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Closing Comments

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Closing Comments

Corn

Corn futures slide on favorable weather, as well as concerns that Chinese demand for U.S. corn and DDGS may face more obstacles.

Little corn has moved from U.S. shores to China over the past year, after China had become one of our top customers. China used various schemes to block U.S. imports, trying to push domestic end users to use burgeoning supplies of reserve corn purchased at high prices to support local agriculture. Those reserves are currently believed to top 4.7 billion bushels.

However, domestic end users can’t afford to pay more than $9 per bushel to get that corn out of reserve for use. That’s one of the primary reasons why the Chinese pork industry, which previously produced 50% of the world’s hogs, has spent the past year and a half liquidating its sow herd, opening the door for a possible shortage of pork to begin later this year. China can’t afford to see a shortage of pork that spur inflation higher, possibly creating social unrest.

As such, China is moving forward with reforms. It announced this week that it will cut its corn support price 10% that it uses to purchase grain from farmers, while adding other subsidies for transportation. The net effect is expected to drop corn prices to domestic end users to “just” $8.18 per bushel at current currency exchange rates.

Chinese officials hope that the move will stem the tide of U.S. grain sorghum and Ukrainian corn imports, while supporting its pork industry and reducing government costs. If not, more reductions are likely in the future, providing some risk to U.S. producers expanding grain sorghum acreage to take advantage of current demand from Chinese end users.

Dried distillers’ grains and solubles prices tumbled more than $15 per ton in some markets this past week. Trade chatter indicated that China had cancelled at least two bulk vessels with DDGS and could cancel as many as six more cargoes. A cargo can hold as many as 55,000 metric tons of DDGS. Other sources said that China was simply rolling the shipments into October or later, but that still suggests declining demand. Declining DDGS prices slash ethanol processor margins and threaten production rates.

The above factors weighed on the corn market today. Both July and December contracts slipped to their lowest levels since June 2, suggesting a possible retest of the June 1 seasonal lows.

Soybeans

Strength in soymeal was unable to hold soybeans above water.

South American soymeal offers dropped $1 to $5 per ton on Thursday as supplies increase there and amid favorable growing conditions for the U.S. crop. That combines with sharply lower DDGS prices here in the United States to keep soymeal traders here nervous. Yet, U.S. soymeal basis remained stable today, with futures pushed to one-month highs.

Strength in soymeal pushed the July board crush margins to their highest level since January, spurring demand for old-crop soybeans at a time when farmers remain tight-fisted sellers. However, holding that strength amid a breaking DDGS market proved difficult, with those crush margins collapsing just ahead of the close of trade for the week. That break took the steam out of old-crop soybeans, while allowing new-crop contracts to lead the way lower.

USDA sapped the energy out of the soybean market mid-week. It emphasized the size of U.S. and global stocks, with many traders expecting USDA to increase soybean acreage on June 30th, although not by as much as originally expected due to planting delays in the southwestern belt. Even so, no major threat is currently seen on the horizon to reverse the trend of rising global supplies, with reasons to be concerned about Chinese demand in the months ahead.

As such, November soybeans came within 1/2-cent of testing support at $9.00 per bushel, which becomes a tempting target for traders to start the new week. Traders will get some direction from the NOPA crush report on Monday, which is expected to show record activity for the month of May, but then the focus should shift to private estimates for USDA’s June 30 quarterly stocks and acreage estimates, as well as updated weather outlooks.

Wheat

Wheat struggles amid large projected surpluses as demand struggles.

Egypt released a snap tender to buy wheat following Wednesday’s collapse of the market. A number of offers were made, but Egypt bought just one cargo of Russian wheat at an average price of $5.43 per bushel Thursday morning. It then released another snap tender on Thursday afternoon, with another flood of offers coming in.

This time Egypt bought three cargoes totaling 6.6 million bushels; two cargoes from Romania and one cargo from Russia. The average price was said to be $5.46 per cwt, while the best price after Ukraine was $5.22 per bushel from Romania. Some might interpret this week’s action by Egypt as saying that Egypt became more aggressive, fearing that perhaps the world market was setting a bottom, although those prices are still well-below U.S. prices accounting for freight, but others aren’t convinced.

The week started with wheat rallying to two-month highs in Chicago, with Kansas City and Minneapolis following behind. However, sustained rallies need to be led by Kansas City, and that simply wasn’t the case. The market broke hard on Wednesday, but still remains in a longer-term uptrend. Kansas City finished the week with 3-cent gains on heavy rains in the Plains that threaten the mature crop, but Chicago and Minneapolis were steady at best.

As such, I would call the Kansas City bounce a technical bounce at best, considering losses of the previous sessions. Traders are still focused on the lack of competitiveness that continues to keep a lid on U.S. exports, leading to large projected surpluses.

Beef

Live cattle futures break sharply lower on weaker cash trade.

Slaughter levels have come in below year ago levels all year long. In fact, total slaughter to date this year is more than 7% below year ago levels. Higher carcass weights helped fill the gap to some extent, but they are trending lower as well. Even so, the higher carcass weights have narrowed the gap somewhat, with total beef production this year just over 4% below year ago levels.

The difference has been in a surge of imports from Australia and New Zealand, which have largely went to meeting the past year’s strong demand for ground beef. Imports for the year to date are roughly 35% above year ago levels.

Packers took advantage of positive packer margins last month to push more cattle through plants, pushing more meat onto the market. The net result was a collapse of the product market starting in late May and continuing into the beginning of this past week. They then put the brakes on slaughter, slowing chain speeds to dramatically cut numbers going through the plants as retailers were stocking up for grilling demand for Father’s Day weekend and the Fourth of July weekend.

Product prices bounced as slaughter numbers dropped, but the bounce was modest relative to the sharp break that preceded it. Beef import levels remain too strong to leave the packers in control with these tactics.

The ironic factor in all of this is that the sharp break in chain speed has not appeared to have led to a backing up of supplies. Those supplies were expected to increase in May and June, but now industry participants are searching for the whereabouts of those cattle. The numbers do not appear to be there.

Cash cattle trade emerged in Kansas late on Thursday, moving at $155 per cwt on a live basis. That was on par with futures prices, but more cattle moved then to close out the week at $152 per cwt in Nebraska. Additional cattle moved at $242 to $244 per cwt on a dressed basis. The trap door below the market was opened and prices fell through it, tripping sell stops that accelerated losses as they did so.

Mid-week optimism turned into late-week pessimism as traders liquidated positions. August live cattle bounced before testing key support near $150, with several layers of moving average support stacked between $149.50 and $150.00. Holding that support would put us back into the recent choppy sideways trading range that we’ve seen for much of the past month. Feeder cattle futures followed the fat cattle market lower as well, with August holding above support near $222 per cwt. The latest CME 7-day cash index came in at $226.40 per cwt, up $0.66 on the day, up $1.92 on the week and nearly a five-month high.

The ongoing tightness of cattle supplies will likely provide some support for the board. The past week’s action finally narrowed basis, but August live cattle have good support just below $150. Heifer retention for the purpose of rebuilding the cowherd is expected to keep slaughter supplies tight for some time, providing underlying support for the market as long as the consumer continues to buy beef. Consumer confidence surged above Wall Street expectations on Friday, providing a good sign that the consumer will likely still be there, but beef traders will continue to keep an eye on the alternative meats.

The Friday kill is estimated at 107,000 head of cattle, up 6,000 from the previous week, but down 8,000 from the same period last year. Saturday slaughter is being estimated at 8,000 head, up from 4,000 head the previous week, but down from 32,000 the previous year. As such, the week’s slaughter is being estimated at 542,000 head, down 8,000 from the previous week and down 64,000 from the previous year. That puts year-to-date slaughter at 12.634 million head of cattle, down 987,000 head or 7.2% from the previous year.

Movement on the spot daily market slowed to 133 loads Thursday, down from 192 loads the previous day and down from 176 loads the previous week. Choice cuts slipped $0.47 to $247.19 per cwt, while Select cuts were down $0.07 to $240.66 per cwt. That dropped the Choice/Select spread to a two-month low of $6.53 per cwt, down from $6.93 the previous day and down from $7.97 the previous week. Movement at mid-morning today was quite slow at 48 loads, with Choice cuts down $0.05 and Select cuts up $0.64 per cwt.

Pork

Erosion continues in the hog market as futures lead cash lower.

Lean hog futures has been in decline this month. The July contract tried to consolidate around the 100-day moving average and just above $80 per cwt early in the past week, but simply could not hold the support amid soft product demand and a soft cash market. USDA data showed a surge in export demand when the dollar broke the previous week, but that wasn’t enough to stem the slide in domestic demand, with the cash market leaking a little lower each day.

The latest CME 2-day lean hog index came in at $81.91 per cwt, down $0.25 on the day and down $0.56 over the past week. Packer margins remain positive at roughly $10 per head, largely due to continued strength in the product market that remains near 2015 highs, but those high prices are hurting domestic demand.

The Friday kill is estimated at 409,000 head of hogs, up 2,000 from the previous week and up 112,000 head from the previous year. Saturday’s slaughter is put at 31,000 head, down 1,000 from the previous week, but up 6,000 from the previous year. That puts the week’s kill at 2.128 million head, up 8,000 from the previous week and up 214,000 from the same period last year. As such, year-to-date kill is put at 51.080 million head, up 6.1% from the previous year.

July lean hogs dipped to their lowest level since April 23 to close out the week. Look for the contract to once again try to consolidate in hopes of putting in a near-term bottom here. However, it’s my contention that product movement needs to strengthen to support a meaningful rebound in prices and that will likely necessitate a larger break in product prices.

Product movement totaled 281 loads on Thursday, down from 400 loads the previous day and down from 293 loads the previous week. The composite pork product price slipped to $86.50 per cwt, down $0.58 on the day and down $0.36 from the previous week. Movement at midday today was slow at just 122 loads, with the composite price down another $1.48 to $85.02 per cwt on weakness in loin, butt and picnic prices.

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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