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Closing Comments

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Closing Comments

Corn

USDA raises corn yield, but cuts acreage and FSU production.

USDA mixed things up a bit with its October crop report, providing some surprises along the way. First, it raised the corn yield estimate to 168 bushels per acre, up 0.5 bushel from the previous month. The previous pattern for years with excessive rainfall in the first half of the growing season was for the problems to show up in the October report with a substantial surprise yield reduction. USDA’s increase in the yield estimate will leave many farmers in the eastern Midwest scratching their heads and the rest of us pondering what could have been this year had we not seen the excessive rains, disease and denitrification in the southern and eastern Midwest.

The agency also cut its harvested acreage estimate to 80.7 million acres, down from 81.1 million in September. Traders will now assume another modest reduction between now and January. However, that was essentially the end of the significant changes for the domestic balance sheet. Export sales fall short of the seasonal pace needed to reach USDA’s target by August 31 by 227 million bushels and the gap is widening, but USDA made no reductions to its export target! There was more justification for lowering its corn export target than its soybean export target.

USDA cut global corn production estimates for the 2015-16 marketing year by 217 million bushels, with the most notable cut coming from the Former Soviet Union due to its drought during the growing season. However, it also cut usage, with ending stocks slipping slightly to a 70-day supply, which is just over a two-week supply above 40-year lows. That probably won’t matter much until/unless a weather threat emerges for next growing season, which the odds would seem to be a bit higher for as El Nino wanes.

The trade viewed USDA’s report numbers through a filter spinning a more positive outlook for the broader commodity sector. Crude oil rallied to within 2 cents of its 200-day moving average at $50.94 overnight, before profit taking pulled it back below $50 at the time of the crop report. The early strength led to the major commodity indices gapping higher above significant chart support, but that strength then ebbed and flowed with the crude oil market, although the flow of money continues to show a positive bias toward the commodities.

As such, an USDA report that could have been viewed as bearish under different circumstances was viewed in a better light, resulting in a more resilient price reaction. Even so, price reactions to the report ebbed and flowed with the crude oil market reflecting the connection between the grain market and money flow more so perhaps than actual supply and demand fundamentals.

December corn slipped lower on the USDA report data, but then firmed with the outside markets. However, that changed over the Noon hour as crude oil prices slid lower. Eventually, corn prices hit sell stops as they fell through areas of chart support, accelerating losses. December corn needs to hold the $3.80 to $3.81 area where several areas of support are layered to avoid more significant losses. We will likely continue to see rallies to the $3.95 area increase cash sales and speculative profit taking until/unless support to the broader commodity sector pushes the market through that area as the dollar sinks lower.

Soybeans

Soybeans rally on ample stocks as trade begins to look at strengthening demand.

Soybean acreage was slashed by USDA to 82.4 million acres, down from 83.5 million the previous month. The agency pushed the crop’s yield upward to 47.2 bushels per acre, matching trade expectations and up just 0.1 bushels from the previous month. USDA pushed its crush target to 1.880 billion bushels, up 10 million from the previous month on strong export demand. However, it cut its export target by 50 million to just 1.675 billion bushels. The agency cut its export target despite a robust buying spree by China in recent weeks.

The net result was a reduction in projected 2015-16 soybean ending stocks to 425 million bushels, down from 450 million the previous week, but above trade expectations of 414 million bushels. There’s nothing bullish about the number, other than USDA has a track record of over-stating soybean ending stocks in its October report, having done so in 15 of the past 20 years; last year by 259 million bushels. The trade is going to assume that acreage gets cut and that some of those exports get put back onto the balance sheet.

USDA increased its global soybean production estimate by 32 million bushels, while increasing usage by 13.6 million bushels. U.S. production was cut 1.29 mmt or 47 million bushels due to the acreage reduction, while Brazil’s crop was raised 3 mmt to 100 mmt. That shouldn’t have been a surprise, with some local private estimates even higher than that. Brazil’s soybean area is expected to expand by 3.7% for the crop currently being planted. In the end, projected 2015-16 global soybean supplies rose just 6 million bushels and remain at an ample 100-day supply.

November soybeans rallied out of the report on the cut in acreage, with traders believing that USDA is likely under-estimating demand. Prices rallied over the following hour, pushing easily through trend line resistance off the summer highs. However, selling returned over the Noon hour as the contract approached $9 and as crude oil sank and money began to flow out of the broader commodity sector with amazing correlation. First significant support is now near $8.70.

Wheat

Wheat prices fail to sustain post-report gains as broader commodity struggles.

USDA cut its wheat production estimate by 84 million bushels based on its September 30 Small Grains Summary report as expected. The agency also cut 20 million off its feed usage estimate as expected based on the quarterly stocks report on September 30. The only other significant adjustment to its domestic balance sheet was a reduction of exports to 850 million bushels, down 50 million from the previous month. The new export target may still be too high, even though it ties shipments in the 2002-03 marketing year as the lowest of the past 44 years.

The net result was a modest decrease in domestic wheat stocks to 861 million bushels. However, that is by no means bullish. Yet, the market behaves as if it has already priced the large stocks into the market and is now looking ahead to future production shortfalls on the global market.

USDA made few significant adjustments of note to its global balance sheet, although supplies firmed a bit to a 116-day supply. However, traders took note that a government weather forecaster stated that Ukraine may reduce wheat area by 30% this year due to lingering drought, while dryness continues to stress heading wheat in Australia and much of the U.S. winter wheat belt continues to want for moisture as well.

Wheat prices firmed coming out of the USDA crop report as firming crude oil prices supported money flow into the broader commodity sector. That outside support waned late in the session, allowing wheat prices to post modest losses at the end of the day. The recent rally ran into trouble profit-taking at the 200-day moving average in Chicago. It now needs additional help from the outside or greater evidence of significant production losses on the global market. Such evidence may be difficult to generate ahead of spring, particularly if corn falters.

Beef

Live cattle futures lead the cash market back from the depths.

Limit moves in live cattle futures continued this week, but at least the predominant direction was to the upside. December cattle ran into resistance near $138 on the charts, but a $10 loss turned into a $10 gain overall as the roller coaster volatility continues in the beef sector. Packers slowed the chains a bit over the past week, with product prices finally starting to find some firm footing. Retailers simply could not ignore the fire sale in the beef market, even though it is National Pork Month.

Cash cattle trade slowly emerged late in the week at $126 per cwt in the northern feedlot belt and $127 in the southern belt, where numbers are lower. Prices were generally $4 to $10 above levels traded the previous week. The lead October contract finished the day near $131.50, which suggests that traders currently expect even more strength to emerge in the cash market over the next three weeks, but again, the scope of that strength may already be priced into the market.

Feeder cattle traders gave a big sigh of relief when USDA did not lower its corn yield estimate. That allowed prices to firm into the close to finish the week, supported by a late-day collapse in the corn market. Traders will continue to closely monitor fat cattle and corn prices over the coming week, but recent developments have supported a return of modest demand for feeders. The latest 7-day cash index came in at $184.29, up $0.86 on the day, up $2.02 over the past two sessions, but down $3.60 per cwt over the past week.

Data released this week showed that total beef movement in the week ending October 2 was 6,790 loads, down 168 loads or 2.4% from the previous week. Movement on the spot daily market during the week totaled a one-year high of 973 loads, which amounted to 14% of total movement. That suggests that spot daily movement increased relative to total movement as prices hit their lowest level since January 2014.

Beef imports during the week totaled 20,968 metric tons, down 1,026 tons or 5% from the previous week, but up 10% from the same week last year. Year-to-date imports total 926,762 metric tons, up 27% from the previous year’s pace.

USDA trade data released this week for the month of August showed that beef exports were down significantly in August, contributing to the oversupply of beef amid a strong dollar. Beef exports totaled 175.9 million pounds in August, down 23.9 million or 12% from the previous month and down 54.5 million or 24% from the previous year. The lead customers were Japan, Mexico, South Korea and Canada.

Beef imports totaled 313.6 million pounds in August, up 25.5 million or 9% from the previous month and up 68.2 million or 28% from the previous year. This again contributed to the oversupply of beef hitting the market during the period, thanks largely to a strong dollar. Top sources for the beef imports were Australia and Canada, followed by New Zealand.

Exporters sold a seven-week low net 8.3K metric tons of beef in the week ending October 1, down from 8.8K tons the previous week and down from 14.1K tons sold in the same week last year. Actual shipments during the week totaled 11.6K metric tons of beef, up from 11.0K tons the previous week and down from 14.0K tons in the same week last year.

Product movement on the spot daily market over the past week totaled a one-year high of 1,026 loads, up from 973 loads the previous week and up from 890 loads in the same week last year. Choice cuts finished the week at $203.00 per cwt, down $2.77 on the week and down $41.90 over the past seven weeks. Select cuts finished the week at $197.89 per cwt, down $3.47 on the week and down $37.55 per cwt over the past eight weeks. The Choice/Select spread to finish the week was at $5.11 per cwt, up $0.70 on the week and up $2.68 over the past two weeks.

Packer margins were estimated at more than $100 per head. Yet, packers slowed the chain speed a bit to try to support product prices; an equation that has worked well for them in the past. The Friday kill was pegged at 106,000 head of cattle, down 6,000 on the week, but up 5,00 on the year. Saturday’s kill was estimated at 13,000 head of cattle, down 1,000 on the week, but up 2,000 on the year. That put the week’s estimated slaughter at 557,000 head of cattle, down 14,000 head on the week and down 7,000 head from the same week last year. Year-to-date slaughter is pegged at 21.947 million head, down 1.440 million or 6.2% from the previous year.

Pork

Lean hog futures consolidate with an upward bias.

Lean hog futures continued to chop sideways with an upward bias over the past week, bouncing off trend line support that has held this market through the recovery since late August. Supply and demand remain well-balanced, but traders are worried about retailers abandoning pork during National Pork Month due to the fire sale taking place in the beef sector.

The cash market was mostly steady through the week, with the cash index showing firm undertones, but with little movement, even as packer margins approach $30 per head. The latest cash index came in at $74.75 per cwt, up $0.46 on the day, up $2.10 over the past week and up $2.94 over the past nine consecutive trading days.

The Friday slaughter was pegged at 430,000 head of hogs, up 10,000 from the previous week on the profitable margins and up 50,000 head over the same day last year. Saturday’s kill was estimated at 124,000 head, down 10,000 on the week, but up 66,000 head from the previous year. That put the week’s estimated kill at 2.290 million head of hogs, up 20,000 head on the week and up 146,000 head of hogs from the same week last year. Year-to-date slaughter is at 87.732 million head of hogs, up 6.612 million or 8.2% from the previous year. Weekly slaughter has slowed from 10 to 13% above year ago levels through the summer to 7% above year ago levels; making that decline over the past month.

Product movement totaled a three-week high of 1,677 loads, up from 1,644 loads the previous week and up from 1,500 loads in the same week last year. The composite pork product price rose to $88.58 per cwt, up $3.05 over the past week and up $5.68 over the past three weeks. That compares with $122.63 per cwt in the same week last year.

Pork exports totaled 373.8 million pounds in August, down 21.3 million or 5% from the previous month, but up 22.8 million or 6% from the previous year. Top customers were Mexico, Japan and Canada. Imports during the month totaled 443.8K head (all from Canada), down 27 million from the previous month, but up 37.1 million from the previous year.

Exporters sold just 14.8K metric tons of pork in the week ending October 1, down from 26.1K tons in the previous week and down from 22.5K tons sold in the same week last year. Actual shipments during the week total 17.2K metric tons, up from 16.9K tons the previous week and up from 16.5K tons shipped in the same week last year.

Pork imports totaled 9,112 metric tons in the week ending October 3, down 173 tons from the previous week and down 16% from the same week last year. Year-to-date pork imports total 335,319 metric tons, up 7% from the previous year.

Closing Market Snapshot

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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(r) | 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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