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Closing Comments

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Closing Comments

Corn

March corn held support at the neckline of a bearish head and shoulders formation on December 4 and have rallied 30 cents from that point, with only periodic set-backs. Prices surged in the early morning hours on Friday after pushing above $4, taking out the July 17 high of $4.07.

Traders were scrambling to tie fundamental reasons to the rally, but they didn’t hesitate to join the developing chart trend. Fundamentally, reports Thursday night revealed that Ukraine will likely be unable to complete deliveries on contracts to Chinese feed mills due to the military conflict in that region. At stake is roughly 8.7 million bushels of corn that may not be delivered. However, that corn could just as well come from Brazil, rather than the United States.

There also continues to be speculation that China may be quietly lifting restrictions on U.S. DDGS imports after industry reports this week that two cargoes were allowed to unload without incident at southern ports. That’s more of a story for the protein market, as ethanol plants are already operating above capacity.

Reuters reports that Syngenta believes that it will win approval for sales of MIR 162 corn in China “in the near future.” That would reopen the door for corn exports into China. However, there are other genetics that China has not approved that it could use to block imports if/when it chooses.

Finally, there is speculation that the trade is building premium into prices on the possibility that USDA will cut 2 to 3 million acres from the 2014. USDA-FSA will update its certified acreage numbers on Monday morning. A significant gap remains between the FSA and USDA-NASS numbers used in the crop report, raising that speculation of reduced acreage.

Ironically, the FSA data suddenly appeared early Friday morning, ahead of its Monday scheduled release. It showed another increase in corn acres of 443K acres certified since the previous month. A purely statistical analysis of past years versus final USDA-NASS estimates would suggest that we could see a 1.9 million acre drop in corn acres next month.

However, I remain skeptical of a significant acreage reduction. USDA-NASS’ has a very thorough survey process, which would have been expected to reflect reduced acreage prior to now. Second, discrepancies between FSA and NASS data are not unusual. Third, there are fundamental reasons why another 1 or 2% of farmers may have simply chosen not to certify this year. That said, neither can I rule out such a reduction. I just feel that it is a risky assumption to make to leave oneself unprotected.

Cash basis is softening amid a wave of farmer selling. The late-week rally provided an opportunity for farmers to deliver corn to terminals above $4 per bushel for both the 2014 and 2015 crops. Export basis at the Gulf dropped to a two-month low amid slow export demand at these prices and increased cash movement.

Corn futures may struggle to sustain gains though without help from soybeans. Bloomberg found that 15 of 20 analysts surveyed expect soybean prices to fall over the coming week. Corn can move in the opposite direction in the short-term, but would likely find it difficult to move in an opposite direction longer-term. It would be expected to buy 2015 acres back from soybeans if it is able to sustain such a contra-move.

December corn went off the board at $3.9625, while the lead March contract rallied to close the week at $4.075. The next chart objective would be the $4.23 to $4.26 range, but traders will also be searching for confirmation of rumors of China possibly approving MIR 162, as well as more chatter about Ukraine not fulfilling its contracts. Regardless, we should see more cash corn pour onto the market as a result of this rally.

Soybeans

I continue to believe that soymeal is the canary in the coal mine for the grain complex. It led the market higher this fall and it is the indicator that I am watching for the end of the party. Some in the trade were bracing for a possible squeeze in the soymeal market as the December contract expired, but we saw quite the opposite.

Farmer sales increased significantly in recent days, as we edge even closer to the big South American crop. Psychologically, the biggest blow for the bulls came on Wednesday morning when CONAB, Brazil’s equivalent to our USDA, rocked the trade world with a big increase in its soybean production estimate, boosting it to 95.8 million metric tons, up from 90.5 mmt the previous month. That’s an increase of 195 million bushels or nearly 6% in one month. The trade now expects private sources to begin boosting their production estimates, with Argentine estimates rising as well.

Demand remains strong, which can continue to give us periodic strength in the market. However, Thursday morning’s USDA weekly export sales report showed a dramatic drop in Chinese buying in the week ending December 4. Chinese buyers will be in Chicago Monday, signing a ceremonial commitment to purchase soybeans. That often times gives us another surge in buying, but doesn’t typically change the final total much.

A Bloomberg survey found that 15 of 20 analysts expect soybean prices to work lower over the coming week. That’s certainly no guarantee of lower prices, but it does tend to reflect trade sentiment. The bottom line is that traders are seeing yield prospects rise amid nearly ideal growing conditions in South America.

Early released FSA data suggested that farmers certified another 234K acres of soybeans since November. A purely statistical analysis comparing the relationship of past years FSA data and final USDA NASS acreage would suggest that we could see a drop of 1.1 million acres in January. However, I remain skeptical, believing that we saw a small reduction in farmers certifying acreage this year.

December soymeal went off the board today at $378.90 per ton, down more than $27 from the previous day. January lost $4.50 on the day. A weaker soymeal market is not conducive to a stronger soybean market, particularly with production prospects rising south of the equator. Strong corn helped soybeans finish the week well, with 5-cent gains common. The January contract needs to move above $10.60 to build confidence in this move.

Wheat

I’ve said it many times – wheat trades headlines more than it does fundamentals. We rallied the market 50 to 60 cents in late November and early December on headlines of a possible reduction in Russian exports. Prices then broke sharply lower as those headlines dried up. The headlines have returned and prices have returned to the early December highs in Chicago; in fact taking them out, with March Chicago wheat trading to its highest level since July 7.

The bottom line is that Russia has a problem. It produced a record crop this past year, but that’s not the problem. It’s ruble is tumbling on the global currency market, creating inflation pressures at home. As a result, farmers there have an incentive not to sell wheat, trading it for rubles that are falling in value. Furthermore, the cheap ruble provides an incentive for grain companies to export the wheat, rather than sell it on the domestic market.

Russia’s greatest threat at this point is social unrest at home, and the greatest risk to social unrest is food inflation. As such, Russia has incentive to scare farmers into selling, while trying to scare exporters into not selling. However, it also desperately needs revenue, which the exports would provide. Furthermore, it doesn’t want to lose political support from countries that are buying its wheat.

The bottom line is that I do not expect Russian exports to be curbed sufficiently to dramatically change U.S. market fundamentals, but that doesn’t necessarily matter to the wheat market. In 2010 we saw U.S. wheat futures nearly double in five weeks due to headlines about drought in Russia, even though we had enough wheat to make up all the difference and still be swimming in supplies. As such, you have to respect the headlines, at least until they disappear again.

Some weather models suggest a dramatic outbreak of Arctic air across the winter wheat belt in late December. Confidence is low, so forecasters have been reluctant to talk about winterkill potential. However, this will need to be something that is watched going forward. Rallies on December winterkill threats tend to be short-lived, but they can sometimes provide nice selling opportunities for producers hoping to catch up with sales or the need to put on protection. Chicago March wheat encounters the 200-day moving average at $6.16.

Beef

A few cattle reportedly moved in Kansas and Texas at $164 per cwt on a live basis Thursday, with more moving at that price in Kansas to close out the week. However, cattle in Nebraska were largely trading for $162, with some at $257 on a dressed basis.

Another $3 to $4 break in the cash market means that we’ve essentially taken $10 off over the past three weeks. Furthermore, we’ve seen corn prices rise 30 cents since bouncing off support on December 4. A red hot feeder cattle market that posted a new record high cash index of $244.99 per cwt on December is now breaking lower with the fat cattle market as corn prices firm. We still see occasional sales above $260 in the northern Plains, but sale barn activity elsewhere is turning much weaker.

As a result, feeder cattle futures are making a habit of trading the $3 daily limit lower. The surge in cash corn prices to close out the week provided the incentive to hit the limit once again. The market is likely overdone and due for a correction, with the January possibly forming a double-bottom with the October low at current levels. Next support is at the 100-day moving average, currently at $223.55.

Product movement dropped to 159 loads Thursday, down from 221 loads the previous day and down from 161 loads the previous day. Choice cuts were down another $2.16 to $247.79 per cwt, while Select cuts were down $0.43 to $235.94. This dropped the Choice/Select spread seasonally to $11.85 per cwt, down from $13.58 the previous day and down from $14.16 the previous week. Movement at mid-morning today was routine at 87 loads, with Choice cuts breaking another $2.16 and Select cuts down another $1.01.

Pork

Traders don’t make money in a stagnant market. They’re always looking for reasons to push prices in one direction or the other. However, the supply and demand fundamentals for the pork industry have been incredibly mundane of late.

Friday’s cash market was again steady to $1 lower, although Ohio saw some hogs trade as much as $2 lower. The latest cash index came in at $88.44 per cwt, down $0.07 on the day and down $0.28 on the week. The cash index has largely traded between $88 and $90 since the first of November; trading sideways with a slight downward bias.

Similar trends have been seen in the product market, but there is a slightly greater downward bias in that market. The weaker prices have stimulated greater demand, but not to levels of out-pacing the supply.

Product movement dropped to 323 loads Thursday, down from 438 loads the previous day and down from 334 loads the previous week. The composite pork product price dropped another $1.36 to $90.93, its lowest level since early February. Movement at midday today was slow, but the composite price bounced $1.13 to $92.06 on a big $14.85 gain in picnic cuts.

February lean hogs broke to $83 to close out the week. They are oversold and due for a bounce. However, rallies should be limited as long as supply continues to exceed demand. Ironically, export demand in the latest week reported was huge, but it had little impact on the market, as supply was there to fill it.

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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