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Closing Comments

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Closing Comments

Corn

Improving forecast pressures prices through areas of support, damaging the charts.

USDA’s daily export reporting system today reflected more export demand for corn. The agency reports that “unknown destinations” bought another 4.8 million bushels of old-crop corn in the previous 24 hours. However, that merely keeps us on pace to have a large carryover at the end of the year.

The week closed with the dollar trading to new three-week lows on durable goods data that suggests that the economy is slowing, reducing chances of an interest rate hike anytime soon. Commodities have frequently benefited from a drop in the dollar, but speculative hedge fund managers are thus far showing their comfort with carrying large short (sold) positions through the planting season.

Selling pushed both the lead May and new-crop December below key areas of chart support at $3.70 and $3.95 respectively on expectations that the weather will open up over the coming week. We’ll turn the calendar to the month of May in the coming week, raising the motivation to get the crop planted. Producers are expected to use their large equipment to make significant progress in getting the crop planted in a timely manner. Wetter risks increase again the following week, but traders remain confident that the crop will get into the ground without any serious threats to this point.

Further south, the safrinha corn crop is looking good in Brazil, with production estimates easing higher. Dryness over the southern half of the safrinha belt could raise concerns over the coming week, but warming waters in the equatorial Pacific suggest that rains will return again to help the crop finish, although this will need to be monitored.

The large short position of the speculative funds will leave this market vulnerable to a sharp rally should something spook the them out of their positions, but thus far no such event can be seen on the horizon. Meanwhile, significant chart damage has occurred, leaving the market vulnerable to additional weakness as prices trade at six-month lows. Modest support sits at $3.82 for December corn.

Soybeans

Soybeans come under pressure from broad-based selling in the commodity sector.

Soybeans spent much of the week continuing their mid-April rally, but prices became top-heavy on Thursday, leading to a sell-off to close out the week. Traders are suddenly focused on rising domestic and global supplies of soybeans on back-to-back record South American crops sandwiched around a massive U.S. crop.

Argentina’s Ag Ministry pushed its production estimate up to 59 million metric tons, up from 54 mmt the previous year and up from USDA’s latest estimate of 57 mmt. Harvest progress of the Argentine crop is nearing the half-way point at 46%, giving analysts a good handle on the crop. Global supplies are rising and China is reportedly trying to slow shipments. Longer-term, we need to monitor shipments to China closely, as producers there have reduced the size of the sow herd for 18 straight months. As such, hog production numbers are expected to show a dramatic decline in the year ahead, which would be expected to reduce demand.

Here at home, we’re also seeing the impact of demand shifting south of the equator. Soybean exports have dwindled dramatically, while soymeal demand is slowing. Processors are expected to see good demand for soymeal for some time, but not at levels seen through the fall and winter. Domestically, avian flu is raising concerns about softening demand as well.

Brazil’s key interest rate is expected to rise this next week, with analysts looking for a 50 basis point increase to 13.25%. That would be the highest interest rate of any major country, theoretically making its real more attractive on the global currency market. Currency volatility has slowed producer interest in selling soybeans until they can book their inputs. Holding soybeans gives them a hedge against currency volatility.

The soybean charts certainly look better than they do for corn and wheat, but their fundamentals are probably more bearish longer-term. Fund managers are building short positions in the soybean market. Commercial demand thus far has slowed the decline in price, but has not been able to stop it.

Wheat

Wheat futures break lower on chart selling and soft demand.

Wheat prices spent the first part of the week pushing higher as traders took profits following the previous week’s big collapse on expectations that rains in the Plains would boost wheat ratings for the drought-stricken area. Ratings crept a bit higher in Oklahoma, but turned lower again for every other Plains’ state. As such, gains were limited beyond a modest bounce, with momentum losing momentum mid-week.

In the end, the past week’s action amounted to a bear flag on the charts, which was executed on Friday with double-digit losses at times driving prices lower. The market’s best opportunity for a spring rally amid drought concerns was expected to be in the weeks leading up to the Wheat Quality Council’s tour of Kansas and surrounding states the week of May 4, but thus far traders are showing no interest in doing so. In fact, speculative hedge fund managers appears confident in boldly adding to their large short (sold) positons.

There’s no question that the Central Plains wheat crop is in trouble. A look at satellite based vegetative health data shows that the poorest conditions are seen from northern Oklahoma to southern Nebraska. Conditions in southcentral and northern Kansas, as well as southern Nebraska are much worse than year ago levels. For added perspective, the latest Kansas condition index score is at 291 (500=perfect crop), down 3 points from the previous week, but up 9 points from the previous year.

However, that currently doesn’t matter to traders, due to weak demand for the food grain. We need to export 60% of the wheat crop to strengthen the balance sheet. Instead, we’re struggling to export 43% of the crop. There are plenty of cheaper supplies around the world keeping a lid on exports. Traders likely won’t care too much about production problems until they see that somebody actually wants to buy it.

Chicago July wheat is threatening to take out the double-bottom just above $4.84, with the charts currently suggesting that it is likely. That becomes more likely if corn prices continue to erode after today’s failure. Kansas City July wheat actually set a new contract low to close out the week at $5.0875, with a possible test of $5 in play.

Beef

Live cattle futures rally again after early-day weakness fails to uncover selling interest.

Cash cattle trade took place earlier this week, perhaps helping the futures market to avoid the big Friday sell-offs of the previous two weeks. Trade in the Plains took place at $157 to $159 Wednesday; mostly at $158 per cwt on a live basis.

Trade firmed to $160 in Nebraska and Colorado on Thursday. That supported strength in the lead April contract that needed to close the gap with the cash market ahead of expiration. A few more head moved in the northern belt to close out the week at $159 to $160 per cwt on alive basis and $260 on a dressed basis.

Some other good things happened for the cattle market over the past week as well. USDA’s cold storage report mid-week showed signs that demand was rising to match, and possibly exceed, demand. That was backed up by a surge in export demand as well. Product prices hovered just below record highs for the Choice cuts, yielding profitable packer margins.

The late-week rally looked every bit as impressive as the previous week’s collapse. The strength largely had its roots in the fact that supplies remain tight, demand is good and futures prices were at a huge discount to the cash. The lead April contract has closed that gap, but the June contract is still at an $8 to $9 discount to the cash market.

It was encouraging to see futures hold levels on the charts that frequently provided support over the past week, but I would caution anyone about becoming too optimistic about sustaining this rally in light of recent packer success in managing cash prices and amid an abundance of much cheaper pork and poultry prices.

Feeder cattle futures followed the lead of the fat cattle market, with help from sinking corn prices. There’s also been an uptick in chatter about tightening supplies of light-weight cattle as heifer retention increases, but that’s been slow to show up in the cash market to this point. In fact, the opposite has been true, leaving the futures market vulnerable. The latest CME 7-day cash index came in at $212.97 per cwt, down $2.60 on the day and down $6.50 over the past five consecutive trading sessions.

Friday’s slaughter was pegged at 105,000 head, up 5,000 from the previous week, but down 13,000 from the previous week. Add in roughly 4,000 for Saturday’s kill and the week’s slaughter is pegged at 544,000 head, up 11,000 on the week, but still down 46,000 from the previous year. That would bring calendar year slaughter to 8.740 million head, down 709,000 or 7.5% from the previous year. Carcass weights are slowly easing lower, off 10 pounds from January. As such, beef production for the year to date is running about 3.5% below the previous year’s level.

Thursday’s movement on the spot daily product market totaled 121 loads, down from 165 loads the previous day and down from 161 loads the previous week. Choice cuts slipped a nickel to $260.01, while Select cuts were up $1.52 to $251.04 per cwt. That dropped the Choice/Select spread to $8.97 per cwt, down from $10.54 the previous day and down from $9.41 the previous week. Movement at mid-morning today was a mere 68 loads, with Choice cuts down $1.23 and Select cuts down $1.76 per cwt.

USDA released its monthly cattle-on-feed report after the markets closed for the week.

USDA Cattle-on-Feed

% of Previous Year

Trade

Trade

USDA

Estimate

Range

On-Feed

100

98.6

97.6-99.2

Placements

100

94.5

91.3-96.9

Marketings

98

98.2

96.2-101.0

Pork

Lean hog futures rise on positive chart signals and rising cash prices.

Both the cash and product markets continue to carve out broad near-term bottoms. The cash market was steady to higher throughout the past week, while being steady to $1 on both Thursday and Friday. The latest CME 2-day lean hog index came in at $65.10 per cwt, up $0.34 on the day, up $2.94 on the week and up $5.52 over the past 13 continuous trading days.

The cash market may be carving out a broad near-term low, but the futures market is already trading at a huge premium to the cash market. That leaves its vulnerable to periodic collapses, which is opposite of the cattle market. Futures trades are betting that the cash market will reach $80 mid-summer, but such expectations as corn prices break lower threaten to speed up expansion of the hog herd once again.

Additional threats come from avian flu. There are a lot of ways to spin this problem. Near-term, the spreading disease threatens to back up supplies onto the retail market as export restrictions increase. That would be expected to turn the product market lower once again, dragging packer margins back into the red and reducing the demand for hogs for slaughter.

However, rapid spread of the disease could more significantly slash poultry production, reducing supplies of competing supplies. Meanwhile lost exports to Mexico, our largest customer, would be expected to increase demand for hams.

These dynamics are further complicated by expectations that avian flu is expected to quickly fade into the background as temperatures warm, but then surge back as a problem in the fall as readings cool once again. USDA is working on a vaccine, but authorities say that we should prepare for the possibility that the highly-contagious disease will be a problem for several years.

June lean hog futures have significant resistance at $80 and $84, with the 100-day moving average dropping rapidly toward $82 per cwt. The longer-term trend remains choppy sideways, but with an upward bias as traders monitor avian flu headlines, as well as corn prices. Traders are also speculating that Chinese demand for pork may increase in the months ahead after it shut off imports of U.S. poultry due to avian flu and as its own hog herd shrinks dramatically due to a lack of profitability.

Friday slaughter is pegged at 417,000 head, down 2,000 from the previous week, but up 6,000 head from the previous year. Saturday’s slaughter is estimated at 49,000 head, down 30,000 from the previous week and down 13,000 from the previous year. That puts the week’s kill at 2.184 million head, down 59,000 from the previous week, but up 193,000 head from the same period last year.

That brings calendar year slaughter to 36.464 million head, up 1.89 million or 5.5% from the previous year. Carcass weights started the year above year ago levels, but have now slipped below. As such, pork production for 2015 is currently running 5.6% above year ago levels.

Product movement Thursday totaled 332 loads, down from 393 loads the previous day, but up from 324 loads the previous week. The composite pork product price pushed upward to $69.67 per cwt, up $2.19 on the day, up $3.53 on the week and its highest level since early March. Movement at midday today was slow at 143 loads, with the composite price down $0.29 to $69.38 per cwt.

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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