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Closing Comments

Corn

Today’s USDA crop report was one of the most anticipated reports of the year, with more potential surprises than we have seen in many years. The first surprise came in a significant drop in the national average yield to 171 bushels per acre, down from 173.4 bushels in November. This also proved to be a sharp break from previous USDA tendencies. The agency also cut planted acreage by 300K acres, but left harvested acres unchanged. The net result was a 14.216 billion-bushel crop, coming in 133 million bushels below trade expectations and nearly 200 million below my expectations.

On the demand side we have to start with grain sorghum, where USDA boosted exports by 40 million or more than 17%. If had little room to drop ending stocks, so it presumed that Chinese end users will bid the grain sorghum away from ethanol plants, cutting ethanol usage by 35 million bushels.

As a result, USDA increased corn usage for ethanol by 25 million bushels, believing that we will have substitution for grain sorghum. The pace of corn usage is strong now, but declining margins may end up leaving USDA too high on corn usage for ethanol later in the year. The agency cut feed usage by 100 million bushels after December 1 stocks came in 80 million above expectations.

The bottom line is that corn ending stocks for the 2014-15 marketing year are pegged at 1.887 billion bushels, down from 1.998 billion the previous month and down from the pre-report trade estimate of 1.927 billion bushels. Yet, that’s a lot of corn if South America produces a big crop.

Exporters shipped 19.7 million bushels of corn in the week ending January 8, down from 21.2 million the previous week and down from the five-year average for the week of 21.3 million bushels. Marketing year shipments total 498 million bushels, up 4 million or 1% from the previous year. Shipments to date fall short of the seasonal pace needed to hit USDA’s target by 89 million bushels, versus being short by 81 million the previous week. Exporters typically have shipped 34% of final corn shipments by this point in the season, whereas they had shipped 26% by this point last year. Thus far this year they have shipped 28% of USDA’s target for the year ending August 31.

Exporters shipped 4.0 million bushels of grain sorghum in the week ending January 8, down from 4.8 million the previous week, but up from the five-year average for the week of 2.2 million bushels. Shipments to China accounted for 3.4 million bushels of the total. Marketing year shipments to all destinations total 124 million bushels, up 81 million or 187% from the previous year, largely due to Chinese end user buying. Exporters typically ship 36% of final grain sorghum shipments by this point in the year, whereas they had shipped 20% by this point last year. However, thus far this year they have already shipped 54% of USDA’s target for the year ending August 31.

Corn prices broke lower with soybeans on the report’s release, but then firmed back into positive territory as corn/soybean spreading provided support for the feed grain. Even so, sustaining gains beyond the spread trade became increasingly difficult, with corn posting rather modest gains at the end of the day. March corn posted an outside day higher (traded both below and above the previous day, settling higher), but I question whether it will be able to sustain this strength amid a collapse in the rest of the commodity sector; especially in soybeans. Next key support is $3.85, with next key resistance at $4.095.

Soybeans

I’ve been warning that traders were building in expectations for a bullish report today and we saw the consequences of that not happening. USDA boosted the 2014 yield to 47.8 bushels per acre, just below my expectation of 48.0 bushels, but above trade expectations of 47.6 bushels per acre. The agency cut soybean planted acreage by 500K, but cut harvested acreage by just 300K acres. That produced a crop of 3.969 billion bushels, up 13 million from trade expectations.

December 1 soybean stocks came in at 2.524 billion bushels, down 66 million from trade expectations. That would suggest that either the crop was smaller than reported by USDA, and/or that usage exceeds what has been reported by the industry to this point.

On the demand side, USDA boosted exports by 10 million to 1.770 billion bushels. I could see that going up another 10 million bushels. It left crush unchanged at 1.780 billion bushels. I could see that going up another 35 million bushels. That means that we either need to raise imports and/or decrease ending stocks. Either way, we’re still going to have plenty of soybeans with a big South American harvest just getting started.

Exporters shipped 67.6 million bushels of soybeans in the week ending January 8, up from 51.7 million the previous week and up from the five-year average for the week of 45.5 million bushels. Shipments to China accounted for 34.9 million bushels of the total.

Marketing year shipments to all destinations total 1.199 billion bushels of soybeans, up 215 million or 22% from the previous year. Exporters typically ship 51% of final soybean shipments by this point in the season, whereas they had shipped 60% by this point last year. However, this  year they have already shipped 68% of USDA’s target for the year ending August 31. As such, shipments to date exceed the seasonal pace needed to hit USDA’s target by August 31 by 300 million bushels, versus 281 million the previous week.

The report overall was neutral, but it failed to provide the bullish surprise that many traders were hoping for, leading to a sell-off. Prices tumbled throughout much of the remainder of the session as the focus now shifts to a big South American harvest.

March soybeans settled near their session low and just above the 100-day moving average at $10.145. Psychological support sits at $10. Consecutive closes below $10 would likely be confirmation of a significant shift in market sentiment at the focus now shifts to the big South American harvest at hand. It would likely take a convincing move above $10.60 to alter this sentiment.

Wheat

December 1 wheat stocks were pegged by USDA at 1.525 billion bushels, up from pre-report trade estimates of 1.499 billion. That suggests lower feed usage, which USDA accounted for by cutting feed use by 30 million bushels. As a result, 2014-15 ending stocks rose to 687 million bushels, up from 654 million previously.

The supportive news came in the winter seedings survey results. Hard red winter wheat acres came in at 29.5 million, down from 30.471 million the previous year and down from trade expectations of 31.023 million and down from my expectation of 32.115 million acres. Soft red winter wheat acres came in at 7.5 million, down from trade expectations of 8.039 million, but very close to my estimate of 7.432 million. Total winter wheat acres were pegged at 40.452 million, down from trade expectations of 42.564 million and down from 42.399 million the previous year.

The lower acreage was over-shadowed by the larger ending stocks number amid sluggish exports. The acreage may matter 60 days from now if crop ratings continue to decline, but likely won’t be a factor as long as the winter wheat crop is dormant.

Exporters shipped 8.8 million bushels of wheat in the week ending January 8, down from 13.1 million the previous week and down from the five-year average for the week of 17.2 million bushels. Marketing year shipments total 519 million bushels, down 250 million or 32% from the previous year. Shipments to date fall short of the seasonal pace needed to hit USDA’s target by 36 million bushels, versus being short by 29 million the previous week.

The wheat charts were bearish coming into today’s crop report and today’s weakness simply added to the sell signals. Wheat will likely particularly have a problem if corn breaks lower, which I believe that it will do if soybeans break support as expected. The downside risk isn’t as great with wheat, but it will likely struggle for the next six to eight weeks while the crop is dormant.

Beef

Live cattle futures tried to push higher in a technical bounce today, following sharp losses in recent days. However, strength waned as we moved through the day on fears of additional index fund selling late in the session as they rebalance their portfolios. That bearish cloud is expected to hang over the market until the rebalancing is completed, likely on Wednesday.

Boxed beef movement was strong today for a Monday at 158 loads, down from 163 loads Friday, but up from 155 loads the previous week. It did so on strong prices as well. Choice cuts were up $1.99 to $258.78, while Select cuts were up $2.15 to $250.38 per cwt. Choice cuts are now within a stone’s throw of their record high of $263.66, while Select cuts are a bit further from their record of $260.83. Regardless, product prices are at historically high levels and still seeing strong movement.

Look for the packers to try to leverage weakness in the futures, combined with bearish charts (which they are) to break the cash market. Their ability to do so or not will have big implications for whether the futures market sees a sharp rebound following the completion of the index fund rebalancing.

The latest CME Feeder Cattle index came in at $233.69, down $1.53 from the previous day. That’s the first break we’ve seen in the index in a while, suggesting that the break in futures may be easing bullish euphoria at the sale barn.

This week’s cash cattle market was expected to come in a couple dollars below last week’s prices, amid the sell-off in futures. However, it’s interesting to note that packers have already been calling feeders to inquire of their interest in selling, similar to last week, suggesting good demand once again.

Pork

The cash hog market was mostly steady today amid more signs that supply and demand are coming into balance. The latest CME cash index came in at $77.40 per cwt, down $0.21 on the day. The index has been lower on each of the past 20 trading days, with losses over that period totaling $11.11 per cwt.

However, the product market is showing signs of weakness once again, even after seeing one of its top weeks of movement of the past 12 months. Movement today totaled 293 loads, down from 326 loads on Friday and down from 342 loads the previous week. The composite pork product price came in at $82.82 per cwt, down $1.14 on the day.

Lean hog futures don’t have a friend now that they broke below support at $78. Demand has been strong, but the hog herd is rapidly expanding, with weights high as well. As a result, the supply continues to be a problem, overwhelming demand. Downside price risk remains the greatest concern.

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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