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Closing Comments



Closing Comments


Corn prices consolidate ahead of Tuesday’s USDA crop report.

July corn futures finished the week consolidating near $3.60 per bushel after a wild week of big price swings that saw prices trade a $0.1375 cent-range within a two day period largely due to movement in the currency market earlier in the week. Meanwhile, December corn finished the week consolidating above $3.75, after trading nearly a 13-cent range on Tuesday and Wednesday.

The bottom line though is that corn prices continued their trend lower during the past week, but spent some time consolidating after reaching over-sold conditions as speculative hedge fund managers build large short (sold) positions.

USDA will release its first balance sheet for the 2015-16 marketing year on Tuesday. Traders expect it to show 2015-16 ending stocks at 1.752 billion bushels, down from 1.864 billion for the old-crop balance sheet.

My balance sheet is a bit tighter, with ending stocks for the new marketing year at 1.551 billion bushels or a stocks-to-use ratio of 11.3% or a 41-day supply. Historically, there is a strong tendency for December corn to take out the spring high in the last half of the calendar year in years when new-crop stocks are projected to be smaller than a 50-day supply, but that tendency is threatened by the current commodity deflationary cycle which has fund managers more comfortable being short the commodities than long (bought).

Near-term, one can argue that much of the bearish news has been built into the market. However, much of that may depend on where USDA pegs the South American crop. The average trade estimate going into Tuesday’s report is for USDA to peg Argentine and Brazilian corn at 24.95 and 76.87 million metric tons respectively. However, some private estimates for Argentina’s crop are between 28 and 29 mmt, while local analyst Safras & Mercado just pegged Brazil’s crop at a large 82.3 mmt.

Sentiment remains bearish in the corn market. Tuesday’s report can either reinforce that sentiment, or trigger hedge fund managers to lighten their load of short positions to build a bit more risk premium into the market. Longer-term, just a 5% reduction in this year’s crop would be quite friendly for prices, while a trend or higher yield in the current deflationary commodity cycle would be seen as amplifying weakness.


Soybeans drift into the weekend seeking direction.

China reports that it imported 195 million bushels of soybeans in April, down 18% from the previous year. The big drop is blamed on the Brazil truckers strike earlier in the year that slowed movement of soybeans to ports, slowing shipments across the Pacific.

Amazingly, soybean prices continued to trend higher over the past week, although they lost quite a bit of that momentum late in the week. Even so, prices continue to trend higher off April 10 lows, especially for the old-crop contracts due to tight farmer selling amid lingering strong demand. That demand could strengthen further if port workers at Argentina’s Rosario port join crush workers in a strike that would cripple exports, but that vote has been delayed until at least the 14th as the two sides talk.

Longer-term, supplies are growing, suggesting weaker prices. Ironically, the new-crop soybean/corn price ratio spent most of the week around 2.5 to 1, trying to buy more soybean acres. The trade expects USDA to peg Argentina’s crop at 58.5 million metric tons Tuesday, up 1.5 mmt on the month, while Brazil’s crop is expected to drop very slightly to 94.44 mmt. However, the trade also expects USDA’s first new-crop balance sheet to show 2015-16 domestic surplus stocks rising to 443 million bushels, up from 360 million for the old-crop marketing year.

In the end, weather has been generally favorable on both sides of the equator, supporting big crops. High inputs for corn are further shifting acres in favor of the oilseed. As such, global supplies are expected to continue rising until the price relationship shifts more in favor of corn and/or a major weather event occurs.

I am normally a demand bull for soybeans, driven by China’s desire to have sufficient feed protein for supporting meat production as its population shifts from a starch-based diet toward a protein-based diet heavily leaning toward pork. However, I have serious concerns about the massive liquidation in the sow population in recent months due to high domestic corn prices that have made it unprofitable to raise hogs in China. That may be friendly for U.S. pork exports later this year, but there will be a lot less hogs to feed within China, which will likely cool what has been red-hot demand for the oilseed.


Wheat prices finish strong as hedge fund managers begin to cover short positions.

Wheat prices finished the week on a strong note, suggesting that more strength may be ahead. Fundamentally, traders remain quite bearish, with speculative hedge fund managers holding massive short positions. In reality, that large short position probably is the best hope this market has for a more significant rally, but that possibility cannot be discounted.

The Wheat Quality Council tour of the Central Plains highlighted many of the drought and winterkill problems in the region, but that really doesn’t matter if there’s no demand. The fact is that demand will likely remain poor for quite some time unless a major production problem unfolds elsewhere in the world. However, the greater factor that was revealed by the tour was the widespread presence of stripe rust in the Plains crop.

Stripe rust can be controlled with treatment, but farmers in the Plains are very discouraged, with little incentive to spend more money on the crop. Conditions are nearly ideal for spread of the disease, which could still have a big impact on the region’s production, further tightening the balance sheet. Without that risk, the trade expects USDA to peg new-crop wheat stocks at a large 750 million bushels, up from old-crop stocks of 693 million that gave us the current low prices.

Going back to the large speculative short position, the stripe rust problem is the best hope fundamentally for an event to scare money managers out of these positions. Otherwise, we could see the dollar continue lower, bringing enough money into the broader commodity sector that pushes wheat prices just high enough to trigger massive profit taking of these large short positions.

The bottom line is that wheat is the one commodity that sometimes moves opposite of the direction justified by the fundamentals and this is one of those times that we may see it play out. The timing doesn’t feel right to me, but I’ve learned to never discount the possibility in the wheat market. As such, we need to respect the chart signals and the charts suggest that we may see additional strength in the near-term. Now we need to see if that upside will be enough to trigger more substantial short-covering by the hedge funds.


Live cattle futures rally on renewed cash optimism.

A few cash cattle traded in Nebraska on Thursday at $157 to $160, which is mostly down $3 from the previous week. However, the dynamics supported greater strength in Kansas and Texas. Those dynamics may not have been enough to excite the market if it wasn’t already trading at more than a $10 discount. The size of that discount increased anxiety late in the week to re-energize buying interest as the trade tries to balance strengthening demand against very tight supplies.

Fundamentally, demand is strong with boxed beef movement on the spot daily market near calendar-year highs. Meanwhile, carcass weights are dropping and the supply of slaughter-ready cattle remains small. Packers have been able to leverage the strong demand to elevate product prices, pushing margins into the black. That then provides an incentive for pulling more animals through the plants, which supports the cash market, but also makes the market more current, with weights easing lower.

Grilling season is expected to heat up with the temperatures and Mother’s Day holiday weekend. Graduation parties are expected to add to that demand the remainder of the month, followed by the Memorial Day holiday weekend. The only question remaining is the scope of imports that will be used to fill the gap.

Meanwhile, June live cattle continue to trade a range predominantly between $148 and $152, betting that the cash market will drop in the weeks ahead. That’s the bet futures traders have been making for most of this year, yet the cash market continues to drag contracts higher ahead of their expiration.

Feeder cattle futures continue to follow the lead of the fat cattle market. The cash index has largely been bouncing around between $214 and $218 per cwt, with the lead May contract facing chart resistance at $216 and August at $219 per cwt. The latest CME 7-day feeder cattle index came in at $215.41 per cwt, down $0.62 on the day, but down $1.96 on the week.

The Friday kill was pegged at 115,000 head, up 6,000 from the previous week and up 5,000 from the previous year. The Saturday kill is estimated at 8,000 head, up 1,000 on the week, but down 1,000 from the previous year. That puts the week’s estimated kill at 567,000 head, up 1,000 on the week, but down 33,000 from the previous year. As such, estimated 2015 slaughter is pegged at 9.881 million head, down 778,000 head or 7.3% from the previous year.

Product movement totaled 148 loads on the spot daily market Thursday, down from an impressive 237 loads the previous day and down from 180 loads the previous week. Choice cuts were up $1.43 to $257.58 per cwt, while Select cuts were up $1.57 to $245.84. That put the Choice/Select spread at $11.74 per cwt, down from $11.88 the previous day and down from $12.85 the previous week. Movement at mid-morning today was slow at 70 loads, but Choice cuts were up another $0.62, while Select cuts were up another $1.00 per cwt.


Lean hog futures push higher on strong fundamentals.

June lean hog futures rallied to three-month highs to close out the week, reaching above $85for the first time since January 29. The market remains vulnerable to a correction lower near-term, as it continues to trade at a large premium to the cash market, but both the cash and product markets continue to trend higher, emboldening the bulls who point to strong demand, shrinking carcass weights and avian flu removing poultry from the market. The one fly in the ointment is that packer margins are estimated at $6 losses per head, as cash hog prices have risen faster than the product market.

I see these fundamentals strengthening later in the year as China steps up imports of U.S. pork through Smithfield foods. Farmers there have been battling negative margins due to excessively high corn prices due to China’s subsidy program. As such, they’ve been liquidating sows in recent months, raising concerns about pork supplies later this year. Pork is the preferred meat in China and the top driver of food inflation during times of shortages. However, these high prices could also stimulate expansion in the U.S. herd sufficient to meet that demand, or even exceeding the increased exports, since China will limit imports to ractopamine-free pork.

The Friday’s kill was estimated at 407,000 head, down 8,000 from the previous week, but up 34,000 from the previous year. Saturday slaughter is estimated at 20,000, down 15,000 from the previous week and from the previous year. That puts the week’s estimated kill at 2.111 million head, down 48,000 from the previous week, but up 104,000 from the previous year. Calendar year slaughter is pegged at 40.712 million head of hogs, up 2.115 million or 5.5% from the previous year.

The latest CME 2-day lean hog index came in at a three-month high of $75.98 per cwt. That’s up $1.41 on the day, up $7.82 on the week and up $16.40 per cwt over the past 24 consecutive trading days.

Product movement on Thursday totaled 305 loads, down from 310 loads the previous day and down from 319 loads the previous week. The composite pork product price reached a new 3-month high of $78.84 per cwt, up $1.35 on the day, up $5.56 over the past week and up $11.36 over the past 11 consecutive trading days.

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

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