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Closing Comments

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Closing Comments

Corn

The Department of Energy reports that ethanol stocks dropped to 17.3 million barrels in the week ending August 22, versus 18.3 million the previous week and 16.3 million the previous year. Ethanol production during the week dropped to 913K barrels per day, down from 937K the previous week, but up from 820K in the same week last year.

The data suggests that ethanol use in the week dropped to 95.9 million bushels, down from 98.4 million the previous week, but up from 86.1 million the previous year. Corn usage for the marketing year to date is estimated at 4.872 billion bushels, up 435 million or 9.8% from the previous year. Estimated corn usage to date falls short of the seasonal pace needed to reach USDA’s target by August 31 by 8 million bushels, which is down from a deficit of 13 million the previous week.

Both September and December corn ended the day unchanged, with March and May both down ¼-cent. December corn hit sell stops below support at $3.65 Tuesday, but traders were reluctant to test support at $3.60 or the contract low at $3.58 ahead of a three-day holiday weekend before seeing more harvest results. That provided support for the market, but resistance was at that $3.65 level that had been support previously. The pattern in high-yielding years is for prices to break lower again after harvest results start to confirm the larger kernel size and high yields.

Soybeans

Reports of Sudden Death Syndrome and white mold continue to come in this week, with SDS tending to get the most reports. SDS reports are rapidly increasing from Illinois west across Missouri, southeastern Iowa and into northeastern Kansas, with scattered reports elsewhere as well.

This doesn’t necessarily mean that we are looking at a bull market, as the highest incidence SDS is largely coming from areas that are more advanced in maturity, therefore we will likely not see the production losses that might otherwise be the case. The bigger question may be whether we see widespread incidence in areas less mature over the next week. For now, the trade is assuming that losses in the crop as a whole will be insufficient to significantly tighten stocks that are currently projected to be over 400 million bushels.

Tight supplies of soymeal, and old-crop soybeans needed to make it, supported the September contracts of those markets once again. Prices had simply fallen too far too fast. Yes, new-crop supplies are making their way north and a few old-crop bushels are being uncovered, but not enough to meet demand in all locations. That’s created a wild basis market, with futures bouncing back to reflect that.

Meanwhile, the November and beyond contracts reflected big crop expectations. The contract held above Tuesday’s low, but the charts remain bearish, suggesting lower lows in the days and weeks ahead unless the SDS problem turns out to be much larger than currently perceived.

Wheat

Ukraine’s military reported today that Russian troops and armored vehicles were occupying a town in eastern portions of that country. That was enough to stimulate support for wheat prices overnight when European traders were dominant, but U.S. traders weren’t buying the fear factor. Overnight gains quickly evaporated, sending prices lower once again.

That selling was insufficient to test the previous day’s low in Chicago and Kansas City. However, harvest selling managed to push prices much lower in Minneapolis. Overall, it’s likely going to be difficult to sustain strength in the wheat market if corn is eroding lower.

Good rains are falling across much of the Plains winter wheat belt as early planting of the 2015 crop begins. Russia is talking up a big crop as well, with bearish news capturing the headlines at a time when corn prices continue to erode lower. This has made it difficult to sustain any kind of rally this summer.

Ironically, wheat prices firmed late, posting 5 to 7-cent gains in Chicago and Kansas City. Rallies may be tough to sustain, but so are new lows with tensions building in Ukraine ahead of a three-day holiday weekend. This leaves the food grain chopping sideways.

Beef

The beef complex traded weaker for much of today’s session, with traders taking profits following recent gains, not willing to press chart signals further without greater fundamental support. The trade believes that packers have control over a greater portion of the supply as we move through September and October, limiting upside price risk. USDA data suggests that the packers have150,000 more cattle contracted for the next two months than during the same period last year.

This week’s kill is expected to be near 585,000 head, with next week possibly dropping as low as 500,000 head. That could end up being one of the smallest Labor Day week kills on record, in effect keeping product supplies low enough to limit downside price weakness for boxed beef, keeping packer margins strong. Those margins are estimated at $65.55 per head, although some sources put margins at $100 per head.

Cheap corn prices this fall could push packers to mimic action in the hog sector, where they simply add pounds to a limited supply of animals. We’ve already seen carcass weights push to record levels. Those weights may continue to grow as we move through the fall.

Boxed beef movement rose to 184 loads Tuesday, up from 135 loads the previous day, but down from 218 loads the previous week. Choice cuts were down $1.21 to $248.48 per cwt, while Select cuts were down $0.59 to $238.48. This narrowed the Choice/Select spread to $10.00, down from $10.62 the previous day. Movement at mid-morning today was strong at 137 loads, with Choice cuts down $0.64, while Select cuts were down $0.35.

Feeder cattle took their direction from the fat cattle market early on today, but the nearby contracts firmed late on the strength of solid upfront demand. Prospects for cheap feed this fall continue to fuel optimism at the sale barn, providing a lift for these nearby contracts. Even so, the September contract still has significant chart resistance just above it between $215 and $216 per cwt. The latest CME cash index came in at $217.68 per cwt, up $0.04 on the day. It was the first day for a higher index since August 12 and only the third day with a higher index since August 1.

Pork

There was a bit more optimism in the pork complex today, with bottom-pickers continuing to buy the lean hog futures contracts on ideas that prices are poised to rally into the fall on declining supplies. Past USDA quarterly hogs and pigs report data would suggest declining numbers later in September.

Packer margins remain strong, estimated at $11 per head, but cash prices continue to slide lower. Today’s Midwest cash market was mostly steady to $1 lower. The latest CME 2-day lean hog index dropped another $1.41 to $101.91 per cwt. It was the 28th straight trading day with a lower index since it hit record highs in mid-July. Losses over that period total $32.26 per cwt.

Product movement rose to 359 loads Tuesday, up from 263 loads the previous day, but still down from 368 loads the previous week. The composite pork product price rose $0.48 to $103.16 per cwt, which was the first increase in the price in nearly two weeks and just the second increase since August 7. Movement at midday today was decent at 278 loads, with prices firmer at $103.47, up $0.31 on the day.

October lean hogs rallied just shy of the 200-day moving average, currently at $97.168, before pulling back today. It’s yet to be seen whether buying enthusiasm will be sufficient to push above this indicator, especially with the cash market still working lower. However, traders are currently reluctant to push prices to new lows until they know more about the supply of slaughter-ready hogs next month.

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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