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Closing Comments

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Closing Comments

Corn

Corn futures to challenge areas of chart support amid ample supplies of cheaper corn on the global market.

USDA released its weekly crop progress report Monday afternoon. The report showed that 9% of the U.S. corn crop was planted as of Sunday, April 19, up 7 points on the week, but down from trade expectations of 10% and down from the five-year average for the week of 13%. Corn planting progress in key states (5-yr avg); IL 15 (21), IN 1 (13), IA 7 (7), MN 12 (6), MO 8 (30), NE 4 (5), ND 0 (2), OH 1 (7). Note that planting progress was 5 points higher in Minnesota than in Iowa.

Avian flu chatter picked up in the feed grain market this week, especially when a large Iowa egg-laying farm with a capacity of 5.3 million birds was confirmed with the disease. Industry estimates suggest that a 5% decline in poultry reduces corn demand by 75 million bushels, but losses thus far are less than 1%. The disease incidence is expected to decline as summer heat arrives, before returning in the fall as temperatures cool again. USDA warns that it may be several years before the disease is brought under control.

Corn futures spent most of the day in the red today, with traders unconcerned about planting delays this early amid expectations of a favorable growing season. There’s been some cooling of sea surface temperatures the past two weeks in the northern Pacific. That doesn’t change the summer outlook at this point, but it could add a hotter drier risk if the cooling continues to expand, but that is currently not expected.

The lead May corn contract finds itself just above key support $3.70, with December dropping to test key support at $3.95. Breaking below those levels would be seen as bearish. Fund managers appear to be very comfortable with their large short (sold) positions; even willing to add to those short positions until/unless a legitimate weather threat emerges.

Soybeans

Soybean prices soften again on declining fears over a Brazil truckers strike.

Traders continue to monitor developments with a potential truckers strike in Brazil starting on Thursday. Rhetoric out of China would suggest that it is quite concerned, but sources within Brazil suggest that may be unnecessary. They note that there is no central authority over the many different trucker’s groups, with all of them having somewhat different demands. A key meeting with truckers begins at Noon Chicago time tomorrow.

The dynamics are much different now than they were in February, suggesting that a repeat of the national road blockage seen then is not likely. Rather, several minor localized strikes are more likely having little influence on soybean shipments out of Brazil. Keep in mind that trade reports indicate that China is asking some April shipments to be delayed until May or June due to supplies backing up in ports at the destination.

Brazilian farmers sold more than a half-billion bushels of new-crop soybeans in the first three weeks of March when the real weakened to 3.3 to 1 U.S. dollar. However, sales have slowed since then as they hold onto soybeans as a hedge against further currency volatility until they can price inputs for next year’s crop. Overall, they have sold just over half of this year’s crop, with profits exceeding year ago levels due to the currency exchange rate changes. Sales are expected to pick up again in May and June as Brazilian farmers begin paying expenses once again.

Soymeal basis was mostly steady today, in both the truck and rail markets. We’ve seen some softening in recent days, particularly in local markets impacted by the avian flu problem, but a significant impact has not yet been seen on the national market. However, the overall softer tone is tied to business shifting south of the equator.

Soybeans gave back a portion of Monday’s gains as talk of Chinese stimulus eased and fears of a Brazilian truckers strike softened as well. Yet, soybeans have maintained enough strength to continue to buy acres away from corn, with the new-crop soybean/corn price ratio rising to 2.41 to 1. Gains continue to be limited by ample global supplies, but traders are still very reluctant to test last fall’s lows until they know more about this year’s Midwest crop.

Wheat

Wheat bounces on weather concerns after crop ratings fail to improve as expected, although sentiment remains bearish long-term on very weak demand.

USDA reports that 16% of the winter wheat crop was headed as of April 19, up 10 points on the week and above the five-year average for the week of 15%. Heading progress in key states (5-yr avg); Arkansas 14 (37), Illinois 1 (10), Kansas 4 (8), Missouri 0 (13), Oklahoma 35 (31) and Texas 50 (36).

The crop rates a condition index score of 325 (500=perfect crop), unchanged from the previous week, but up from the 10-year average for the week of 323. The trade was looking for crop ratings to rise following the previous week’s rains in dry areas of the Plains, but it didn’t happen.

Ratings increased in Arkansas, Indiana, Michigan, Missouri, North Carolina, Ohio, Oklahoma and Washington. Ratings deteriorated in Colorado, Idaho, Kansas, Montana, Nebraska, South Dakota and Texas. Condition index scores in key production states included Kansas 291, Oklahoma 309, Texas 344, Nebraska 296, Illinois 350, Indiana 358, Ohio 356, Michigan 350 and Arkansas 348.

Most of the Plains’ states saw deterioration, despite last week’s rains, as the crop was simply too far along, although we may see a bit of improvement with more time. Improvement was largely in the Midwest soft red wheat belt, as well as Oklahoma and Washington.

The spring wheat crop was 36% planted as of April 19, up 19 points on the week and 17 points better than the five-year average for the week. Each of the six major production states saw planting progress above the five-year average for the week. Progress in those states was as follows: Idaho 68%, Minnesota 64%, Montana 21%, North Dakota 22%, South Dakota 73% and Washington 88%. Now the region simply needs rainfall to establish the crop.

A sustained rally in the wheat market likely needs to be led by Kansas City. However, the hard red winter wheat market has the weakest charts, continuing to trend closer to the soft red wheat market. Our best chance for a supply-driven short-covering rally may be within the next 2-1/2 weeks leading into the Wheat Quality Council’s tour of Kansas and surrounding states, but thus far interest in such is tepid.

We’re watching for such a rally opportunity, but also recognize significant additional downside risk longer-term due to poor export demand. Longer-term, our next best chance for a rally would be later this summer if dryness concerns emerge in Russia and/or Australia, as some forecasters anticipate.

Beef

Live cattle futures bounce following big losses during the previous two sessions.

A Reuters’ poll reveals that the trade expects that Friday’s USDA cattle-on-feed report will reveal that all cattle on feed April 1 totaled 10.641 million head, or 98.6% of year ago levels. March placements are expected to come in at 1.702 million head, or 94.5% of year ago levels. March marketings are expected to be 1.630 million head, which would be 98.2% of year ago levels.

Live cattle futures bounced today, but gains were rather modest relevant to losses of the previous two sessions, suggesting that sentiment remains bearish. Market bulls were arguing that we could see steady cash trade this week, which was the best argument that they could make. However, futures contracts remain at a huge discount to the cash, leaving them vulnerable to a short-covering rally. Most contracts beyond the April contract are trading several dollars below $150, which has held most of the bottoms in the cash market over the past year.

The cash market remains relatively quiet early in the week, although there are unconfirmed trade reports of a few cattle moving in Iowa at $157 to $159 per cwt on a live basis and $253 to $254 per cwt on a dressed basis in Nebraska, generally $3 lower on the week.

Today’s kill is estimated at 110,000 head, down 1,000 from the previous week and down 6,000 from the previous year. Week-to-date slaughter is estimated at 220,000 head, matching the previous week’s level, but up 1,000 from the same period last year.

Grilling season is strengthening demand for beef, with the Choice/Select spread firming seasonally despite better grading of cuts due to heavier weights for cattle, although the spread has corrected lower in recent days. Overall movement on the spot market hit a nine-week high last week, despite seeing prices near record-high levels. However, a strong dollar continues to support active beef imports to meet the need as well.

Movement on the spot market dropped to 114 loads, down from 144 loads on Friday, but matching the previous week’s pace. Choice cuts firmed to $259.14, up $1.35, while Select cuts were up $1.23 to $252.20 per cwt. That firmed the Choice/Select spread to $6.94 per cwt, up from $6.82 the previous day, but down from $8.51 the previous week. Movement at mid-morning today was routine at best at 83 loads. Choice cuts were up another $1.56, while Select cuts lost $1.24, pushing the Choice/Select spread to $9.73 per cwt.

Feeder cattle futures followed the lead of the fat cattle market today, with traders taking profits on short (sold) positions. Today’s CME feeder cattle cash index came in at $217.48 per cwt, down another $0.18 on the day and down $1.80 over the past week.

Pork

Lean hog futures post impressive gains as market perspective swings the other way on avian flu news.

Avian flu has largely been perceived as a bearish influence on the pork market to this point, with headlines triggering a massive sell-off last Wednesday that damaged the charts, bringing the rally to one-month highs to an end. The fear was that the disease would block exports, backing up supplies of cheaper poultry at the retail level. We highlighted the fact that Mexico, our top buyer, would likely switch to hams, boosting demand for pork, but the focus remained on bearish factors.

The pendulum began to swing the other way today. Confirmation of avian flu on a large egg-laying facility in Iowa with no signs of slowing down yet shifted market sentiment the other way. Lean hog traders today focused on the possibility that the disease will hurt poultry production to the point that it draws down supplies of competing meats, raising demand for pork. The shift in sentiment supported a healthy rebound in lean hog futures, although the June contract needs to establish itself above $80 to swing momentum again.

Today’s cash market was mostly steady across the Midwest, although the closely-watched Iowa/Southern Minnesota market was steady to 50 cents higher. Today’s lean hog index came in at $64.27 per cwt, up $0.54 on the day, up $3.53 over the past week and up $4.69 over the past 11 consecutive trading days.

Today’s kill is estimated at 432,000 head, up 1,000 from the previous week and up 23,000 from the previous year. Week-to-date kill is pegged at 862,000 head, down 21,000 from the previous week, but up 179,000 from the same period last year.

Product movement totaled 268 loads Monday, down from 290 loads on Friday and down from 298 loads the previous week. The composite pork product price slipped to $67.86 per cwt, down $0.13 on the day, but up $1.89 over the past week. Movement at midday today was fairly routine at 192 loads, with the composite product price up another $0.98 to $68.84 per cwt on good demand for bellies, and loins.

June lean hogs rallied sharply today, stopping just short of the 50-day moving average of $77.86 per cwt. Today’s gains were impressive, but it would likely take a sustained move above $80 to shift market sentiment bullish again. However, look for expansion to ramp up again above $80, particularly if corn prices continue to fall.

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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