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Closing Comments

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Closing Comments

Corn

Feed prices remain resilient in the face of broad-based selling pressure.

The Department of Energy reports that crude oil stocks rose 2.4 million to 465.4 million barrels in the week ending June 26. That reverses a trend of declining supplies and keeps supplies near their highest level of the past 80 years for this time of year. Crude oil prices came under pressure when the data was released, signaling the sensitivity that remains in the market to signs of slowing demand.

Ethanol stocks slipped to 19.5 million barrels during the week ending June 26, down from 19.8 million the previous week, but up from 18.2 million in the same week last year. Production of ethanol dropped modestly to 968K barrels per day during the week, down from a record 994K barrels in the previous week, but still above the 953K barrels per day in the same week last year.

The data suggests that ethanol grind of corn during the week reached an estimated 102.7 million bushels, down from a record 105.5 million the previous week, but still above 102.6 million bushels consumed in the same week last year. That brings estimated corn usage to date for ethanol to 4.325 billion bushels, up 131 million or 3% from the previous year. Corn usage to date exceeds the seasonal pace needed to reach USDA’s target by 17 million bushels, up from 16 million the previous week.

The market continues to process USDA’s stocks and acreage data in light of Monday’s declining crop ratings amid heavy producer selling and an approaching three-day holiday weekend. Today’s lower prices were not a surprise, considering Tuesday’s big gains. Some speculators wanted to claim profits ahead of leaving town for an extended Fourth of July holiday weekend. Other weakness came from producer selling on the rally. Furthermore, a sharp rise in the dollar produced broad-based selling in the major commodity indices, of which the grains are a part. That amplified losses in corn.

However, today’s market never looked like a market that was collapsing. I believe losses would have been much greater if the major funds had turned bearish again. Instead, wheat proved to be an anchor, dragging corn lower, but corn started to firm when wheat prices stabilized. Then, corn quickly erased its losses, moving into positive territory late in the session as wheat came off its lows.

The late-day trade reaffirms my confidence in the corn market. Traders are growing concerned about the condition of the corn crop due to excessive rains in the southern half of the belt. It’s surprising from a historical standpoint to see the scope of their concerns, as they typically remain skeptical in wet years until harvest. However, balance sheets are starting to tighten for the new-crop marketing year, with traders afraid of a national average yield below 160.

We’re not there yet, but the door has been opened to that possibility. That has speculative hedge fund managers covering their short positions, with end users looking to buy the breaks as well until more is known. A northwestern flow pushes heavy rains south of the core corn/soybean growing areas this week, but then the rains are expected to shift back north again in the 6- to 15-day period, returning wetness concerns to the region once again.

Soybeans

Soybeans correct lower, but find good support from the soymeal market.

Soybeans dropped with much of the rest of the commodity sector today, with prices posting double-digit losses at times. The losses were rather mild following the big gains seen on Tuesday following USDA’s report. Losses were amplified by strength in the dollar that spurred selling in the broader commodity sector, but buyers were there to buy the breaks.

I remained comfortable with the losses in the soybean market through the day due to continued strength in the soymeal market. Export demand for soymeal has slowed seasonally, but remains generally above rates normally seen at this time of year. USDA’s balance sheet necessitated that we see a much sharper decline in soymeal demand. As such, processors continue to enjoy profitable margins, keeping demand for soybeans strong.

Gains will likely be more difficult in the days ahead, but fears about declining acreage and sliding crop ratings will likely provide good support beneath the market. The soybean balance sheet is looking much tighter than it was a month ago. New-crop stocks looked to be near 500 million bushels a month ago, but are now looking much closer to 300 million bushels.

My seasonally adjusted yield model is currently at 44.2 bushels per acre and declining. A drop to 43 bushels would be expected to be bullish, dropping ending stocks to a 20-day supply or lower. That should keep prices generally supportive until more is known about the crop.

Wheat

Tuesday’s big gains turn into Wednesday’s big losses as the other markets turn lower.

Wheat prices collapsed today, reversing the previous day’s gains. This shouldn’t be a surprise. The pattern over the past couple of months has been for a volatile roller coaster ride where each rally takes out the previous high by a  modest amount and the following break stays a small amount above the previous low. The strength has largely coincided with times when adverse global weather patterns have been in the headlines. Weakness came when headlines focused on large U.S. stocks and the inability to compete on the global export market.

Tuesday’s USDA stocks and acreage reports were modestly bearish on both counts, focusing on the latter. As such, wheat should have been lower, based on the recent pattern, but strength in the other markets pulled them positive, with traders holding short- positions feeling trapped and in a rush to get out. Sellers stepped aside, allowing the market to run. Gains were ridiculous.

The other markets turned lower today. Strength in the dollar spurred outside money to flow out of the broader commodity complex, which amplified those losses. Wheat bears seized the opportunity to short the market once again, at least until adverse weather headlines return. My previous comments were that we would likely see the roller coaster ride continue with big price swings, but that the harvest low is likely behind us.

In other words, I’m expecting the return of headlines focused on adverse global weather problems to return. Rains are being pushed south of the Midwest near-term by a strong northwestern flow, allowing for some advancement of the soft red winter wheat harvest north of the storm track. Those rains are expected to shift back to the north next week.

High pressure locked over Europe will have a limited impact on wheat yields at this point, but that doesn’t necessarily matter to fund managers. It certainly didn’t in 2010. However, chatter about the heat and drought continue, with reports of 140 field fires in France alone, burning about 1,500 acres. This week’s relief for the dry Canadian Prairies produced just very light showers, with heat and dryness returning. Australia is also turning dry, with stress expected to build over at least a third of the wheat belt over the next two to three weeks. As such, the roller coaster ride will likely continue, although we’re not likely to run out of wheat any time soon.

Egypt released another snap tender to buy wheat for early August shipment after the close today. That could remind traders of the high price of U.S. wheat relative to European and Black Sea supplies tomorrow and must be watched.

Beef

Cattle market roars back as cash cattle trade surprises traders.

The cattle market appears to be trying to take a page out of this spring’s wheat market, with big moves in both directions. Feeder cattle collapsed on Tuesday when USDA’s reports sparked a surge in corn prices. August feeder cattle opened below the 100-day moving average this morning as corn prices tried to firm off overnight losses, but found little selling interest at that point. Prices firmed as corn prices turned lower again, but gained considerable upward momentum as fat cattle futures pushed higher.

We started the day with feeders asking $150 per cwt on a live basis in the Plains, with packers still very silent. Last week’s trade was mostly between $147 and $149 per cwt, but showlists are down about 20,000 head this week, raising hopes of firmer prices.

Packers suddenly began calling feeders to accept their offers, with cattle moving in Kansas and Texas at $150, with some moving in Nebraska and Colorado at $151. Movement appeared to be good, with packers eager to obtain next week’s needs ahead of the three-day holiday weekend. The mostly $3 higher cash market triggered the $3 daily limit move higher in the August, October and December contracts, although December continued to trade. We should be looking at expanded limits on Thursday, although I question the need in this case.

Feeder cattle operated with expanded limits today, although they were not needed. Even so, they pushed sharply higher as corn prices dropped and fat cattle prices pushed higher. The big discount to the cash index gave them room to run. The latest CME 7-day cash index came in at $228.27 per cwt, down $0.18 on the day, down $3.03 over the past four consecutive days, but up $0.39 over the past week and still roughly at a $10 premium to the lead August contract.

Estimated packer margins remain above $100 per head. Today’s kill is pegged at 111,000 head of cattle, up 7,000 from the previous week, but down 6,000 from the previous year. Week-to-date slaughter is pegged at 338,000 head, up 13,000 head from the previous week, but down 13,000 head from the same period last year. The holiday-shortened slaughter week is expected to produce a kill of 525,000 head, down from 555,000 the previous week.

That should keep support under the product market near-term, although prices are widely expected to decline as we get past the holiday weekend. The primary question revolves around the scope of the decline. That will impact cash cattle prices going forward, with probably a bit more downside risk than upside in the weeks ahead. Imports in the week ending June 20 increased to 24,471 loads, up 1,767 loads from the previous week and equal to 54 million pounds of beef. Year-to-date imports are up 34% from last year, which was also elevated.

Product movement on the spot daily market rose to 134 loads Tuesday, up from 114 loads the previous day and up from 125 loads the previous week. Choice cuts were down $0.49 to $252.73 per cwt, while Select cuts were up $0.71 to $249.35. That dropped the Choice/Select spread to a three-month low of $3.38 per cwt, down from $4.58 the previous day and down from $6.14 the previous week. Movement at mid-morning today was good at 98 loads, with Choice cuts up 5 cents and Select cuts up 17 cents per cwt.

Pork

Hog market consolidates following recent gains.

The Midwest cash hog market was mostly steady today, although the Peoria market was seen $1 lower. Today’s CME 2-day cash index slipped to $77.32 per cwt, down $0.32 on the day, down $1.81 on the week and down $5.15 over the past 18 consecutive days of losses.

Packer margins remain near $10 per head, but packers aren’t having to push bids to get enough hogs, particularly with the holiday-shortened schedule this week. Today’s kill is pegged at 423,000 head of hogs, up 5,000 from the previous week and up 8,000 from the previous year. Week-to-date slaughter is pegged at 1.272 million head, up 15,000 from the previous week and up 40,000 from the same period last year.

Hedge pressure appeared to increase in the deferred contracts following recent gains, while the August contract added to recent gains. Even so, August turned back after unsuccessfully testing the 20-day moving average, speaking to the fragility of the current rally.

Product movement rose to 380 loads Tuesday, up from 275 loads the previous day and up from 360 loads the previous week. The composite pork product price dropped to a 2-1/2 month low of $81.44 per cwt, down $1.47 from the previous day and down $1.43 from the previous week. Movement at midday today was good at 274 loads, with the composite price up $0.09 to $81.53 per cwt.

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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