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Closing Comments

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Closing Comments

Corn

USDA reports that 53% of the U.S. corn crop had reached the dent stage as of August 31, up from 35% the previous week, but down from the five-year average for the week of 59%. Corn in dent in key states was 72% in Illinois, 51% in Indiana, 53% in Iowa, 28% in Michigan, 34% in Minnesota, 61% in Nebraska, 13% in North Dakota, 41% in South Dakota and 23% in Wisconsin. The U.S. crop was rated at 8% mature, down from the five-year average for the week of 16%.

The crop rated a condition index score of 387 (500=perfect crop), which was the highest rating for the week since 1994. The past week’s score was up from 385 the previous week, up from 349 the previous year and up from the 10-year average for the week of 346. The corn condition score was unchanged at 407 in Illinois, was down modestly in Colorado, Kansas, North Carolina, Ohio and Pennsylvania and up in every other state. Condition index scores for key states were Illinois 407, Indiana 389, Iowa 393, Kansas 343, Michigan 379, Minnesota 379, Missouri 417, Nebraska 380, North Dakota 395, Ohio 390 and South Dakota 382.

The ratings supported a 1.3-bushel rise in our yield model to 172.7 bushels per acre. I expect this to continue ratcheting higher in the weeks ahead if depth of kernel was greater than normal this year as we expected. FC Stone pegged the crop at 14.595 billion bushels on a yield of 174.1 bushels per acre. Their estimate is based on a survey of elevator grain merchandisers, etc. who hear what farmers are saying about their crops. Most of these reports would not yet reflect larger-than-normal depth of kernel.

As such, we will likely be above 174 in January. My estimate for this year’s crop has been a national average yield of 176 bushels per acre since the first week of August. FC Stone’s estimate above 174 bushels before we’ve really started the harvest and had the opportunity to experience depth-of-kernel makes me worry that I may be too low with my estimate.

Allendale and Lanworth jumped into the fray with estimates today, with Informa’s estimate expected on Friday. Allendale’s survey-based estimate pegged the crop at 171.9 bushels per acre, while Lanworth put the crop at 173.7 bushels. It’s scary to think that most of these estimates still do not take into account the impact of a larger kernel size typical of mild summers. For example, just a 5% rise in kernel size could add another 8.5 bushels to the crop’s yield.

We’ve talked many times this summer of the tendency for December corn in big crop years to trend lower into late July when it trades sideways to higher into the end of August, before turning lower once again. That’s the pattern that we are following, with the speculative hedge funds just beginning to build their harvest short (sold) positions. I’ve been telling farm groups this summer to brace for a yield of 176+ and the risk for a harvest low of $2.85 or lower. I’ve still not seen anything to change my mind.

Soybeans

USDA reports that 5% of the U.S. soybean crop was dropping leaves as of August 31, down from the five-year average for the week of 7%. The crop rated a condition index score of 383, the highest on record for this point in the growing season. The score was up from 379 the previous week, 346 the previous year and up from the 10-year average for the week of 348. Missouri saw a modest decline in the rating, but the score was unchanged in Illinois, easing concerns about Sudden Death Syndrome.

Condition index scores were unchanged on the week in Arkansas, Illinois, Louisiana, Mississippi, North Dakota and Tennessee, they were down in Kansas, Missouri, North Carolina and Ohio and up in all other states. The scores for key states were Arkansas 368, Illinois 396, Indiana 382, Iowa 387, Louisiana 405, Minnesota 372, Mississippi 402, Missouri 389, Nebraska 381, North Dakota 385, South Dakota 381, Ohio 379 and Wisconsin 388.

The score pushed our yield model up to 48.0 bushels per acre, up from 47.3 bushels the previous week. FC Stone’s survey put the crop at 4.0 billion bushels on a yield of 47.6 bushels per acre. Again, soybean yields are much more difficult to estimate, lowering confidence in them, but harvest results in the southern belt thus far have been nothing short of amazing, with Delta yields topping out just below 100 bushels per acre. Allendale pegged the crop at 46.4 bushels per acre today, while Lanworth put it at 46.7 bushels.

Lanworth also shocked the trade with a high Brazil soybean production estimate. It pegged Brazil’s 2014-15 soybean crop at 98.0 million metric tons or 3.601 billion bushels, up from USDA’s estimate of 91 mmt and this year’s crop of 87.5 mmt. Short of an emerging weather threat over the next six months, a crop of that size would suggest weakness in soybean prices well into next year, or more. Demand is very strong, so we could always get a pop in prices if weather threatens at some point, but that is an unknown.

The November soybean charts have been showing signs of a bigger sell-off and they got it today. There are still a lot of questions about this year’s crop and soybeans are trading at nearly a 2.9:1 ration, suggesting that soybeans are over-priced relative to corn. Furthermore, the speculative hedge funds already have nearly record large short positions in the soybean market.

As such, we could see a bounce, or at least another round of consolidation, but the path of least resistance remains lower. So far, this year’s crop is exceeding the expectations of many, with significantly higher production expected in South America six months from now.

One thing that we are watching is the forecast for the middle of the month. The GFS American model midday called for readings in the 25-30°F range on about the 15th over much of Minnesota, touching surrounding areas as well. The other models aren’t as cold, so forecasters have little confidence that we will see a significant damage event. However, we will need to monitor the situation, as the models are trending cooler.

Wheat

USDA reports that 38% of the spring wheat crop was harvested as of August 31, up from 27% the previous week, but down from the five-year average for the week of 65%. Progress is slowest in North Dakota, where just 21% of the crop was harvested, followed by Minnesota at 35%. The crop rated a condition index score of 366, down from 372 the previous week. The 10-year average final condition score for the crop is 359, so the crop is still above average.

Russia’s expecting a record wheat crop and that crop is expected to compete aggressively on the global market to raise revenue for the nation’s beleaguered economy. Reports broke overnight that steps to a truce had been agreed to in both sides of the Ukrainian conflict, leading traders to remove the risk premium. Losses accelerated after prices hit sell stops below contract lows, with sinking corn adding to the selling. The glass is half full, as far as traders are concerned, necessitating lower prices to get rid of a massive soft red winter wheat supply.

Beef

Cattle futures added to gains posted on Tuesday on expectations that this week’s cash trade will firm from the previous week. The October live cattle futures contract is trying to catch up with the cash market, versus try to lead it lower like we saw through much of the last half of the summer. Surprisingly, this week’s showlist is smaller in most major feedlot states when supplies were expected to increase.

The first significant objective of market bulls is to take out $155.95 per cwt, which is the level where the August contract went off the board last week. Additional strength in the cash market this week could support such a move. Estimated margins are shrinking, down to $27.80 today, a drop of nearly $44 from last week’s high, but still high enough to allow packers to pay up if the need to do so. However, that should stabilize as product prices firm.

Boxed beef movement was strong at 212 loads Tuesday, down from 250 loads on Friday, but up from 135 loads the previous week. Choice cuts were down $0.19 to $246.11 per cwt, while Select cuts were down $0.56 to $233.83. That pushed the Choice/Select spread to $12.28 per cwt, up from $11.91 the previous day and its strongest level since May 8. Movement at mid-morning today was strong at 162 loads, with Choice cuts up $1.75 and Select cuts up $0.82 cents, pushing the Choice/Select spread to $13.21 per cwt.

Feeder cattle futures pushed higher as well, garnering strength from sharply weaker corn prices, amid strength in the fat cattle market. This suggests that the lead September contract could retest its contract high of $224.675 per cwt. The latest CME cash index was $218.75, up $0.24 per cwt. The index has been higher in four of the past five trading days, with gains over the period totaling $1.11 per cwt.

October live cattle were the $3.00 daily limit higher at the end of the trading day on the signs of improved fundamentals, with many of the feeder cattle contracts seeing similar gains. I think it’s too soon to say that the bulls are back in control once again, but the fundamentals are certainly not as bearish in this first week of September as the trade had been anticipating. Now the trade is waiting for the cash market for its next clue.

Pork

The lean hog futures market surged higher in recent days on profit taking and bargain-hunter buying on ideas that the cash market would soon carve out a bottom. Now the profit taking is pressuring prices, although the lead October contract found support from a steady to $1 higher cash market. Today’s profit taking in the deferred contracts amid weaker product prices suggests that traders are still somewhat skeptical about the size of the anticipated hole in supplies beginning later this month.

The latest CME 2-day lean hog index was down another $1.11 to $96.45 per cwt. It was the 32nd straight trading day with a lower index, with losses over that period totaling $37.72 per cwt. However, we should see the cash index turn the corner in the days ahead.

Product movement reached 358 loads Tuesday, up from 258 loads on Friday, but essentially matching the previous week. The composite pork product price was again higher, up $0.72 on the day to $102.44 per cwt. It was the fourth increase of the past five trading days, although the one down day was a big one. Movement at midday today was good at 307 loads, but the composite price was down $1.02 to $101.42 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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