets noticed in the industry.

Retailers have a decision to make. This is National Pork Month, but there’s a fire sale on beef that could be good for business. The lower prices appear to be attracting demand from retailers, despite the focus on pork. Hopefully, that will help the product market carve out a bottom. Even so, the beef sector still needs to deal with an ample supply of very large cattle on the Corn Belt side of the feedlot region.

Feeder cattle futures locked the $4.50 daily limit higher on strength in the fats, despite good gains in the feed market. That pushed the lead October contract to $182.625 before it hit the limit, although I still believe that this market is trending lower longer-term. The latest cash index came in today at $182.29 per cwt, down $0.47 on the day, down $8.17 over the past week and down $23.04 per cwt over the past 16 consecutive trading days.

Today’s slaughter is pegged at 114,000 head of cattle, up 1,000 on the week, but down 1,000 head from the same day last year. Week-to-date kill is pegged at 220,000 head, down 2,000 on the week and down 10,000 head from the same period last year.

Product movement on the spot daily market slid to 147 loads Monday, down from 202 loads on Friday and down from 151 loads the previous week. Choice cuts dropped $1.80 to $203.97 per cwt, while Select cuts fell $2.31 to $199.05 per cwt. That pushed the Choice/Select spread to $4.92 per cwt, up from $4.41 the previous day and up from $1.52 the previous week. Movement at mid-morning was solid at 127 loads, with Choice cuts up $1.39 and Select cuts up $0.77 per cwt.

Pork

Lean hog futures rise on broad commodity support, along with steady cash and rising product prices.

Lean hog futures were not to be left out today, with broad-based buying lifting the ag sector. Futures found support from strength across the sector, but also from another day of steady to firm cash prices, a rising cash index and solid product prices. Packer margins are believed to be better than $25 per head, stimulating packers to pull hogs forward. However, the supply of hogs available is slowly starting to decline as anticipated, just as demand is expected to soften seasonally as well.

The latest cash index was posted today at $73.38 per cwt, up $0.32 on the day, up $1.52 on the week and up $1.57 over the past six consecutive trading days. Midwest cash prices were mostly steady. Today’s kill is pegged at 433,000 head of hogs, up 5,000 from the previous week and up 5,000 from the previous year as well. Week-to-date kill is estimated to be 868,000 head of hogs, up 14,000 on the week and up 13,000 head from the same period last year.

Product movement rose to 308 loads on Monday, up from 239 loads on Friday and up from 303 loads the previous week. The composite pork product price firmed to a seven-week high of $87.17 per cwt, up $1.64 on the day and up $2.03 on the week. Movement at midday today was routine at 187 loads, with the composite price up $0.14 to $87.31 per cwt.

December lean hogs have first support at $65, with resistance at $67.60. This is a market trying to determine whether the supply of hogs will drop sufficiently to account for the anticipated seasonal decline in demand later this month. Thus far it appears to be doing so.

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

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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