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Closing Comments

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Closing Comments

Corn

USDA surprised the bulk of the trade, including myself, by cutting its corn yield in its November crop report. The agency reduced ear populations overall, while cutting yields by 2 and 5 bushels respectively in Iowa and Minnesota, with additional losses in Ohio, Michigan, Kansas and Oklahoma. In the end, it pegged the corn crop at  173.4 bushels per acre, down from 174.2 bushels the previous month and down from my expectations of 176 in this report.

Looking back at previous USDA tendencies, the agency has cut its corn yield in the November report nine times since 1993. It raised the yield again in January the last four times it did so, which was for the crops produced in 2008, 2009, 2010 and 2011. That doesn’t mean it will raise it this time in the January report, but I find that tendency interesting. I was probably most surprised by USDA leaving Illinois unchanged at 200 bushels per acre, when our client data would suggest something much higher.

The agency raised its ethanol usage estimate by 50 million to 5.150 billion bushels, but left feed usage and exports unchanged. This resulted in ending stocks coming in at 2.008 billion bushels, down from 2.081 billion the previous month, but still a very comfortable 54-day supply, with global corn stocks rising slightly.

Exporters shipped just 20.4 million bushels of corn in the week ending November 6, up from 16.8 million the previous month, but down from the five-year average for the week of 25 million bushels. Marketing year shipments total 290 million bushels, up 66 million or 30% from the previous year. Yet, shipments to date fall short of the seasonal pace needed to reach USDA’s target by 19 million bushels, versus being short by 8 million the previous week.

USDA’s daily export reporting system today indicated more business with Mexico over the weekend. Mexico reportedly purchased another 5.1 million bushels of current-year U.S. corn. The business is relatively routine and not a market-mover.

Exporters shipped 2.4 million bushels of grain sorghum in the week ending November 6, down from 5.3 million the previous week and down from the five-year average for the week of 2.7 million bushels. Shipments to China accounted for virtually all of the shipped grain sorghum during the week.

Marketing year shipments total 63.6 million bushels, up 36 million bushels or 128% from the previous year, largely due to Chinese end user buying. As a result, USDA raised its export target another 10 million to 230 million bushels, up from 212 last year and up from 76 million the previous year. Shipments to date exceed the seasonal pace needed to hit USDA’s target by 16 million bushels, versus 18 million the previous week.

In the end, the report was “less bearish” than the trade expected, but there was nothing bullish about it. We still have more than 2 billion bushels of surplus corn projected to be in the bin when we start the 2015 harvest, with weather currently favorable for good yields in South America.

Even so, December corn surged to $3.7875 as computers bought the headline of a surprise drop in the corn yield, but dropped to $3.675 in the next minute as the computers recognized ending stocks above 2 billion bushels and rising global corn stocks. In the end, the contract settled just above the session low.

While still positive, I believe that it will be difficult for corn to sustain its current strength without help from the soybean market, and that market will increasingly get its direction from South America. We may not drop as low as I once expected, with the crop coming in less bearish that expected, but it’s still difficult to justify sustaining a rally much above current levels without a significant weather threat in South America in the weeks ahead, or the Midwest next summer.

Soybeans

USDA raised the size of the soybean crop by 0.4 bushels to 47.5 bushels per acre. That was just below the trade’s expectation of 47.6 bushels and down from my estimate of 48.0 bushels per acre. The agency increased pod counts, while partially offsetting that increase with a drop in pod weights. Soybean yields rose in Nebraska, the Dakotas, Iowa and much of the South, while dropping in Missouri, Wisconsin, Michigan and Tennessee. USDA pegged the crop at 3.958 billion bushels, keeping it below that psychological 4 billion bushel mark.

Exports were raised by 20 million and crush by 10 million bushels in USDA’s report, offsetting the increase in demand. That kept ending stocks at 450 million bushels, when many traders were looking for even bigger demand to cut stocks. USDA increased soymeal production as a result of the crush increase, while basically offsetting that with an increase in exports, keeping meal stocks the same.

My soybean demand estimate remains roughly 100 million bushels above USDA, but I also expect a modest rise in soybean production in January. However, USDA traditionally has been very slow to recognize soybean demand, so I wasn’t surprised by its modest increase in the November report. However, the trade was surprise, resulting prices dropping shortly after the data dump.

Exporters shipped 91.2 million bushels of soybeans in the week ending November 6, down from 102 million the previous week, but up from the five-year average for the week of 66.8 million bushels. Shipments to China accounted for 64.3 million bushels of soybeans in the latest week reported.

The trade typically ships 23% of final soybean shipments by this point in the marketing year, whereas last year it was 26%. However, exporters have already shipped 29% of USDA’s target this year. As such, shipments to date exceed the seasonal pace needed to hit USDA’s target by August 31 by 95 million bushels, up from 69 million the previous week.

December soymeal finished the day down $9.50 per ton and near its session low. The contract traded an outside day ( traded both above and below the previous session’s trading range ) and settled below the previous day. Follow—through selling tomorrow would leave the market vulnerable to additional weakness. Today’s cash meal market was mostly steady, although a couple of locations were firmer.

January soybeans followed the lead of the soymeal market. The contract fell short of the October high of $10.5925 before turning lower, leaving a bearish double-top formation on the charts. It held above the previous day’s low of $10.1925, which likely prevented more significant selling of corn and soybean contracts. The long-term fundamentals are bearish, but the near-term supplies are still tight. As such, we could still see this market supported near-term, but at some point I expected to see a quick and largely unanticipated collapse of futures if weather remains favorable in South America.

Wheat

USDA pegged current-year wheat ending stocks at 644 million bushels, down 10 million from the previous month and down more than 15 million from trade expectations. The primary reason was a surprise drop in wheat production of 9 million bushels after the agency made a surprise adjustment for the November report in both acreage and yield for the year. Hard red stocks jumped 20 million bushels, while hard red spring dropped 30 million, which supported Minneapolis futures. Otherwise, there were few changes of consequences for the wheat balance sheet in the November crop report.

Exporters shipped just 11.1 million bushels of wheat in the week ending November 6, up from a dismal 7.7 million the previous week, but below the five-year average for the week of 14.9 million bushels. The weekly total included 0.8 million bushels destined for Brazil.

Marketing year shipments total 414 million bushels, down 199 million or 32% from the previous week. Shipments to date fall short of the seasonal pace needed to reach USDA’s target by 39 million bushels, versus falling short by 37 million the previous week.

It’s unusual for USDA to adjust wheat production estimates in November. However, USDA did so, tweaking both acreage and yield. It cut hard red spring supplies by 30 million, while increasing hard red winter by 20 million. However, tighter supplies of hard red spring means that buyers should need more hard red winter. As such, both went up following recent sharp losses. There was nothing bullish in this report, but wheat was due for a bounce and USDA gave it an excuse to do so.

Beef

Once again we started the week firmer in the live cattle futures trading pit. Prices firmed late on Friday, breaking through the top of a bear channel, when the drop in cash prices was less than many expected. Cash cattle were mostly $1 lower last week. As a result, we saw some follow-through buying in today’s market.

Last week’s kill was a bit larger than expected at 564,000 head, which was up 11,000 from the previous week. Current trade estimates for the current week are near the 560,000 head level. Carcass weights are at record high levels.

Arctic cold spilling into the Plains and Midwest reminds the trade of the winter threats at hand. Feed conversion is expected to be impacted, which may make it difficult to sustain the recent high carcass weights, which seasonally tend to ease lower from this point forward.

Boxed beef movement bounced back last week, reaching 830 loads, up from 735 loads the previous week, but down from 939 loads the week prior to that. Choice cuts finished the week at $249.11 per cwt, down $2.09 on the week. Select cuts finished the week at $238.07 per cwt, down $0.56 on the week. The Choice/Select spread finished the week at $11.04 per cwt, down $1.53 on the week. Product movement at mid-morning today was slow at 62 loads, but Choice cuts were up $1.26, while Select cuts were up $1.82 per cwt.

Demand at the sale barn is heating up again for light-weight cattle to push cheap corn through in the months ahead. As a result, the latest cash index came in at $240.54 per cwt, up $0.18 on the day and its highest level since October 20. The record high is just above the market at $244.04 per cwt. Feeder cattle futures traded positively most of the day as a result. Live cattle futures showed very modest gains from the follow-through buying.

Pork

Today’s cash market was mostly steady, with the slide in the cash index slowing. The latest index came in at $88.01 per cwt, down $0.24 on the day. It was the 21st straight trading day with a lower index, with losses over that period totaling $22.59 per cwt.

Product movement over the past week totaled 1,905 loads, up from 1,763 loads the previous week and the strongest movement since mid-January. The composite pork product price ended the week at $94.74 per cwt, down $2.77 on the week and down $29.01 over the past six weeks. Movement at midday today was slow at 148 loads, with the composite price down $0.36 to $94.38 per cwt on weak ham and picnic prices.

December lean hogs bounced again today, following-through on Friday’s strength. However, the rally failed an attempt to test the top of the recent trading range, with resistance at $90.65. We’ve seen a nice rebound in product demand at the lower prices, but I don’t see the strength in ham prices that I’d like to see ahead of the holidays and am concerned at the overall ongoing weakness of the product market. This leaves me concerned about additional downside risk, although the rate of decline has likely slowed.

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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