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Closing Comments



Closing Comments


Grain prices finish an explosive week with impressive gains on crop concerns.

It was an impressive week in the corn market; one that farmers across the Midwest had been hoping for, but were starting to fear would not happen. Prices are still nowhere near the December highs, but they’re a lot easier for farmers to swallow than the prices seen a couple of weeks ago.

Several weeks ago I highlighted my study of December corn price action in years in which it posted a lower high in May than it did in April, which is contra-seasonal. The market had done such in nine of the past 25 years going back to 1990. Last year prices continued to slide all the way through September before posting an impressive harvest rally. The other eight years December corn rallied four times in June and four times in July.

Each time prices pulled back then until more was known about the size of the crop at the end of the growing season. The average rally for the eight years was roughly 45 cents, measuring from settlement prices. Thus far this year’s rally has been a little over 38 cents using that same measure. The range of summer rallies in the eight years mentioned above was from 32 cents in 1993 to 68 cents in 2007.

The late-week rally looks a lot like a blow-off top near-term. I’m not saying the rally is over, but there’s a lot of risk for traders over the next several trading days that will leave them nervous. First notice day for deliveries against the July contract is on Tuesday. USDA’s quarterly stocks report known for its surprises is Tuesday. USDA’s acreage report is Tuesday and the end of the fiscal quarter is Tuesday, which is a time when fund managers tend to want to square positions to show profits on their books.

Furthermore, the three-day Fourth of July holiday weekend known for its volatility comes a couple days later, as the markets will be closed from Noon Thursday (early close) until 7 p.m. CDT on Sunday evening. All of this puts traders and farmers both at greater risk over the coming week. Cash sales have increased and basis is weakening. Historically, the tendency is for prices to pull back until later in the summer when more is known about the crop, but the emotions of the marketplace are different each time we face an uncertain crop.

In the end, it comes down to how much damage is done in the third of the Corn Belt under significant stress compared to the other two-thirds that is in much better condition. The impacted third encloses very concentrated areas of production, so it does matter, but it must be kept in perspective of the whole. Well-respected analysts are still calling for a national average yield in the upper 160s to near 170, crop models having a track record of over-estimating yields in years like this, including my own. However, my agronomic experience continues to pull me lower.

It would take a national average yield of 157 bushels per acre or lower to pull projected ending stocks below the psychological 1 billion-bushel level. Stocks at that level would be expected to ignite more fund buying, should it occur. It’s simply too early to know that yet at this point. The door has been opened, but history tells us that July and August weather still have a big impact, especially for the two-thirds of the belt still seeing relatively good growing conditions.


Option expiration messes with the weather rally.

July soybeans gained 30.5 cents over the past week, while the new-crop November contract rallied 46.25 cents. That brings the June rally for July based on settlement prices to 81.5 cents, while November is up 84.75 cents. My study of November futures in years when the May high is lower than the April high is that the contract found a reason to rally in all eight years out of the past 25 when that scenario was true. The average rally was just over $1.00. The smallest rally was 82 cents in 1996 and again in 2004, while in 2010 the rally totaled $4.28 per bushel. Removing the 2010 outlier the largest rally was $1.58 in both 1993 and 2011.

Weather hasn’t been the only reason prices rallied in recent weeks. There’s a growing realization that old-crop stocks will likely have a “2” in front of them than a “3” in the months ahead, due to strong demand for soymeal that keeps crush margins strong. However, traders also expect to see delayed plantings take acres off the balance sheet, especially in the southwestern Midwest. However, I do not expect that to show up in Tuesday’s USDA report.

Like corn, the focus on crop conditions will continue to be on the one-third across the core of the Midwest that is battling excessive moisture. The trick will be to continue to “feed the bull” because the bull “needs to be fed every day.” That leaves prices vulnerable near-term, particularly with all of the uncertainty facing traders the next few days, but the USDA data on Tuesday will likely set the tone and direction going into the holiday weekend.

USDA currently pegs this year’s soybean yield at 46 bushels per acre. July and August will be critical, but the odds suggest a lower yield. A yield below 43 bushels would draw anticipated new-crop stocks to the mid-200s, providing support for prices at higher levels. However, I think it will be difficult to sell the trade on a yield that low before we get to USDA’s August crop report.


Prices explode higher on weather concerns.

We’ve seen a period of generally favorable weather for wheat production around the world, outside of the Plains drought. However, that pattern appears to be over, with talk of heat and dryness in Europe, Russia, Canada and expectations that El Nino will lead it to be a problem in the Australian spring.

Wheat supplies are large, both domestically and globally, but 2010 provides a great example of how that doesn’t matter if fund managers are reading headlines everyday of problems. The Friday rally to close out the week began in Europe, where heat and dryness are a daily factor, but traders were also looking at more heavy rains in the Midwest keeping combines parked and threatening quality.

Chicago ended the week trading at a 3-cent premium to Chicago. That could hold near-term, but I do not expect it to hold longer-term. Quality of the Plains crop is improving as the harvest moves north. Protein levels are good, with test weights coming up. However, vomitoxin may again be a factor for the Midwest soft wheat crop, although not enough wheat is harvested to have a good handle on that. Regardless, we should see improving demand for hard red wheat, particularly if dryness becomes a greater problem for Canada and Australia as expected, while soft wheat exports will likely struggle through the year due to ample supplies in Europe and the Black Sea region.

It’s been quite a roller coaster ride for wheat. I expect that to continue, but the harvest lows may very well be behind us, with the roller-coaster trending higher.


Futures consolidate after big losses earlier in the week.

Cash cattle trade opened up in Kansas at $148 per cwt on a live basis, with a few moving at $147 in Nebraska. On a dressed basis, some traded in Nebraska on Tuesday at $240 per cwt, sinking to $236. A few feeders held out for $150 per cwt on a live basis, providing encouragement that a near-term bottom may be in place for eh cash market.

As a result, June live cattle, which go off the board Tuesday, possessed the greatest strength early on Friday, but volume in that contract is in decline. August cattle immediately dropped to test Thursday’s lows, but then bounced modestly when the low held. The 100-day moving average is just below Thursday’s low at $147.71 per cwt. The bottom line is that this market remains vulnerable to lower prices based on the trade’s belief that product demand will decline seasonally next month.

Feeder cattle futures locked the $4.50 daily limit lower on Thursday and added to those losses to close out the week. Renewed fears about margin compression pressured prices amid weaker fat cattle prices and strength in corn prices. Recent news coverage of excessive rains in the Midwest has heightened concerns about the impact on this year’s corn crop, with feed grain prices quite sensitive to modest changes in projected yields.

Feeder cattle futures remain at a big discount to the cash market, but traders believe there is time for the cash market to break lower if corn prices continue to be strong. Other areas of support sit at $216 and $214.50 for the August contract, while currently testing trend line support off the February and April lows. The latest cash index came in today at $230.18 per cwt, down $1.12 on the day, but still up $4.54 on the week and a $13 premium to the lead August contract.

Estimated packer margins are back over $100 per head. The last time packers faced nice margins they responded by pushing slaughter rates higher. That promptly flooded the market with beef, precipitating a collapse in the product market amid a steady flow of imports. As such, they are expected to hold the line on slaughter numbers this time to protect their margins, particularly amid expectations that demand for product will decline seasonally beyond the Fourth of July holiday.

The Friday kill was pegged at 111,000 head of cattle, up 2,000 from the previous week, but down 6,000 from the previous year. The Saturday kill was estimated to be 7,000 head, matching the previous week, but down 27,000 head from the previous year. As such, the week’s slaughter is estimated at 555,000 head of cattle, up 6,000 from the previous week, but down 59,000 from the same period last year. Year-to-date slaughter is pegged at 13.740 million head, down 7.5% from the previous year.

Product movement Thursday dropped to just 91 loads on the spot daily market, down from 166 loads the previous day and down from 118 loads the previous week. Choice cuts dropped $0.96 to $255.16 per cwt, while Select cuts fell $0.26 to $250.13. That dropped the Choice/Select spread to $5.03 per cwt, down from $5.73 the previous day and down from $6.10 per cwt the previous week. Movement at mid-morning today remained sluggish at just 57 loads. Choice cuts lost another $0.63 per cwt, while Select cuts were down $0.45.


USDA’s quarterly hogs and pigs report resets the table for the next three months.

Lean hog futures plummeted Monday in continuation selling as traders priced in expectations of a bearish USDA quarterly hogs and pigs report to close out the week. They were also expecting a bearish cold storage report, but didn’t get that. That friendly surprise provided support beneath the market, but expectations for a bearish hogs and pigs report kept a lid on the market. As such, prices consolidated throughout the week, primarily trading within Monday’s trading range.

The cold storage report showed the trade that demand was better than suggested, supported by better export numbers in recent weeks. However, the supply remains large as well. Slaughter numbers in recent weeks have been running 11 to 13% above year ago levels as the industry rebounds from the PED virus crisis. Live weights have dropped roughly 5 pounds below year ago levels, with carcass weights near 3 pounds below, which has help to offset the increase in slaughter numbers.

Even so, supply continues to exceed demand with fears that expansion will continue to amplify the problem. Packers have been able to maintain profitable margins of generally near $7 to $10 per head, but have not had to push bids to draw in supplies. The cash market has been steady to 50 cents lower on most days this month. The latest CME 2-day lean hog index finished the week at a seven-week low of $78.62 per cwt, down $0.31 on the day, down $1.49 on the week and down $3.85 over the past 15 consecutive days of decline.

The Friday kill is pegged at 403,000 head of hogs, up 1,000 from the previous week and up 84,000 from the previous week. The Saturday kill was estimated at 65,000 head, up 25,000 from the previous week and up 46,000 from the previous year. That brought the week’s total estimated kill to 2.143 million head, up 8,000 head from the previous week and up 233,000 head from the same period last year. Year-to-date slaughter is pegged at 55.351 million head, up 3.413 million head or 6.6% from the previous year.

Product movement Thursday slowed to 248 loads, down from 405 loads the previous day and down from 293 loads the previous week. The composite pork product price has been supported by good demand for bacon this summer, but still slipped lower to a one-month low of $82.64 per cwt, down $0.91 on the day and down $1.30 on the week. Movement at midday today was sluggish at 143 loads, with the composite price down another $0.29 to $82.35 per cwt.

USDA’s quarterly hogs and pigs report confirmed the big slaughter numbers that we’ve been seeing in recent weeks. In fact, it suggested that near-term supplies are even larger than the trade expected, while future expansion plans appear to have been curtailed more than anticipated. As such, the numbers would appear to add pressure to the upfront contracts, while providing support for the deferred contracts when trade opens again on Monday.

June 26 Quarterly Hogs & Pigs


Trade Est.


percent of previous year

All hogs June 1



107.4 – 109.0

Kept for Breeding



101.3 – 102.6

Kept for Market



107.9 – 110.8

Pig Crop

March to May



106.1 – 109.0

Weight Groups

Under 50 lbs.



106.0 – 111.5

50 to 119 lbs.



106.1 – 110.2

120 to 179 lbs.



108.2 – 111.6

Over 180 lbs.



107.8 – 111.8


March to May



102.0 – 102.5

Farrowing Intentions

June to August



97.0 – 101.2

September to November



97.4 – 102.2

Pigs per Litter

March to May



105.0 – 108.0

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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