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Closing Comments

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Closing Comments

Corn

USDA’s daily export reporting system reported additional corn demand today. The release indicated that exporters sold 4 million bushels of current-year corn to “unknown destinations.” The sale is likely to Mexico, Japan or South Korea, but we probably won’t know until it is shipped.

This week’s rise in money flow amid slow new-crop deliveries supported a move of December corn above chart resistance at $3.60 per bushel. However, the overnight move above $3.60 could not be sustained in today’s trade. The market posted a bearish reversal ahead of what is expected to be an active harvest weekend in which we may see additional cash sales.

It’s rare to see a grain market put in a bottom in a big crop year until the farmer turns bearish and begins to dump. That hasn’t happened yet. Fundamentally, it’s difficult to justify prices at current levels, either for spot futures or December 2015 prices, without a significant weather story unfolding in a major production area, which is not yet the case. Furthermore, it’s likely going to be difficult to sustain fund trader support at current price levels without help from the Federal Reserve.

As such, corn prices are vulnerable to selling pressure in the weeks ahead. I still believe that we are vulnerable to new lows as the size of this year’s crop becomes more apparent. Demand is strong, but in line with what we’ve been projecting. Supply though is even larger.

Soybeans

November soybeans surged higher to push above the active $10 strike price ahead of today’s option expiration overnight, supported by positive speculative money flow, strong demand and dryness in Brazil. However, the rains have started in dry areas of Brazil, harvest is gaining momentum and money flow has reversed to flow out of the broader commodity sector.

Option open interest was big at the $10 strike price, but the market was unable to hold the strike price into option expiration today. That’s a bearish sign as we head into an active harvest weekend, when the pace of farm deliveries is expected to pick up.

It’s difficult to justify holding prices at these levels if the improved weather pattern for Brazil holds. In fact, it’s difficult to conceive that the old lows will hold if that is the case. Today’s reversal should see follow-through selling next week, unless we see a dramatic shift in Fed policy in its meeting next week.

Wheat

Wheat futures in Chicago rallied to chart resistance near $5.40 early in today’s session, but profit taking and a general flow of money out of the broader commodity sector sent prices reversing lower. The rally was less enthusiastic in the hard red wheat markets, which need to lead if we’re going to sustain a rally.

Fundamentally, the bulls point toward dryness followed by cold in Russia, along with drought cutting yields in the southern quarter of Australia and planting delays in the Midwest. However, weather stories are difficult to sustain this time of year and Australia’s problems have not yet translated into strong export demand to threaten U.S. supplies.

Wheat trades headlines more than any other commodity. The above factors could generate enough headlines to sustain a rally beyond current levels, but I would be surprised. New lows can’t be ruled out, but I think wheat has enough support to hold above its fall lows. The market will likely set up a broad sideways trading pattern headed into the winter.

Beef

This week’s cattle market was fascinating to watch unfold. Futures posted a bearish double-top as traders worried about the ability of the market to hold current values, with pork prices trending rapidly lower. That’s a legitimate concern, which the market has battled previously over the past six months. Yet, demand for product continues to be far more resilient than ever expected by most anyone in the trade.

Yet, selling remained limited as word reached the trade that the packers were calling feeders early in the week, offering up to $2 above tops for cattle, trying to secure their needs. The move suggested that packers worried that there wouldn’t be enough cattle to meet their needs if they failed to secure them early. Yet, the bearish double-top at $169.75 held.

Cash trade surprised the industry late Thursday, with active movement at $170 per cwt on a live basis across the Plains feedlot region. Movement in the northern belt could also be seen at $265 per cwt on a dressed basis. Both were all-time record highs for the cash market.

Futures prices pushed higher Friday morning on the strength of the cash market, but selling returned when the December live cattle contract was unable to take out the bearish double-top. It is a futures market, betting that cheap pork prices will eventually erode beef demand at current prices, requiring lower beef prices as well.

The Choice/Select spread is trading near one-year highs as rib cuts lead the Choice seasonally higher. Will cheap pork prices undercut this seasonal move? It hasn’t yet, but logic would suggest that it will. This will be one of the keys moving forward.

New trading hours begin next week. Livestock trading will begin at 9:05 a.m. on Monday mornings as it has in the past. The trading session will remain open until 4 p.m. Monday through Thursday. Trading hours will begin at 8:00 a.m. Tuesday through Friday, but Friday trading hours will conclude at 1:55 p.m. so that traders can start their weekend.

USDA’s cattle-on-feed report showed that October 1 on-feed numbers were at 10.1110 million head or 99% of year ago levels. The trade expected 99.7% of the previous year. September placements came in at 1.988 million head or 101% of the previous year. The trade was looking for 101.9%. Marketings matched expectations at 99% of the previous year’s level. In other words, it was a non-event.

Pork

Pork fundamentals were bearish throughout much of the past week. Cash prices were sliding throughout the period, while product prices were in a virtual free-fall. The latest CME cash index came in at $102.40. down $1.77 on the day and down $6.70 per cwt over the past week. The cash index has been down each trading day of the past two weeks, with losses over the period totaling $8.20 per cwt and gaining momentum. The cash market to end the week was down another $0.50 to $1.00 per cwt, which was an improvement from earlier in the week.

December lean hog futures dropped to chart support at $88 on Tuesday and consolidated above that level through the week. The contract was nearly $20 below the cash index at the time, but that gap has closed closer to $13 by the end of the week. That gap provides support near-term, but this market remains vulnerable to a deeper drop as we move into early winter if the industry is able to manage the PED virus as it anticipates this year.

Product movement Thursday dropped to 364 loads, down from 435 loads the previous day, but up from 279 loads the previous week. Cheaper prices are stimulating increased domestic demand, although export demand appears to still be suffering. We’ll have to see next Thursday’s USDA data dump to assess that.

The composite pork product price was down another $0.62 to $100.54 per cwt Thursday. It was the 13th straight trading day of a lower composite price, with losses over that period totaling $23.91 per cwt. Movement at midday today was routine at 173 loads. The composite pork product price was down another $2.34 per cwt at $98.20; the first sub-$100 price since February 24 of this year.

I still believe that December lean hogs are vulnerable to breaking below support at $88. However, today’s reversal must be respected. The contract probed briefly below $88 to a new low for the move, before reversing higher to post a new high for the week and to settle near that high. That could trigger some follow-through buying to start the week, but ultimately we’ll need to see if the product market can find a bottom soon.

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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