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Closing Comments

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Closing Comments

Corn

This was a weak of grain and oilseed prices being influenced by both the fundamentals and by monetary policy. The end result was a rally into midweek, followed by weakness into the weekend.

Fundamentally, this year’s harvest progress was slowed by rain, primarily in central and eastern portions of the Midwest. In fact, pesky rains continue to hamper harvest efforts in eastern areas of the belt, with this pattern expected to continued. However, harvest progress has accelerated in other parts of the Midwest, with large supplies now available to the market. Farmers began to take advantage of this week’s rally to two-month highs to unload a portion of that inventory, with basis starting to soften again.

The Federal Reserve Open Market Committee met Tuesday and Wednesday to discuss monetary policy. There’s been speculation on Wall Street throughout the past month that the Fed would recant on its plans to end quantitative easing at the end of October, and perhaps even move toward a fourth QE program as the U.S. and global economy slows. I expected the Fed to hold the line.

Late Wednesday, the Fed released a more hawkish statement. Yes, it held the line on ending its current QE program, but it also used language to suggest possible monetary tightening at some point next year. The dollar rallied and money that had been flowing into the broader commodity sector reversed to flow out. That trend accelerated to close out the week when Japan surprised the financial world with another stimulus program.

As a result, we ended the week with increased cash corn movement and money flowing out of the broader commodity sector, weighing on corn futures. December corn posted its highest close since August 15 today, although it failed to reach Thursday’s high of $3.81.

The contract settled above the 100-day moving average as soybeans pulled it higher in the final minutes, but remains below the double-top at $3.81. Fundamentally, corn deliveries are increasing, but the feed grain continues to get support from soybeans/soymeal. That support is expected to be short-term, with basis weakening, but for now we finished the week well.

Soybeans

Soybeans are currently the best hope for the bulls. They experienced similar factors as corn, but have stronger upfront fundamentals, led by soymeal. Near-term soymeal supplies remain tight, especially in eastern areas that tend to supply the export market, which is also where harvest progress and farmer selling has been the slowest.

As a result, the broader sell-off in the commodity sector weighed on the soybean complex to close out the week, but it wasn’t enough to hold soymeal under water. There’s still enough fundamental strength near-term to keep the front month strong. Traders expect that to change at some point, with supply eventually overwhelming demand. That might happen next week or next month, but they expect it to happen. As a result, the strength is in the lead contract.

That strength in soymeal limited losses for soybeans, while at times providing an injection of buying. In fact, soybeans were able to mount double-digit gains at times, even as corn remained in the red, with wheat posting double-digit losses. Once again, the greatest strength is in the front-month due to near-term fundamentals.

Longer-term, it comes down to South America. It’s crop has been delayed somewhat, which should extend the U.S. export season a few weeks longer than normal. U.S. export shipments are strong, but similar to last year at this point. In the end, it comes down to whether South America has a legitimate weather problem or not this year. Normal yields would be expected to overwhelm strong demand with even stronger supplies. A short crop on the other hand renew buying interest into the winter.

Rains have been increasing in previously dry areas of Brazil’s northern corn/soybean belt. There’s still time to get normal yields in Brazil, although the delays may reduce safrinha corn acreage. Roughly 25% of Mato Gross continues to see lingering dryness.

A number of longer-range models are encouraging, suggesting that an overall wet pattern will continue through November and fill in these areas, but some models suggest reason for concern. The bottom line is that a bias remains for a relatively normal growing season, but there is some risk as we turn the calendar. It’s the equivalent down there to the start of May in our growing season.

December soymeal rallied into the close, but dropped $5 to $6 off its high in the final minute in end-of-the-week and end-of-the-month profit taking. January soybeans followed meal higher, reaching $10.54 late in the session, before settling at $10.4925. That leaves the contract just below Thursday’s high of $10.5925. I still believe that this market is near its high, but soymeal basis continues to firm, making it too soon to confirm a high.

Wheat

Wheat prices were solidly under pressure to close out the week. They rallied on a weaker dollar and money flowing into the broader commodity sector earlier in the week, but then reversed that trend to close out the week. Yes, the northern 2/3rds of Russia winter wheat belt is vulnerable if it lacks snow cover this winter. That might be a story several months from now, but it’s difficult to sustain a rally at this time of year on that possibility.

Yes, the southern quarter of Australia’s wheat belt remains dry. Some showers may be on the way for the region, but it’s largely too late. However, the trade still does not see that as a big story in light of current global supplies.

Crop conditions in the U.S. Southern Plains had a disappointing start, but good rains are expected next week. The northwestern corner of the belt will likely remain dry, but stands are better in this region due to earlier rains. As such, wheat doesn’t have much of a story to sustain a rally at a time of year when rallies are difficult to sustain.

In the end, the past week’s rally priced U.S. wheat above the world market. The rally of the dollar to new four-year highs to close out the week was enough to send wheat prices to double-digit losses. Kansas City continues to lose to Chicago, which is a bearish sign for the wheat complex.

Beef

I’ve been concerned about the cattle futures complex for the past couple of weeks. The charts suggest that a top is in place. The fundamentals near-term remain supportive, but traders believe that the fundamentals will soon be changing , with demand softening relative to supply. Rapidly falling pork prices fit into that template.

Futures prices firmed mid-week on ideas that packers would pay steady to firmer prices in the cash market this week. However, that optimism evaporated when cash trade emerged in Kansas at $168 per cwt on a live basis, down $2 from the previous week’s trade. The same was then reported in Texas, with Nebraska cattle rumored to be trading at $266 per cwt on a dressed basis.

December live cattle dropped on the cash trade rumors, dropping to its lowest level since October 20, We’ve been here before, and then rallied to new highs. The same may occur this time as well. In the end, the cash fundamentals will drive us. However, cheaper pork prices are at some point expected to seduce the consumer away from the beef market.

The lead October live cattle futures contract went off the board at Noon CDT today trading at $169.75, but before doing so, it posted an all-time high for any contract at $171.975 per cwt. The question now, will the December match/exceed that level, or will that record high hold for the foreseeable futures? In the end, it will come down to the cash market and whether the consumer makes the shift, because the supply isn’t expected to be there.

Slaughter numbers are generally running 7 to 9% below year ago levels. Carcass weights are running generally 2 to 3% above year ago levels. The net impact has been for total beef production to run 5 to 7% below year ago levels. Consumer confidence continues to rise though, keeping domestic demand strong, with export demand also rising. The futures market behavior suggests that traders are skeptical that demand will hold, which is a legitimate concern when competing pork prices are falling hard. Yet, they are firmer today on expectations of firmer cash prices near-term.

Boxed beef movement dropped to 153 loads Thursday, down from 188 loads the previous day and down from 221 loads the previous year. Choice cuts were down $0.28 to $253.35 per cwt, while Select cuts were down $0.36 to $239.41. That firmed the Choice/Select spread to $13.94 per cwt, up from $13.86 the previous day, but down from $15.89 the previous week. Movement at mid-morning today was slow at 74 loads, with Choice cuts down another $1.58 and Select cuts down $0.24 per cwt.

Feeder cattle futures tried to go higher on lower corn prices this morning, but then turned weaker as fat cattle dropped. The latest CME cash index came in at $239.30 per cwt, up $0.47 on the day and the fourth increase in the past five trading sessions. The October record high was $244.04 per cwt.

Pork

It was a poor week for the pork complex. Cash prices trended lower throughout the week, although they stabilized some to end the week, being mostly steady, to occasionally 50 cents lower, on Friday. The CME cash index closed the week at $93.03 per cwt, down $1.58 on the day and down $9.37 on the week. The index has posted losses for the past three weeks, with losses over the past 15 trading days totaling $17.57 per cwt.

The index was trading at roughly a $20 premium to the December contract in early October, but it finished the month trading at close to a $5 premium. The cash market showed some signs of stabilizing at the end of the week, but the product market remains vulnerable, suggesting that additional weakness is possible in the weeks ahead, particularly after December lean hogs broke support at $88 on Thursday. We could see a “7” in front of the contract if the product market continues to trend lower.

Slaughter numbers have been trending higher in recent weeks, at a time when we were expected to see a hole in supplies due to the impact of the PED virus earlier in the year. Final numbers for this past week are not in yet, but slaughter for the previous week was up 5.0% from five weeks earlier. Carcass weights are running roughly 3 to 4% above the previous year, depending on the day. As such, supplies are exceeding demand, resulting in declining prices.

The best hope for strength in the product market near-term is the holiday ham market. However, we have not yet been able to pick up sustained demand in the ham market, with supplies in the freezer believed to be adequate to meet usage.

Product movement Thursday dropped to 372 loads, down from 462 loads the previous day, but up from 364 loads the previous week. The composite pork product price was down $1.51 to $97.84 per cwt on more than a $5 drop in loin and picnic prices, although hams were up $1.48. Movement at midday today was sluggish at 152 loads. The composite price was down $0.85 to $96.99 per cwt, an eight month low, on big drops in loin and ham prices.

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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