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Closing Comments

 

Corn received pressure in early trading from rains last night. This continued with a less than bullish USDA report which showed domestic ending stocks for both 2016/2017 and 2017/2018 higher than the previous USDA estimate, as well as higher world ending stocks. Corn futures fell hard to –16 ¼ at 3.85 ½ (Sept) and –15 ½ at 3.98 ¾ (Dec). It is tough to have a sustained rally with large carry, and the market continues to struggle under the weight in spite of other potential bullish fundamentals. The USDA views corn yield unchanged at 170.7 bpa, while corn production was bumped up to 14.255 million bushels from the previous report’s 14.065 mb, on higher harvested acres. Brazil’s production was unchanged at 97 MMT, while Argentina got a 1 MMT increase from the last report to 41 MMT. EIA Ethanol weekly numbers were released today and they showed a small decline in production of 0.69% compared to last week, but still up 0.30% over last year. Ethanol stocks were down 1.81% compared to last week and up 0.24% over last year same period. Corn used for ethanol is in good position to hit the USDA target of 4.73 billion bushels for the year, as weekly usage hit 105.74 million bushels (which is well over the 91.857 million bushels needed for a weekly average until the end of the year). Heat is going to be ratcheting up a notch next week as areas in the Western Corn Belt will be seeing upper 90’s. A drop in yield is becoming a higher probability, as too much heat is not friendly to pollination. July futures expire this Friday.

 

Soybeans also were negatively affected in the market from more than expected overnight rains, and this continued after the report (to the surprise of traders) as beans could not resist the pull from corn and wheat, -9 at 10.25 ¼ (Sept) and –9 ¼ at 10.34 (Nov). Soybeans were the most supported by the USDA numbers and are likely to gain on the other grains over the next few weeks with additional weather premium being added. Recent trade gives the feeling that more impactful news is needed to move the market to another level. Regarding the USDA Supply & Demand report, domestic ending stocks for old and new crop are both lower than the previous estimate – in large part to old crop soy exports being ratcheted up 50 mb. World ending stocks for both years did increase modestly. Soybean yield is pegged unchanged at 48.0 bpa, with production at 4.260 million bushels compared to last report’s 4.255 mb. To the south, Brazil soybean production was right on par with the last report at 114 MMT while Argentina also stayed in line at 57.8 MMT. Focus will now return to threatening hot and dry weather and how this materializes over the next couple of weeks.

 

Wheat took the USDA report in a bearish manner, as all wheat production got a bump up to 1.760 million bushels compared to average estimates of 1.750 mb. Spring wheat was the lone wheat class of the three that was lower at 385 million bushels vs. expectations of 409 mb. Spring wheat may also see abandonment of acres, especially in the Dakotas, as they continue to be ravaged by drought. The 2017/2018 domestic ending stocks were up by 14 million bushels over the June estimate and way over average estimates of 880 mb. World stocks are pegged as up in 2016/2017 while 2017/2018 showed a mild reduction vs. June. It is not likely that these numbers are going to impact the overall trend. Wheat crops are more likely to see damage than improvement in the next few weeks, so it is hard to be completely bearish from here. Farmer selling has provided a measure of restraint to the rallying while spring wheat conditions have continued to spur action. In global news, dryness in Australia is becoming a real concern with 2/3 of the growing area at risk. With predictions of extended drier than normal conditions, the key heading period is September could be in jeopardy. And, other areas of the world, including Europe and Ukraine, will bear monitoring. Minneapolis HRS -13, Kansas City HRW -13 ½, Chicago SRW -16 (Sept).

 

Live Cattle as well as Feeders went lock limit up today, as speculation that packers may be short bought provided a spark, +3.000 at 117.875 (Aug). Strong packer margins have continued to support the market. Heat in the Plains could spur more aggressive selling by producers. The cash trend is down, trading in the $118-119 range last week. The Fed Cattle Exchange is held today offering 2500 head, and should help provide price direction. Boxed beef cutout values yesterday were down $2.30 at $215.24.

 

Hogs were able to post positive gains in the front months, +.375 at 82.625 (Aug) and +.100 at 69.275 (Oct). The deferred months were much weaker, -.775 at 63.000 (Dec) and –.675 at 67.000 (Feb). Look for volatility ahead as futures are at a big discount to cash with high open interest. USDA cutout values were released after the session yesterday and they were pegged at $.27 above Monday at $104.83 and higher than last week’s $103.62.

 

In Other news of interest, the Wall Street Journal featured an article highlighting the dominance of computer algorithm trading in commodities. It is estimated that up to half of all trades are automatically generated and are not based on market fundamentals.

 

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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