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Closing Comments

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Closing Comments

Corn

Corn rides along just above key chart support.

Much of Washington, D.C. was closed for Columbus Day, including USDA. That pushed export shipment and crop progress data back a day until tomorrow, leaving the grains subject to the shifting tide of the major commodity indices once again. Crude oil continues to struggle beneath the 100-day and 200-day moving average, leading to profit taking. That provided a drag on the major commodity indices that were trying to post a breakout to the upside, which in turn proved to be a drag for the grain and oilseed markets as well.

Crude oil prices were down more than $2 per barrel at the end of the grain trading day, pulling down on the major commodity indices, which kept pressure on corn as well. Yet, the lead December corn contract found enough buying to hang on and keep it just above the critical $3.80 support level. That level needs to hold or this market will be vulnerable to testing contract lows. On the other hand, holding this support level would be expected to open the door for a test of $4 if we see crude oil prices stabilize as it would be expected to bring renewed buying to the broader commodity indices.

That money flow continues to be the greater influencer of grain and oilseed prices. Fortunately, the bias for the broader commodities is higher after posting multi-year lows as the dollar trends weaker. Unfortunately, crude oil has the power to change that sentiment.

Fundamentally, the largest yield reduction USDA made after the October report was 4.4 bushels in 2006, followed by a 4.0-bushel reduction the following year. Otherwise, yield losses after October tended to be more in the 2 to 3 bushel range, if they occurred. Obviously yield increases are possible as well.

My bias is that we will continue to see yields pull back in the latter part of the harvest, but ending stock projections will likely be no lower than 1.4 billion bushels in the January report, and possibly higher. That still leaves us vulnerable if the death of El Nino next year brings adverse weather to the Midwest, which is why I still anticipate prices above $4, possibly as high as $4.50, as long as sentiment remains positive toward the broader commodity complex amid a weakening dollar.

Soybeans

Soybeans provide glimmer of hope for grain complex.

Soybean prices spent the bulk of today’s session in positive territory, although they finished the day just 2 cents off the session low. Prices remain near the upper end of the trading range that has held the market for much of the past seven weeks. That range has an upward bias to it as well.

The market feels that it has factored in the bearish production data, with the focus now shifting to the demand side of the equation. Demand has been red hot in recent weeks, with China significantly accelerating its purchase and shipping pace. As such, soybean prices behave like they want to go higher, but they also need cooperation from the broader commodity sector.

Selling increases each time that November soybeans approach $9, from both speculators and producers. However, the market can generate enough momentum to push through that level as long as demand remains strong and the broader commodity indices continue to confirm multi-year lows. The current bottom of the trading range is currently near $8.72.

Wheat

Wheat chops sideways while waiting for clearer direction.

Wheat supplies are large, but that has largely been factored into the market. Export demand is projected to tie for its slowest pace of the past four decades and the current pace suggests that we may not hit those projections. Yet, the market behaves as if that has already been priced in already.

Meanwhile, traders are gradually taking notice of dryness in much of the U.S. winter wheat belt, Argentina, Australia, Russia and Ukraine. USDA raised its Australian production estimate to 27 million metric tons, up 1 mmt on the month, while local estimates are closer to 23 or 24 mmt. That alone isn’t enough to push prices higher, but dryness in the Former Soviet Union is far more serious. However, it’s typically difficult to sustain a rally on FSU dryness at this time of year.

In the end, I look for wheat to chop sideways until more is known, depending on the broader commodity sector. Chicago wheat appears to have good support near $5, while selling increases near $5.30. Kansas City has been slowly gaining on Chicago, which is needed longer-term to sustain a rally. However, it’s still trading at a discount to the soft wheat market. As such, prices remain vulnerable until Kansas City can establish itself at an 8-cent or better premium to Chicago.

Beef

Cattle industry hopes fire sale on product has boosted consumer demand.

Livestock prices tried to work higher today, but found buying enthusiasm to be limited. Cash cattle traded at mostly $126 to $127 in the Plains feedlot belt last week, up from mostly $118 to $124 per cwt the previous week. While encouraging, that’s still at a substantial discount to the board.

The recovery in the board and cash markets was impressive last week, with the industry now looking to see if the product market can do the same. The industry is anxiously awaiting product movement data from USDA for last week, but it has been delayed due to the Columbus Day holiday. The expectation is that retailers threw aside National Pork Month to feature beef on fire sale. Hopefully the data will show that the price break paid off with substantial movement at the retail level to produce a healthy bounce for the product, just as it has for the cash and board. If not, this market could struggle once again.

In fact, December live cattle struggled to hold early gains today. The contract pushed to nearly a three-week high of $138.875 early today, above resistance at $138, but buying interest dried up at that point. That allowed prices to fall back below $138. Traders need to see that product strength to sustain the current move and avoid a return of selling.

Feeder cattle took advantage of the strength in the fat cattle combined with weakness in corn to push higher. Feeders were encouraged that USDA did not lower its corn yield estimate on Friday, raising hope for better margins down the road. Today’s latest CME cash index came in at $184.00 per cwt, down $0.29 on the day and down $1.24 on the week, ending a two-day winning streak in which the index bounced $2.02 per cwt.

Packer margins remain above $100 per head. Today’s kill is estimated at 112,000 head of cattle, up 6,000 on the week and up 2,000 from the same day last year. Unfortunately, carcass weights bumped another pound higher to 849 pounds last week, up 23 pounds on the year and up 45 pounds over the past 2 years. That’s the equivalent of more than 30,000 head of cattle per week over two years ago, just from heavier carcasses.

As such, slaughter numbers at 557K head last week were down 6.2% from the previous year, but total beef production for the week was up 1.5% due to the heavy carcasses. Add to that large beef imports that are running 27% above year ago levels year-to-date, although the pace is slowing somewhat.

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. Movement at mid-morning today was routine for a Monday at 78 loads, with Choice cuts up $1.32 and Select cuts up $1.12 per cwt.

Pork

Lean hogs look top-heavy as cash strength begins to wane.

Estimated packer margins are near $30 per head, providing an incentive to push as many hogs through the plants as possible. As such, last week’s slaughter of 2.29 million head was the largest since January. However, slaughter numbers were rising at a rapid pace a year ago as the industry gained a handle on the PED virus. As such, last week’s slaughter fell to “just” 6.8% above year ago levels, down from 10 to 13% above year ago levels for the bulk of the summer.

Today’s Midwest cash market was mostly steady to 50 cents weaker amid an ample supply of hogs. The latest CME 2-day lean hog index rose to a five-week high of $74.84 per cwt, up $0.09 on the day, up $1.78 over the past week and up $3.03 over the past 10 consecutive trading days. However, the rate of increase is slowing and likely to turn negative in the next day or two, based on activity in the cash market. Today’s kill is pegged at 419,000 head of hogs, down 16,000 on the week and down 6,000 head from the same day last year.

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. Movement at midday today was sluggish at 145 loads, but the composite price reached a new 7-1/2 week high of 89.39 per cwt, up $0.81 on the day.

December lean hogs probed briefly above $67 again early today, but could not hold it. The contract managed to finish the day with modest gains, but still lacked upward momentum. This market behaves like it is top-heavy, with traders worried about a seasonal dip in decline, amplified by increased competition from the beef sector, which is having a fire sale. First key support is near $65.84 per cwt on Tuesday.

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

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