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Closing Comments



Closing Comments


Crude oil prices broke sharply once again, trading down to $53.60 per barrel early in the session before rallying off its low. That recovery came as the dollar came off its low after being sharply lower overnight in profit taking. Wall Street’s fear index, the VIX, traded to two-month highs early today on rising global economic fears, but it pulled back later in the day. U.S. stocks traded wide extremes as Wall Street tried to absorb a flood of global news; some good and some bad.

This was one of those days when the news flow was almost more than one could absorb. Some of it was supportive and some was the contrary. Traders had to sort through it to figure out the long and the short of it. This comes at a time when traders typically start to square their positions to show profits on their year-end statements so that they can take an extended holiday break before returning after the first of the year.

The most significant news for corn came from China. Reuters reports that China informed seed industry officials that it has approved Viptera corn for import, which should open the door for U.S. corn shipments once again. There are still no indications that it has approved Duracade, leaving China with a trump card up its sleeve for shutting down imports once again when it decides that it is in its best interest to do so.

The above-mentioned announcement from China could add 40 to 80 million bushels to U.S. exports this year. However, an anticipated break in ethanol margins could see a large drop in corn usage domestically. Ethanol prices continue to trade above gasoline values, unable to keep up with the decline.

The above factors led corn to trade both sides of unchanged today as traders tried to weigh the good and the bad against one another. In the end, March corn lost 3 cents on the day, helping to correct an over-bought condition. Selling would be expected to accelerate below $4, but it would be premature to say that the high is in this market. In the end, my greatest concern for corn is in the soymeal and soybean market, which could prove to be an anchor to the feed grain market.


Soybeans probably came the closest to trading supply and demand fundamentals more than headlines today. Soymeal led the complex lower, with South American values softening as supplies prepare to rise. Argentina farmers are being pushed toward selling, increasing supplies, while Brazilian producers are nearing the harvest period. U.S. soymeal values are weakening, particularly for February and beyond.

We’ve been expecting a ceremonial signing ceremony this week as Chinese soybean buyers visit Chicago. That agreement was signed with much hoopla, but it exceeded the hype. These agreements typically are large, but only commit China to buy what they were going to anyway. This morning’s agreement committed China to buying 1 million metric tons or 36.7 million bushels. That’s smaller than the latest weekly shipment total of 47.9 million bushels, which was a disappointment to the trade.

January soymeal broke below the 200-day moving average, tripping chart-related sell-stops that accelerated losses. A break below $350 would likely see a rapid rise in bearish sentiment. Basis dropped $15 per ton in the Kansas City rail market today, although it held mostly steady elsewhere.

Weakness in the soymeal market proved a drag for crush margins, pulling soybeans lower as well. Soybeans saw double-digit losses as traders focused on softening crush margins and a big harvest around the corner in South America amid favorable growing conditions. Selling in the soybean market is expected to accelerate if/when the lead contract breaks below $10.

January soymeal finished the day near its session lows and appears poised to test key support at $350. January soybeans remain in their recent broader trading range, but broke below first support at $10.2575. The charts haven’t confirmed a break to the downside at this point, but the market is certainly starting to feel top-heavy with a big South American crop coming.


The greatest volatility came from the wheat pits, where traders tried to absorb the latest developments from Russia. I didn’t believe that it was in President Putin’s best interest to restrict wheat exports until the ruble totally collapsed overnight. The ruble bounced modestly when Russia’s central bank boosted its key interest rate to 17% overnight, up from 10.5% previously. However, it absolutely collapsed later in the day as global investors worried about what the move said about the future of Russia’s economy.

Food inflation is now a legitimate problem for President Putin. His actions to this point have raised nationalist passions that have supported him. However, food inflation can rapidly deteriorate that support. As such, he must risk losing the revenue and political support of his customers to cap inflation at home. Furthermore, some believe that he will take military action to try to reignite those nationalist passions again. Along that line, his government threatened today to move nuclear weapons into the Crimea Peninsula, which he recently took from Ukraine.

Exporters front loaded shipments from Russia this year, following a record crop. They feared possible problems and took advantage of a weak ruble. As such, they have reduced the potential impact of restricted exports on the global balance sheet. Furthermore, other sources are available to replace those supplies. Losing a competitor is generally good, but that alone doesn’t make wheat fundamentals bullish.

Yet, wheat trades often headlines more than it trades fundamentals. As such, expect wheat to find good support as long as Russia’s actions are making headlines. But, expect prices to collapse once those headlines dry up. For now, prices are over-bought and due for a correction, but traders are afraid to be short (sold). Kansas City is leading the rise, largely on spread unwinding after the Kansas City/Chicago spread held key support at 25 cents.

Wheat traded to double-digit gains today, before pulling back as the ruble found buying near 80 rubles per dollar and as crude oil came off its lows. Hard wheat futures are trading at their highest level in the March contract since August, while Chicago March wheat is at its highest level since June.

Profit taking and some farmer selling were responsible for the late-day pull back from session highs. However, Reuters broke a story right at the close that three sources have confirmed that Russia’s Veterinary and Phytosanitary Surveillance Service has begun restricting export licenses to for some countries, in effect restricting exports of wheat.


Feeder cattle futures locked the $3 daily limit lower for the fourth consecutive day today. Traders holding large long (bought) positions remain trapped and unable to exit. As such, they’ve looked to other markets to take positions to try to manage their margin exposure risk. That led to selling first in the fat cattle market, and then the lean hog futures market when fat cattle locked the $3 daily limit lower.

It should be pointed out that we have not seen the same type of collapse in the cash market, although it is trending lower on a weekly basis. Neither have we seen a parallel collapse of the product market. That suggests that the futures market, led by feeder cattle, are likely move down too far too fast, but knowing that doesn’t minimize the pain. Sharp drops will often produce a bounce, but from what level?

Monday’s kill was estimated at 112K head, up from 111K the previous week, but down from 120K the previous year. This week’s slaughter is expected to be similar to lower than last week, with slaughter the next two weeks slowed much more by holidays. That should provide underlying support for the product market, which has to this point reduced packer losses from nearly $140 per head to just over $100 per head.

Product movement dropped to 113 loads Monday, down from 201 loads on Friday and down from 115 loads the previous week. Choice cuts firmed $0.49 to $245.52 per cwt, while Select cuts rose $0.57 to $234.67. That continues to drop the Choice/Select spread seasonally, coming in at $10.85 on Monday, down from $10.93 the previous day and $16.62 the previous week. Movement at mid-morning today was good at 121 loads. Choice cuts were down $1.95, while Select cuts firmed $0.53, dropping the Choice/Select spread to $8.36 per cwt.

Sale barn demand for feeder cattle remains the strongest in the northern belt, with some South Dakota sales still above $250 per cwt. However, other markets are trending lower. Even so, the latest CME cash index bounced $0.58 to $237.48, ending a streak of 5 straight days of losses during which the index lost $7.92 per cwt.

Trade sources suggest that the feeder cattle market may need to drop another $5+ to start clearing the business at hand. The charts suggest additional weakness to $204 is possible, but we could see a bounce before we reach that level. Fat cattle traders are looking at support roughly $1 below today’s market that needs to hold.


Spillover selling from the beef complex weighed on lean hog futures today, but pork had its own problems with fundamentals as well. Today’s cash market was mostly steady to $0.50 lower, although Illinois was again up to $1 lower. The latest CME 2-day lean hog index came in at $87.30 per cwt, down $0.75 on the day and down $1.00 from the previous week. Monday’s kill was estimated at 432K head, up from 430K the previous week, but down from 436K on the same day last year.

Product movement dropped to 263 loads Monday, down from 286 loads Friday and down from 318 loads the previous week. The composite pork product price firmed for the second day in a row. It came in at $93.46 per cwt, up $0.91 on the day and up $2.53 over the past two days. However, the composite price dropped sharply at midday today; down $3.60 to $89.86 per cwt on a sharp drop in belly and picnic cuts.

Both domestic and export demand has improved lately, with some business coming over from the beef sector. However, the supply is coming in larger than expected as well. Producers are pulling hogs forward, fearing even lower prices in the days and weeks ahead. That’s allowing packers to enjoy nearly $20 per head profits without having to chase the market higher. Slaughter numbers last week were up 10.5% from 12 weeks ago as more hogs come to town and at heavier weights.

February lean hogs broke to fresh 10-month lows today, with next support near $80 per cwt. The market is oversold and due for a bounce, but what it needs is a surge in demand to deal with all of its new-found supply. I wouldn’t be surprise if we see a bounce due to position squaring ahead of next Tuesday’s USDA quarterly hogs and pigs report, but we may need to stabilize the beef market first.

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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