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Closing Comments

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Closing Comments

Wider markets saw mixed trade today, as the dollar did its best to match highs set in March, energies were pressured, grains traded higher, and meats sold off. If the dollar does not see follow through buying over the coming days and weeks, than we could be witnessing the formation of a good intermediate term high. The KC / Chicago wheat spread finally appears to be turning up, a good indication that we could see wheat start to work its way higher from its currently oversold condition.

Goldman Sachs, the creator of the GSCI commodity, announced today that this November is the 5th worst November for commodities since 1970; additionally, of the 24 commodities included in the index, 21 will produce a negative return, more than any other November on record. Originally created as a hedge against the S&P 500 and bonds, the index has quickly become a loss leader for fund managers over the past 2 years.

Corn

Corn traded higher today, putting in a key reversal in the March contract, despite some of the worst export shipments of this year.

Corn was able to recover Friday’s losses and then some in the March contract, where the market opened lower, traded lower and higher, only to close even with the previous day’s high (this is the formula for a key reversal). Though many negative fundamentals still loom, the market continues to carve out a value area between 3.65 – 3.77 March. Any departure from this range has been bought or sold in the wake on the November USDA crop report.

Weekly export shipments of corn set back considerably today to just a little under 12 million bushels, the second smallest number since the marketing year began on September 3rd. This number comes on the heels of last week’s far better than expected sales number of nearly 2.6 mmt, and leaves trade with mixed signals as to the attractiveness of US corn on the global market. To date, the US is running just over 26% off of last year’s shipping pace, despite the speed and ease of harvest.

The EPA released its updated RFS mandate today, reinforcing an increase in the mandate through 2016 for all renewable fuels covered by the mandate. This increase was not as much as originally proposed this summer, but higher than original EPA proposals. Biodiesel will see an increase of 100 million gallons of production in 2015 and 170 million gallons in 2016; corn based ethanol will see an increase in the mandate from 13.61 bg in 2014, to 14.05 bg in 2015, to 14.5 bg in 2016. While these numbers are supportive, they reflect a floor that we are currently over since the 2016 number implies a minimum of 5.27 billion bushels of corn to satisfy the mandate; we are slated to grind 5.25 billion for the 2015 crop, so growth could occur, but it will be above and beyond what the mandate requires.

Managed money continues to pile on to corn, as another 15k contracts of corn were sold through last Wednesday, bringing their overall short position to just a shade under 500 million bushels of corn.

Soybeans

Soybeans traded higher today, buoyed by continued strong export shipments, but still face an uphill battle to break the upper end of their trading range at 8.85.

News continues to develop out of Argentina, as regards the changes to the export tax situation in Macri’s new government. Previous releases have indicated that corn and wheat will both see a cessation in their export tax upon the President’s taking of office, while current information indicates that soybeans will only see a 5% reduction to 30% immediately. This development in conjunction with the cancellation of any “tax holiday” for grain sales, should stem producer selling in the short term. Long term, trade still expects more grain to come to market, but for now the inevitable flood of exportable Argentine beans seems to have been averted.

Weekly export shipments of soybeans continued to exceed expectations with another 67 million bushels exported this week. We are still lagging behind last year’s scorching pace by just over 7%, but at a strong enough clip to continue to show that Chinese demand is alive and well.

Southern Brazil has a wet forecast for the coming week, which could worsen areas already flooded by earlier precipitation, and also increase the instance of rust which have far exceeded last year’s reported cases. Central Brazil will see more active planting pace with a drier forecast, but many areas of Northern Brazil will continue to be impacted from hot and dry conditions affecting early plant development and emergence.

The positivity in the bean market over the past week has been driven largely by bean oil, as palm oil exports out of Malaysia continue to decrease led by droughty conditions. Bean meal has not participated in the rally at all. If beans are beginning a sustainable rally above 8.85, than we need to see bean meal begin to participate in this turn around.

Managed money did not lighten their short position in soybeans, adding just over 2k contracts to soybeans and another 9,500 contracts to soymeal; however, they did increase their oil position from very near net neutral last week to long just over 21k contracts. Overall, they are net short the products by a small margin and short over 250 million bushels of beans.

Wheat

The KC Wheat / Chicago spread continued its radical correction today, up nearly .13 in the December contract, with KC positive and Chicago continuing to slip.

Wheat still face a slew of bearish fundamentals: Will Argentine wheat start to pour on to the export market when Macri takes office on the 10th? Will tensions in Russia and Turkey affect the worldwide export market? How much feed wheat is available out of Europe and the Black Sea Region? These factors will all continue to pressure the market short-term, but a correction of the severely oversold KC / Chicago wheat spread could indicate a change in the incredibly bearish market psychology of the wheat complex.

Today’s boost to Kansas City came largely out of nominal weather fears that areas in the Southern Wheat belt have missed storms over the past week. Pressure in the Chicago complex is more easily explained by the massive amount of deliveries, just over 2300 contracts, made on first notice day.

Funds remain very short the wheat complex, adding another 6k of shorts to the Chicago complex this week, while staying steady in KC and Minneapolis.

Livestock

Cattle and hogs were under pressure today, with feedlot weather conditions and disparity from cash to futures values continuing to weigh on the markets.

Feedlots in the North will still see poor weather for a few more days, with Nebraska, South Dakota, and Iowa covered in snow. However, the next few weeks should see moderating conditions in Central to Southern plains, but it will take a while to improve conditions on feedlots that have experienced heavy rains, snow, and ice over the past two weeks. These conditions should lead to lighter weights as well as enhanced death loss as we close out November.

The market will need to see higher beef prices just ahead to confirm a stronger demand tone into December. Packers are building up beef orders into Mid-December which will need to be filled, and this could in turn support the cash market moving forward.

Hogs took a breather today after the last 10 days of positive action, largely as a result of the lean index flattening out more than futures and not yet participating in the recovery. The deferred months continue to differentiate themselves from the front month, as they have softened over the last week. Cutout values this morning were firm, with carcass cutout up +1.29 to 73.69.

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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