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Closing Comments

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Closing Comments

Corn

The dollar surged to new 4-1/2 year highs this morning as global investors position ahead of the European Central Bank’s meetings later this month. The ECB is expected to support additional stimulus, which would further cheapen the euro. Additional support comes from a sharp break in Russia’s ruble.

Crude oil and most of the commodity sector came under pressure as the dollar rallied today. That wasn’t necessarily the reason that corn prices were under pressure much of the day, but it seemed to add to the selling pressure.

Trade chatter in the corn pit was bearish today. Traders are seasonally focusing more on growing conditions in South America, as well as tumbling crude oil prices. Today’s action tipped the charts a bit more to the bearish side, although they haven’t confirmed a break from the recent trading range yet. However, mounting weakness in the soybean complex adds pressure to corn, painting an increasingly bearish picture for the feed grain amid expectations for a 2 billion bushel carryout this year.

Next significant support for March corn is at $3.7825, followed by more significant support at $3.7575. Significant pivotal resistance is in the $3.94 to $4.00 range. Meanwhile, weather in South America remains favorable at this point.

Soybeans

Soymeal continues to be the canary in the coal mine for the soybean complex, as well as much of the feed grain sector. Soymeal was under pressure for much of the day on ideas that we are starting to work our way through tight supplies. Meal basis did strengthen $15 at Claypool, Indiana as it rolled its bids, but basis was reported to be $2 lower at three Iowa locations. The western Midwest has been an area where weakness has been quicker to show up in the soymeal market.

Weakness in soymeal fueled selling in soybeans as well, with the lead January contract testing key support in the $9.95 to $10 area. The contract dropped to $9.95 in the final minute, taking out the November 5 low of $9.9525, but settling just above that level. That, combined with weakness in soymeal and good weather in South America, leaves the market quite vulnerable to tripping sell stops below the market, sending us another leg lower.

Bearish technical selling is gaining momentum as the charts turn lower. Violation of the neckline of the bearish head and shoulders formation could send prices to the low $9 area or lower if weather remains favorable in South America. Snug soymeal supplies and strong oilseed demand will likely create periodic rallies, but the tone is noticeably more bearish following the Thanksgiving break.

Wheat

Wheat enjoyed a quick surge of roughly 50 cents over the past several trading sessions, largely due to chatter out of Russia about potential steps to limit exports from the region. Russia’s grain industry lobby group is pleading with Moscow not to limit exports. Well-respected local sources express doubt that Russia will limit exports. There are a number of political and economic reasons why limiting exports would be bad for Russia. Yet, the government appears to be taking steps to do just that.

It’s speculation, but this is what seems to make sense. Food inflation is increasingly a problem in Russia as its ruble loses value amid its conflict with Ukraine. That threatens support for President Putin at a time when he needs to maintain domestic support for his ambitious actions on the global front. Farmers produced a big wheat crop this year, but they don’t want to sell due to a declining ruble and strong inflation. Their failure to sell adds to the food inflation problem.

As such, Russia may be taking these steps to simply bluff farmers into fearing a sharp drop in prices. That could scare farmers into selling wheat, easing inflation fears at home. Russian farmers produced more than enough wheat to meet both domestic and export demand, but Putin needs them to sell. We saw similar dynamics in Argentina, where the government forced farmers to sell by cutting off needed credit. It’s too soon to see how this would play out, but the odds suggest that Russia’s wheat will eventually flow, just as soybeans are flowing now in Argentina.

Australia cut its wheat production forecast 4% to 23.22 million metric tons overnight, or 853 million bushels. That was widely expected by the market, with additional cuts likely. My sources indicate that a drop to 21.5 mmt could occur in the months ahead, but again, much of this has already been factored into the market’s expectations.

Russia was the primary topic of chatter on the trading floor today, creating a great deal of uncertainty. However, traders were also worried about the lack of competitiveness of U.S. wheat following the recent sharp rally and its big premium to corn. That would explain today’s weakness, with hints of future vulnerability of the headlines from Russia dry up.

Kansas City initially led the way higher, but that’s where the first cracks in the strength began to appear on Monday. Today’s break was led by double-digit losses in Kansas City, raising concerns about the sustainability of the recent rally. An optimist would say that today’s losses were merely a correction in an overbought, but otherwise bullish market. However, I’d feel better about this rally if it were the end of February and the dollar were breaking hard rather than posting new highs.

A strong dollar makes it very difficult for U.S. wheat to compete. We need to export 60% of the U.S. hard red winter wheat crop and 50% of both the hard red spring and soft red winter wheat crops. We don’t do that with a combination of sharply higher prices and a sharply higher dollar.

Beef

Feeder cattle futures pushed the $3 daily limit higher Monday, with follow-through buying this morning. Strength was grounded in resurgent demand at the sale barn, where cash prices were surging once again. Today’s early strength evaporated with weakness in the fat cattle futures pit, but then returned again as selling returned to the corn pit.

The latest CME cash index came in at $240.45 per cwt, down $0.26 from the previous day, but a look inside the numbers suggests that we’ll be seeing the index move up in the days ahead, with cash sales just below $270 per cwt for 7-weight cattle in Nebraska under good volume of nearly 900 head. Meanwhile, the lead January contract is trading at a roughly $5 discount.

Fat cattle futures continue to bounce around on changing chart signals, but largely between $168 to $172 per cwt. Price bounced off chart support Monday at the 40-day moving average Monday, with support from last week’s strong cash prices. However, prices corrected lower today, retracing much of Monday’s strength, with cash trade expected to be steady to weaker as packers lean heavily on formula cattle this week. Packer losses are estimated to be $104.50 per head.

Boxed beef movement was slow Monday at 76 loads. Choice cuts were up $0.08 to $257.48 per cwt, while Select cuts were down $0.51 to $245.34 per cwt. That pushed the Choice/Select spread to $12.14 per cwt, up from $11.55 the previous day, but down from $13.45 the previous week. Movement at mid-morning today remained sluggish at 89 loads, with Choice cuts down $0.61 and Select cuts down $0.87 per cwt.

Pork

Today’s cash market remained incredibly steady and uneventful; mostly steady, but up to 50 cents lower in a few places. The latest CME cash index was $88.45 per cwt, down $0.34 on the day. It was the 5th day out of the past 6 with a lower index, with prices down 50 cents per cwt over that period of time.

That’s keeping the December and February contracts trading near $89 per cwt. Meanwhile, the market took some of the premium out of the deferred contracts amid a lack of evidence of significant losses due to PED virus. USDA confirmed today that the PED virus was confirmed on the Hawaiian island of Oahu on November 20, but that shouldn’t have much impact on domestic supplies and/or prices.

Product movement rose to 196 loads Monday, up from 176 loads on Friday, but down sharply from 385 loads the previous week. The composite pork product price rose to $93.92 per cwt Monday, up $0.78 on the day with generally broad-based strength across all but picnic cuts. The product market were more mixed today, but the overall composite price gained another $0.72 to $94.64 per cwt on generally routine movement of 176 loads.

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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