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Sunday Outlook

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Weekend Developments

·         China was the focus of headlines over the weekend. Data released showed that it reduced its holdings of U.S. debt by $180 billion between March and May as it raised cash to prop up growth at home. However, those efforts do not seem to be working. Another report over the weekend indicated that prices at the wholesale level fell 5.4% year-on-year in the month of July. That is an indication that both domestic and export demand is slumping.

·         Prices at the consumer level were up 1.6%, largely due to a rise in pork prices, which were up 16.7%. Pork supplies are being squeezed due to sow liquidation over the past year as farmers gave up trying to make a living paying $9+ for government reserve corn to feed.

·         Chinese officials will likely focus on necessary stimulus to turn the wholesale prices around, but U.S. farmers should pay attention to the pork story. Look for China to begin importing more pork via Smithfield foods later this year to keep pork prices in check, while government officials try other stimulus to increase demand for products at the wholesale level.

·         Chinese soybean demand has risen in each of the past 11 years, while I project them to break that streak in 2015-16 due to sow liquidation. Yet, I project new-crop U.S. stocks at just 241 million bushels on a 44.4 bushel yield, even with the smaller export number. I reach that level with just a 600,000 acre reduction in area harvested, while an argument can be made for an even larger acreage reduction. However, based on its past behavior in similar conditions, I expect USDA to disappoint the trade on Wednesday and not match its expectation of stocks to drop from 425 down to 301 million bushels; not in the August report anyway.

·         Soybeans will likely be the driver to start the week. The garnered energy late last week on ideas that USDA will sharply cut stocks in Wednesday’s crop report. Look for follow-through strength to start the week, although we could see some early pressure from cash sales over the weekend.

·         Corn is a follower at this point, lacking a lot of strength of conviction, but not willing to depart too far from the direction of soybeans. As such, it should have firm undertones going into Friday’s report, although here again I expect USDA to disappoint in its downward adjustment of stocks, even though I am friendly corn longer-term.

·         Private crop tours thus far have come in only slightly below USDA’s 166.8 bushel per acre yield. A big reason for that is sampling relatively close to the roads (versus problem areas in the middle of the field) and dividing by the standard 90,000 seeds, when many of these fields should probably have a divisor larger than that due to a lack of nitrogen and plant health that lead to a smaller seed. I look for an eventual yield in January close to 160 bushels per acre, or perhaps as low as 156 if disease manifests itself.

·         Wheat is trying to carve out a bottom, lacking sufficient sellers at this point to sustain downward momentum for now.

·         Weekend rains limited lingering dry patches to just 10% of the Midwest. Heat and dryness persist in the deep South, impacting soybean yields. Heat and dryness continues to take the top off European corn production.

Commodity Weather Group Weekend Summary

In the Midwest/South, weekend rains have not strayed much from expectations and were most organized in southern NE, northern KS, northern MO, central/southern IA, central WI, and central/northwest IL. Additional scattered showers in the next two days will track into northern parts of IN/OH and will also again reach parts of NE/IA/SD/MO.

The balance of the week is quieter outside of some very patchy showers in the upper Midwest by Friday. While dry patches appear likely to linger this week in parts of ND, southern WI, far northern IL, far northwest IN, and near the IA/MN border, only about 10% of the Midwest should be affected. Showers may still be a bit disorganized but do become more frequent in the 6 to 10 day, with the chance to narrow a few of these drier pockets.

More widespread rains are possible early in the 11 to 15 day for the upper Midwest as well, with the latest CFS guidance showing the best rains in the northern/western Midwest in the 16 to 30 day. Mid-90s to 100s were limited to the Deep South during the weekend. While the outlook is a bit warmer in the 6 to 15 day for the Midwest and the 16 to 30 day also trended warmer, mid 90s or better will mainly be possible from the western Plains into the Deep South. This will continue to focus the best chance for late stress to soy on the southern 1/3 of the Delta (northern LA, southern AR, central MS, and eastern TX).

In the N. Plains/Canada, weekend showers were mainly scattered into southern MT, northern SD, northern MN, and northern Saskatchewan. Shower chances continue to favor the northern Canadian Prairies through the forecast period, aiding late canola growth. Dryness concerns remain limited to about 10% of the belt, mainly in eastern Alberta. Earlier losses are not being reversed despite the recent beneficial moisture.

N. Plains spring wheat harvest will move along with few interruptions this week. Minor delays are possible in the eastern Dakotas/MN in the 6 to 15 day, but the 16 to 30 day holds the main threat for slowdowns in southern Canada and the N. Plains.

 

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

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