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Closing Comments

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Closing Comments

Corn

Trade chatter emerged to close out the week that China may be preparing to lift restrictions on imports of U.S. dried distillers grains and solubles. China closed that door this summer, causing protein supplies to back up on the U.S. feed market. Export sources say they still see little hard evidence that China has changed its stance, but the rumor provided support for both corn and soybeans going into the weekend.

The U.S. Grains Council reports that China accounted for 50% of DDGS exports in the first half of 2014. The early July restrictions dropped China’s imports from an average of more than 500K metric tons per month to just 167K in September; the latest month for which data is available. Fortunately, demand from other parts of the world has continued to increase, absorbing much of the lost demand. Sales to countries other than China surged 745K tons in September from averaging near 500K tons per month previously.

The net result was that September DDGS exports were down 175K tons from the same month last year. However, total 2014 DDGS exports through September came to almost 9.2 million metric tons, which is 95% of total 2013 exports. Other significant customers include Canada, Mexico, Taiwan, South Korea and Latin America.

Traders are more confident in maintaining/building ownership in corn after the lead March contract held critical support at the neckline of a potentially bearish head & shoulders chart formation mid-week. Additional support comes from strong domestic demand for corn, with ethanol margins remaining profitable and the pork industry attempting to expand. Export demand has also improved.

Supplies are more than adequate to meet that demand, with USDA expected to project more than 2 billion bushels of surplus corn on Wednesday. However, the unwillingness of farmers to sell at current prices continues to keep end users bids strong to meet their weekly needs. Gains however, are limited by expectations that those bushels will eventually come to town, with South American yields looking very good at this point as well.

Soybeans

Both soymeal and soybean prices broke below critical chart support at the neckline of a bearish head & shoulders formation mid-week, suggesting a much bigger move to lower prices in the weeks ahead. However, I warned at that point that demand remains strong enough short-term, that we will still likely have times of rallies amid tight supplies. That certainly proved to be the case over the past couple of trading session.

Prices received a boost to close out the week when USDA announced that “unknown destinations” bought another 8.8 million bushels of U.S. current-year soybeans. The buyer will be presumed to be China, but we probably won’t know until the soybeans are shipped. It’s not unusual to see sales to “unknown destinations” this time of year as China worries about potential shipment delays out of Brazil. Those sales are sometimes cancelled if Brazil is able to quickly ship soybeans, but switched to China and shipped if delays develop.

We frequently see significant soybean shipments out of Brazil begin in the first 10 days of February, but planting delays will likely move that date back this year. At this point, I don’t expect to see significant shipments before February 20, and possibly March 1. This is expected to extended the U.S. export season, which is already being baked into the market, with traders expecting USDA to add roughly 25 million bushels to its demand estimates on Wednesday.

The trade is expecting USDA to drop soybean ending stocks to 427 million bushels, down from 450 million currently. I’m looking for 403 million bushels at the end of the current marketing year, but that’s still a lot of soybeans.

Soymeal and soybean prices both received a boost from the China DDGS rumors. A rebound in Chinese demand for DDGS would be expected to tighten protein supplies for the U.S. market at a time when soymeal supplies here are already tight due to strong export demand.

However, soymeal basis showed its most significant weakness of the season to close out the week. Rail offers dropped as much as $15 per ton in the eastern Midwest as rail performance improves. Truck offers were also lower in some markets. Soymeal basis has been one of the indicators that I’ve been watching for signs of the overall soybean complex confirming a high in this year’s fall rally.

For now, we’re seeing soybean basis hold steady, and actually push higher in some Midwest markets as demand exceeds the pace of farmer selling. That should change at some point as soybeans come to town, barring a weather problem in South America, but for now it continues to provide support.

Soymeal weakness seemed to cap Friday’s rally in soymeal futures at the 20-day moving average, but soybeans continued to get strength from the ongoing battle between processors and exporters to meet their needs from a limited supply available to the market. January soybeans remain below critical resistance in the $10.55 to $10.60 region, with South American weather remaining quite favorable.

Wheat

Wheat prices managed a nice technical bounce on the charts to close out the week, but little has changed fundamentally to suggest that this market can sustain a rally in the near-term. In reality, it’s likely developing a broad sideways trading pattern for the winter months.

Technically, wheat remains in a longer-term uptrend off late September lows. Chicago March wheat ran into significant resistance at $6.10, with the 200-day moving average at $6.17. The U.S. wheat market is heavily dependent on export demand, but that’s not doing so well amid ample competing supplies overseas.

Problem areas exist in parts of the Plains, Midwest, Australia, China and the Former Soviet Union. However, those problems have historically been difficult to provide sufficient strength to sustain a rally in the month of December. Rather, those are easier to trade as supportive factors in February and March, if at all.

Yet, strength in the corn and soybean markets provided sufficient justification for a technical bounce in the wheat market to close out the week following big losses in previous days. Wheat prices experienced quite a roller coaster ride following the Thanksgiving holiday, with little hard fundamental justification for the ride. Yet, the movement reflected wheat’s ability to trade headlines.

Headlines of potential Russian export restrictions provided the strength for the post-Thanksgiving rally, while poor near-term demand amid high prices and a strong dollar that makes our wheat the most expensive of the major sources on the global market.

Beef

Market fundamentals became much more challenging for beef packers over the past week. Product prices have begun their seasonal decline into the holidays, just as a strong dollar begins to erode export demand. Yet, packers don’t want to give up market share. That necessitates battling for tight supplies of cattle to acquire enough to maintain market share, but doing so pushed estimated margins to losses of more than $130 per head.

Kills are expected to fall in the 555K to 565K head range the next two weeks, before falling closer to 430K head during Christmas, which would tighten up supplies and hopefully provide support for product, assuming export demand doesn’t totally collapse. Packers are trying to find ways to buy as few of cattle as possible on the negotiated market to cut their expenses, but they don’t want to lose market share.

Cash trade emerged at $166 per cwt in Nebraska on Thursday, down nearly $6 from the previous week. Kansas feeders held out and were rewarded with sales at $168 to close out the week, down roughly $4 from where much of the trade took place the previous week.

The sharply lower cash prices were enough to send fund managers to the door, taking profits on a declaration that the high is behind us, again. Support for February live cattle at $165.55 gave way, with the contract now eyeing the 100-day moving average at $161.74, as the market makes its most significant break since August.

Futures traders continue to pressure feeder cattle prices, largely due to weakness in the fat cattle market. They’re betting that demand at the sale barn will slow as the fat cattle market breaks, but thus far it hasn’t happened. We’re still seeing light-weight cattle trade for more than $260 per cwt in portions of the northern feedlot belt, where corn prices are cheapest. The latest CME cash index came in at $244.19 per cwt, down $0.80 from the previous day’s record high, but still roughly $10 above the lead futures contract.

Product movement dropped to 161 loads Thursday, down from 204 loads the previous day and down from 194 loads the previous week. Choice cuts were down $1.99 to $254.42 per cwt, while Select cuts were down $1.52 to $240.26. This dropped the Choice/Select spread to $14.16 per cwt, down from $14.63 the previous day, but up from $13.13 the previous week. Movement at mid-morning today was good at 121 loads on cheaper prices, with Choice cuts down another $0.55 and Select cuts down $2.48 per cwt.

Pork

Traders don’t make money in a stagnant market, so they’ve been searching for a direction that they can push the lean hog futures market. The cash market was incredibly steady over the past week, with a slight downward bias. The latest CME 2-day lean hog index finished the week at $88.72 per cwt, down $0.07 on the week. As such, the cash hog market provided little direction for traders.

We’re seeing similar trends in the product market, which continues to chop around in a sideways pattern. Christmas ham demand has been disappointing, so some retailers have been trying to feature other cuts. Yet, insufficient demand has been generate to pull the market out of this malaise.

Deferred contracts had a healthy premium built into them on expectations that we would see a resurgence of PED virus problems when temperatures dropped this fall, resulting in smaller slaughter numbers down the road. But major widespread problems do not appear to be developing as producers use new tools available to them to manage the disease. That’s provided an overall bearish bias to the market as supplies exceed expectations. Slaughter numbers are trending higher, rather than lower.

Product movement dropped to 334 loads Thursday, down from 428 loads on Wednesday. The composite pork product prices rose to $93.62, up $1.66 on the day. However, that leaves us very close to where products were trading a week ago. Movement at midday today was routine at 164 loads, with the composite price down $0.88 to $92.74 per cwt on weakness across most cuts.

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

Past performance is not indicative of future results. The information contained in this report is intended for informational purposes only and is the opinion of the writer and may change at any time. This information was compiled from sources believed to be reliable but accuracy cannot be and is not guaranteed. There is no warranty, expressed or implied, in regards to this information for any particular purpose. There is SIGNIFICANT RISK involved in trading futures and or options on futures and may not be suitable for all investors. Investors should consider these RISKS and evaluate their suitability based on their financial conditions. No one should ever consider trading futures or options on futures with anything other than RISK CAPITAL. This information is provided freely and is NOT in the capacity of a trading advisor. NO LIABILITY on the part of the author exists for any trading loss you may incur in the use of this information. Information provided is not to be construed as an offer to sell or solicitation to buy any commodity or security named herein.

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