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Closing Comments



Closing Comments


Futures tumble on “perfect weather” and a collapsing wheat market.

The Federal Reserve Open Market Committee met on Tuesday and today to discuss its monetary policy, releasing a statement at 1 p.m. CDT this afternoon. The statement included no change in rate its guidance. However, it seemed to set the stage for one later this year.

The policy statement provided an upgraded assessment of the jobs market, laying the foundation for a rate hike later this year. Economic activity increased moderately over the past quarter, according to the Fed, with “solid” job gains and increased consumer activity. The verbiage on jobs was a clear signal of changing sentiment.

I’m a bit of a contrarian at this point, believing that the Fed will raise interest rates 25 basis points in September, and if that goes well another 25 basis points in December. As one trader stated, they need some bullets back in the chamber in case things get worse down the road.

Crude oil stocks dropped by 4.2 million to 459.7 million barrels in the week ending July 24. The sharp drop surprised traders, resulting in a surge in prices from four-month lows. Even so, stocks remain near their highest level of the past 80 years for this time of year. Gasoline stocks dropped 0.4 million barrels and are currently near the middle of the typical range for this time of year. Distillate stocks (diesel) rose by 2.6 million barrels, but are also near the middle of the typical range for this time of year.

Ethanol stocks remained unchanged at 19.6 million barrels in the week ending July 24. Stocks at this level are near their lowest level of 2015, but are still 1 million barrels above levels seen in the same week last year. Production slipped to 965K barrels per day during the week, down from 973K the previous week, up from 954K barrels per day in the same week last year, but not that far below the record weekly pace set five weeks ago at 994K barrels.

The data suggests that processors used 102.4 million bushels of corn during the week, down from 103.3 million the previous week and down slightly from 102.7 million in the same week last year when conversion ratios were not quite as good. This brings estimated corn usage to date to 4.740 billion bushels, up 139 million or 3% from the previous year. Corn usage to date exceeds the seasonal pace needed to reach USDA’s target by August 31 by 10 million bushels, up from 6 million the previous week.

Corn captured the short-end of spreads with soybeans today amid trade talk of “near-perfect weather” for the crop. Collapsing wheat prices were sufficient to swing the pendulum bearish after prices showed early signs of a possible bottom on Tuesday. Traders are hearing of record yield potential in the western Midwest, helping them forget about problems in the southern half of the belt or to feel that those problems are being fixed.


Split day for soybeans with favorable weather battling strong demand.

Soymeal demand remains unseasonably strong keeping crush margins solidly in positive territory. That provides incentive for processors to pay up for soybeans, pulling old-crop stocks tighter. We’re not going to run out of soybeans ahead of this year’s harvest, which is only a month away. However, we are tightening up free stocks and the nearby contracts reflect that concern, while new-crop contracts fell the pressure of the current more favorable weather pattern.

August soybeans rallied to take out Monday’s high of $9.8825, but could not uncover significant buy stops above that level. As such, prices pulled back from the session high of $9.8875, but still held in positive territory throughout the bulk of today’s session.

Meanwhile, new-crop contracts traded both sides of unchanged. Many analysts, including myself, have much tighter new-crop balance sheets than does USDA, but we’ll have little proof of such until we get into early harvest a month or more from now. As such, fund managers are reluctant to become too aggressive building long (bought) positions in the new-crop months at this point, particularly at a time when the rest of the commodity sector is struggling and when USDA still has new-crop stocks north of 400 million bushels.

I was disappointed in the weak finish to today’s trade, suggesting that the market may be creating a bear flag ahead of slipping lower. Soybeans can surprise, making yields difficult to estimate. However, it is difficult to see the national average yield at 46 bushels considering what the crop in the southern half of the Midwest has been through thus far this year. A drop to 44 bushels would be friendly and a drop to 43 would be considered bullish at this point.


Bottom falls out of wheat market amid large domestic supplies.

Industry representative again spread out on a number of different routes traversing across North Dakota and surrounding areas for day two of this year’s annual tour today. Tour participants met last night to put their data together, releasing a day one yield of 51.1 bushels per acre, the highest in tour history going back to 1994.

The trade new the crop was pretty good in the Northern Plains, but the record high yield estimate was sobering. Wheat prices showed signs of carving out a bottom just above chart support on Tuesday, but this news seemed to tip the market over again, dragging it to new lows for the move, which included new contract lows in the hard wheat markets.

The bottom line is that demand is weak. Soft wheat demand will likely remain weak due to the poor quality of the crop, including vomitoxin problems. Hard wheat quality thus far is better; perhaps not as good as we’d like, but still not the problems seen in the soft red wheat belt. However, hard red wheat prices continue to struggle to compete on the world market, depending on the destination. Weather issues in Canada, Argentina and Australia could see that trend change later in the year, but for now the market remains under pressure, with the charts turning bearish again today.

The bottom line is that wheat has in the past rallied when the fundamentals were not supportive. However, such a rally generally takes help from outside of the U.S. wheat market. There are several events that could support such a rally, but none are currently at play, leaving fund managers to chase the trend lower.


Today’s activity suggests that bullish conviction is lacking in the beef complex.

Stronger product prices triggered euphoria in the beef complex late Monday, leading to a massive short-covering rally on Tuesday. However, product prices softened late Tuesday, taking some of the air out of the bulls argument and setting up a consolidate, wait and see attitude today. Both the fats and feeders struggled to test Tuesday’s highs and couldn’t sustain a rally once they did. That doesn’t reflect a lot of bullish conviction following Tuesday’s sharp gains. The market lacks the conviction to build long (bought) positions due to the steady flow of beef imports thanks to the strong dollar.

Cheaper corn prices today gave an added boost to feeder futures, but the market still struggled to sustain gains, particularly as the feeder cash index continues to erode lower. The latest cash index came in today at $214.89 per cwt, up $0.06 on the day, but down $2.25 over the past week and down $9.62 from July 10th.

Today’s kill is pegged at 105,000 head of cattle, up 1,000 from the previous week, but down 10,000 from the previous year. Week-to-date kill is pegged at 320,000 head of cattle, down 7,000 from the previous week and down 17,000 from the same period last year.

Boxed beef movement on the spot daily market rose to 150 loads Tuesday, up from 119 loads the previous day and up from 139 loads the previous week. Choice cuts slipped $0.12 to $232.15 per cwt, while Select cuts dropped $0.01 to $228.87 per cwt. That dropped the Choice/Select spread to $3.28 per cwt, down from $3.39 the previous day and down from $3.31 per cwt. Movement at mid-morning today was good at 110 loads, with Choice cuts up $0.52 and Select cuts up $0.27 per cwt.


Lean hog futures surge, but then fizzle as supplies rise.

The cash hog market showed some strength today as packer margins continue to strengthen on firmer product prices. Midwest cash hogs were mostly steady to $1 higher across much of the region. The latest CME 2-day lean hog index slipped to $78.36 per cwt, down $0.17 on the day, down $1.30 on the week and down $2.23 per cwt over the past nine consecutive trading days.

Even so, stronger product prices, and therefore stronger packer margins, spurred buying interest in the lean hog futures pit today. October lean hogs pushed above resistance near $66 that had held the market over the past month, triggering buy stops that accelerated gains. The contract surged through the 50-day moving average at $67.12 per cwt, but could not sustain the move. Like the cattle complex, traders were eager to unwind short positions, but less eager to build ownership.

Today’s kill is estimated to be 422,000 head of hogs, up 1,000 on the week and up 16,000 on the year. Week-to-date kill is pegged at 1.262 million head of hogs, up 35,000 head from the previous week and up 57,000 from the same period last year on those favorable packer margins.

Product movement rose to 324 loads Tuesday, up from 235 loads on Monday, but down from 372 loads the previous week. The composite pork product price firmed to nearly a seven-week high of $86.21 per cwt, up $1.35 on the day and up $1.14 on the week.

Movement at midday today was strong at 307 loads, but at weaker prices. The composite pork product price dropped $1.51 to $84.70 per cwt on a sharp drop in ham and belly prices that more than offset a surge in rib demand. Improved packer margins stimulate pulling more hogs through the plant, which increases supplies of product, leading to lower prices.

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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