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Closing Comments



Closing Comments


Seasonal and chart signals weigh on corn prices.

Money generally flowed back into the broader commodity sector to close out the week, after the major commodity indices broke hard to multi-year lows mid-week. However, it was not enough to hold grain and oilseed prices higher, with traders again focused on large supplies, a big South American harvest and bearish chart signals.

Corn basis firmed over the past week, with the national average rising about 2 cents during the period. Ethanol processors continue to push corn through the plant, while export demand has improved as well. There’s been little doubt that corn demand is solid, but supplies have remained in the hands of tight-fisted farmers. They simply do not want to accept current prices.

The refusal of farmers to sell helped support an impressive fall rally, but it didn’t alter the fact that in the end the supply is much larger than the demand. Some support had come from expectations that South American farmers would sharply curtail production in favor of soybeans, with U.S. farmers doing the same this spring. Acreage did drop in Argentina, but bountiful rains now suggest that high yields will offset much of the decline in area.

Further north in Brazil, the focus is on the safrinha corn crop, which is planted following the harvest of the soybean crop. Drought slowed planting of the soybeans, raising trade speculation that we would see a late harvest leading to a sharp decline in safrinha corn acres. Safrinha corn accounts for 60% of Brazil’s production and the bulk of its exportable supplies.

However, the weather outlook now looks favorable for rapid harvest of the soybean crop. Rains are expected to be scattered enough to allow combines to gather the crop, followed by opportunities for farmers to plant the safrinha corn crop by the March 1 deadline. In fact, one major analyst in the area now expects this year’s safrinha corn acreage to match last year’s, with a small increase possible. That’s because corn prices and profit margins are actually better this year than last, due to currency exchange rate changes.

This realization began to weigh on corn futures over the past week. Losses accelerated after key chart support gave way mid-week, with fund liquidation and spread unwinding adding pressure. Sentiment has clearly turned negative for corn. I expect losses to ease in the days ahead as traders turn to pressuring soybeans to narrow the new-crop soybean/corn price ratio. Corn traders still need to worry about getting some acres back for the 2015 crop in the Midwest, but the path of least resistance is clearly lower near-term.


Seasonal pressure weigh on soybean prices as the South American harvest slowly gains momentum and as soymeal prices break lower.

Soybean futures broke lower mid-January, but the rate of decline was slowed by a resurgence in soymeal demand. The lack of availability in South America sent more business north to the U.S. market, where livestock producers were also shifting away from high-priced DDGS back to soymeal. The combination helped hold up crush margins, keeping processors battling exporters for soybean supplies.

However, it’s a futures market, whose job is to anticipate future value. As such, early harvest progress in South America with the first cargo loaded for export in Brazil refocused the trade on the large South American crop about to hit the world market. That crop may not be as big as it was once expected to be. USDA raised its production estimate to 95.5 million metric tons January 12, up from 94.0 mmt previously. It may need to drop closer to the 94 mmt level down the road due to hot dry conditions in January, but that would still be a big crop.

The final straw came late in the week as soymeal basis and futures began to break harder. This pulled the support out from beneath the soybean market, with traders pushing prices to three-month lows. This sets the stage for a possible test of the early October low of $9.20. However, that may not be the end of soybean price problems if the weather remains favorable.

The job of the marketplace in times of surplus supplies is to take prices to a low enough level to discourage production and stimulate demand until the two come back into balance. Demand is strong; likely tapping its full potential at this point. That means that production needs to be curtailed. Adverse weather can do that, but in the absence of adverse weather, acreage needs to shrink.

But that’s not happening. South American farmers expanded acreage, and now U.S. farmers say they will do the same. As such, the marketplace has still not done its job.

Soybean stocks were record tight for much of 2014, keeping the new-crop soybean/corn price ratio high. However, those supplies are large now. As such, I look for the new-crop soybean/corn price ratio to do what it did in each of the previous 8 years before 2014 and drop to 2.05 or lower at some point. That leaves soybean prices vulnerable to trading in the low $8 range if corn is unable to put together a rally.

It probably won’t happen right away. February can be a time of sharply lower prices, but we’re likely looking at the lowest prices once traders are comfortable with the condition of the 2015 crop.


Deflationary cycle continues to keep bearish cloud over the wheat market, aided by good rains expected in the Plains this weekend and good snows in the Midwest early in the next week.

Winter is a difficult time for wheat prices. Rallies tend to be built on headlines, but it’s difficult to generate supportive headlines for the Northern Hemisphere when the crop is dormant for the winter. That could change in another month as the crop begins to break dormancy, but even that is a question mark at this time.

Global wheat supplies are roughly in the middle of the historical range when looked at in terms of “days of supply.” However, we must understand that global traders are looking at those supplies through the filter of a declining global economy. As such, they look at the numbers through the perception that the world is in a deflationary cycle when many major economies are in or near entering a recessionary period, which is expected to lead to slower demand for commodities at large. As such, any surplus is considered to be a big surplus within this context.

Chicago March wheat tested support at $5 late this week, probing below it. That’s down more than $1.77 from its December high, while Kansas City lost $1.67 and Minneapolis lost more than $1.26. Under different circumstances, the market would agree with farmers that prices had already fell too far and that they need to find support here for a seasonal spring rally.

However, the crude oil market demonstrates that prices can go much lower than would otherwise be expected when Wall Street fund managers are focused on the deflationary side of the price/demand cycle. This leaves wheat prices vulnerable to lower lows, even though that may seem difficult to justify from a fundamental standpoint.

Fundamentally, prices aren’t finding much support near-term. Yes, acreage of both hard red and soft red winter wheat is lower. But that’s not a concern to the trade as long as crop conditions are not threatening. Crop ratings are scheduled to be updated in key states on Monday, which may show more deterioration over the past month. However, traders are focused more at this point on good rains expected in dry areas of the Plains this weekend, with good 4 to 8” snows expected to fall over the bulk of the Midwest soft red winter wheat crop.


Cash trade surprise, but trade reaction is restrained amid market uncertainty.

Cash cattle trade started the week at $157 per cwt on a live basis, but slowly firmed to close the week at $160 to $160.50 per cwt. Packers had to push the price higher to get the cattle needed to fulfill their orders. That would seem to be supportive, particularly when futures prices are at a substantial discount to the cash market. However, traders believe that packers have large contracted supplies available to them beginning in the week ahead, which is expected to push cash prices lower once again.

Market bulls can argue that the worst is behind the market, with prices trending higher through the week in an outside trading range on the weekly charts. The cash market is trading at a premium to futures with demand improving significantly as product prices tumble. The market has worked by stimulating demand with lower prices and carcass weights are dropping. They would argue that a move back into the $160 to $162 range would be justified.

Market bears can argue that more weakness lies ahead. February live cattle took out the December lows in January, which usually (not always) leads to weaker prices into the spring. Product prices still are not showing any signs of bottoming and packers are expected to have access to large contracted supplies as we turn the calendar to February.

Feeder cattle futures find themselves in a similar situation to live cattle, with futures prices trading at a discount to the cash market. However, the cash market continues to decline as demand for light-weight cattle erodes. The latest CME cash index came in at $213.90 per cwt, down $1.35 on the day, down $6.33 over the past week and down $21.32 over the past 14 trading days. An increasing number of sales are now occurring below $200 per cwt.

Product movement Thursday dropped to 187 loads, down from 208 loads the previous day, but up from 130 loads the previous week. Product movement remains on pace to rise to at least three-week highs as prices tumble. Choice cuts Thursday traded at $244.59 per cwt, down $2.70 on the day, while Select cuts dropped $2.00 to $238.34 per cwt. That puts the Choice/Select spread at $6.25 per cwt, down from $6.95 the previous day and down from $6.76 from the previous week.

Boxed beef movement at mid-morning today was routine at best at 92 loads. Choice cuts were down another $1.20 to $243.39 per cwt, which is down more than $20 per cwt from the January 14 record high. Select cuts were down another $1.31 to $237.03 at mid-morning, which is down more than $17 from their mid-January high.

Slaughter totals through Thursday totaled an estimated 445K head, up 12K on the week, but still down 12K from the same period last year.


Pork supply grows faster than demand, even though demand is good.

February lean hog futures traded down to $70 per cwt on January 23, down more than $24 or more than 25% from their mid-November high. However, they spent much of the past week bouncing from that level on ideas that the market was oversold and had gone too far too fast. Prices posted a healthy rally into early Thursday, but could not hold the strength as both the cash and product markets continued to trend lower. That lead to a weak finish to the weak, with the charts showing signs of a possible bear flag.

The cash market was mostly steady to up to $1 lower nearly every day this past week, although some days were a bit weaker. The CME cash index finished the week at $71.73 per cwt, down $0.41 on the day and down $2.38 on the week. The cash index has posted losses for the past 34 straight trading days, with total losses over that period coming in at $16.78 per cwt.

Slaughter this week through Thursday totaled an estimated 1.720 million head, up 23K on the week and up 156K or 10% from the same period last year. Furthermore, carcass weights continue to come in heavier than year ago levels, adding to the overall supply of pork. Demand has been increasing, but supply has been even larger.

Product movement on Thursday totaled 343 loads, down from a robust 528 loads on Wednesday, but up from 257 loads the previous week. That puts us on pace to reach a three-week high in product movement this week. The composite pork product price came in Thursday at $78.30 per cwt, down $2.03 on the day and down $6.17 over the past three days. Movement at midday today was routine at 184 loads. The composite pork product price bounced $0.91 to $79.21 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

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