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Closing Comments

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Closing Comments

Corn

Bargain hunters buy the break, but corn futures still lose ground on crop ratings and weakness in the outside markets.

USDA’s weekly crop progress report indicated that 12% of the U.S. corn crop had moved into the silking phase as of July 5, up from 4% the previous week, but still below the five-year average for the week of 18%. North Dakota reported that 4% of its corn was silking already, up from the normal pace of 3% as of the first week of July. Otherwise, every other state was below the normal pace for early July. Most noted was an 11-point delay in Indiana, Missouri and Tennessee.

The crop rated a condition index score of 373 (500=perfect crop), versus 372 the previous week, 390 the previous year and the 10-year average for the week of 366. The big declines in the eastern Midwest stabilized during the week, with the largest decline in Illinois at358, down 3 points on the week. Other small declines were seen in Indiana, Iowa, Kansas, Michigan, North Carolina and Texas. Significant improvements were seen in the northwestern Midwest. The best scores are in Pennsylvania at 413, Wisconsin at 406, Tennessee at 402, Minnesota at 400 and Iowa at 398.

My seasonally adjusted yield model now pegs the crop at 166.4 bushels per acre, up from 164.8 bushels the previous week. Again, yield models tend to over-estimate final yields in wet years until late in the growing season. However, the data didn’t provide USDA with much justification for changing its corn yield in its Friday crop report.

Traders were caught leaning the wrong way on the crop ratings, expecting a decline when they actually improved. Losses in the 3-I states were more than offset by gains elsewhere. As such, prices would likely have been down anyway today, but the continued rout in China’s stock market combined with ongoing uncertain in Europe regarding Greece has fund managers worried about a global slowdown in demand for commodities. As such, they were significant sellers of the major commodity indices, of which the grains are a part. That amplified losses within the grains.

Corn futures battle their way back as selling eased in the broader commodity sector. December corn settled at $4.33, within one-half cent of its session high, but still down 1-3/4 on the day. Even so, the bargain buying that lifted prices was an encouraging sign. I still believe that this market is vulnerable back down to the $4.00 level over the coming weeks until traders get a better look at actual yields. Lower prices are possible if the China sell-off continues to spread fear in the global markets. The trade wants to see USDA tighten its balance sheet with a lower yield on Friday, but history suggests that USDA will be reluctant to do so in this report.

Soybeans

Post-holiday sell-off continues in soybeans.

USDA reports that 96% of intended soybean acres were planted as of July 5, up 2 points on the week, but still short of the normal 100% by the first week of July. Many of the unplanted acres are double-crop, some of which will not be planted, but there are a few acres across most states that probably do not get planted. However, USDA is only resurveying Kansas, Missouri and Arkansas for soybean acres. Unplanted acres in those states was reported at 305K acres.

In the end, I look for USDA to reduce its soybean acreage by 300K at the most on August 12, with further adjustments totaling 500K from current levels by January. Many people will continue to argue that fewer acres were planted, but I do not see any indication that USDA will make such a reduction. As such, it would likely be an exercise in futility to use a soybean acreage smaller than 84.6 million at this point.

Soybean emergence was pegged at 93%, up 4 points on the week, but still 4 points behind the “normal” pace in the first week of July. The agency reports that 21% of the crop was blooming as of July 5, matching the five-year average for the week, which one would expect for a day-length-sensitive crop.

The crop rates a condition index score of 363, unchanged on the week, when the trade was looking for another significant decline. The past week’s score compares to an index of 381 in the same week last year and the 10-year average for the week of 359. Indiana posted the largest decline on the week at 327, down 6 points on the week. The best crop scores were seen in Wisconsin at 402, Mississippi at 400, Iowa at 391, Minnesota at 389 and South Dakota at 385. Poorest scores were Missouri at 314, Indiana at 327, Ohio at 331 and Illinois at 339.

My seasonally adjusted yield model puts the crop at a yield of 44.5 bushels per acre, up from 44.2 bushels the previous week. That’s because crop ratings normally decline at this time of year, so stable ratings suggest higher crop potential.

The trade was really caught leaning the wrong way in the soybean market. It was expecting a significant decline in crop ratings, but got stable ratings instead. Stable ratings in early July mean higher yield potential. Most traders believe that a favorable August can make up for a lot of problems in soybeans early in the season. As such, they’re much more comfortable owning corn right now than they are soybeans in the current environment.

The new-crop soybean/corn price ratio traded to 2.57 to 1 a couple of weeks ago. I pointed out at that point that history argues for that ratio to drop to 2.05 to 1 or lower at some point this year. Today it settled at 2.28 to 1, cutting that gap in half in a very short period of time. Additional pressure could come as Brazilian soybean crushers reduce production on tightening margins due to sluggish demand.

November soybeans settled today at $9.8575, after falling nearly 60 cents from is July 1 high. The contract starts encountering more significant chart support near $9.70, or a dime below today’s lows. A lower low is possible, particularly if we continue to see a collapse of economic indicators in China. USDA has only adjusted its soybean yield in the July crop report in five of the past 22 years. That suggests that we could see the trade disappointed again on Friday, even though the balance sheet is tightening up from a practical standpoint.

Wheat

Wheat prices continue to slide, but bargain-hunter buying limits losses.

USDA reports that 55% of the winter wheat crop was harvested as of July 5, up from 38% the previous week, but down from the five-year average for the week of 59%. Harvest is nearly complete in Arkansas, North Carolina and Oklahoma, with 79% of the crop harvested in the wheat-state of Kansas. Big delays continue in Colorado, Illinois, Indiana, Missouri and Ohio.

The crop rates a condition index score of 317, versus 318 the previous week and 270 in the same week last year. Significant declines were seen in Illinois, Idaho, Missouri, Oregon and Washington. Those were partially offset by gains in Colorado, Ohio, Oklahoma and South Dakota.

The spring wheat crop was 76% headed as of July 5, up from 49% the previous week and up from the five-year average for the week of 47%. Virtually all of the Washington crop is headed, while just 65% of the Montana crop was headed, but that’s still well-above the typical pace of 29% for the date.

The spring wheat crop rated a condition index score of 376, versus 379 the previous week, 374 the previous year and the 10-year average for the week of 374. Conditions dropped a sharp 15 points in Washington and 7 points in Montana, more than offsetting modest gains in Idaho and South Dakota. Scores for the six primary production states were 395 in Idaho, 399 in Minnesota, 346 in Montana, 392 in North Dakota, 362 in South Dakota and 318 in Washington.

Wheat came under significant pressure overnight, carrying into today’s session. A strong dollar and broad-based selling in the commodity sector amplified those losses. The strong dollar makes it more difficult for U.S. wheat to compete in the global market, which has played out in rising estimates for domestic wheat stocks, particularly after USDA raised old-crop stocks on June 30, suggesting slower demand.

Even so, active buying emerged again at the lows in today’s session to limit losses. Chicago September wheat settled today more than 32 cents off its June 30 high, but it has done very little chart damage considering how far we had rallied going into the USDA stocks reports. I expect USDA to surprise the trade with large new-crop stocks on Friday, which could put additional pressure on the market near-term.

Even so, stocks thus far remain below levels seen in the summer of 2010 when the market fixated on weather problems overseas. Traders continue to focus on headlines of a heat dome in Europe, as well as in Canada, with Australia dryness headlines likely just around the corner. As such, I expect the roller coaster to continue with big price swings, but cannot say yet that the highs are in, even though stocks are quite burdensome.

Beef

Cattle futures firm on ideas of steady or better cash amid tight supplies, but gains are limited by weaker product prices and weakness in the outside markets.

Cash cattle prices were surprisingly strong on large volume last week. Packers have been aggressive in offering contracts above this week’s tops this week, suggesting that their captive supply for the month may be smaller than what we’ve seen in recent months. That demand may once again support this week’s cash trade as packers battle over remaining tight supplies of cattle on the negotiated market.

Yet, futures contracts continue to struggle to sustain rallies, with tops lower than previous highs. In other words, skepticism has returned to the futures market based on expectations that product prices will slide this month now that we are beyond the major grilling weekends. Prices thus far provide concrete support to support that theory.

Product movement on the spot daily market rose to 139 loads Monday, up from 129 loads the previous day and up from 114 loads the previous week. Choice cuts dropped $2.47 to $247.65 per cwt, while Select cuts were down $4.13 to $243.92 per cwt. That firmed the Choice/Select spread to $3.73 per cwt, up from $2.07 the previous day, but still down from $4.58 the previous week. Movement at mid-morning today remained routine at 69 loads, with Choice cuts down another $0.99 and Select cuts down $2.24 per cwt.

Estimated packer margins have dropped closer to $60 per head, down about $50 over the past week. Today’s kill is pegged at 110,000 head of cattle, down 4,000 from the previous week and down 6,000 from the previous year. Week-to-date kill is estimated at 214,000 head, down 13,000 from the previous week and down 13,000 from the same period last year as well.

August live cattle traded below the previous day’s low and below the previous day’s high in what some would call a bull flag. However, we won’t know that unless the contract can take out $151.98, and ultimately needs to take out $152.425 to turn the chart friendly once again. Meanwhile, a test of support at $148 remains a risk for this market, particularly if product prices continue to slide. One of the keys is import levels. Some in the trade are pointing toward expectations that imports will slow in the weeks ahead, with slaughter numbers declining in Australia.

Feeder cattle took their lead from the fat cattle market. Weaker corn prices provided support, as did gains in the fats, but gains were limited by rapidly falling demand for lighter-weight cattle at the sale barn. August feeder cattle dropped sharply late last month expecting the cash market to follow. The contract is now chopping sideways as the cash market does just that. Today’s latest cash index came in at $220.22 per cwt, down $1.59 on the day, down $8.23 over the past week and down $11.08 over the past seven consecutive trading days of decline. It is now at just a $3 premium to the lead August contract.

Pork

Upfront contracts firm on signs of a near-term low in the cash market.

Packers have enjoyed steady profitable margins for a number of weeks now. Strong export demand sustained product prices, even as a steady flow of hogs prevented them from needing to push bids to obtain supplies. That supply has been running better than 13% above year ago levels in recent weeks.

However, USDA’s quarterly hogs and pigs data suggests that the number of available hogs will be dropping off in the weeks ahead. As such, there are reports of some packers contracting hogs a couple of weeks out to lock in their needs. As such, cash hog prices are showing signs of a near-term low as demand catches up with demand.

Today’s Midwest cash market was steady to up to $1 higher, with the cash index beginning to turn higher as well.  The latest cash index came in at $77.13 per cwt, up $0.09 on the day, but still down $1 from the previous week. Even so, the rise in the index broke a string of 20 straight trading days with a lower index, with losses over the period totaling $5.43 per cwt.

Product movement rose to 324 loads Monday, up from 316 loads on Thursday and up from 275 loads the previous week. The composite pork product price rose $1.27 to $82.66 per cwt, but still down $0.65 over the past week. Movement at midday today was good at 219 loads, with the composite price down $0.26 to $82.00 per cwt, despite good demand for bellies for those BLT sandwiches.

Packer margins are estimated to be near $7.50 per head. Today’s kill is pegged at 423,000 head of hogs, down 2,000 from the previous week, but up 23,000 from the previous year. Week-to-date kill is estimated at 815,000 head of hogs, down 34,000 from the previous week, but up 29,000 from the same period last year.

August lean hogs rose to new three-week highs early today, but struggled to sustain the rally. Even so, today’s strength reflected expectations that the upfront cash market has good support beneath it after falling for much of the past month. However, traders were not as optimistic for the deferred contracts.

Egypt released another snap tender after the close today. It is seeking to buy wheat for delivery in mid-August. It does not look like U.S. wheat will be competitive, even with the recent decline.

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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