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Closing Comments

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Closing Comments

Corn

March corn holds above key strike price, reflecting underlying strength as corn seeks 2015 acres.

Exporters sold 42.3 million bushels of corn in the week ending February 12, including 36.7 million old-crop bushels. The old-crop sales were down from 39.5 million the previous week, but were above the five-year average for the week of 30.7 million bushels.

Marketing year sales total 1.342 billion bushels, down 43 million or 3% from the previous year. Exporters typically sell 68% of final corn shipments by this point in the marketing year, whereas they had sold 72% by this point last year. However, this year exporters have already sold 77% of USDA’s target for the year that ends August 31. As such, sales to date exceed the seasonal pace needed to hit USDA’s target by 155 million bushels, unchanged from the previous week.

Exporters sold 3.5 million bushels of grain sorghum in the week ending February 12, including 1.4 million old-crop bushels. The old-crop sales were down from a robust 13.1 million the previous week and were down from the five-year average for the week of 2.0 million bushels. The past week’s total included sales of 3.2 million bushels to Chinese end users, while “unknown destinations” reduced previous sales by 2.2 million.

Marketing year grain sorghum sales total 293 million bushels, up 162 million or 123% from the previous year. Exporters typically sell 58% of final grain sorghum shipments by this point in the marketing year, whereas they had sold 62% by this point last year. However, this year they have already sold 98% of USDA’s target for the year, largely due to sales to Chinese end users trying to avoid high-priced domestic corn. As such, sales to date exceed the seasonal pace needed to hit USDA’s target by August 31 by 120 million bushels, although that is down from 122 million the previous week.

There were four primary drivers of the corn market over the past week. First, the dollar overall showed good strength on rising risks that Greece may fall out of the euro-zone, amid reports that the European Central Bank is preparing plans for such. Wire service reports late on Friday reported that a deal had been reached to extended Greece’s aid package for another four months, but that may merely be delaying the inevitable while preparations are being made.

Second, rains fell in key areas of central and northwestern Brazil for much of the week, slowing soybean harvest, as well as safrinha corn planting. The planting pace varies greatly from area to area, but generally is believed to be about half the normal pace for Mato Grosso, which is six times the size of Illinois and basically the size of the Midwest. The ideal time to plant is February 20 to 25, with risks rising beyond that time. One analyst in the region predicts that safrinha corn area will be down 12% this year.

Third, USDA’s Outlook Forum pegged corn area at 89 million acres, although that really wasn’t a surprise. Yet, it provided more confidence that area will be down, in addition to lower safrinha corn production in Brazil and a 7% reduction in corn area in Ukraine, both of which are primary export competitors. However, USDA also projected that 2015-16 marketing year ending stocks will still be above 1.6 billion bushels, which is hardly bullish by itself.

Finally, March options expired. The most attractive strike price for option expiration was $3.80 for the March contract. That tended to put a lid on the market to close out the week.

Now that USDA’s Outlook Forum is behind us, look for the trade to focus more on safrinha corn progress in Brazil, as well as on spring planting intentions for the U.S. Midwest. Look for several additional private forecasts to emerge over the next several weeks to keep the focus on planting intentions, while weather forecasters should also get a better idea of spring weather patterns. Commodity Weather Group currently has a cool dry bias for the Midwest this spring.

Look for December corn to slowly turn the leader as we move into the spring. Old-crop contracts and cash basis will both turn increasingly sensitive to the timing of the highly anticipated second-harvest, when bushels come to town in bulk as farmers give up on getting significantly higher prices. However, December needs to do all it can to get more acres to create a wider safety net against a possible weather problem this summer.

Soybeans

Soybeans focus on option expiration to close out the week amid confusion created by USDA.

Exporters sold 22.8 million bushels of soybeans in the week ending February 12, including 18.6 million old-crop bushels. The old-crop sales were down from 27.4 million the previous week as buyers shift to new-crop South American supplies, but they were still above the five-year average for the week of 13.6 million bushels. The past week’s sales included sales to China of 7.5 million old-crop and 4.0 million new-crop bushels, but that was largely offset by “unknown destinations” reducing previous purchases by 9.8 million bushels.

Marketing year sales total 1.716 billion bushels, up 133 million or 8% from the previous year. Exporters typically have sold 84% of final soybean shipments by this point, whereas they had sold 96% by this point last year. This year’s sales to date match that 96% pace, relative to USDA’s target for the year. As such, sales to date exceed the seasonal pace needed to reach USDA’s target for the year ending August 31 by 216 million bushels, but that is down from 213 million the previous week.

Demand for soymeal remains strong amid lingering tight supplies out of South America. Sales for the week ending February 12 were the largest since the first week of October at 316.6K metric tons, up from 189.4K the previous week and above the five-year average for the week of 168.2K tons. Actual shipments remain strong as well at 384.8K tons, up from 283.2K the previous week and up from the five-year average for the week of 192.6K. This strong demand continues to help elevate crush margins for soybeans to keep domestic demand strong.

The same factors impacting corn prices were also generally at play for soybeans as well, except that the general trend has been for soybean acreage to increase on both sides of the equator as corn area declines. That’s why the market was so surprised to see USDA release a smaller acreage estimate at its Outlook Forum.

Comments made at the USDA event lead us to the possible thinking of USDA economists for releasing its 83.5 million-acre planting estimate for soybeans. Economists pointed to the soybean/corn price ratio, indicating that it is much lower than it was last year. As such, one economist stated that “it is hard to imagine producers ramping up plantings as they did last year.” That statement seems to overlook other factors that go into acreage decisions, including high input costs for corn.

In the end, that resulted in the new-crop soybean/corn price ratio rising, rather than dropping as it needs to do as we head into the growing season. As such, the charts suggest that we may see prices creep a bit higher in the near-term. Longer-term, old-crop prices should come under pressure as demand shifts south of the equator, although strong demand for soymeal should slow that decline. New-crop soybeans are probably most vulnerable when/if the trade becomes comfortable with the summer growing season.

Wheat

Traders focus on sluggish export trade amid a strong dollar.

Exporters sold 11.2 million bushels of wheat in the week ending February 12, including 9.8 million old-crop bushels. The old-crop sales were down from 15.0 million bushels sold the previous week and were down from the five-year average for the week of 18.4 million bushels. Marketing year sales total 772 million bushels, down 246 million or 24% from the previous year. Sales to date exceed the seasonal pace needed to reach this year’s low export target by 24 million bushels, but that is down from 29 million the previous week.

This was the week that traders were reminded that a strong dollar continues to make U.S. wheat uncompetitive on the global market. We saw some risk premium added early in the week on winterkill concerns, but then forecasts for snow cover form Colorado to Ohio late in the week eased those concerns with the focus returning to sluggish demand as highlighted by the weekly export sales data.

Egypt rejected all offers in a tender to buy U.S. wheat, pointing to high prices. It then issued another tender that opened up to other sellers as well, buying wheat from France and Romania at 20 to 70 cents per bushel below U.S. price levels. The renewed focus on poor export sales and improving weather gave wheat a poor finish for the week. Look for the market to mark time chasing chart signals through the week ahead until we begin to get more states issuing weekly crop ratings in March.

Beef

Live cattle futures fail to hold gains, with USDA’s cattle-on-feed and cold storage reports providing more fodder for the bears.

Cash cattle trade on the negotiated market turned out to be disappointing volume for the past two weeks. Supplies are tight, but 85% or more of the cattle slaughtered are now bought on contract, rather than in the negotiated market, giving the packer greater leverage. As a result, we’re seeing an erosion of values paid for cattle, which should begin to help packer margins, but the trend also emboldens bearish futures traders with deferred contracts currently at big discounts to the cash market.

This past week’s kill is estimated at 524,000 head, down 13,000 from both the previous week and from the same week last year. This brings calendar year slaughter to 3.983 million head, down 6.8% from the previous year. Cash trade emerged late in the week at mostly $160 per cwt on a live basis, although some moved in Iowa late at $158. Movement in the north was also seen at mostly $254 to $258 per cwt on a dressed basis.

Product prices have stabilized over the past week, but boxed beef movement declined as a result. Retailers are increasingly cost conscious amid cheaper supplies of alternative meats. Exports are struggling as well.

The impact of the West Coast port slowdown continues to be felt in the meat industry, with the strong dollar adding to problems for beef exports. Exporters sold 10.7K metric tons of beef in the week ending February 12, down from 13.8K the previous week, but up from 9.9K in the same week last year. Estimated calendar year sales to date total 124.3K metric tons, down 42.1K or 25% from the previous year.

Actual shipments in the week totaled 11.5K metric tons, matching both the previous week and the total seen in the same week last year. Calendar year shipments are estimated at 66.9K metric tons, down 7.9K or 11% from the previous year.

USDA noted this week that is expects beef exports to total 2.5 billion pounds in 2015, which would be down 4.8% from the previous year. They attribute the decline to the strength of the dollar combined with the high price of beef expected this year. Beef imports are estimated at 2.8 billion pounds, down 4.6% from the previous year.

USDA’s cattle-on-feed report will add to the bearish tone of the late-week weakness in prices. The agency reported that 10.711 million head of cattle were on-feed February 1, up from 10.678 million the previous month when the trade was looking for a small decline. Feeders placed another 1.787 million head of cattle on feed in January, down 11% from the previous year, but traders were looking for a 13% decline. January marketings totaled 1.625 million head, down 9% from the previous year when the trade was looking for about an 8% drop.

Additional weakness could come from USDA’s cold storage report. It showed 490.937 million pounds of beef in the freezer as of January 31, up 10.4% from the previous month. The total is also up 14.4% from the previous year as demand slows amid high prices, slow exports and tight supplies.

Product movement Thursday totaled 135 loads, down from 176 loads the previous day and down from 181 loads the previous week. Choice cuts firmed $0.14 to $239.92 per cwt, while Select cuts rose $0.86 to $236.71. This narrowed the Choice/Select spread to $3.21 per cwt, down from $3.93 the previous day and down from $3.91 the previous week. Movement at mid-morning today was again routine at best at 92 loads, with Choice cuts up 20 cents and Select cuts up 15 cents per cwt.

April live cattle broke decisively below $150 today, suggesting a possible test of the double-bottom just below $147 per cwt. Today’s USDA cattle-on-feed and cold storage reports add to the bearish momentum going into the weekend.

Pork

Lean hogs try to carve out a bottom, but USDA’s cold storage report threatens the recovery.

Bottom-picking seemed to be the theme of the past week. Supply continues to be a problem, overwhelming demand at times as the industry works to keep the PED virus at bay at the same time that it continues to expand the breeding herd.

This past week’s slaughter is estimated at 2.285 million head, up 63,000 from the previous week and up 174,000 from the same period last year. That brings calendar year slaughter to 16.465 million head, up 1.3% from the previous year, and at higher weights.

Cash hog prices stabilized mid-week and then firmed late week; mostly steady to $1 higher to close out the week. Yet, the latest CME 2-day lean hog index came in at $60.40 per cwt, down $0.53 on the day, down $3.51 on the week and down $28.11 over the past 49 consecutive days of lower prices.

Exporters sold 13.8K metric tons in the week ending February 12 as the West Coast port slowdown takes its toll on buyer interest. The total was down from 24.2K tons the previous week and down from 16.0K in the same week last year. That brings estimated sales for the calendar year to date to 157K metric tons, up 28.5K or 22% from the previous year.

Actual shipments in the week rose slightly to 17.9K tons, up from 17.6K the previous week and up from 13.0K in the same week last year as pork flows through other ports. Shipments for the calendar year to date are estimated at 108K metric tons, up 35K or 48% from the previous year as buyers try to take advantage of cheap prices for pork.

USDA’s cold storage report threw cold water on bullish embers in the pork complex, although much of the bearishness may already be built into the market. Regardless, the data suggests that any strength would be seen as more of a bounce than a turn of fundamentals until/unless we see movement through West Coast ports return to normal.

USDA reports that there were 596.532 million pounds of pork in the freezer, up 18.4% over the previous month. Supplies are still down 3.6% from the previous year, but the gap is rapidly closing. Supplies of all major cuts were up from the previous month, with ham supplies nearly doubling over the past month.

Product movement dropped to 360 loads Thursday, down from 443 loads the previous day and down from 386 loads the previous week. The composite pork product price fell 12 cents Thursday, it’s first decline in a week, settling at $72.32 per cwt.

April lean hogs posted a friendly reversal on the weekly charts, trading both lower and higher than the previous week and closing higher on the week. However, it failed to close above the previous week’s high, casting some doubt on the sustainability of the strength, which likely hinges on the ability to get a settlement that sticks at West Coast ports, considering the bearish cold storage report.

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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