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Closing Comments

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Closing Comments

Corn

Late week rally fails to test key chart resistance.

March corn rallied ahead of USDA’s Tuesday USDA crop report, posting its weekly high on Monday, the day before the report. That high is significant, because it fell less than a penny short of testing the January 21 high of $3.925. Failing to test that high amid a strong dollar and increased farm deliveries, both current and expected weighed on the market, as did USDA’s increase in its Argentine production estimate. Other private production estimates were much larger even than USDA’s estimate.

Corn futures trended lower through the week, losing ground to soybeans, with the new-crop soybean/corn price ratio rising back above 2.3 to 1. Prices tried to rally to close out the week as the dollar turned lower and money flowed into the broad commodity sector, but the resistance at $2.925 remains in place.

My bias continues to be that December corn may be able to pull the corn market slowly higher as we draw nearer to USDA’s planting intentions survey. We still need to turn a few more chart signals to give me confidence in such a move, but fundamentally, corn needs to make sure it gets enough acres to provide a buffer against a potential weather problem in the Midwest this summer.

As for old-crop, a non-scientific text poll of 1,200 farmers by Farm Journal Pulse provided a picture of the large amount of unpriced old-crop corn still on being withheld from the market. The poll indicated that 21% of farmers have priced no corn to this point, with 38% having priced just 25% or less. Eighteen percent have priced all of their 2014 corn, but overall the selling pace is well behind normal.

The grain industry is bracing for the bearish impact of when that corn might finally break loose and hit the marketing pipeline. Some of that is beginning to move now, largely under deferred pricing contracts. Large movement of corn under DP contracts is not fundamentally friendly to the market as it puts a lot of corn into the hands of end users, allowing them to drop basis offers and not bid in the marketplace for the corn.

Corn futures remain in a sideways choppy pattern with a bit of upward bias, led by December.

Soybeans

Soybeans rally on weaker dollar, but increased producer selling helps cap gains below key chart resistance.

USDA’s daily export reporting system today indicated that China returned to buy U.S. soybeans in the past 24 hours. However, its latest purchase was for new-crop supplies, totaling 4.0 million bushels.

The job of the marketplace in times of surplus is to drive prices lower to stimulate demand and to discourage production. Demand is strong. There’s no question about that. However, there are indications that demand may be capped near current levels, suggesting that supply will need to be reduced if we are going to bring the two into balance.

However, that job has still not been accomplished. A record U.S. crop saw prices rally into the harvest period, helping to assure expansion of area planted to soybeans in both Argentina and Brazil. As a result, both are expected to product record crops this year; likely significantly above previous record levels. Furthermore, producer surveys suggest that U.S. soybean acres will expand by 3 to 4 million this spring as well.

Logic would therefore suggest that soybean prices would fall into the spring, but that has not yet been the case. Prices surged to more than two-week highs in the first week of February on strong demand and declining production estimates for Brazil, getting a huge boost from a weaker dollar and a surge of money into the broader commodity complex even though supply and demand fundamentals are generally bearish.

Prices pulled back from the February 3 high of $9.99 as the dollar firmed again, but increased money flow into the broader commodity sector again on a weaker dollar to close out the current week took prices higher in an attempt to retest that level. Increased money flow has the potential to turn the charts higher as spring planting approaches, assuring once again that supplies continue to increase unless a major weather event emerges this summer. On the other hand, failure to do so adds to the bearish chart outlook.

Wheat

Short-covering provides double-digit gains for wheat prices.

Wheat prices rallied on short-covering and dollar weakness in the first week of February, pulled back on weak fundamentals for much of the past week on disappointing demand, forming a bull flag on the charts. It’s difficult to sustain a rally in February, particularly when the dollar is strong and exports are weak. However, traders also understand that March tends to bring a renewed focus on potential crop problems in the Northern Hemisphere and speculative hedge fund managers had built fairly large short (sold) positions.

A weaker dollar to close out this week was all that was needed to trigger a larger short-covering rally, with Chicago March wheat taking out the previous week’s high. Kansas City didn’t perform as well, which should be a warning sign for those wanting to get bullish wheat. Sustained rallies are typically led by hard red wheat and that has not really been the case yet to this point.

Minneapolis took a larger lead over the past week, following USDA’s crop report that boosted both soft red and hard red winter wheat stocks, while reducing hard red spring stocks. Minneapolis March managed to rally above the previous week’s high, but settled fractionally below it. The sheer size of speculative short positions still in the market suggest that it continues to have some upside potential as spring approaches, particularly if the dollar sees additional weakness, but the spark needed to sustain a rally is still lacking.

Wheat prices have a modest upward bias heading into the spring, but will likely remain susceptible to outside forces until we get deeper into the growing season when wheat has enough headlines of its own to drive the market.

Beef

Firm cash and a Canadian mad cow provide support.

Cold air is expected to plunge south into the Midwest and Plains over the coming week. The brunt of that cold is expected to impact the Midwest, but a significant amount of that cold is also expected to move into a portion of the Plains feedlot region, which has shifted to the north in recent years due to cheap corn in that region. The cold is expected to take pounds off of cattle while hurting gains, reducing the number of slaughter-ready animals.

Another case of mad cow disease has been confirmed in Alberta, creating more excitement in a cattle market in need of stability. The news provided fresh energy for the cattle market to close out the week on speculation that it might shift export demand to U.S. shores in the days and weeks ahead. The strong close to the week adds to that sentiment, although Canada says that it will have no impact on export business.

Packers continue to hold their cards close to the vest, trying to manage a very tight supply. Next week’s cold air out break simply adds to those problems. That doesn’t mean that prices have a free ticket to move higher. Cheap pork continues to be a trump card that retailers can hold over the heads of packers to resist price increases. Regardless, a slower chain speed is starting to provide some stability in the product market following several weeks of sharp losses. That should begin to ease pressure on packer margins that are currently estimated at losses of near $80 per head.

April live cattle futures posted their highs early in the week, up $7.675 from the previous week’s low. They declined from the early-week highs revealing the continued skepticism of the futures market, but then rallied back to close out the week. Yet, it was not able to challenge the early-week highs. The lead February contract has to respect the cash market, but the big discount of the deferred contracts reveals the underlying bearishness of the trade following its recent thrashing.

The week’s kill was estimated at 537,000 head, down from 547,000 the previous week and down from 530,000 the previous year. That brings estimated slaughter for the year to date to 3.460 million head, down 277,000 head or 7.3% from the previous year. However, higher carcass weights are helping fill the gap to maintain market share. That’s becoming increasingly difficult due to the “cheapness” of competing pork.

The latest CME feeder cattle index came in at $210.93, up $1.09 on the day, up $2.27 over the past three days, but down $0.53 on the week. Demand at the sale barn is beginning to improve once again as feeders see improving fat cattle prices. March Feeder cattle futures continue to see solid resistance just above $205, as traders bet on weaker cash prices going forward.

Boxed beef movement Thursday totaled 181 loads, up from 163 loads the previous day and up from 173 loads the previous week. Choice cuts were down $0.64 to $239.10 per cwt, while Select cuts were down $1.17 to $235.19. this firmed the Choice/Select spread to $3.91 per cwt, up from $3.38 the previous day, but down from $5.79 the previous week. The spread should reach a seasonal low over the next two to three weeks. Movement at mid-morning today was good at 115 loads, but with Choice cuts down another $1.01 and Select cuts down $0.82 per cwt.

Pork

Pork fundamentals remain bearish, but prices rally into the end of the week as traders hope for resolution of the West Coast port workers slowdown.

At first glance, export demand for pork looks quite good, but industry sources suggest that it would be much stronger as prices languish at multi-year lows if not for the port slowdown on the West Coast. Industry sources indicate that just one item remains left to agree on between labor and ownership, but when agreement on that issue of selecting arbiters is unknown. Yet, the thinking among traders is that movement will rise significantly once an agreement is reached, leading to stronger product prices and a turnaround in cash prices as well.

Lean hog futures fell to a new low for the move this week before rebounding on profit taking to close out the week. The February contract now goes into its settlement period, closing out the week trading near $62. The latest CME cash index came in at $63.91 per cwt, down $0.91 on the day, down $4.97 on the week and down $24.60 over the past 44 consecutive trading days. The pace of losses would seem to affirm the close for the February contract.

The deferred futures contracts though bounced on short-covering after Thursday’s trade failed to test Wednesday’s low of $63.675, suggesting that a near-term low may be in place. The market was oversold and due for a bounce, but it’s yet to be seen if this bounce can be sustained. Market fundamentals remain weak, but traders appear to be placing their hopes on settlement of the West Coast port slowdown, even though there are few signs yet that will be the case anytime soon.

The week’s slaughter is estimated at 2.222 million head, down from 2.250 million the previous week, but up from 2.095 million in the same week last year. That puts the past week’s slaughter up 6.1% from the previous year, with carcass weights still above year ago levels as well. As a result, prices need to find a level to move sufficient product to keep product from backing up.

Product movement on Thursday totaled 386 loads, down from 496 loads the previous day and down from 398 loads the previous week. The composite pork product price was down $0.72 to $72.09 per cwt. Movement at midday today was very slow at 126 loads. The composite price bounced $1.07 to $73.16 per cwt.

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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