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Closing Comments

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Closing Comments

Corn

Corn falls to new six-month lows as corn planting accelerates and the dollar rallies.

Corn futures started the week with follow-through selling, after tumbling late in the previous week. They consolidated mid-week, before finishing the week by dropping to new six-month lows. Prices garnered modest support mid-week from weakness in the dollar as money flowed into the broader commodity complex, but speculative fund managers added to their large short (sold) positions to close out the week on bounce in the dollar that sent money flowing out of the broader commodity sector once again.

Hedge fund managers typically worry about adding risk premium in April and May, but not this year. This year’s ending stocks are projected to exceed 1.8 billion bushels. Yes, acreage will likely slip a little this year, but traders see the past week’s rapid planting progress as increasing the odds that corn will get some of those acres back. Furthermore, forecasters continue to call for a favorable growing season, maintaining surplus supplies, with production estimates rising for the South American crop as well.

In the end, the above adds up to support the bearish bias that fund managers prefer in the current commodity bearish super-cycle. They’re simply more comfortable being short the commodities at this point and that is particularly true for the grain and oilseeds. Some short-covering would normally be expected ahead of USDA’s May 12 crop report, but traders still see rallies as meant to be sold until something happens to change the prevailing sentiment.

December corn finished the week less than 25 cents above its contract low of $3.6425 set on October 1, with few areas of support separating the two. History would suggest some short-covering between now and May 12, but the bias remains bearish.

Soybeans

Soybeans finish the week on a bearish note, despite Argentine port strike.

Soybean prices started the week on a weak note, rallied to three week highs, but then tumbled to close the week after slipping to two week lows. Better-than-expected demand amid tight-fisted farmer selling weighed against large overall domestic stocks, a massive South American harvest and expectations of a big Midwest crop this summer.

Stevedores joined boat captains in supporting crusher unions in a strike in recent days at Argentina’s port at Rosario. The work stoppage brought soybean shipments to a halt. There are unconfirmed rumors that the government was making threats behind the scenes to bring an end to the strike by Monday and Tuesday, which is what traders are counting on. Crusher unions are said to be demanding a 43% pay raise, while management was offering a 23% increase.

Meanwhile, the new-crop soybean/corn price ratio traded above 2.5 to 1 this week; effectively buying more soybean acres away from corn at a time when global surpluses continue to grow. Fund managers see current soybean prices as a good value, relative to where prices were a few years ago.

The Wall Street mentality is that news is factored into prices once it is known. However, the commodity markets have to trade news until the price brings supply and demand into balance. Surpluses continue to grow, but yet farmers on both sides of the equator continue to expand acreage. As such, the table is set for prices to eventually go much lower if a legitimate weather threat doesn’t emerge over the next few months. That’s the tension that is beginning to be felt as prices trade just above contract lows.

Wheat

Wheat prices consolidate ahead of next week’s Wheat Quality Council tour of the Central Plains.

This may be remembered as the week that wheat prices tried to put in a near-term bottom, but couldn’t. Chicago July wheat fell more than $2 off its December highs, approaching oversold territory. The dollar started to break lower, leading wheat prices to find support amid modest profit taking.

Further weakness in the dollar increased the flow of money into the broader commodity indices, pushing prices closer to pivotal levels on the charts that threatened to trigger active covering of massive short positions in wheat futures. However, speculative hedge fund managers aggressively defended their positions late week as the dollar found stability near the 100-day moving average. That drove prices down well away from those pivotal chart points once again.

Even so, traders were not comfortable driving prices to new contract lows with a couple of key events coming in the days ahead. The Wheat Quality Council tour of the Central Plains has the “potential” to provide enough headlines to scare fund managers out of at least a portion of their short positions, as does the approach of USDA’s first 2015-16 balance sheet on May 12, including the first production estimates based on actual field surveys.

Regardless, that doesn’t change the underlying bearish sentiment of this market. Traders see global supplies as more than ample to meet demand over the coming year, with few significant areas of production concerns. Russia is expected to make a decision by mid-May on lifting its export tax, which could dump more cheap wheat on the global market, continuing to keep a lid on U.S. exports. We need to export 60% of our wheat to make the balance sheet work, but that’s been tough to do amid good production overseas and a strong dollar that makes it tough to compete.

Beef

Fat cattle futures slide on weaker product prices despite strength in the cash market.

It’s been a volatile week for live cattle futures. Prices dropped on Monday following an USDA cattle-on-feed report that showed more heavy-weight cattle than expected placed in feedlots in March. In fact, 40% of the cattle placed during the month were 800 pounds or more in weight, coming off lush spring pasture.

Yet, losses were limited by the fact that the numbers are still relatively tight. That supported a recover of June cattle futures back to Friday’s highs, which were again tested mid-week. However, prices began to pull back on Thursday when the market was unable to move higher, with more significant resistance at $152 to $153 per cwt on a live basis. Cash cattle trade turned out to be positive late-week, but futures prices came under pressure as product prices began to fall to close out the week.

A few head moved in the Texas Panhandle late Thursday at $157 per cwt on a live basis, down $1 to $2 from where trade took place there the previous week. However, packer offers improved on Friday, with feeders beginning to let go of cattle in Kansas at $160 per cwt, up $2 from the previous week’s trade. Even so, futures were under pressure even though the June contract was trading $10 to $11 below the cash market, reflecting the ongoing skepticism that continues to plague the market. Traders simply do not believe that the cash strength will hold.

Slaughter dropped to a ridiculously low 502,000 head in the week ending April 11, but margins have improved dramatically since then. As a result, packers are doing what they can to increase the number of cattle moving through the plant and will likely try to push more than 570,000 head through in the week ahead. That’s still not expected to be enough to meet barbecue demand over the coming month, but imports remain a significant factor in filling the gap, keeping a lid on gains.

The Friday kill is estimated at 109,000 head, up 4,000 from the previous week, but down 10,000 from the previous year. Saturday’s kill is pegged at 7,000 head, up 3,000 from the previous week, but down 10,000 from the previous year. Put it altogether and the week’s kill was pegged at 566,000 head, up 22,000 from the previous week, but down 44,000 from the previous year. That brings year-to-date slaughter to 9.310 million head, down 749,000 or 7.4% from the previous year.

The Feeder cattle market continues to monitor the fat cattle market for direction, but with a bit more strength beneath it. That’s best illustrated by the large discount of fat cattle futures to the cash market, relative to the more modest discount of feeder cattle futures to the cash market. The latest CME cash index came in at $218.00 per cwt, up $0.63 on the day and up $5.03 over the past five-consecutive trading days, helping to provide support for feeder cattle futures.

The one surprise over the past year has been the resiliency of demand for beef amid historically high prices. Yes, the consumer shifted to ground beef during times of the highest prices, but they still held much truer to beef than expected amid rapidly falling pork prices. Fears of a major shift have now eased somewhat as well as pork prices firm again to two-month highs.

Boxed beef movement on the spot daily market Thursday slipped to 180 loads, down from a strong 221 loads the previous day, but still up from 121 loads the previous week, although at lower prices. Choice cuts dropped $1.65 to $256.90 per cwt, while Select cuts dropped $2.01 to $244.05. That pushed the Choice/Select spread to a four-month high of $12.85 per cwt, up from $12.49 the previous day and up from $8.97 the previous week. Movement at mid-morning today was routine at 82 loads, but at much weaker prices. Choice cuts dropped $2.40, while Select cuts lost $1.67 per cwt.

Pork

Lean hog futures consolidate ahead of the weekend as the cash market pushes to catch up.

Lean hog futures added to their gains over the past week, although traders decided to take some profits to close out the week. The cash market has clearly posted a near-term bottom, with the product market doing the same. Producers pushed their hogs to get to market, perhaps to facilitate active planting progress this week, or worried that higher prices would not hold.

That has pushed carcass weights 4 to 5 pounds below year ago levels, reducing pressure on the market at a time when demand is showing signs of improving as avian flu spreads in the poultry flock and cheap prices attract foreign interest in light of tighter poultry supplies.

Midwest cash trade was mostly $2 to $3 higher in the closely watched Iowa/Southern Minnesota market to close out the week, with the Midwest as a whole at mostly $1.50 to $3. Some packers were looking for hogs to slaughter early in the week ahead as producers focused on getting corn planted ahead of approaching rains.

Yet, futures prices remain well above the cash index, leaving them vulnerable and inviting pre-weekend profit taking. The lead June contract still has an attractive target of $84 to $85 per cwt, but the latest cash index came in at just $68.16 per cwt. Granted, that index was up $0.91 from the previous day, up $2.98 over the past week and up $8.58 per cwt over the past 19 consecutive trading days.

The Friday kill is estimated at 420,000 head, up 3,000 from the previous week, but up 9,000 from the previous year. Saturday’s kill has been estimated at 35,000, down 14,000 from the previous week, but up 12,000 from the previous year. That would put the week’s kill at 2.164 million head, down 20,000 from the previous week, but up 149,000 from the same week last year. Year-to-date kill is pegged at 38.624 million head, up 2.034 million or 5.6% from the previous year.

Product movement on Thursday totaled 319 loads, down from 372 loads the previous day and down from 332 loads the previous week. Yet, prices continued to push higher. Thursday’s composite pork product price came in at a two-month high of $73.28 per cwt, up $1.94 on the day and up $3.61 over the past week. Movement at midday today were slow at 141 loads, but prices continued to firm. The composite product price firmed to $73.92 per cwt, up $0.64 on the day.

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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