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Closing Comments

Corn

Corn rebounds following big post-report collapse on Tuesday.

The Department of Energy reports that ethanol stocks fell to 20.5 million barrels in the week ending March 27, versus 21.3 million the previous week and 15.9 million barrels in the same week last year. Ethanol production slipped to 952K barrels per day during the week, down from 953K the previous week, but up from 922K barrels per day in the same week last year.

The data suggests that ethanol producers utilized 101 million bushels in the week, down slightly from 101.1 million the previous week, but up from 99.3 million barrels in the same week last year. Estimated corn usage to date for ethanol production totals 3.015 billion bushels, up 120 million or 4% from the previous year. Marketing year corn usage to date exceeds the seasonal pace needed to reach USDA’s target by August 31 by 20 million bushels, up from 18 million the previous week.

USDA reports that processors used 442.2 million bushels of corn for the production of alcohol in February. The total was down 11% from January and down 13% from December. The agency reports that 91.5% of the corn consumed went for the production of alcohol, while the remainder went for other uses. Corn use for fuel alcohol totaled 395.8 million bushels during February, down 11% from the previous month and down 13% from December. Dry milling accounted for 89.8% of the corn usage.

Dried distillers grains and solubles production reached 1.65 million tons in February, down 11% on the month and down 14% from December. Distillers wet grains with 65% or more of moisture totaled 1.14 million tons, down 15% on the month and down 19% from December.

We’ve been saying that the job of the market this time of year is to make sure that corn has a wide enough safety net in the event of adverse weather in the growing season. USDA confirmed expectations Tuesday that this year’s corn acres will beat expectations, while the stocks report confirmed larger supplies. Add it together and the data broadened the safety net for the coming growing season by the equivalent of roughly 1.3 million acres.

The initial market reaction was to turn bearish, largely as traders unwound corn/soybean spreads. However, some traders are also beginning to understand that the safety margin is still very narrow. A return to the 158.1 bushel per acre yield seen two years ago would again drop supplies below 1 billion bushels, making stocks snug once again. That still should support risk premium being added back to the market, although we probably have to lower our objectives and to also recognize downside risk due to the deflationary nature of the market.

December corn probed below $4 this morning, but then rallied when selling interest was limited at that point. That doesn’t confirm a near-term low, but rather a technical bounce following a major collapse on Tuesday. Now we need to build on this strength to regain confidence in the market. Weather becomes the primary driver in the weeks ahead. The new-crop soybean/corn price ration finished the day at 2.39 to 1, favoring a shift from corn to soybeans.

Soybeans

Soybean traders add to Tuesday’s gains, following seasonal buy signals as we start the month of April.

Soybean prices continued to push higher today, garnering from improved chart signals and seasonal tendencies for soybeans to firm in April. The grain complex also benefited from a fresh supply of index fund money available to start the new month.

The soymeal basis market continues to look soft as business begins to shift south of the equator. Tomorrow morning’s USDA weekly export sales report will likely again show strong soymeal shipments, but there’s a sense that new sales will likely begin to ease back. Export demand for soybeans is certainly slowing soybeans.

Yet, the funds love to own soybeans and they point to seasonal charts that suggest firmer prices in the month of April. They took advantage of fresh money supplies to start the month amid a weaker dollar to establish new long (bought) positions in the wake of USDA’s less-bearish-than-expected reports on Tuesday.

Long-term, soybean fundamentals remain bearish if we see a “normal” growing season this year. Supplies are abundant and a trend yield would likely see those supplies remain that way, or get even larger, even with strong demand. Today’s new-crop soybean/corn price ratio of 2.39 to 1 is attempting to buy even more acres. The lead May soybean contract is again targeting $10, while November may do so as well if it’s able to take out resistance at $9.77.

Wheat

Wheat prices rebound again as the focus shifts back again to dryness in the Plains.

Fundamentally, exports are very poor, which caps the market when it tries to rally. However, losses on down days are limited by concerns that drought and winterkill in the Plains could result in a short crop. As such, we’ll likely see this choppy action continue within a broad sideways trading range until more is known about the size and quality of the Plains’ crop. However, this market remains vulnerable longer-term if rains improve the outlook for the crop, as demand remains poor and is likely to remain that way as long as production prospects continue to improve overseas and the dollar remains strong.

Wheat in the Plains is in its reproductive stage in the Plains, with jointing taking place in Kansas and heading in South Texas. The region is quite dry, but Oklahoma received beneficial showers last night. Of greater interest in abnormally warm sea surface temperatures off the coast of California. These waters have been moderating over the past two weeks. A study of the analog years would suggest that the Central Plains will turn much wetter in the weeks ahead if this moderation continues, raising production prospects for the region. We will monitor this and keep you informed.

In the meantime, look for wheat prices to be range bound. Chicago July wheat will likely remain predominantly between $5.00 and $5.40, while Kansas City July trades predominantly between $5.40 and $5.80, with a bit more upside bias possible if crop ratings continue to decline in the Central Plains. Minneapolis will focus on planting time weather, but has an area of resistance above $6.05.

Beef

Live cattle futures maintain sideways trading action with a negative bias while waiting for cash trade to unfold.

Live cattle futures once again failed to test highs set over the past week, resulting in traders turning sellers to test the downside potential of the market. The lead April contract dropped to a new one-week low, but selling interest was limited at that point due to strong near-term fundamentals. Feeder cattle futures followed a similar path. As such, traders are marking time while waiting for the cash to provide greater direction.

This week’s slaughter started off stronger than the previous week, but then slowed down as some plants again went dark to slow production; also responding to a tighter supply of available cattle. Feeders are banking on prices to be steady to $1.50 above last week’s predominant $165 per cwt level on a live basis, although those perceptions could change if the board would break hard.

From a technical standpoint, the April live cattle futures contract shows the 100-day moving average nearing the 200-day moving average, risking breaking below it to create a bearish chart signal. The April feeder cattle chart has already seen these indicators cross this week, as has the cash index chart.

The bottom line is that the charts suggest that this market may be near its high for the spring bounce, even though upfront supplies of cattle remain quite tight, although packers now have access to April captive supplies. Packer margins are improving, estimated today at losses of $28.65 per head.

Today’s kill is estimated at 96,000 head as some plants go dark today. The total is down 3,000 from the previous week and down 21,000 from the previous year. Week-to-date slaughter totals 314,000 head, up 3,000 from the previous week, but down 38,000 from the same period last year.

Seasonal demand for product is rising amid the tight supplies, allowing packers to push prices for product higher. This weekend’s Easter holiday provides the first real test for consumer willingness to pay up for steaks next to cheaper pork and poultry at the retail level as barbecue season kicks off. The aggressiveness of retailers to restock their inventories next week should tell us quite a bit about the consumer behavior they witnessed over the weekend.

Boxed beef movement rose to 115 loads Tuesday, up from 93 the previous day, but down from 126 loads the previous week, suggesting that we’re going to see this week’s movement continue to trend lower as prices rise. Choice cuts were up another $2.43 to $254.13 per cwt, while Select cuts were up $1.02 to $248.64 per cwt. That pushed the Choice/Select spread to $5.49, up from $4.08 the previous day and up from $2.05 the previous week on a seasonal rally. Movement at mid-morning today was good at 121 loads, even though Choice cuts were up another $1.67, while Select cuts were up $1.97 per cwt.

The latest CME cash feeder cattle index came in at $218.65 per cwt, down $0.24 on the day, but still up $1.75 from the previous week. Traders are closely watching to see if this market has topped out once again.

Pork

Upward momentum wanes in the lean hog futures as traders again begin focusing on big supplies.

Today’s Midwest cash market was mostly steady for the third day in a row, although Indiana markets were mostly 50 cents weaker. The latest CME 2-day lean hog index came in at $59.70 per cwt, down $0.26 on the day, down $2.11 on the week and down $8.39 over the past 18 consecutive trading days. Packer margins are estimated at $14.55 profits per head.

Today’s kill is estimated at 434,000 head, down 1,000 from the previous week, but up 27,000 from the previous year. Week-to-date slaughter is estimated at 1.295 million head of hogs, down 6,000 from the previous week, but up 80,000 from the same period last year.

Product movement rose to a strong 418 loads Tuesday, up from 290 loads the previous day and up from 397 loads the previous week. The composite pork product price slipped $0.03 to $65.36 per cwt. Movement at midday today was typically good for a Wednesday at 308 loads, but the composite price was down $1.13 to a new low of $64.23 per cwt.

Lean hog futures firmed again today, but buying momentum following Friday’s USDA quarterly hogs and pigs report is slowing. April lean hogs are bumping against resistance at $63, while trading several dollars above the cash index, which is still leaking lower. August holds the largest premium, but the contract pulled back from the 40-day moving average Tuesday and failed to come close to testing the level today.

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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