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Closing Comments

Corn

EPA announcement pulls the legs out from under a modest pre-weekend rally in corn futures.

Exporters sold a net 25.5 million bushels of corn in the week ending May 21, including 25.8 million old-crop bushels. Obviously, new-crop sales were net negative with more reductions than new purchases. The old-crop sales were down from 32.0 million bushels the previous week, but still above the five-year average for the week of 20.9 million bushels. China bought 1.8 million bushels of old-crop corn during the week, but cancelled previous purchases of new-crop corn by 2.3 million bushels.

Marketing year corn sales total 1.691 billion bushels, down 104 million or 6% from the previous year. Exporters typically sell 90% of final corn shipments by this point, whereas they had sold 94% by this point last year. Thus far this year they have sold 93% of USDA’s target for the year ending August 31. As such, sales to date exceed the seasonal pace needed to reach USDA’s target by 41 million bushels, up from 40 million in the previous week.

Exporters sold a net 7.2 million bushels of grain sorghum in the week ending May 21, including 2.9 million old-crop bushels. The old-crop sales were down from 4.0 million the previous week, but were still above the five-year average for the week of 1.6 million bushels. China bought 6.4 million old-crop and 4.3 million new-crop grain sorghum bushels during the week. Meanwhile, “unknown destinations” reduced previous old-crop bushels purchased by 3.4 million.

Marketing year grain sorghum sales total 326 million bushels, up 166 million or 103% from the previous year. Exporters typically sell 76% of final grain sorghum shipments by this point in the year, whereas they had sold 76% by this point last year. However, they have already sold 93% of USDA’s target for the current year that ends August 31. As such, sales to date exceed the seasonal pace needed to reach USDA’s target by August 31 by 61 million bushels, down from 62 million the previous week.

The U.S. Environmental Protection Agency finally released its proposed revised biofuel mandates ahead of the weekend. The bottom-line is that the EPA proposes total 2016 renewable fuel use at 17.4 billion gallons, down from the 22.25 billion gallon target in the 2007 law.

For ethanol, EPA puts the 2014 target at 13.25 billion gallons, with 2015 at 13.4 billion and 2016 at 14 billion gallons. While those numbers are increasing, the combined three years of mandates fall 3.75 billion gallons below levels set in the 2007 law, equating to roughly 1.33 billion bushels of corn not processed.

Many in the industry who are in regular conversations with the EPA have long felt that the EPA was not a fan of corn-based ethanol. These numbers would appear to show EPA’s true colors. It originally started this debate when corn supplies were tight, blaming those tight supplies. They are no attempting to finalize the reduction now when corn supplies are in surplus.

Corn prices have fallen roughly 80 cents this year. They were attempting to bounce to close out the month, but the EPA announcement pulled the legs out from under the modest rally. The EPA announcement doesn’t put a cap on ethanol production, but does leave it much more dependent on the volatile export market to sustain production levels, and therefore demand for corn.

The question is, where do we go from here with corn prices. The fundamentals are bearish, boosted by forecasters call for an El Nino summer, that tends to favor high yields. Thus far that is supported by high crop ratings, although it is still early in the season.

I looked back at the past 25 years and found that 9 of those years saw May post a lower high for the December contract than the April high. Last year was the ninth of those years, when prices continued to trend lower right on through September. The other 8 years saw 4 June rallies and 4 July rallies; the average of which was roughly 45 cents.

Those years included seasons when old-crop stocks were as big or bigger than the current year. Whether we see a similar rally this year, or trend lower into harvest as we did in 2014, may very well hinge on movement in the U.S. dollar, and therefore money flow either in or out of the broader commodity complex.

Corn futures continues to consolidate just above contract lows. The low for July corn is $3.4675, while the low for December is $3.6425. The market will likely probe these lows for sell-stops. Finding a lot of sell-stops would lead prices lower, but traders may want to see us get deeper into the growing season before pressing prices significantly lower.

Soybeans

Soybean futures get a boost from EPA announcement and Argentine strikes.

Exporters sold 13.9 million bushels of soybeans in the week ending May 21, including 11.8 million old-crop bushels. The old-crop sales were up from 6.1 million the previous week and up from the five-year average for the week of 3.9 million bushels. Old-crop sales were boosted by a purchase of 7.3 million bushels by China, but that was more than offset by a reduction of previous purchases by “unknown destinations” of 7.8 million bushels of old-crop soybeans.

Marketing year soybean sales total 1.836 billion bushels, up 185 million or 11% from the previous year. Exporters typically sell 97% of final soybean shipments by this point in the year, whereas they had sold 100% by this point last year. Thus far this year they have already sold 102% of USDA’s target for the year ending August 31. As such, sales to date exceed the seasonal pace needed to reach USDA’s target by 95 million bushels, up from 94 million the previous week.

The real question was whether we’d see a rise in soymeal export sales due to strike problems threatening shipments in Argentina. The strike issue has been hanging over Argentina since May 5. A recent spike in U.S. crush margins suggested that some of that business was coming our way. Granted, the latest data was as of May 21, but it did show a modest bump in demand.

Soymeal sales rose to 123.7K metric tons in the week ending May 21, up from 103K tons the previous week and up from the five-year average for the week of 94.8K tons. Actual shipments of previous purchases during the week jumped to 213.1K metric tons, up from 107.2K the previous week and up from the five-year average for the week of 127.9K. As such, some customers buying from both sources may have pushed for earlier delivery of U.S. purchases, although we have no confirmation of that.

The late-week EPA announcement was a bit friendlier for soybeans. The biodiesel mandate proposal is set at 1.63 billion gallons for 2014, 1.7 billion gallons for 2015,1.8 billion gallons in 2016 and 1.9 billion gallons in 2017. That ignited soyoil futures, which provided a lift for soybean futures on the expectation that improved crush margins.

Keep in mind that the EPA opened the door earlier this year for foreign produced biodiesel to qualify for the mandate. Along that line, I’ve been noticing a series of ships on the loading docket at Argentine ports to be loaded with biodiesel for shipment to the United States. Argentina did nearly triple its export tax on biodiesel this week, seizing an opportunity to profit from the above, but one needs to clearly question how much of the above mandates will actually be met by U.S. produced biodiesel?

Additional support continues to come from strike disruptions in Argentina. The crusher’s union says it is close to an agreement, but a much larger union says it will strike Monday if a labor agreement isn’t reached, with a national strike of all unions the following week.

The bottom line though is that supplies are expected to continue expanding until/unless a major weather event occurs to slash production. No such threat is yet on the horizon. A moderate El Nino would suggest very dry conditions in northern Brazil with wetter conditions further south in next year’s growing season, but forecasters currently believe that the dryness will be far enough north that the overall pattern will be net neutral to net positive for soybean production.

Soybean prices bounced modestly to close out the week and the month. Sustaining the rally would likely necessitate ongoing problems with shipments out of Argentina, which is possible. However, the long-term fundamentals remain bearish due to expanding supplies.

Wheat

Wheat futures tumble on improving weather and poor export demand.

Exporters 10.9 million bushels of wheat in the week ending May 21, including 1.6 million old-crop bushels. The old-crop sales were down from 2.7 million bushels sold the previous week and down from the five-year average for the week of 2.8 million bushels. Marketing year sales total 856 million bushels, down 310 million or 27% from the previous year. Sales to date exceed the seasonal pace needed to reach USDA’s target by May 31 by 20 million bushels, but what really matters at this point is actual shipments and they fall a bit short.

Sustaining rallies in the wheat market generally necessitates that Kansas City leads the way. However, Kansas City July wheat lost 47.75 cents this week, while Chicago lost 38.25 and Minneapolis lost 38 cents. That’s not the combination that you like to see for a rally in the wheat market.

Prices tumbled through most of the week, largely due to a strong dollar and its impact on export demand. Exports continue to be very poor. Traders largely ignored problems in the Southern Plains during the week despite record rains and wheat sprouting in the head due to the strong dollar. However, prices continued to tumble to close out the week as the dollar pulled back, with traders pointing toward improving weather forecasts in the Southern Plains and poor export demand.

The market is again approaching contract lows, with speculative fund managers holding massive short positions. That leaves it vulnerable to a significant short-covering rally should something occur to scare them out of those positions. Thus far that has not happened, leaving fund managers emboldened to continue chasing the current trend, which is lower. Odds of supportive headlines that could encourage short-covering increase later in the summer, but that could be from significantly lower levels in this current commodity deflationary cycle.

Beef

Live cattle rally falls short as product market collapses.

Thursday’s rally in feeder cattle and live cattle futures was impressive. June live cattle reached their highest level since May 15 and their fourth highest level since January 8. However, similar to 2014, spikes to new highs, even though accompanied with heavy volume and growth in open interest, are often followed by a sell-off.

The rally was questioned, considering that we were about the move from May into June, when supplies increase and demand softens. Furthermore, packers are expected to be less aggressive in bidding in the negotiated market as product prices decline seasonally into the summer. Product demand has softened following the record high set by Choice cuts on May 19, with supplies expected to rise in the weeks and months ahead. Today’s hopes for a rally were dashed by sharply lower product prices coming out mid-morning.

The Friday kill was pegged at 115,000 head of cattle, up 6,000 from the previous week, but down 5,000 from the previous year. The Saturday kill is estimated at 60,000 head, up 56,000 from the previous week and up 5,000 from the previous year. That puts the week’s kill at 525,000 head, down 41,000 from the previous week due to the Memorial Day holiday and down 15,000 from the same week last year. That brings 2015 slaughter to date to 11.537 million head, down 862,000 or 7% from the previous year’s pace.

June live cattle continue to have a series of moving average indicators providing support just beneath the market between $151 and $151.60 per cwt. Dropping below that area would open the door for testing support at the trend line off this year’s lows, which currently intersects at $149.67 per cwt, with the possibility that we could eventually test support just above $145, although the contract remains at a big discount to the cash market.

Feeder cattle futures pulled back as well going into the weekend as traders took profits as they squared their month-end books. August feeders remained largely within the previous session’s trading range, suggesting that the market needed to consolidate from its over-bought condition and leaving the door open for more strength going forward, but that will also likely hinge on corn prices going forward. The latest CME 7-day cash index came in at $222.66 per cwt, up $0.21 on the day, up $2.36 since the previous Friday and up $2.88 over the past five consecutive trading days.

Domestic demand may be softening, but export demand for beef was strong for the second week in a row as buyers stocked up before the dollar rose back to higher levels. Sales in the week ending May 21 totaled a net 20.8K metric tons, up from 18.8K the previous week and up from 12.7K tons in the same week last year. Actual shipments during the week totaled 11.4K metric tons, down from 11.8K the previous week and down from 16.4K tons shipped in the same week last year. Sales to date for 2015 are down 16% from the previous year’s pace, while actual shipments are down 9%.

Product movement Thursday slipped to 173 loads, down from 178 loads the previous day, but up from 124 loads the previous week. Choice cuts averaged $259.25 per cwt Thursday, down $1.86 on the day, while Select cuts were down $3.14 to $246.74. that pushed the Choice/Select spread to $12.51 per cwt, up from $11.23 the previous day, but down from $12.90 the previous week. Movement at mid-morning today was routine at 90 loads, but Choice cuts were down $4.14, while Select cuts were down another $3.17 per cwt.

Pork

Lean hog futures pull back ahead of the weekend as cash market stagnates.

The lean hog futures market tried to mount a comeback this week after completing its recent correction lower. However, that comeback ran into problems, with demand softening and cash prices flattening. We finished the week with the cash market largest steady, although the cash index continues to leak lower. The latest CME 2-day lean hog index was pegged at $82.20 per cwt, down $0.31 on the day, down $1.00 over the past week in which it slid on each trading day.

We should see product demand improve in June as retailers feature it more in the coming weeks. That should particularly be true for the summer favorite of bacon. The market is also very current, which should limit the downside for the cash market as well. However, we may need to see a deeper correction in the market near-term to allow the consumer to adjust to higher prices; both domestically and on the export market.

July lean hogs are largely chopping around between $82 and $85 per cwt. I look for demand to pick up later in the year, particularly on the export market, but fear that the recent spike in prices may encourage over expansion of the breeding herd.

The Friday kill was estimated at 422,000 head of hogs, up 11,000 on the week and up 10,000 from the previous year. Saturday’s slaughter is pegged at 170,000 head to make up for lost time on Memorial Day, up from 34,000 the previous week and up from 74,000 the previous year. That puts the week’s total kill at 1.826 million head, down from 2.142 million the previous week, but up from 1.743 million in the same week last year. As such, 2015 slaughter is estimated to be 46.827 million head of hogs, up 2.525 million or 5.7% from year ago levels.

Export demand for pork improved a bit in the latest week. Exporters sold 15.8K metric tons in the week ending May 21, up from 11.2K the previous week and up from the 9.1K tons sold in the same week last year. Actual shipments remained solid at 18.4K metric tons, up from 18.2K tons the previous week and up from 10.2K tons in the same week last year. Sales to date for 2015 are up 62% from the previous year’s pace, while actual shipments to date are up 74%, based on USDA data.

Product movement on Thursday slipped to 350 loads, down from 442 loads the previous day, but above the 248 loads moving the previous week. However, we saw a sharp break in product prices, with the composite pork product price down to $84.63 per cwt, down from the 2015 high of 87.28 the previous day and down $2.42 per cwt from the previous week. Movement at midday today was slow at 153 loads, but the composite price bounced back to $86.08, up $1.45 from Thursday on good demand for picnics and bellies.

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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