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Closing Comments

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Closing Comments

Corn

USDA shocks trade, but does what it typically does in these wet  years.

USDA has a tendency to raise yields in the August report, before lowering them in later reports in these wet years. As such, I was expecting a bearish report today, but on the other hand, it was hard to believe that USDA could actually raise yields this far after walking the fields. Today’s increased yields appear at first glance to come from near-record high ear weights, but a source within USDA stated unofficially that they relied more heavily on the farmer survey for this report than they did the field checks.

As for the numbers, USDA left planted and harvested corn acres unchanged as expected. However, it raised its yield estimate 2 bushels to 168.8 bushels per acre, when the trade was looking for a similar decline. That pushed production to 13.686 billion bushels. New-crop imports went up 5 million to 30 million bushels, while Feed and residual added another 25 million to 5.3 billion bushels. Ethanol corn use also increased for the new-crop year to 5.25 billion bushels, up 25 million from July, while exports dropped by 25 million to 1.85 billion bushels.

The bottom line is that new-crop stocks rose to 1.713 billion bushels, up from 1.599 billion the previous month and up from trade expectations of 1.424 billion bushels. Global stocks came in at 195.09 million metric tons, up from 189.95 mmt the previous month and up from trade expectations of 187.91 mmt. USDA painted a bearish picture of corn fundamentals for the next year, but then again that is common in the August report in wet years. The real question is where we go from here? Our analysis remains confident that this year’s crop is closer to 161.5 bushels per acre with ending stocks closer to 1.1 to 1.2 billion bushels.

The Department of Energy reported that crude oil stocks dropped by 1.7 million to 453.6 million barrels in the week ending August 7. However, that still leaves supplies near their highest level on record (80 years) for this time of year. Furthermore, the Energy Information Agency predicts that global crude oil supplies will remain large into the fourth quarter of 2016 if sanctions on Iran are lifted. Gasoline supplies fell by another 1.3 million barrels and remain near the middle of the typical range for this time of year. Distillate stocks are also near the middle of the range for this time of year, although they rose by 3.0 million barrels in the latest week reported.

Ethanol stocks fell to a calendar-year low of 18.5 million barrels in the week ending August 7, versus 19.2 million the previous week and 17.8 million barrels in the same week last year. Production during the week rose to 965K barrels per day, up from 961K barrels the previous week and 931K barrels in the same week last year. The all-time record was set in mid-June at 994K barrels per day.

The data suggests that ethanol users ground 102.4 million bushels of corn during the week, up from 102.0 million the previous week and up from the estimated 100.3 million bushels used in the same week last year. That brings estimated corn use to date to 4.945 billion bushels, up 146 million or 3% from the previous year. Estimated corn usage to date exceeds the seasonal pace needed to reach USDA’s target by 16 million bushels, up from 13 million the previous week.

December corn dropped sharply to a new contract low of $3.575 following the report’s release, but quickly pulled off that low, minimizing the chart damage. It’s settlement at $3.68 was encouraging, putting greater focus on Thursday’s close. A climb back above $3.75 would suggest to me that fund managers believe that yields will drop from this point, while a weak close on Thursday would suggest that believe that big crops get bigger. It’s all about perceptions now, with traders looking for reports from next week’s Pro Farmer tour, followed by early harvest results by early September.

Soybeans

USDA shocks soybean traders with near-record yield.

USDA had additional bearish news for soybean traders, but then again that is consistent with its pattern in August reports in wet years. The agency dropped planted acres by 0.8 million to 84.3 million acres and dropped harvested area by 0.9 million to 83.5 million acres. That was pretty much the end of the good news, but seeing that big a drop this early in the process speaks to the scope of problem acres that are out there.

USDA raised its soybean yield estimate to 46.9 bushels per acre, up from 46.0 bushels the previous month and above trade expectations of 44.7 million bushels. In fact, USDA’s yield is just 0.9 bushel off last year’s record yield when conditions were much more favorable than the current year.

USDA raised old-crop soybean crush by another 15 million bushels to meet my expectation, which dropped old-crop stocks to 240 million bushels. On the new-crop side, USDA increased new-crop crush to 1.860 billion bushels, up 20 million on the month, while exports dropped by 50 million to 1.725 billion bushels. That puts new-crop exports down 100 million bushels below current-year levels, which is likely too aggressive, even with the problems in China.

The bottom line is that new-crop ending stocks rose to 470 million bushels, up from 425 million bushels the previous month and up from trade expectations of 301 million bushels. I still expect these stocks to fall closer to 240 million bushels by one year from now; perhaps lower. However, history indicates that it will take some time for USDA to acknowledge these more bullish expectations. Global new-crop stocks fell to 86.88 mmt, down from 91.80 mmt previously and down from expectations of 86.88 mmt.

November soybeans spent about one minute at the 70-cent daily limit lower, before rebounding and settling 8-1/2 cents off its low at $9.10. I don’t think that fund managers want to be short (sold) soybeans below $9 at this point, with uncertainty remaining over the size of this year’s crop. We remain friendly soybeans, but I’ve argued that it will likely take some time for the data to back us up, leaving us vulnerable in the near-term.

Wheat

USDA releases friendly wheat production estimate, but stocks are still large.

USDA pegged the U.S. wheat crop at 2.136 billion bushels, down 12 million from July and down 17 million from the average trade guess. The average yield dropped 0.2 bushel to 44.1 bushels per acre, while harvested acres remained unchanged at 48.5 million acres. The winter wheat crop came in at 1.44 billion bushels, down from 1.456 million in July, with hard red winter losing 10 million and soft red winter wheat losing 2 million bushels. Durum production rose 1 million, while hard red spring wheat gained 4 million to 621 million bushels.

USDA cut exports by 25 million to 925 million bushels, reversing a questionable increase in July. The net result was to push ending stocks up to 850 million bushels, up 8 million on the month, but still 8 million bushels below the average pre-report trade guess. Global wheat stocks were pegged at 221.47 million metric tons, up from 219.81 mmt the previous month and up from trade expectations of 2.18.15 mmt.

The bottom line is that wheat stocks are still large. Total wheat stocks sit at a 143-day supply, but that doesn’t tell the whole story. Hard red spring wheat stocks are at a 141-day supply, soft red winter at a 153-day supply and hard red winter stocks are at a 167-day supply. Those numbers need to drop to sustain a rally long-term. That can happen by prices going lower and/or by seeing significant problems in major competitor areas, which we have not yet seen.

The hard red wheat markets broke to new contract lows and settled at their lowest levels for the life of the September contracts. Chicago September broke below support at $4.90, but settled at $4.9225. Wheat needs help to sustain a rally, due to the above factors, and that help wasn’t there today. Egypt tendered to buy wheat for late September delivery this afternoon. U.S. wheat will not likely make it into the mix, due to quality and price problems.

Beef

Feeders try to rally on bearish corn data, but fat cattle pull them back down.

Cattle trade was pretty quiet ahead of USDA’s monthly supply and demand report, but turned lively after its release. Feeder cattle pushed sharply higher after USDA released its bearish corn numbers, pulling the fats higher. However, the fat cattle market failed to hold the gains and tumbled lower, tripping sell stops along the way that accelerated losses. That in turn pulled feeders lower on fears once again of tightening margins.

There were unconfirmed reports of cash cattle moving in the Plains at $153, near last week’s high. Otherwise, packers were said to be offering $147 while feeders were asking $153, casting some doubt on the report. Even so, the cash market remained largely quiet for today’s trading session. Today’s kill came in at 104,000 head, up 2,000 on the week, but down 10,000 from the previous year. Week-to-date kill is pegged at 323,000 head, up 5,000 on the week, but down 21,000 from the same period last year.

October live cattle found buying interest once again above $146, while traders wait for this week’s cash trade to gain momentum. Product prices are good now, but traders anticipate that they will be breaking as we get closer to Labor Day and retailers finish stocking up for the holiday.

Product movement on the spot daily market rose to 123 loads Tuesday, up from 107 loads the previous day, but down from 151 loads the previous week. Choice cuts rose $2.41 to $240.93 per cwt, while Select cuts gained $2.88 to $234.80 per cwt. That dropped the Choice/Select spread to $6.13 per cwt, down from $6.60 the previous day, but up from $5.31 the previous week. Movement was decent at mid-morning at 91 loads, with Choice cuts up another $2.97 and Select cuts up $0.67 per cwt.

Feeder cattle finished the day mixed after fats pulled them off their highs. September had an outside lower day, which leaves the market vulnerable to additional weakness, even though it is still more than $6 below the cash index. Today’s 7-day cash index was $216.83 per cwt, up $0.15 on the day, but down $0.87 on the week.

Pork

Bearish corn numbers weigh on deferred hog contracts.

The nearby lean hog futures contracts were firmer today reflecting strength in the cash market which continues to hover near the $80 per cwt level. Today’s cash market was mostly steady, while hogs in the closely watched Iowa/Southern Minnesota market were up to 50 cents higher. The 2-day lean hog index came in at $78.79 per cwt, down $0.11 on the day, but up $0.11 cents on the week.

Product movement topped 438 loads Tuesday, up from 301 loads on Monday and up from 348 loads the previous week. The composite pork product price rose to a new calendar-year high of $90.77 per cwt, up $0.57 on the day and up $2.20 on the week. Movement at midday today was good at 222 loads, but the composite price slipped $1.32 to $89.45 on weakness for loin, rib, ham and belly cuts.

The relative strength of the product price pushed estimated packer margins above $27 per head. That provides ample incentive to pull hogs forward, but packers aren’t hurting for deliveries. Today’s kill is pegged at 425,000 head of hogs, matching the previous week, but up 16,000 from the previous year. Week-to-date slaughter is pegged at 1.274 million head, up 52,000 head from the previous week and up 80,000 from the same period last year.

October lean hogs held above key support at $62 on Tuesday, leading to chart-related buying today. However, the deferred contracts from February and beyond came under pressure today after USDA released its bearish corn report, with traders worried that cheap feed will stimulate over-production in the months ahead.

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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