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Closing Comments



Closing Comments


Feed prices push higher on expectations of a tighter balance sheet next month.

USDA released its July monthly crop report with a few surprises for traders. The agency incorporated stock and acreage numbers from its June 30 reports, which tightened old-crop corn stocks. There was a lot of focus on wheat USDA would do with its yield estimate. The trade largely anticipated a reduction in the yield, even though we’ve been warning that USDA’s methodology does not support such a reduction in its July report. USDA kept its yield estimate unchanged at 166.8 bushels per acre, above trade expectations of 165.4, but the surprise was that it didn’t faze money managers.

USDA took its June 30th stocks report and used it as rationale for increasing feed usage by 50 million bushels on the old-crop balance sheet, however, it cut new-crop feed usage by 25 million, suggesting it isn’t convinced that feed usage will remain that strong. It raised both old- and new-crop ethanol usage each by 25 million bushels due to the ongoing strength of ethanol production at near record rates. Old-crop exports were raised 25 million bushels due to the strength shipments showing up in the Census data, while cutting new-crop exports 25 million on increased Brazilian production.

In the end, old-crop corn stocks drop 97 million to 1.779 billion bushels, down 32 million bushels from trade expectations , but down just 7 million from my pre-report submitted estimate. New-crop corn stocks came in at 1.599 billion bushels, up 59 million from the average trade expectation and up 127 million bushels from my estimate, but my new-crop estimate was based more on where I expect USDA to go in future reports as it begins to cut yields. The agency boosted its projected average on-farm cash price to $3.70 per bushel, up a nickel from June, while pushing its new-crop price to $3.95 per bushel, up $0.25 from June.

The new-crop global corn balance sheet saw ending stocks drop to 189.95 million metric tons or a 70-day supply, down from a 72-day supply the previous year and up just 15 days or 1.64 billion bushels from 40-year lows. USDA boosted Brazil’s crop 1 mmt or 40 million bushels to a record 82 mmt, but the big surprise was a 1.36 mmt increase in Europe’s crop despite a heat dome currently threatening the crop at pollination. However, USDA boosted global demand by 5.6 mmt, resulting in tighter old-crop and therefore tighter new-crop global stocks.

The big difference this year from previous years when production was threatened by wet conditions was the response from money managers. They’ve considered USDA data gospel in the past and would have said that its failure to reduce yields proves that “rain does makes grain.” However, the response this year was to point toward tightening old-crop stocks and say, “just wait until USDA lowers yields next month.”

Part of the reason I believe is the current investment climate. The stock market has been in decline, bonds are yielding much and speculative traders are looking for something with a story that they can own. They see potential in the corn and soybean markets. I’m still not convinced that the market will be able to remain focused on crop problems, particularly with the intensity of rains expected to ease over the next several weeks. As such, I’m still wary of a potential more significant pull back and choppy trade, but still do see more upside potential longer-term if USDA does cut yields in later months as anticipated.

I should also mention a couple of interesting items from USDA’s grain sorghum balance sheet, which will take on greater importance IF USDA does further tighten its new-crop balance sheet in the months ahead. USDA kept old-crop exports at 350 million bushels, which is a bit surprising considering that reaching that target necessitates new-crop exports ahead of August 1 and the southern crop is delayed.

It also pushed new-crop exports to 390 million bushels, up from 335 million the previous month due to a 70-million bushel increase in production on the rise in acreage reported June 30. That keeps new-crop stocks tight at a 20-day supply, but necessitates continued record demand from Chinese end users, even though government officials there have indicated a desire to block those imports.

December corn rallied to a one-year high and then hung on to the bulk of those gains into the close. I still believe that soybeans are the barometer longer-term, but corn can gain on soybeans in the near-term. However, gains will likely become more difficult near-term unless USDA resumes its slashing of crop yields. Weather maps are looking a bit more favorable for saturated areas of the Midwest for the second half of July, which could make it difficult to keep fund managers focused until they see actual yields 45 to 60 days from now.


USDA slashes old-crop soybean stocks, but keeps new-crop stocks high.

The number one data point that captured the attention of traders in USDA’s July crop report was a drop in old-crop ending stocks to 255 million bushels, down 75 million from June and 32 million below the average pre-report trade guess. My submitted estimate was 294 million bushels, but I felt that we had the potential to drop stocks into the low 200s by the October stocks report IF we maintained export shipments and crush totals at the current pace, with some reductions for seasonal maintenance times.

USDA boosted crush and exports by 15 million bushels each. We may see that crush number rise further, as exports remain at a seasonally strong pace. The agency also boosted seed and residual use by 45 million to 181 million bushels. The residual portion of that at 82 million bushels is high and is likely setting the stage for USDA cutting a million acres off last year’s crop later this fall, cutting better than a half-bushel from the 2014 yield or some combination of the two.

On the new-crop balance sheet, USDA started with the lower carry-in stocks, and then boosted crush by 10 million to 1.840 billion bushels. That’s about all it did to adjust its new-crop balance sheet. That put new-crop ending stocks at 425 million bushels, down from 475 million the previous month, but up from the average trade estimate of 370 million bushels. My estimate is 311 million bushels, but I’m already lowering my yield estimate, which I did not expect USDA to do in this report.

On the global balance sheet, USDA pushed Argentina’s recent soybean harvest to 60.0 mmt, up 0.5 mmt from June, but kept Brazil unchanged at 94.50 mmt. That was a surprise, considering that Brazil’s official estimate is above 96 mmt. The agency also pushed old-crop global demand up by 2.1 mmt, reducing old-crop ending stocks by 2.02 mmt or 74 million bushels. It made few changes to the new-crop balance sheet.

This crop report was released in an environment where fund managers were looking for something to buy into, amid all the uncertainty in the other markets. Computers were the initial sellers of soybeans based on the high yield estimate, but humans quickly became buyers based on the old-crop stocks number. Those traders expect new-crop stocks to drop once USDA does begin dropping its yield estimate, and I agree.

The November contract rallied more than 26 cents in the next half hour, but could not sustain the momentum to test the previous week’s high of $10.40. Prices began to erode lower as producers and speculators sold the rally. Prices ended the day with five to six cent gains, but below pre-report levels.

That is not a good finish for soybeans after failing to take out an overhead objective and suggests problems for soybeans near-term if the bulls can’t be thrown some fodder to start the new week. I continue to look for the opportunity for higher prices down the road, but still feel that we are vulnerable near-term based on the history of how fund managers trade wet years.


USDA emphasizes the size of U.S. and domestic supplies, taking the focus off weather problems for now.

USDA cut its winter wheat production forecast to 1.46 billion bushels, which was down 3% from June. It cut 0.8 bushels from its winter wheat yield, dropping it to 43.7 bushels per acre. Hard red winter wheat production lost 2% from June, while soft red winter wheat was down 5%. That provided early support for Chicago soft red wheat prices following the report’s release, but then the focus shifted back to large supplies overall and poor export demand.

Hard red spring wheat production on the other hand rose to 573 million bushels, up 3% from the previous year on increased acreage. USDA matched the 2014 yield of 46.7 bushels per acre for spring wheat based on good crop ratings. Durum accounted for 75.5 million bushels, up 42% from the previous year.

Hard red winter wheat supplies rise to a burdensome 165-day supply, while soft red winter wheat supplies are close behind at a 163-day supply. Hard red spring wheat supplies are still large at a 134-day supply, but they could tighten if a heat dome over Canada continues to stress its crop.

USDA cut its Canadian production estimate 1.5 mmt to 27.5 mmt. That could drop significantly yet if forecasters are correct on the duration of this heat dome. Europe’s crop fell 2.8 mmt to 147.88 mmt. That number is expected to drop as well. Australia remained at 26 mmt, but that number will likely fall if spring dryness develops due to El Nino as forecasters anticipate. The surprise was a 2 mmt increase for Russia and 1 mmt increase for Ukraine. Kazakhstan also rose by 1 mmt. The plusses and minuses largely offset each other, but there is a sense that there are a lot more minuses yet to come.

The bottom line is that wheat fundamentals are bearish. Yet, history argues that doesn’t matter to fund managers if they see a lot of headlines about adverse weather overseas. It would likely take a catastrophic event overseas to use up our surplus supplies and that isn’t expected at this time. However, the odds are good to see an increased focus on dryness in late July and August for Canada and Australia.

Today’s price action suggests that wheat prices are vulnerable to a larger correction lower near-term. Then the outlook will hinge on whether stress in Canada and Australia will be sufficient to provide headline support to stimulate buying again by fund managers.


Cattle futures reflect fear of weaker prices, despite near-term strength in the cash market.

Cash trade emerged in the Plains this week at $150 per cwt on a live basis, with some unconfirmed reports of $151 to $152 per cwt in the northern belt. Dressed cash trade ranged from $240 to $242 per cwt. Trade the previous week varied mostly from $148 to $152 per cwt on a live basis.

Cattle futures slid lower from early-week highs as product prices tumbled. Traders anticipated steady trade this week, but the collapse of product prices suggests weaker prices down the road as packer margins topping $100 evaporated. Futures slid through areas of chart support, hitting preset sell-stops that accelerated the losses.

Feeder cattle bounced Friday early on expectations that USDA would confirm good yields that keep feed prices cheap. They surged in the minute after the report’s release when USDA did just that, but then turned sharply lower the rest of the session when corn prices pushed higher and held.

August fat cattle fell to their lowest level since the first of May, with more weakness expected in the days/weeks ahead, depending on where product prices find support. August feeder cattle traded down to $210.60, keeping that contract at a double-digit discount to the cash market. The latest 7-day cash index came in at $221.44 per cwt, up $1.05 on the day, up $1.22 over the past three days, but still down $1.85 on the week.

Friday’s kill was pegged at108,000 head of cattle as packers continued to slow chain speed to tighten product supplies, up 30,000 from the previous week due to the holiday, but down 5,000 from the previous year. The Saturday kill is pegged at 9,000 head, up 9,000 from the previous holiday week, but down 1,000 from the previous year.

That puts the week’s slaughter at 551,000 head of cattle, up 30,000 from the holiday shortened week prior, but down 28,000 head from the same period last year. Year-to-date slaughter is estimated at 14.815 million head of cattle, down 6.9% from the previous year.

In the end, it comes down to the large amount of imports and softening demand. Imports in the week ending July 4, the latest available, totaled 25,253 metric tons, up from 23,190 metric tons the previous week and up from 17,778 tons in the same week last year. That brings imports for the year-to-date to 629,258 metric tons, up 33% from the previous year’s pace.

U.S. per capita beef supplies that account for production, imports and exports are estimated to by 75.8 pounds this year, down from 76.6 pounds last year and down from 95.5 pounds per person in 2002. That suggests declining demand due to higher prices in recent years, but it also shows the added impact that larger imports have in that environment.

Product movement on the spot daily market accounts for about 10% of total movement, but sets the tone on price. Prices continue to tumble, but the drop is stimulating demand. Movement Thursday totaled 229 loads, up from 180 loads the previous day and a five-week high. Choice cuts traded at $239.72 per cwt, down $2.31 on the day and down $13.50 over the past seven trading days. There’s good support at $238, but trade sources believe we may break that by another $5.

Select cuts traded at $236.58 on Thursday, down $2.66 on the day and down $12.77 over the past six consecutive trading days. The Choice/Select spread was at $3.14 per cwt, up from $2.79 the previous day and up from $2.07 the previous week. Movement at mid-morning today was good at 121 loads, but Choice cuts were down another $0.69 and Select cuts down another $0.54 per cwt.


Cash hogs firm futures, but weaker product prices remain a concern amid a flood of supply.

The cash hog market showed signs of a near-term bottom over the past week, trading steady to $1 higher most days and finishing the week at mostly steady. As such, the latest CME 2-day lean hog index finished the week at $78.66 per cwt, up $0.59 on the day, up $1.62 over the past four consecutive days and up $1.53 over the past week.

Futures slid through the week, posting their largest losses on Thursday and then bouncing modestly to close the week. Packer margins are slipping negative as product prices slip amid firming cash hog prices. Slaughter numbers grew this week as more hogs came to town for a full slaughter schedule, but at modest losses for each head processed.

In the end, we had a nice bounce following USDA’s quarterly hogs and pigs report. However, trade sources now fear that USDA may have under-counted hogs, leading prices to turn lower once again.

The Friday kill was pegged at 394,000 head, up from the holiday-impacted slaughter of 161,000 the previous week and up from 281,000 the previous week. The Saturday kill was pegged at 36,000 head, up from zero due to the holiday last year and 1,000 last year. Kill for the week is being estimated at 2.079 million head, up 222,000 from the previous week and up 218,000 from the same period last year. That brings year-to-date kill to 59.282 million head, up 6.9% from the previous year.

Pork imports in the week ending July 4 were pegged at 6,640 metric tons, down from 7,792 tons the previous week, but up from 5,770 tons in the same week the previous year. Year-to-date imports total 220,631 metric tons, up 11% from the previous year.

Product movement over the past week surged to 1,749 loads, up from 1,330 loads the previous week and a 12-week high. A year ago, movement was 1,415 loads. The composite pork product price slipped to a two-month low of $80.79 per cwt, down $0.20 on the week and down $6.01 over the past six weeks. The composite price one year ago was $135.33 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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