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Sunday Outlook

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Weekend Developments

* There was nothing bullish about Friday’s USDA crop report, with USDA raising corn and soybean yields, although cutting acres, and slashing wheat exports to their lowest level of the past four decades. Yet, soybean and wheat prices moved higher and corn quickly erased early post-report losses. In fact, I would argue that Friday’s closing prices had more to do with the price of crude oil than it did with USDA’s crop report.

* Speculative fund money dominates today’s commodity trade. Yes, supply and demand matter in the end, but day to day movement, and even sometimes month to month movement, frequently has more to do with money flow than it does actual supply and demand fundamentals.

* The major commodity indices are a basket of 15 to 25 individual commodities, with most of them including corn, soybeans, wheat, cattle and hogs, as well as members of the energies, soft commodities and metals. A fund managers buying or selling a major commodity index is in essence buying or selling contracts of corn, soybeans, wheat, etc.

* Many of these major indices posted multi-year lows this summer, with the CRB index dropping to its lowest level since 2002. The latest jobs report released on October 2 convinced many fund managers that the Fed would not be raising interest rates for a long time. The dollar has had a rate hike baked in for many months, so it started working lower. The weakening dollar led many fund managers to suddenly see value in the commodity sector at these low prices. As such, the charts of many of the commodity indices have started to turn higher on their way to hopefully confirming major lows.

* Money flowed into the major indices through most of last week under this idea that the commodity sector is a buy once again. It was within this context that traders viewed Friday’s USDA crop report. They probably would have sold the grains off hard in an environment that was bearish toward the commodities, but not on Friday.

* Crude oil has been acting as a leading indicator in the eyes of many traders on whether to buy or sell the commodity sector. It essentially ran into the 200-day moving average at a 2-1/2 month high of $50.94 on Friday, triggering profit taking. That led to profit taking over the Noon hour CDT in the major commodity indices, pulling strength back out of the grain complex. Corn slipped through areas of chart support, tripping preset sell stops that accelerated losses to do some chart damage. Crude oil recovered late in the afternoon, but the damage had been done already in the grains.

* The charts still look relatively healthy for some of the major commodity indices. Crude oil is modestly higher and pushing back for another test of $50 this evening. Continued strength in crude oil tonight and tomorrow would be expected to support buying of the broader commodity sector, giving a boost to grain and oilseed prices once again. However, if crude oil falters again, the grains could receive a bigger setback near-term. My bias is that we will trend toward more interest in the commodities in the weeks ahead, but that also depends on what the Fed does when it meets again in a couple of weeks.

* Corn is the most vulnerable right now, due to the chart damage done on Friday when crude oil prices broke. December corn needs to hold the $3.80 level to avoid tripping more sell stops, sending prices another leg lower. Basis is firming, particularly in eastern areas of the Midwest that have a deficit of supply.

* Soybeans have been in a sideways channel with an upward bias for most of the past 34 days. Friday’s action only reinforced that trend, with soymeal looking like it is finding support at $300 per ton as well. The charts suggest that the market is telling us that it has priced a big crop in and now expects strengthening demand and shrinking acreage to tighten the balance sheet in the months ahead. I’m not bullish soybeans, but it would appear that the path of least resistance is to the upside as long as the crude oil market doesn’t collapse again.

* Wheat had a big September on ideas that it had priced bearish fundamentals into the market. The question now is whether it can continue to sustain a rally. Corn prices will continue to have an influence, but traders are also very cognizant of changing weather patterns that are threatening future production in the U.S. winter wheat belt, Australia, Russia and Ukraine. As such, this market remains well-bought on breaks, but traders will also be reluctant to build ownership near recent highs until they have a better handle on the impact of adverse weather; which may not come ahead of spring.

* Mostly dry weather is expected to favor active harvest progress in the Midwest this week. We could see a few showers develop in southwestern areas of the belt late in the 10-day period, but the best chance for rain arrives late in the 11- to 15-day period.

* Showers could pop up in southern Kansas late in the 10-day period, with a better chance in the 11- to 15-day period favoring southern and eastern areas of the Plains winter wheat belt. However, dry spots are expected to increase in eastern Colorado, western Kansas and southwest Nebraska.

* Rain chances are limited in Brazil through the next two weeks in Mato Grosso, but some dry areas did see beneficial moisture over the weekend. Southern wheat areas remain wettest and most at risk through the next two weeks.

* Showers are expected to expand into the drier half of the Former Soviet Union wheat belt late in the 10-day period to aid establishment. Showers should be confined to southern South Russia this week, but reach Ukraine next week to improve late fall growth. Light showers were confined to southeast Australia over the weekend, with limited showers over the next 10 days. At least a quarter of the wheat and canola, focused in Victoria and South Australia, will continue to see yield declines.

Commodity Weather Group Weekend Summary

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In the U.S., weekend rains focused on the Southeast and eastern Delta (.25 to 1.5″, locally 3.5″), which exacerbated flooding in SC with additional minor losses likely. Drier weather will ease flooding over the next 2 weeks across the Southeast. Light showers (.10 to .50″) favored southwest/north-central OK.

Mainly dry weather will dominate harvest areas in the Midwest and Delta over the next week. By late in the 6 to 10 day, a few showers may develop in the southwest Midwest, but the main showers are not until the latter half of the 11 to 15 day in the Midwest/western Delta. Harvest concerns remain minor. The rains should aid moisture for early soft wheat growth.

Plains showers could pop-up in southern KS late in the 6 to 10 day, while the main rains in the 11 to 15 day favor the south/east and would improve early growth. Dry spots in eastern CO, western KS, and southwest NE would still be likely to suffer from moisture shortages for fall establishment (nearly 1/4 of hard red wheat).

In South America, weekend rains favored northern/eastern Mato Grosso, extreme west-central Minas Gerais, central/western Sao Paulo, far northeast Mato Grosso do Sul, Parana, Santa Catarina, and southern/far northern Rio Grande do Sul in Brazil. While rain chances are limited again through the next two weeks in Mato Grosso, the rains did offer some key soy areas beneficial moisture.

Wheat areas will remain most frequently wet through the rest of this month, particularly RGDS. This will slow harvest as well as lead to quality declines and localized lodging. While our outlook remains fairly dry for the northern 2/3 of the coffee belt, the 6 to 10 day forecast is slightly wetter in southeast Minas Gerais. The GFS also shows a much wetter 11 to 15 day, but the drier Euro guidance is preferred.

Argentina picked up only very light weekend showers along northern/western fringes of the belt, and a similar pattern is expected to prevail for much of the next two weeks. This will allow central corn/wheat areas to see moisture decline, and better rains will be needed in early November to recharge moisture supplies. Light frost continued in far southern wheat areas during the weekend but led to little to no damage.

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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