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Closing Comments

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Closing Comments

Corn

Corn finishes week on a strong note supported by Brazil truckers strike and safrinha corn delays.

It was a roller coaster ride for corn futures, with March corn dropping to its lowest level since February 3rd mid-week, before attempting to test the week’s highs to close out the week. Selling early in the week focused on fears of a “second harvest” when farmers finally decide to bring the 2014 crop to town, while strength late in the week focused on safrinha corn planting delays along with trucker strikes in Brazil.

Now we turn the calendar to March, when the focus shifts to the “what if” risks of the season ahead. Ukraine expects to reduce corn acreage by 7% this year. A crumbling currency producing inflation risks will likely see input usage decline as well, risking lower yields. A close study of similar years in Brazil suggests that we could see a reduction in exportable supplies of 160 to 200 million bushels this year with Brazil’s crop shrinking to 70 million metric tons.

That in itself is not bullish corn, but it dramatically shrinks the margin of error for a possible weather problem this summer. A look at the analog years currently suggests better than 50% odds of weather favoring trend yields this year, but spring is the time when the market worries about the 30 to 40% odds of adverse weather, building in risk premium to add acres in order to expand the safety net.

Price action of this past week saw the new-crop soybean/corn price ratio rally above 2.4 to 1, although that eased somewhat to close the week as December corn gained on November soybeans once again. Even so, the ratio is still too high to get the acres needed, which could help support December corn in the days and weeks ahead if traders focus on the seasonal fundamentals.

Traders continue to worry about the “second harvest” when the bulk of the 2014 crop comes to town, but that may not occur until producers are more comfortable with the growing season ahead. Slowing ethanol demand for corn as stocks rise near record levels is also a bearish factor for old-crop contracts over the next several months, which is why we could see December take more of a leadership role going forward.

March corn went off the books amid heavier than expected deliveries at 1,416 contracts or 7.1 million bushels. This again is not bullish for old-crop corn. We will not run out of corn ahead of this year’s harvest, but we still can’t be confident of that for the coming year.

December corn ran into a roadblock at the 200-day moving average of $4.1975 to close out the week, settling near the middle of its recent trading predominantly between $4.10 and $4.20. A better test of that moving average will be the objective of market bulls to start the month of March.

Soybeans

Old-crop soybeans find additional support from Brazilian truckers strike and delayed harvest, but new-crop prices soften on fears that the market may be buying too many acres.

Soybean prices trended higher through the past week as trucks blocked highways and forecasts for more rain delays spurred talk of an extended export season for U.S. soybeans. USDA data released Thursday for export sales in the week ending February 19 showed rapidly declining new orders for soybeans and soymeal, suggesting that global end users are less concerned than futures traders about the delays, but nonetheless, fund managers continue to buy soybeans.

The strength of the market is clearly in the old-crop, showing that concerns that our export season will be lengthened are being partially offset by expectations that a huge South American crop will eventually hit the market, combined with larger acreage in the U.S. belt this spring. Even so, the new-crop soybean/corn ratio continues to favor expansion of soybean acreage at the expense of corn due to lingering high input costs for corn.

This suggests that we could/should see this ratio narrow in the weeks ahead to encourage a modest shift back to corn. That could leave November soybeans vulnerable to additional weakness, particularly if December corn continues to struggle to sustain much of a rally.

The bottom line is that the United States has a surplus of soybeans and that South America is expected to dramatically increase global supplies in the weeks ahead, with Brazil’s crop near 94 mmt and Argentina’s rising to 58 mmt or higher. Yet, the market has still not done its job of removing the incentive for farmers to increase acres in the United States this spring.

But that is significant as well. This soybean market refuses to go down to levels that the fundamentals suggest and that needs to be respected. That doesn’t necessarily mean that the topside is wide open, as we’re close to pricing soybeans, and more specifically soymeal, into the United States out of South America for spring delivery. Ocean freight rates are very cheap, making such imports into the Southeast a bit more likely if we see U.S. prices rise much above current levels unless something currently unseen happens to push prices higher in South America.

We closed out the week with old-crop contracts moving higher on the above demand factors. However, November soybeans finished in the red, indicating that traders are starting to worry that prices near $10 may buy too many acres this year. This is a level where farmer selling tends to increase, adding pressure as well with the new-crop hedging.

Wheat

Short-covering energizes the wheat market, posting a reversal on the charts as traders put risk premium back into prices as we turn the calendar to March.

Market bulls headed to the sidelines with their tails between their legs mid-week as Chicago March wheat fell below $5.00 and settled their, with the May contract doing the same. However, selling interest began to dry up at that point, with hedge fund managers holding near record large short (sold) positions. That created nervousness in the trade, with the calendar turning to March when the market tends to add risk premium.

The expiring Chicago March contract left a double-bottom on the charts, triggering profit taking on the large speculative short positions. Fundamentally, traders pointed toward sub-zero temperatures in the Plains with little snow cover, but Chicago led the rally to close out the week, suggesting that this had more to do with finding an excuse to respond to seasonal chart factors. Yes, the cold is a concern, but the market has also dismissed similar threats this year.

Recent warmth brought much of the central and Southern Plains crop out of dormancy, allowing agronomists to begin assessing damage from previous Arctic air outbreaks in the region. Thus far, I’m seeing reports of tiller damage in northwestern Kansas, with more warm weather expected to reveal similar damage in western Nebraska and northeastern Colorado. As such, the focus now shifts to Monday, when many key states will begin to release weekly ratings for the winter wheat crop.

That should provide greater fundamental direction for the market going forward. As such, I look for wheat to build on the past week’s reversal with prices building risk premium back into the market in the weeks ahead. However, we need to keep in mind that U.S. wheat exports continue to be very poor, largely due to the strength of the U.S. dollar. That isn’t going away anytime soon. As such, we need to be prepared for this market to break once again when/if the trade becomes comfortable that this year’s crop will be sufficient to meet that small demand.

Beef

February live cattle contract goes off the board with more than $6 swing.

Cattle futures continued to prove frustrating for feeders; for those trying to use the market to manage their risk exposure in the market. The expiring February contract surged higher on Wednesday and Thursday; attempting to add to that strength on Friday. In fact, trade late morning suggested that traders may be expecting cash cattle to trade near $162 per cwt on a live basis, which would have been several dollars above where many traded the previous week.

However, the market wasn’t finished with its surprises. The February contract plummeted down to $156.15 just ahead of Noon, losing more than $4 in a couple minutes time in thin trade volume, before bouncing back to near the $160 level.

However, the huge discount of the deferred contracts provides guidance about where traders continue to believe that the cash market is heading beyond this week. April takes over the leadership role starting on Monday and it traded as low as $149.30 on Friday.

Yet, prices firmed starting at Noon Friday on reports that Brazil would be unable to fill its export orders, with 60 packing plants closed due to the truckers strike. The reports suggest that pork and poultry shipments are most at risk, but beef traders reacted to the possibility that U.S. beef exports might benefit from Brazil’s problems as well.

March feeder cattle found good support at $195 again this week, establishing strength in that area. However, the cash market faced renewed weakness once again. The CME cash index sits at $207.72 per cwt, up more than $5 from the lead March contract, but down $0.55 on the day and down $2.86 over the past week with losses in each of the past five days.

Packers have effectively wiped out more than $100 losses per head by pushing product prices higher over the past week. However, product movement dropped dramatically as prices rose, with retailers focused on cheaper pork and product prices.

Boxed beef movement totaled 123 loads on Thursday, matching the previous day’s total, but down from 135 loads the previous week. Choice cuts were priced at $247.03 per cwt, up $0.54 on the day, while Select cuts were down $0.03 to $244.90. The Choice/Select spread bounced to $2.13 per cwt, up from $1.56 the previous day, but down from $3.21 the previous week. Movement at mid-morning today remained slow at 74 loads, although prices continued to firm. Choice cuts were up $0.81 per cwt, while Select cuts were up $1.03.

Pork

Brazil strike raises hopes of U.S. exports.

Lean hog futures focused on the debate over whether the cash market was carving out a seasonal bottom for much of the week, but finished the week talking about a truckers strike in Brazil. Wire service reports indicate that the strike has slowed movement of animals, reducing slaughter at packing plants by 50%.

Reuters reports that poultry and pork producers in particular will be unable to fill some export orders, with 60 pork and poultry plants to close temporarily. That report strengthened U.S. futures in the meat sector to close out the week on hopes that some of that business will come to U.S. shores.

Cash hog prices finished the week near steady, but spent much of the week trending higher as adverse winter weather slowed movement to packing plants. Traders fear that hogs left on the farm added more weight, increasing future supplies.

The latest CME cash index came in at $63.38 per cwt, up $1.32 on the day and up $2.98 on the week. The cash index dropped for 50 consecutive days, with losses over that period totaling $28.24 per cwt. That streak broke early in the week, with the index now posting gains on four consecutive days with gains over those four days totaling $3.11 per cwt.

The problem for packers is that product prices didn’t turn higher, but continued to trend lower. As such, the profitable margins that they had been enjoying for most of the past seven months have evaporated.

Product movement dropped to 391 loads Thursday, down from 506 loads the previous day, but up from 360 loads the previous week. However, prices continue to trend lower. The composite pork product price dropped to a new low of $68.13 per cwt Thursday, down $1.34 on the day and down $3.46 over the past three days. The price had bounced $1.85 per cwt at midday today, but movement slowed to just 183 loads as a result.

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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