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Closing Comments

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Closing Comments

Corn

A member of the Federal Reserve governing body commented over the weekend that a slowing global economy may force the Fed to delay raising interest rates. That sent the dollar sharply lower overnight, although it has found good support at Friday’s low.

Corn prices were initially weaker in follow-through selling from Friday’s liquidation, but the weaker dollar encouraged bargain-hunting buying during European trade overnight. Additional buying came today after that overnight strength held in early trade. Strength eventually triggered additional short-covering, accelerating gains.

Today’s gains were impressive for corn after breaking below the 20-day moving average early in the session. Yet, December corn was unable to even test Friday’s high of $3.485, with additional resistance at $3.50 & $3.505. There is still a sense in the market that a number of fund managers are looking for a rally that they can sell and re-establish their short (sold) positions.

Friday’s CFTC report showed that the speculative hedge fund operators were liquidating their net long (bought) positions, suggesting that they may be ready to go short. Storage problems are expected to start forcing more corn on the market in the final third of October and into November as harvest progress gains momentum.

Yields have been much more variable over the western third of the Midwest, where dry weather has allowed harvest progress. The weather pattern is expected to open dramatically later this week, with fairly dry conditions for much of the rest of the month. We may see some lingering light showers delay the drying until late week in eastern portions of the Midwest.

Soybeans

Soymeal demand is strong amid Argentina’s political and economic problems. That provides incentive for processors to push soybeans through the plant, but harvest delays have slowed the flow thus far for many of these processors. As a result, strong product prices provided support today, but that strength is expected to weaken as harvest picks up momentum once again after the next few days.

Today’s rally in the soybean market shaped up very similar to that seen in the corn pit. The lead November soybean contract also failed to test Friday’s high of $9.5125, although it did come within a quarter-cent of the high. The contract is also bumping up against the top of the steep descending price channel that has held prices since late July.

Breaking through the top of that channel could encourage additional short-covering, but many speculative traders remain in a sell-the-rally mode. Fundamentally, it is difficult to support a sustained rally without a significant weather problem in South America. Yes, demand is likely larger than currently projected by USDA, but that still doesn’t remove this year’s massive surplus.

A good growing season in South America could simply add to that surplus. The northern half of Brazil’s corn/soybean belt is hot and dry, where it is the equivalent of mid-April in our growing season, but good rains are still expected to reach the region in the last half of next week.

Wheat

U.S. wheat is not competitive on the global market. Good rains are expected over dry areas of the Former Soviet Union, with good rains falling in previously dry areas of the Southern Plains over the past 48 hours. Eastern Australia saw good showers in recent days, while the southern quarter of Australia’s belt remains dry.

The bottom line is that it’s difficult to sustain a rally in wheat this time of year without a strong fundamental story. I do believe that the food grain is trying to carve out a longer-term bottom. It may be able to hold recent lows with traders unwinding corn/wheat spreads. However, the upside would appear to be limited near-term by weak corn and strong dollar fundamentals, today’s action aside.

Speculative hedge funds hold large short positions in Chicago wheat, yet gains there were rather modest relative to corn and soybeans. Sustain a rally in wheat would likely necessitate Kansas City leading the way higher. Thus far, we’re not seeing signs that Kansas City is willing to do that.

Beef

Cash cattle traded at mostly $162 to $165 per cwt on a live basis last week, up from mostly $162 the previous week. That stimulated follow-through buying in live cattle futures today, with the lead contracts trading at $167 and higher. Prices are still below the recent high of $169.60 set by the December contract last week, but it does put up a warning sign for market bears thinking the high may be behind us.

Last week’s higher cash prices pushed packer margins a bit deeper into the red to start the week. Estimated margins are near $52 losses per head. Product prices are still trending higher, but at a slower pace than seen initially.

Boxed beef movement dropped to 890 loads last week, down from a 2014 high of 1,076 loads the previous week and an eight-week low. Choice cuts finished the week at $247.67 per cwt, up $9.35 on the week, while Select cuts finished the week at $234.74, up $8.38 per cwt. This strengthened the Choice/Select spread to $12.93 per cwt, up $0.97 on the week. Movement at mid-morning today was strong for a Monday at 100 loads, with Choice cuts up $0.50 per cwt, while Select cuts were up $0.89.

Feeder cattle have been the leader lately, with open bunk space and cheap corn stirring optimism at the sale barn. However, higher corn prices moderated bullish enthusiasm for much of today’s trading session. The latest CME feeder cattle index came in at a record $239.35 per cwt, up $0.63 on the day. It was the 21st day of the past 24 trading days with a record cash index, with gains over that 24-day period totaling $13.94 per cwt.

Last week’s slaughter numbers came in at 562K, which was the smallest non-holiday total since March. That should support boxed beef prices. Cattle supplies are expect to be tight through the fourth quarter, as evidenced by the aggressiveness of packers to lock in supplies with basis contracts through February, but especially into December. The primary question will likely come down to the consumer’s willingness to pay. The consumer will be keeping a close eye on Wall Street for his/her confidence.

Pork

Today’s cash market was mostly steady at Midwest terminals. The cash market appears to have found an area of value where supply and demand are in balance. A weaker dollar was supportive for futures trade today, but prices overall remain range-bound, with the December contract largely between $93 and $96 per cwt. The market tried and failed twice last week to push above that range.

The latest CME 2-day lean hog index came in at $110.36 per cwt, down $0.24 on the day. The index has largely been bouncing around both sides of unchanged over the past week to 10 days. Packer margins remains strong at an estimated $27.60 per head, although that is off of last Friday’s high of $31.30.

Weakening margins are largely due to signs that the product market is putting in a short-term high. Product movement rose to 1,500 loads last week, up from 1,448 loads the previous week. However, it took weaker prices to boost that demand. The composite pork product price dropped to $122.63 per cwt, down from the week’s high of $124.45 and down $1.12 on the week. Movement at midday today was again slow, with the composite price down another $0.56 to $122.07 per cwt.

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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