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Closing Comments

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Closing Comments

Corn

The primary focus to close out the week was USDA’s October crop report. The agency cut harvested corn acreage to 83.1 million acres, down 0.7 million from the previous month. It pegged the crop at 14.475 billion bushels on a yield of 174.2 bushels per acre, versus 14.395 billion on a yield of 171.7 bushels per acre the previous month, but down from trade expectations of a 14.506 billion-bushel crop on a yield of 174.7 bushels per acre.

I posted expectations of a 14.925 billion-bushel crop on a yield of 178.1 bushels ahead of the report. I didn’t expect USDA to go that far in this report, but believe that it will eventually do so. The trade obviously believes that the crop is much bigger as well, based on its post-report reaction. The first response came from the computers, which bought the better-than-expected numbers. However, human traders then quickly sold the initial strength, pushing prices to double-digit losses on the day. Always beware when a “friendly” report fails to produce a “friendly” response in the market.

USDA’s September 30 quarterly stocks report suggested that the previous quarter’s feed usage was about 50 million bushels less than USDA’s data would suggest. That was expected to carry over into the first quarter of the new marketing year as well as weaker demand. Yet, USDA increased its feed usage estimate to 5.375 billion bushels, which will be questioned by the trade.

The bottom line is that USDA pegged 2014-15 corn stocks at 2.081 billion bushels, up from 2.002 billion the previous month, but below trade expectations of 2.130 billion. This number is expected to rise in future reports, with the main pressure of harvest and storage problems still in front of us. December corn’s decline stopped at the 20-day moving average of $3.32. It has retraced 50% of the past week’s bounce. A break below the indicator would likely find more sell-stops, setting up a probable test of support at contract lows.

Soybeans

USDA’s October report lowered harvested soybean acreage by 0.7 million to 83.4 million, similar to the reduction in corn. It then pegged the crop at 3.927 billion bushels on a yield of 47.1 bushels per acre. That was up from its September estimate of 3.913 billion on a yield of 46.6 bushels per acre. However, it was below the trade’s expectation of a 3.976 billion-bushel crop on a yield of 47.1 bushels per acre. Basically, the trade got the yield right, but not the acreage reduction.

I’m still looking for USDA to eventually push the yield to 48.8 bushels per acre, and perhaps higher, based on the yield data that we are getting in. The trade appears to have similar expectations, with prices breaking hard after initially finding support from computer buying.

Keep in mind that USDA pegged this year’s beginning stocks at a record tight 92 million bushels on September 30, which was 34 million below trade expectations. Yet, USDA’s 2014-15 ending stocks ended up at 450 million bushels, down just 22 million from the trade’s expectation and still a very large surplus. It made no changes to demand, while bumping the yield.

November soybeans ended the day down $0.195 on the day to close the week. That’s up $0.1025 from the previous week, but the contract is now poised to test its contract lows. Wet weather will be a problem through the first part of next week, but the pattern is expected to improve beyond that. Furthermore, the outlook for dry areas of Brazil is shifting wetter for later this month, which would be in plenty of time to still raise a big crop south of the equator, further aggravating surpluses. It’s bearish when a “friendly” report is sold.

Wheat

USDA’s biggest surprises may have been in the wheat market, which did manage modest gains, although double-digits off the session highs. USDA incorporated changes from its small grains summary report, boosting production by 5 million with larger hard red and smaller soft red crops. The agency’s September 30 stocks report suggested smaller feed usage, but the agency increased feed usage by 25 million bushels. Furthermore, it raised its export target by 25 million after cutting it by the same last month.

In the end, USDA cut ending stocks to 654 million bushels, down from 698 million the previous month and down from trade expectations of 704 million bushels. Furthermore, world wheat stocks were pegged at 192.59 million metric tons, down from 196.38 mmt the previous month and below trade expectations of 196.38 mmt. We’re still not running out of wheat, but wheat fundamentals aren’t as bearish as previously believed.

Wheat saw wild price swings after the report, initially surging higher, but then coming under pressure from broader weakness in corn, soybeans and the rest of the commodity sector. In the end, little changed. Wheat would still like to confirm that a bottom is behind us, but that will likely be difficult to do as long as the dollar is strong and the funds are selling the broader commodity sector. Wheat should benefit from spread unwinding with corn and soybeans, but in the end it still doesn’t have a story sufficient to swim upstream to sustain a rally, or maybe even hold its recent lows.

Beef

This week’s cash cattle trade has been impressive. Volume remains modest, as anticipated following last week’s strong movement, but prices performed much better than anticipated early in the week. Cash trade has varied widely from $256 to $165 per cwt range, with much of the trade focused at the higher end, up $2 from the previous week on a live basis. Cattle in the northern belt traded as high as $260 per cwt on a dressed basis.

Meanwhile, packers continue to write basis contracts up to 120 days out in an attempt to control a larger portion of the supply. Packers understand that there simply won’t be enough cattle this winter if demand remains at current levels. Packers are even bidding for lighter-weight cattle that they put back into the feedlot to add more weight. Carcass weights are up 26 pounds on the year and 30 pounds over the five-year average as the industry seeks ways to create supply amid a limited number of animals.

The strong cash market provided support for the lead October contract, but the remainder of the contracts gave way to follow-through selling following the mid-week bearish reversal on the charts. Feeder cattle futures contracts traded the $3 daily limit lower in profit taking, despite a strong cash market, although the nearby contracts came well-off their lows as the live cattle market did the same.

The profit taking could be expected, based on the fear/greed cycle we witness through much of the summer. However, the market continues to be supported by the fact that supplies are tight and will likely remain that way for quite some time. The primary remaining question focuses on the health of the U.S. and global economy and the resulting willingness of the consumer to pay these high prices. That in the end will determine the level at which prices will finally ration demand to bring it into balance with the smaller supply.

Packer margins are estimated at losses of $40 per head, which beats losses of $69 per head a week ago. Strong demand for product combined with the packer’s ability to control more of the cattle supply is helping to keep losses in check.

Product movement Thursday reached 197 loads, down from 228 loads the previous day and down from 235 loads the previous week. Choice cuts were up $0.51 to $247.06 per cwt, while Select cuts were up $0.37 to $234.85. This raised the Choice/Select spread to $12.21 per cwt, up from $12.07 the previous day and up from $11.12 the previous week. Movement at mid-morning today was routine at 90 loads, with Choice cuts up another $0.64 and Select cuts up $0.27 per cwt.

Fund managers were heavy sellers of the feeder cattle futures market, despite strength in the cash market. The latest CME feeder cattle index was up $0.71 on the day to a record $238.72 per cwt. It was the 20th day of posting a record cash index out of the past 23 trading days, with gains over that period totaling $13.31 per cwt.

Pork

Today’s cash market was mostly steady once again, with the product market continuing to behave like it was putting in a near-term top. The latest CME 2-day lean hog index came in at $110.60 per cwt, up $0.14 on the day. Packer margins remained large at $31.30 per cwt, up from $27.60 the previous day and up from $25.50 the previous week.

Product movement dropped to 296 loads on Thursday, down from 474 loads the previous day, but up from 286 loads the previous week. The composite product price dropped another $0.08 to $123.45, which has been down for three days in a row. Movement at midday today was routine at 116 loads, with the composite price up 3 cents from the previous day.

Lean hog futures came under broad-based selling today after the market failed for the second time during the week at an attempt to push above its recent trading range. The market keeps attempting to push higher, but it simply hasn’t been able to sustain a move, which has me worried about a turn lower.

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

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