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Closing Comments

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Closing Comments

Corn

Corn prices surged higher once again today, boosted by speculative short-covering. Prices were bumped above the 20-day moving average on fund buying of the broader commodity sector, triggering more buy stops for fund managers wanting to unwind short (sold) positions. Prices faltered some late-morning, but then firmed again late in the session to finish near the day’s high.

Today’s rally took the December contract nearly 23 cents off last week’s low. Farmers are hoping that the low is in place and speculative hedge fund managers are wondering if the low is behind them. They don’t understand supply and demand fundamentals real well, so talk of freeze damage and excessive rains makes them worry if they are holding large short positions, especially ahead of a USDA crop report, due out Friday morning.

Fundamentally, corn ratings were steady to higher in all but one state on Monday, following a freeze in many areas of the northern belt. In other words, the first assessment shows little significant impact to the crop, although I’m sure we’ll see some quality issues, particularly in northwestern areas. Heavy rains are expected over the next 10 days or so across southern and eastern parts of the belt, impacting 20% of the remaining unharvested crop.

The trade expects USDA to add about 3 bushels to its September yield estimate, taking it to 174.7 bushels per acre. We believe that the yield data we’ve seen justifies a larger move to the 176 to 178 bushel range with this report. The trade is looking for harvested acreage to drop by better than 2 million acres, but we also think that is suspect, since the rules for certifying changed this year. It could happen, but the bias would appear to be toward a bearish surprise in yield and acreage on Friday.

Finally, Gulf basis offers are softening. U.S. corn was among the most expensive on the global market ahead of this week’s rally and this week’s strength has priced us out of the market. That’s not supportive of sustained strength either. Furthermore, we still  haven’t seen the normal pressure that comes with storage problems in big crop years. We didn’t see that in 2009 either as a wet fall slowed harvest progress, but then the big break came in January when USDA finally reported the overall size of the crop.

December corn rallied to $3.4225 today. It’s possible that we could get a third rally day, but I would be surprised if we find enough energy near-term beyond that. My primary concern at this point would be a bearish surprise on Friday if the numbers come in as I anticipate. The market is already pricing in a friendly report, so anything less could pull the rug out from under prices once again. Meanwhile, December 2015 prices are again approaching $4.00 per bushel, which may be a difficult feat to repeat down the road without a significant reduction in acreage and/or weather problem.

Soybeans

November soybeans pushed higher once again early today as broad-based buying in the commodity sector pushed prices above the 20-day moving average. However, that strength began to wane as the price began to approach descending trend line resistance at the top of this fall’s price channel. In the end, the contract finished with modest losses and more than 14 cents off the session high.

The trade is looking for a half-bushel rise in USDA’s yield on Friday, but yield reports we’ve seen suggest that the upward adjustment could be much larger. A 2+ bushel rise would be consistent with other similar big-crop years. There is some concern about excessive rain over the next 10 days, that will impact 30% of the nation’s yet-unharvested crop. However, Monday afternoon’s ratings suggest little damage to the crop as a result of this past weekend’s freeze, as nearly all of the crop was already dropping leaves in the region.

There is some talk of dryness in Brazil. The northern half of the belt is expected to be warm and dry into early November. It’s the equivalent to early April in our growing season down there. Commodity Weather Group currently sees changes in sea surface temperatures that it believes will favor a return of rainfall to the dry areas in November. If so, they should still be able to raise a good crop.

I’ve been working on my balance sheet for the 2015-16 marketing  year. The most bullish scenario I can currently see, assuming a normal growing season in South America, would be for ending stocks above 500 million bushels. As such, our only significant hope of a sustained rally from these levels hinges on a minimal upward adjustment in this year’s  yield on Friday, combined with a sustained drought in Brazil; neither of which is expected based on the best information currently available to  us.

Wheat

Wheat has been wanting to put a bottom into the market for several months, but has been unable to do so as the dollar trended higher, overseas yields trended higher and corn prices trended lower. Those factors all reversed over the past two days, allowing wheat prices to explode higher.

That tripped chart signals that encouraged more covering of massive short positions held by the funds. However, the best information currently available to us suggests that those three factors will soon resume their previous trends. That leaves wheat vulnerable. Wheat is probably the strongest leg of the three major ag commodities, with some support from dryness in Australia and the Former Soviet Union. Yet, sustaining this rally in the face of those other factors going against wheat would take a lot of work.

The weather is raising prospects that we will see a decline in soft red winter wheat acreage this year. However, moisture in the Plains suggests an increase there. Furthermore, we have half a crop of surplus anticipated at the end of the current marketing year, so a downturn in acreage isn’t exactly bullish unless it is very substantial.

Beef

This week’s showlist dropped significantly from the previous week, reflecting the overall small size of the supply of cattle. Some in the industry are interpreting that as a sign of smaller fourth-quarter supplies overall. This, combined with stronger product prices, sent live cattle futures prices to new highs, with the bulls engaged once again. We’ve seen how quickly these bullish moves can fall apart in the past when fund managers get cold feet at these altitudes, but for today the strength continued.

Last week’s slaughter total was revised down to 570,000 head. That should keep the product market well-supported. Last week’s negotiated cattle trade was larger than originally expected, along with a larger total of committed cattle. As such, the packer should be in pretty good position this week, despite the smaller showlist. As such, we may not see a stronger cash cattle market this week, but supplies overall look to remain snug for some time, providing underlying support for the market.

Boxed beef movement Monday was a solid 167 loads, matching Friday’s total, but down slightly from 172 loads the previous week. Movement the past two weeks has been the strongest of 2014. Choice cuts were up $3.04 per cwt Monday to $241.36, while Select cuts were up $3.02 to $229.38. This put the Choice/Select spread at $11.98 per cwt, up 2 cents on the day, but up 79 cents on the week.

Movement at mid-morning today was decent at 93 loads, but below levels we’ve frequently seen over the past couple weeks. Choice cuts were up another $2.49 to $243.63 per cwt, while Select cuts were up $2.85 to $232.02. This dropped the Choice/Select spread to $11.60 per cwt.

The renewed focus on a tighter cattle supply helped re-energize the feeder cattle market. November feeder cattle rose to new highs for the move, reaching a high of $243.275 per cwt. The latest CME feeder cattle index came in at a record $236.91 per cwt, up $0.49 per cwt, but also showing signs of losing momentum today.

Pork

The lean hog market started strong today, but turned lower as the day progressed. The market received strength early from broad-based fund buying of the broader commodity sector. That pushed December lean hogs above their recent trading range, creating more buying interest that increased gains. However, the market turned lower on soft cash and product markets, resulting in a weak finish back inside the recent trading range.

Today’s cash market was mostly steady across the Midwest, with an occasional 50 cents lower. That made it even more difficult to sustain strength in the board price. The latest CME 2-day index came in at $109.54 per cwt, down $0.14 on the day.

Product movement dropped to 210 loads Monday, down from 238 loads on Friday and down from 223 loads the previous week. The composite pork product price came in at $124.45, up $0.70 on the day and its highest level since August 8. However, the product market turned weaker today, adding to the day’s woes on the board. The composite pork product price dropped $1.32 to $123.13 per cwt. Picnic and rib cuts were higher, but all other cuts were lower at midday.

December lean hogs finished the day with a reversal lower, settling near the session low. That’s a potential warning sign of additional weakness in the days ahead, particularly if the product market sees follow-through weakness as retailers begin to look beyond October.

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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