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Closing Comments

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Closing Comments

Corn

A strong dollar and weaker crude helped draw corn prices lower ahead of option expiration.

Corn futures found underlying support Tuesday from ideas that we will see a significant reduction in safrinha corn area in Brazil, with additional reductions in Ukraine this year. Nothing changed in that arena today, but traders were unwilling to sustain support on those concerns.

Lost production in Brazil and Ukraine narrows the margin for error for a possible Midwest weather problem this summer. The market typically adjusts for that by raising corn prices relative to soybeans to be sure that the feed grain gets enough acres to buffer against possible weather problems. However, the new-crop soybean/corn price ratio has gone the wrong way in recent days, rising to 2.36 this week after dropping below 2.3 to 1 last week.

March corn options expire on Friday, leading to some focus on strike prices with the highest open interest. A look at the data suggests that the $3.80 strike price is most attractive to the markets in the absence of other significant market drivers.

USDA’s Outlook Forum takes place over the next couple of days. Based on its track record, speakers are expected to call for more of the same over the next 10 years, with surplus supplies remaining a problem.

A strong dollar and weaker crude oil prices helped facilitate a break in corn prices today that would draw the lead March contract closer to the $3.80 strike price ahead of option expiration on Friday. Today’s move still leaves the door open for December to lead the market modestly higher going into the spring, but that’s assuming that money flow is neutral.

The Federal Reserve released the minutes of its last meeting today just ahead of the close. The minutes suggested that we will likely see interest rates rise later rather than sooner. The dollar rallied sharply again today, leading to selling in the broader commodity sector, but the dollar quickly erased most of those gains when the minutes were released. Furthermore, Greece reportedly requested and was given a two-week extension to its current funding, buying it more time.

Soybeans

Buyers back away from soybeans above $10.

March soybean prices traded to a fresh one-month high of $10.1225 overnight on strong upfront demand. However, buying interest dried up at that point, with farmer selling modestly higher above $10 and speculative traders asking whether they could justify owning soybeans above $10 with such a big South American harvest coming.

Delays in the Brazilian harvest continue to be a concern near-term. An active rain pattern is expected to dramatically delay harvest through much of this week, followed by a brief window of opportunity next week. The midday GFS model was wetter for next week, but forecasters currently do not feel that next week’s wetter outlook is well-supported.

March options expire Friday, with open interest data showing that the most attractive strike price is at $10. The $9.80 strike price is the next attractive strike price, adding a bearish tone if the market cannot hold the $10 level.

Broad-based selling of the commodity sector as the dollar rallied and crude oil sank added to the bearish tone in soybeans today. We are extending the export season, but we are not going to run out of soybeans, South America has a big crop and we will likely add 2 to 4 million acres to the 2015 U.S. crop this spring. Prices may not reflect that reality this spring, but they eventually will need to do so unless the weather bails us out with a low yield this year.

Wheat

Wheat prices tumble following Egypt’s cancellation of a tender to purchases supplies.

Egypt released a snap tender to buy wheat once again late on Tuesday, but this one was different. The latest tender was for U.S. soft wheat only, as Egypt intended to use a $100 million grant that it has had sitting on the shelf for some time. That raised hopes of people in the industry that we might be able to make a big sell, but that would be difficult.

First, Egypt is very value conscience, even when using our money, to get the most bushels possible for the money. Second, Egypt has strict quality standards and vomitoxin presence in the bulk of our soft red winter wheat supplies following last year’s harvest makes it difficult to meet those standards in large quantities for soft red winter wheat. Nonetheless, exporters offered 3 cargoes of soft red winter and 1 cargo of soft white wheat.

Unfortunately, Egypt didn’t like the prices offered and cancelled the tender. It suggested that it will open a new tender that would include other competitors, who’s recent offers have been roughly $0.70 to $1.00 cheaper than U.S. wheat thanks to the strength of the dollar and larger freight costs from U.S. shores versus closer sources in Europe and the Black Sea.

In other words, it appears that Egypt wants to talk down the market to a more favorable price so that it can stretch the $100 million to cover more bushels. That strategy appears to be working, at least in the short-term. Prices dropped sharply on news of the cancelled tender. As anticipated, Egypt released another tender after today’s close, but this time it opened it up to competing supplies as well. This may be an attempt to buy cheaper wheat from our competitors, or it may be another try at using the grant, but with opens that opening it up will pressure U.S. offers to be more competitive.

Beef

Live cattle futures firm on ideas of a steady to higher cash market, but gains continue to be limited by cheap alternative meat prices.

Live cattle futures posted modest to good gains today, with the greatest strength coming over the noon hour. Traders expect cash cattle to trade steady to firm this week, providing support for futures contracts that are trading at a considerable discount. Last week’s negotiated trade volume was low, leading to a big jump in the show list this week, particularly in Kansas. Product prices are stabilizing, but volume tends to drop off as prices rise due to cheap alternative meat supplies.

Product movement dropped to 142 loads Tuesday, down from 173 loads the previous day, but still up from 123 loads the previous week. Choice cuts were up $0.90 to $239.12, while Select cuts were up $0.16 to $233.20. Prices for both are near areas of support that has held over the past six months. That should begin to help margins, which were estimated at losses of $115.80 per head today.

Boxed beef movement at mid-morning today was routine at best at 89 loads. Movement appeared to be slowing due to higher prices. Choice cuts were up $1.19 to $240.31 per cwt, while Select cuts were up $3.43 to $236.63 per cwt. That narrowed the Choice/Select spread to $3.68 per cwt.

The latest CME cash index dropped $0.37 to $210.99. It was the first drop in the index following six straight days of rises totaling $2.70 per cwt. March feeder cattle continue to struggle under a cap at $205, with today’s lower cash index not providing any help to pull it higher.

This week’s kill through the first two days of the week is estimated at 208,000 head, down 11,000 head from the same time last week, but up 5,000 head from the same period last year. Friday’s USDA cattle-on-feed report is expected to show another decline in placements. Supplies remain tight, but rallies are limited by cheap alternative meat supplies, at least until/unless we can get barbecue season warmed up.

Pork

Lean hog futures consolidate, but show little ability to sustain gains thus far.

Lean hog futures posted modest gains today on signs that the hog market may be finding a near-term low, once again. However, the move was not convincing. Buying dried up on a break to new lows, leading to an early-morning short-covering rally. However, prices came well off their highs when they were unable to even challenge the highs of the past two sessions. In the end, today’s modest gains were more a product of market consolidation than anything else.

Fundamentally, the cash and product markets showed signs of stability. Illinois cash hog prices were again steady to $1 lower, but the bulk of the rest of the Midwest markets were called steady. The latest CME cash index dropped another $0.55 to $61.42 per cwt. That’s down $4.36 over the past week. The index has posted losses on each of the past 47 business days, with losses over that period of $27.09 per cwt.

Product prices are showing signs of stabilizing once again, just as they about a month ago. The composite pork product price rose 1-cent Tuesday to $72.39 per cwt. It was the third day of a higher composite price, but gains over the three-day period totaled just 30 cents per cwt. That’s hardly enough to confidently signal a bottom in the market.

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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