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Closing Comments

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Closing Comments

Corn

Corn prices firm on hopes for a tighter balance sheet next week from USDA.

December corn spent the bulk of the past week consolidating between $3.75 and $3.85, after falling sharply from its mid-July high of $4.5425. A 10-cent bounce isn’t impressive after falling nearly 80 cents, but then again it shouldn’t be surprising. Talk is emerging of a possible low, but such has not yet been confirmed. That may hinge on what USDA does with its balance sheet on Wednesday.

A Reuters’ survey of trade participants reveals expectations that USDA will cut a couple bushels off its yield estimate Wednesday, tightening new-crop surplus stocks to 1.424 billion, down from 1.599 billion bushels in July. We agree that the crop should get smaller, but based on USDA’s track record we question whether USDA will do so in this report. As such, any emerging euphoria of significantly higher prices may be premature.

In the end, the type of problems seen in the crop often do not show up  until the combines roll, and that will take some time. As such, we could see periodic short-covering spikes, but sustaining rallies may be difficult for a bit longer until the trade has harder evidence of problems. USDA could provide that on Wednesday, but that would be a break from past behavior under similar conditions.

The bounce in corn prices found support from buying in the broader commodity indices, which are showing signs of a possible multi-year low. Those indices have not yet confirmed a bottom, but some speculators see value at current price levels for the commodity complex.

Soybeans

Soybeans rally to two-week highs on expectations of much tighter stocks.

Soybeans led the way higher to close out the week, posting double-digit gains for the bulk of the session. Old-crop basis is on fire in some markets on strong processor demand and slow farmer selling, while the trade is also penciling in much tighter balance sheets for the year ahead.

November soybeans spiked down to $9.2625 to start the week, but seemed to run out of selling interest at that point. Prices trended higher the rest of the week, but the strength came on the back of a roller coaster. In the end, future price direction depends on the size of this year’s crop, which remains the subject of considerable debate.

A Reuters survey reveals that the trade expects USDA to cut more than 1 million acres off the crop. It’s not hard to support that notion in the long-term, but USDA’s methodology for this August report leaves such a move in doubt until the agency has more data from FSA certification. The trade is also looking for USDA to knock 1.3 bushels off the crop’s yield. Again, such a move isn’t difficult to argue longer-term, but it would be unusual for USDA to do so in August in this type of year.

The bottom line then is that we expect yields to fall as harvest reveals problems with this year’s crop. However, the scope of those problems hinges largely on the extent of disease problems seen this year and that question isn’t answered yet. As such, USDA will likely be conservative in any yield drop in this report, leaving the near-term price outlook more uncertain.

November soybeans rallied into the closing bell, closing a chart gap to $9.6325 in the final minutes. The positive close suggests follow-through buying to start next week’s trade, but the primary focus will likely be positioning for Wednesday’s crop report.

Wheat

Wheat prices consolidate higher on ideas that a bottom may be at hand.

Like corn and soybeans, wheat prices posted their low on Monday, with that low being a contract low in Kansas City. Minneapolis September wheat actually probed to a new contract low Tuesday, but the general trend from that point was to consolidate higher. Buying enthusiasm remains limited by large supplies of surplus wheat; both domestically and globally. However, the recent price decline uncovered some of the best demand of the year thus far, with Chicago September wheat holding just above its mid-June lows.

Look for USDA to pare back its production estimate for Canada on Wednesday, with Argentina and Australia’s new-crop production estimates expected to be reduced in later reports. That should support hard wheat prices in the weeks and months ahead, relative to soft wheat, which has significant quality and pricing competition problems.

Longer-term, this market is showing signs of finding value at current levels, but its ability to sustain a rally likely hangs on the outlook for corn. Fortunately, we’re looking for higher corn prices this fall, which should help support wheat, but it would take a dramatic shortfall on the global balance sheet to turn U.S. wheat fundamentals bullish. As such, wheat likely needs help from the outside to sustain a rally longer-term.

For now, some of that support comes from ideas that this year’s bumper spring wheat crop may not be quite as big as expected. It should still be good, but harvest results have been disappointing in places. It’s still early, but this suggests that the most bearish scenarios may have already been priced into the market.

Beef

Cattle futures chop sideways while waiting for action in the cash market.

October live cattle surged higher to start the week, pricing in better-than-expected cash trade last week that was several dollars above the previous week. The contract worked its way cautiously higher by Thursday, reaching a high of $149.275 before pulling back. That puts the contract near the high of the previous week’s cash trade, with prices then pulling back a bit to close out the week while waiting for cash trade to unfold. The August contract was a bit more enthusiastic, probing briefly above $150, but that shows that there is more optimism in the market near-term than there is for later in the fall.

Supplies of slaughter-ready cattle will likely remain tight over much of the next year as producers hold back heifers to rebuild the cowherd. However, that doesn’t mean that the supply of beef will be tight. We’ve seen some signs of demand rationing, with consumers shifting some buying to cheaper pork and poultry. However, the biggest impact has likely come from a surge in beef imports this year, particularly for 90% lean meat for hamburger.

The strong dollar continues to hurt U.S. beef exports, while encouraging imports. Export sales in the week ending July 30 were the second lowest of the year at just 5.9K metric tons, down from an anemic 6.2K the previous week and down from 11.9K in the same week last year. Actual shipments were a bit better at 10.5K metric tons, although that was down from 11.7K tons shipped the previous week and down from 14.9K tons shipped in the same week last year.

Recently released USDA data shows that June beef export shipments totaled 213.9 million pounds, up 21.4 million or 11% from the previous month. However, June shipments were down 21.3 million or 9% from the previous year. Meanwhile, beef imports in June totaled 339.6 million pounds, up 34.1 million or 11% from the previous month and up 87.8 million or 35% from the same month last year.

Beef imports in the week ending August 1 totaled 21,623 metric tons, down from 22,817 tons the previous week, but up from 21,117 tons in the same week last year. Year-to-date imports total 725,148 metric tons, up 30% year-on-year.

Total beef movement in the week ending July 31 totaled 6,272 loads, up 131 loads or 2.1% from the previous week. Movement on the spot daily market continues to be about 10% of this total beef movement during the week.

Friday’s kill is pegged at 107,000 head of cattle, up 4,000 from the previous week, but down 7,000 from the previous year. The Saturday kill is estimated at 1,000 head, down 1,000 from the previous week and down 4,000 from the previous year. That puts the week’s total kill at an estimated 535,000 head, up 3,000 from the previous week, but still down 38,000 head from the same period last year, reflecting the increase in beef imports that are meeting consumer needs. Year-to-date slaughter is pegged at 16.965 million head of cattle, down 6.9% from the previous year.

August feeder cattle rallied to $215.45 this week, but that fell short of the mid-July rally high of $216.80 per cwt. Feeders are worried that Wednesday’s USDA crop report may confirm a smaller crop, suggesting higher feed prices and tighter feeding margins.

Product movement slipped to 136 loads Thursday, down from 180 loads the previous day, but up from 125 loads the previous week. Choice cuts dropped $0.02 to $235.19 per cwt, while Select cuts were down $0.46 to $228.39 per cwt. That pushed the Choice/Select spread to nearly a two-month high of $6.80 per cwt, up from $6.36 the previous day and up from $4.02 the previous week. Movement at mid-morning today was quite slow at just 50 loads, with Choice cuts up $0.28 and Select cuts up $0.75 per cwt.

Pork

Lean hogs hold chart support, but traders fear larger supplies next month.

The cash hog market has been stagnant for the past couple of months, trading primarily a couple dollars either side of $80. That would suggest that hogs have found good value at that level, but that’s only part of the story. The latest 2-day lean hog index came in at $79.08 per cwt, up $0.12 on the day and up $0.57 on the week.

Recent support for holding prices near that summer price range have largely come from more than one-year highs in belly prices due to the popularity of bacon for summer sandwiches, as well as active buying for the school lunch program before the start of school. That support has pushed the composite pork product price to its highest level since December, pushing packer margins to roughly $20 per head.

Packers therefore have incentive to pull more hogs through the plant, but the supply has been more than adequate to do so without them having to bid up for the hogs. Warm humid weather has reduced weight gains, leading to lighter carcasses that have helped prevent the supply from overwhelming demand.

However, the concern is that weights will begin to rise again as temperatures cool after the Labor Day weekend, with numbers rising as well. That would coincide with a seasonal decline in domestic demand as well. As such, futures traders are reluctant to trade up to current cash levels, believing that current strength in the cash will dry up.

Friday’s cash market was steady to $1 higher in the closely followed Iowa/Southern Minnesota market, while steady to $1 lower in Illinois and steady to 50 cents higher elsewhere. The Friday kill was pegged at 395,000 head of hogs, up 4,000 from the previous week and up 49,000 from the previous year. Saturday’s kill was pegged at 85,000 head, up 31,000 from the previous week and up 61,000 from the previous year.

As such, the week’s total is estimated to be 2.126 million head of hogs, down 6,000 from the previous week, but up 198,000 head from the same period last year. That brings year-to-date kill to 67.710 million head of hogs, up 7.6% from the previous year.

Product movement Thursday fell to 324 loads, down from 408 loads on Wednesday, but up from 301 loads the previous week. The composite pork product price slipped to $89.00 per cwt, down $0.12 on the day, but up $2.77 on the week. Movement at midday today was slow at 149 loads, but the composite pork product price rose to a new calendar-year high of $90.41 per cwt, up $1.41 on the day.

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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