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Closing Comments

Corn

Corn prices bounce on strength in soybean market.

USDA’s weekly crop progress report revealed that 55% of the corn crop was silking as of July 19, up from 27% the previous week and basically on schedule with the five-year average for the week of 56%. It was interesting to note that both Minnesota and South Dakota were ahead of normal, while North Dakota trailed the normal pace by 9 points. Otherwise, double-digit delays were also seen in Indiana, Ohio and Michigan, where crop development has been hampered by this year’s weather.

The crop rated a condition index score of 375 (500=perfect crop), versus 373 the previous week, 392 the previous year and the 10-year average for the week of 357. Ironically, the crop’s condition score in the same week in the last persistently wet year of 2010 at this point was 384. Modest declines were seen in Colorado, Indiana, Michigan, Missouri, North Carolina and South Dakota, with scores unchanged in Illinois and Kentucky. However, Ohio saw a 12-point gain to 331, while Wisconsin was up 8 points to 409, Kansas was up 6 to 353 despite its recent heat and North Dakota was up 5 points to 388.

Overall, the best corn is still clearly in the western Midwest, which is why I project record yields for Minnesota, North Dakota, South Dakota, Iowa and Nebraska. The poorest corn is across the southern Midwest. My seasonally adjusted corn yield model this week rises to 168 bushels per acre, up from 166.8 bushels the previous week.

Keep in mind that these yield models tend to over-state the crop until harvest begins and actual yields are known. As such, still putting the crop at just below 162 bushels per acre, even with the record yields in the west. That suggests that we should see the marketing year average cash corn price just above $5 in the 2015-16 year, although this will remain fluid as we monitor grain fill in the weeks ahead and gain a better grasp on the size of this year’s crop.

Corn prices rode a wave of commodity buying early in the session as the dollar dropped. The greenback turned lower in profit taking after failing to take out the previous day’s three-month high. The move stimulated profit-taking in the major commodity indices, which had plummeted in recent days as the whole investment world seemed to turn bearish commodities. That sometimes signals a bottom, when everybody turns bearish.

Regardless, that initial short-covering/profit-taking dried up as the day wore on, with fears of a shrinking global economy hung over virtually all of the major market sectors. Yet, strength in soybeans helped hold corn prices in positive territory. We will likely see choppy trade continue in the corn market, with December possibly testing support at $4, but I don’t see a sustained rally before the trade has a better handle on yield losses in the southern Midwest next month.

Soybeans

Resilient soybeans were the bright spot of the commodity sector.

USDA reports that 56% of the U.S. soybean crop was blooming as of July 19, matching the five-year average for the week. Minnesota reports that 75% of its soybeans were blooming on that date, while North Dakota soybeans were 71% blooming, up 21 and 14 points respectively. The big concern is with Missouri, where just 21% of the crop was blooming, down 18 points from the five-year average for the week.

Pod setting was at 17% on July 19, again matching the five-year average for the week. Similar patterns were seen in pod setting as with soybean blooming, but overall no significant problems are seen in the pace at this point.

The crop rates a condition index score of 360, unchanged on the week at a time when the 10-year average for the week trends 1 point lower to 355. The crop rated a score of 383 in the same week last year and a score of 372 in the same week in 2010. Modest losses were seen in Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Missouri and Ohio, with modest gains in Arkansas, Kansas, Minnesota, Mississippi, Nebraska, North Dakota, South Dakota, Tennessee and Wisconsin. Again, the best crops tend to be in the western Midwest, with the poorest soybeans generally across the southern and eastern Midwest.

My seasonally adjusted soybean yield model pushed upward to 44.3 bushels per acre, up from 44.2 bushels the previous week. That’s probably a reasonable yield for the soybean crop at this point. I mentioned in the corn commentary that the yield models tend to overstate corn yields in persistently wet years, but that correlation is much weaker in soybeans. A state-by-state analysis supports a yield near that indicated by the model.

I’m assuming that this year’s planted acres will fall 0.5 million below current USDA estimates. As such, the above yield would be expected to result in a 3.72 billion-bushel crop. I’m assuming that old-crop demand will exceed USDA’s target, resulting in stocks of 238 million bushels of August 31, below USDA’s estimate of 255 million. That lowers my new-crop ending stocks estimate to 230 million bushels of just a 22-day supply, arguing for a marketing year average cash price of $11.05 per bushel.

I mentioned the resiliency of soybeans in Monday’s sell-off, due to strong demand and strengthening basis. That led to a bounce in prices today, which was accentuated by increased money flow into the broader commodity complex on a weaker dollar early in the session. That money flow evaporated as the day progressed, but soybeans held onto their strength.

Today’s trade of November soybeans basically took place above $10, increasing its significance to the market. However, I do not see a sustained rally at this point until traders have a better handle on crop problems in the southern Midwest. The next couple of weeks should begin to provide some clues toward the scope of disease problems that we see this year, with possible significant price implications.

Wheat

Prices continue slide on a lack of export demand.

USDA reports that 75% of the winter wheat crop was harvested as of July 19, up 10 points on the week and 1 points above the five-year average for the week. The primary concerns that pop out are in Indiana, Ohio and Michigan, where harvest delays of 23, 35 and 51 points respectively are seen. Monday’s data though should show that we have closed the gap somewhat. Unfortunately, much of the wheat is of poor quality with vomitoxin problems.

The spring wheat crop was 96% headed on July 19, beating the five-year average pace for the week of 83%. The slowest state was North Dakota at 94%, so you can essentially say that the crop is virtually headed by now.

The crop rated a condition index score of 377, down 2 points on the week, but equal to the score seen in the same week last year. The 10-year average condition score for the week is 368. Condition scores for the key states are 394 in Idaho, 401 in Minnesota, 347 in Montana, 399 in North Dakota, 361 in South Dakota and 283 in Washington. The Washington score dropped 18 points over the past week and 63 points over the past four weeks due to drought stress.

Egypt again took advantage in a break in prices to tender to buy wheat late Monday. It tendered to buy wheat for early September delivery, with results revealed this morning. Exporters didn’t even bother to submit bids for U.S. wheat, which was high-priced and quality issues with vomitoxin in the Midwest. The low bid was $5.27 per bushels FOB, which is well-below U.S. prices. Egypt ended up buying 6.4 million bushels of Russian wheat at an average price of $5.59 per bushel.

The best demand this year should be for hard red spring wheat amid weather problems in places which compete most directly with our hard red wheat, such as Argentina, Australia and Canada. That allowed Minneapolis to gain on the winter wheat markets which have little demand at this time, but those markets still pulled the hard red spring wheat market lower as crop ratings suggest a big crop.

Beef

A break in feeder demand drags beef complex lower.

I highlighted the warning signs on Monday. Cheap corn prices were expected to energize buying in the feeder cattle market, negating a bear flag. Other factors in the fat cattle market were expected to provide support there as well. However, neither market could even test the previous session’s high, with the feeder cattle market the greater concern.

That was followed by a sharp $4.17 per cwt break in the cash feeder index, with corn prices pushing higher today. The combination led to heavy selling in feeder futures today, pushing contracts more than $3 lower and executing that bear flag on the charts that prices failed to negate the previous day. This market remains quite vulnerable if we see higher corn prices later this year as we anticipate.

The fat cattle market followed the feeders lower with traders now worried that the packers have the upper edge. Packer margins are in the red and feeders fighting heat in the Plains will likely be interested in letting go of cattle early rather than holding and risk death loss. As a result, there are unconfirmed reports this afternoon indicate that cash trade opened up in the northern Plains feedlot region at $147 per cwt, generally a dollar lower than the previous week.

Today’s kill is pegged at 113,000 head of cattle, up 1,000 from the previous week, but down 1,000 from the previous year. Week-to-date slaughter is estimated to be 223,000 head of cattle, up 5,000 from the previous week, but down 5,000 from the same period last year.

Product movement Monday totaled 102 loads, down from 106 loads on Friday and down from 159 loads the previous week. Choice cuts bounced $0.53 to $233.83 per cwt, while Select cuts were up $0.83 to $230.22. It was just the third day in the past 17 trading days in which Choice cuts posted gains, with total gains on those three days equaling just $0.67.

The Choice/Select spread slipped to $3.61 per cwt, down 30 cents on the day, but up 31 cents on the week. Movement at mid-morning today was routine at best at 77 loads, with Choice cuts up $0.27 and Select cuts down $0.05 per cwt.

Pork

Supply concerns weigh on hog market.

Today’s cash market was mostly steady to 50 cents lower across the Midwest. That continues a trend of eroding cash values as the number of hogs coming to market exceed the number needed by packers to meet demand. The lead August contract still maintained modest gains during the bulk of today’s session, because it is still at a discount to the cash index, but most other contracts spent the bulk of the day in negative territory on concerns that supply will continue to exceed demand. We should be nearing a seasonal low for this winter’s contracts, but as yet the market has not yet confirmed that.

Today’s kill is pegged at 422,000 head of hogs, up 4,000 from the previous week and up 26,000 from the previous year. Week-to-date slaughter is pegged at 806,000 head, down 27,000 head from the previous week, but up 38,000 from the same period last year.

The latest CME 2-day cash index today came in at $79.90 per cwt, down $0.31 on the day and down $0.69 over the past three consecutive trading days. However, the index is still up $0.15 from the previous week at this time.

Product movement firmed to 256 loads Monday, up from 216 loads on Friday, but down from 275 loads the previous week. The composite pork product price firmed to $82.97 per cwt, up $0.55 on the day and up $0.94 on the week. Movement at midday today was routine at best at 182 loads, but the composite price was up sharply to $85.43 per cwt, up $2.46 from the previous day on widespread support across most of the cuts.

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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