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Closing Comments

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Closing Comments

Corn

The Department of Energy reports that ethanol stocks dropped to 18.7 million barrels in the week ending October 3, down from 18.8 million the previous week, but up from 15.4 million the previous year. Ethanol production rose to 901K barrels per day during the week, up from 881K the previous week and up from 868K barrels per day in the same week last year.

The data suggests that the ethanol industry utilized 95.6 million bushels of corn in the week ending October 3, up from 93.5 million the previous week and 93.5 million in the same week last year. That brings projected marketing year corn usage for the production of ethanol to 481 million bushels, up 21 million or 5% from the previous year. Estimated corn usage to date exceeds the seasonal pace needed to reach USDA’s target by August 31 by 4 million bushels, versus 3 million the previous week.

Short-covering ahead of Friday’s USDA crop report continued to support corn prices today. Strong ethanol numbers and ongoing harvest delays with more heavy rains expected in the southern belt provided additional support. Some fund managers feel that USDA’s current yield estimates are likely pretty close to final levels, with a possible acreage reduction coming. However, others see the current rally as an opportunity to build fresh short (sold) positions, possibly after they see that USDA doesn’t have any surprises in the report.

December corn managed to take out Tuesday’s high late in the trading session, opening the door for a bit more strength in the coming days. However, it now comes down to the emotions of fear and greed leading into the report, as well as the trade’s response to the actual numbers. We continue to believe that it is too early for the market to confirm a bottom, with significant downside price risk until the actual size of the crop is better known.

Soybeans

Soybeans came under renewed selling today. We continue to see some traders talk of declining soybean stocks following USDA’s bullish surprise on September 30, along with a possible acreage reduction. However, most traders acknowledge that this is all academic if South America has a good growing season, with surplus stocks likely to be the story going forward.

Warm dry weather continues to plague the northern half of Brazil. It’s the equivalent of early April in our growing season there. Forecast models show improving chances for rain in many of these dry areas late this month, as well as in early November. Brazil can still grow a big crop if those rains come, although it might have more friendly implications for the second-crop corn as it would push it into the dry season. Prolonged dryness into November would start to threaten Brazil’s soybean production, but that’s not the way that forecast models are currently leaning.

November soybeans dropped below Tuesday’s low, but firmed back to just above it at the end of the day. Look for more choppy action ahead of Friday’s report as traders position for USDA’s data, but the bias continues to be bearish, as long as forecast models call for rains to return to dry areas of Brazil.

Wheat

Wheat prices had a relatively quiet day today. Short-covering produced modest support for Chicago, while a wetter forecast provided pressure for Kansas City hard red winter wheat. The remnants of hurricane Simon are expected to provide soaking rains for many dry areas of the Southern Plains over the next several days.

Traders will be watching USDA’s Friday data closely for signs of a shrinking Australian wheat crop. The agency currently has the crop pegged at 25.5 million metric tons, which is where Commodity Weather Group puts the crop. However, some local sources are putting it closer to 20 million metric tons. That’s a 200 million bushel difference, with direct implications for exports that compete with our hard red wheat. The truth is likely somewhere in the middle.

The dollar dropped sharply in the final 15 minutes of trading in the wheat pits today after the Federal Reserve released the minutes of its latest policy meeting. The minutes showed that several voting members wanted to rewrite their guidelines for raising interest rates, confirming expectations of an early 2015 increase, but then those members backed away from doing pushing that agenda.

As such, currency traders are now anticipating a 3rd quarter rise in interest rates, rather than a 2nd quarter increase. That could allow for a greater correction in the dollar near-term. Weakness in the dollar tends to favor increased money flow into the broader commodity sector, while strength tends to pull money out.

The value of the dollar does tend to significantly impact export demand, or the lack thereof for wheat. As such, it will likely have significant implications for wheat prices longer-term, but short-term, the focus should remain on Friday’s USDA report, with special focus on the Australian crop.

Beef

Trade reports suggest that a major packer completed a deal to buy cattle at even basis to the October contract late Tuesday. Packers are doing a better job of contract cattle ahead of time to avoid fighting over a limited supply as their needs become more pressing. As such, total negotiated and formula cattle acquired last week were at a 14-week high. Even so, supplies will likely remain tight for quite some time, keeping this tension in the market.

This week’s anticipated kill total is slipping, with some projecting it now at 560 to 565K head. That would be the smallest weekly kill since March, outside of a holiday week. Slowing the chain speed should continue to support product prices, which are rapidly improving packer margins. Today’s estimated margins stood at a loss of $55.70 per head, but that’s about $35 to $40 per head better than we saw in late September.

Boxed beef movement rose to 171 loads Tuesday, up from 167 loads the previous day, but down from 251 loads the previous week. Choice cuts were up $2.52 to $243.88 per cwt, while Select cuts were up $2.88 to $232.26. This dropped the Choice/Select spread to $11.62 per cwt, down from $11.98 the previous day, but 4 cents better than the previous week.

Movement at mid-morning today was strong at 161 loads. Furthermore, the strength came as prices moved sharply higher as well. Choice cuts were up another $2.23, while Select cuts were up $3.07 per cwt.

The lead October live cattle contract pushed to a new high of $167.25 today, before pulling back in the final hour. Traders grew nervous of the high levels of prices ahead of this week’s cash trade. Most of the back months traded just below the previous day’s highs.

Strong demand for cash feeder cattle and underlying support beneath the live cattle market supported another day of gains in feeder cattle futures, although we saw a bit more caution ahead of Friday’s USDA crop report. The latest CME feeder cattle index came in at a record $237.57 per cwt, up $0.66 on the day. The index has posted a new record high in 18 of the past 21 trading days, with gains over that period totaling $12.16 per cwt.

Pork

Lean hog futures pushed higher today, as the ride back and forth from the top to the bottom and back again in the recent trading range continues. December lean hogs are trading primarily between $93 and $96 per cwt, with today’s trade testing the top of that range. Prices spiked through the top of that range Tuesday, only to see the market collapse back into the range by the end of the day.

Strength comes from robust packer margins, currently estimated at $29.40 per head. Yet, the supply of heavier hogs is large enough that packers do not need to chase the market higher to get them. Today’s cash market was mostly steady, although volume was backing off. Yet, product demand and supply appear to be well-balanced, with signs that the product market may be near its high. The latest CME 2-day index came in at $109.91 per cwt, up $0.37 on the day after the index dropped the previous two days.

Product movement rose to 321 loads Tuesday, up from 210 loads the previous day and up from 289 loads the previous year. The composite pork product price dropped $0.70 to $123.75 per cwt. Movement at midday today was strong, typical of a Wednesday, at 307 loads. However, the composite price backed down to $123.20 per cwt, down $0.55 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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