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Closing Comments



Closing Comments


The outside markets provided little clear direction for the commodity sector to close out the week. The dollar surged during the week, posting a new 4-1/2-year high early on Friday. However, Wall Street couldn’t agree on how to interpret Friday’s jobs report that basically showed the economy steadily improving, although at a slower-than-desired pace. As such, the dollar pulled back in profit taking, while the equity markets were mixed.

We generally saw positive money flow into the commodity sector to close out the week, but corn didn’t participate. That’s largely because the connection between grain price movement and the broader commodity sector broke during the week, with grain traders focusing a bit more on supply and demand fundamentals ahead of USDA’s crop report on Monday.

December corn continues to consolidate above chart support at $3.60. I expected that to give way ahead of Monday’s USDA report, but it’s running out of time to do so. The flow of corn is improving as on-farm storage fills up, especially in eastern areas where yields have been the largest.

Monday’s USDA crop report is expected to show a bushel increase in yield, pushing ending stocks up another 50 million to 2.135 billion bushels. I’m looking for stocks to come in another 100 million bushels above that. Either way, there’s nothing bullish about stocks above 2 billion bushels. As such, the corn market has much weaker fundamentals near-term than soybeans.

December corn is trading in a wedge formation that tends to precede a significant move in one direction or the other. The fundamentals would argue to the downside, but market bulls would call the formation a bull flag. Perhaps USDA’s crop report will provide direction. I remain bearish as we head into January, but soybeans will likely continue to provide direction and they’ll get their direction increasingly from South American weather.


The soybean complex started the week on the defense, rallied mid-week on strong soymeal demand amid tight supplies, but the finished the week on a mixed note. We finally saw some rail offers for soymeal emerge late in the week, which added pressure to meal futures. However, the truck market was mixed. A $10 rise on Thursday in Kansas City was followed by a $7 decline on Friday. Iowa truck offers were $2 to $3 higher, while eastern Midwest locations were up to $10 higher.

We’ve seen record high crush margins strengthen demand for soybeans. Those margins reached as high as $7 per bushel at some locations, but have generally been $3 to $4. As a result, soybeans were able to trade higher for most of the day on Friday, even as the meal futures market showed signs of weakness.

The short-term fundamentals for soybeans remain strong, largely due to upfront tightness as the industry seeks to bring supply and demand into balance. Processors received huge orders for soymeal after Argentina defaulted on its debt at the end of July. Those orders trailed off dramatically over the past month, with some of them now being cancelled due to our high prices. However, enough of them remain to keep crush margins strong.

As such, processors must battle exporters for those supplies being sold by farmers amid record shipments to China. Chinese end users like our cheap new-crop soybeans amid their own high-priced domestic supplies. Our cheap soybeans keep their crush margins profitable. The adage of “a bird in the hand is better than two in the bush” applies here. They can get our soybeans cheap now, but what if a weather problem emerges in South America to push prices higher a month from now?

Eventually, supply is expected to overwhelm demand as this year’s big crop comes forward. That will be especially true if the rains continue to fall in Argentina and Brazil, as they are now. The trade expects Monday’s USDA crop report to show a half-bushel increase in the yield to 47.6 bushels per acre, with an increase in demand offsetting the increase to leave stocks at 442 million bushels. That’s a lot of soybeans.

USDA typically then makes no more adjustments to U.S. production estimates until its final estimates come out in January. Therefore, we should see a shift in focus to South American growing conditions beyond Monday’s report, along with weekly export sales and shipments and monthly crush data. As such, daily weather forecast updates for South America will garner increasing attention, setting the tone. Continued favorable weather would likely set us up for a test of support at $8 early next year, while a return to hot and dry would likely help us hold above the early harvest lows.

January soybeans continue to consolidate above support in the $9.95 to $10 range. I expected that support to give way ahead of Monday morning’s 11 a.m. crop report, but time is running out for that to happen. However, I still expect the report to reinforce this year’s overall bearish fundamentals. I have a much stronger demand estimate, even with my larger production expectations, that leaves ending stocks near 400 million bushels, but that’s still a lot of soybeans if South America has normal yields.

Technically, this market can continue to chop around here while we pull more soybeans into the system. Watch basis levels for indications of market direction. If we start seeing soymeal basis collapse, we know that we’re finally getting enough meal produced to meet demand. If soybean basis breaks, then it’s likely going to be hard to hold this market up, unless adverse weather develops in South America. On the other hand, strengthening basis in either market would suggest we still have more work to do near-term.


Iraq bought 7.3 million bushels of wheat early Friday morning, sourcing it from Australia and Canada. The business was in direct competition with U.S. hard red winter wheat, showing that our wheat remains over-priced relative to competing supplies on the global market. Our strong dollar adds to our problems competing with other sources.

The Iraqi purchase seemed to keep traders focused on wheat’s bearish fundamentals heading into the weekend. Traders expect USDA to raise ending stocks estimates to 660 million bushels Monday morning, up from 654 million the previous month. That’s close to my estimate of 659 million bushels.

The coming week’s cold wave will push northern winter wheat into dormancy. That traditionally marks the period when it becomes difficult to sustain rallies in the wheat market based on threats to the crop. Kansas City is leading the way lower, with the lead December contract now trading at more than one-month lows, with the door open for a retest of its fall low of $5.50 if it fails to quickly re-establish itself above $5.70 to start the week ahead.


Live cattle futures had a relatively quiet week, with the lead December contract hovering just above $165, while waiting for greater clarity from the cash market. Packers have done a better job in recent weeks of managing the supply; effectively locking in supplies that they needed primarily with advanced contracts, keeping them from having to be as aggressive on the negotiated cash market. In some cases they bought cattle that they put back on feed to add to carcass weights as we move deeper into the winter season, adding to supply at a time that is expected to see very tight slaughter numbers.

Trade reports indicate that a packer bought a couple thousand head of cattle in Nebraska at $168 per cwt on a live basis Thursday, before bids dropped back to $165. However, movement then re-emerged on Friday in Kansas at mostly $167, down $1 from the previous week. Reaction in the futures market was somewhat muted, as December was already trading at a discount to the cash market. However, we did see the December contract back above the 20-day moving average, and above the recent descending price channel, to reflect the current cash market.

The bottom line is that packers are better managing the supply, even as demand shows signs of weakening amid cheap pork prices. Boxed beef prices softened as a result, although we saw seasonal strength in the rib primal sector. Lower prices helped boxed beef movement bounce back a bit, but the weaker demand is helping to balance supply and demand in the cash market.

This past week’s slaughter is expected to come in near 560,000 head, which would be down about 17,000 over the past couple of weeks. Early speculation puts the coming week’s slaughter at 550,000 head as packers slow chain speed. Packer margins are estimated at losses of nearly $110 per head.

Feeder cattle futures found strength from the weaker corn prices, along with renewed strength in the cash market. The latest cash index came in at $240.36 per cwt, up $0.37 on the day, but also the highest since October 21 and down just $3.68 per cwt from last month’s record high. The cash market is currently trading at a several dollar premium to the lead November futures contract.

Product movement Thursday dropped to 183 loads, down from 205 loads the previous day, but up from 153 loads the previous week. Choice cuts were down $0.72 to $250.52 per cwt, while Select cuts were down $0.87 to $237.25 per cwt. That firmed the Choice/Select spread to $13.27 per cwt, up from $13.12 the previous day, but still down from $13.94 the previous week. Movement at mid-morning today was slow at 82 loads, with Choice cuts down $1.36, while Select cuts were up $1.19 per cwt.


This was a week for the cash hog market to start to find firm footing. We haven’t confirmed a bottom in the cash market yet, but the closely watched Iowa/Southern Minnesota market was up to $1 higher. The latest CME 2-day lean hog cash index came in at $88.25 to close out the week, down $0.47 on the day and down $4.78 on the week. The index has posted losses each trading day for the past four weeks, with losses over the period totaling $22.35 per cwt.

The drop in the cash market came as product prices tumbled. The trade expected slaughter-ready animals to drop in numbers this fall, due to PED virus losses earlier this year. Instead, slaughter numbers trended higher through the period, with carcass weights rising seasonally as well. In fact, slaughter numbers for the week ending November 1 were up nearly 160,000 head or 7.5% over the previous six weeks. Actual pork production rose 24.4 million pounds over the past month, according the latest data.

That increase in supply pressured product prices, which went into a free-fall. In fact, the composite pork product price fell more than $26 per cwt in a three-week period in October. Those lower prices though boosted demand, particularly in light of strong beef prices. Both domestic and export demand were stimulated, with product movement rising to more than eight month highs.

It’s probably too soon to say that the bottom is in the pork market, but futures traders celebrated improving fundamentals by pushing December lean hogs back above $88 on Friday.

Product movement dropped to 330 loads on Thursday, down from an impressive 593 loads on Wednesday and down from 372 loads the previous week. . The composite product price dropped $0.59 to $95.30 per cwt, its lowest level since February 14. Movement at midday today was routine at 179 loads. However, the composite price was down another $1.44 to $93.86 per cwt, down on a big drop in ham values as we head into a holiday period known for its demand for ham.

December lean hogs jumped back into its recent trading range of $88 to $90 per cwt to close out the week. This market remains vulnerable to weaker prices in the weeks ahead if the product market fails to find firm footing. Demand is improving, but the supply is still overwhelming it.

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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