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Closing Comments

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Closing Comments

Corn

USDA’s daily export reporting system today showed more business to Japan and Mexico; two markets to which we have a freight advantage. Japan bought another 5.3 million bushels of current-year U.S. corn, while Mexico bought another 4.0 million bushels.

Informa released its updated 2015 acreage estimates this morning. The private analyst reportedly told its clients to expect corn acres to fall to 88.01 million in 2015, down 2.875 million from this past year’s crop. This estimate is in line with a number of other private estimates, as well as USDA’s long-term outlook data released earlier in the week. The market has been trying to adjust the corn/soybean price relationship to buy some of these corn acres back.

Corn basis turned soft briefly early in the week as farmer selling increased, but then it firmed again late as farmer selling slowed again amid strong demand from the ethanol industry. The lead March corn contract posted a bull flag on the charts, which it tried to break out of to the upside on Thursday. However, corn is struggling to sustain gain amid renewed weakness in soybeans and wheat.

Corn prices firmed into the close, but the spreads were still leaning to the bearish side. The next two weeks could see erratic holiday trade, but my greatest concern going forward is the potential for a larger break in soybean and wheat prices that could pull corn lower.

Soybeans

Informa reportedly told its clients to expect soybean acreage to rise to 88.78 million in 2015, up 4.596 million from 2014. That’s not a total surprise to the market, as other estimates have shown similar rises, but it is well above USDA’s projection of 84 million acres released earlier in the week.

The market reaction was nearly undetectable, but it does reign in some of the enthusiasm holding soybean prices above $10 at a time when we have a big crop coming south of the equator with expectations of expanded production in the U.S. next spring. The 2015 soybean/corn price ratio is currently trading near 2.35, down from just below 2.8 in late October. The market is clearly trying to reverse this shift in acreage, but many private analysts believe that it has not done so yet.

I’m looking for a more modest shift in acreage, likely closer to 1.5 million. That’s because I expect the soybean/corn price ratio to continue to decline, not with higher corn prices, but with much weaker soybean prices as the South American crop hits the global market. However, many traders have to be looking at USDA’s 2015-16 soybean ending stocks estimate of 519 million bushels and asking, what if acreage does increase significantly?

Soybeans firmed into the close, but the bear spreads held, suggesting that this complex remains vulnerable as long as production estimates are rising for South America and the trade expects expansion in the U.S. this spring. Beware if/when the lead contract breaks below $10.

Wheat

The CME Group took the rare step of briefly halting trade for Chicago soft red winter wheat in the early morning hours Friday after the commodity dropped more than a dime in roughly 10 seconds time. Traders were reacting to news related to Russia, which they believed favored lower U.S. prices.

There’s little debate now that Russia is taking action to curb exports. That’s happening through several means, but shipments are being slowed. Russia’s primary concern is to cool inflation for bread prices, while supporting its production agriculture. As such, it has slowed the exports, but its moving forward with buying wheat for its intervention stocks.

Russia’s pull back from the global wheat market probably leaves about 175 million bushels of business to be fought over by other suppliers. The bulk of that business will likely go to Ukraine, Europe, Argentina, and perhaps India. The lost Russian business impacts global trade for both milling and feed wheat. We may see a small boost in corn exports as a result, but will not likely see a sizeable increase in wheat exports, at least at current price relationships. As a result.

The U.S. wheat market finished the week with big losses, trying to price itself back into the world market. The trade feels that the bullish potential has probably more than been priced into the market and now the reality of cheaper sources overseas is being factored in once again. This market remains vulnerable to significant additional losses, but holiday trade will likely be somewhat erratic, with traders focused on a mixed back of 2015 winter wheat acreage estimates ahead of USDA’s January crop report.

Beef

It has truly been a rough week for the cattle market. Feeder cattle led the market down with a string of five straight days with contracts locking the $3 daily limit lower, as the CME Group simply said that they were monitoring the situation. Traders holding long (bought) positions were trapped in those positions, raising anxiety as the margin calls entered the market. They sold fat cattle trying to manage that margin exposure, driving that market sharply lower as well.

The CME Group finally stepped up to the plate and expanded the trading limits for feeder cattle to $4.50 per cwt, while putting expanded limits in place for both feeder and fat cattle. Expanded limits for fat cattle would be $4.50 per cwt, while feeder cattle expanded limits would be at $6.75 per cwt. The expanded limits would be triggered when one of the top two months settles the daily limit higher or lower.

Expanded limits finally allowed the market to trade and anxieties eased as margin risk pulled back. Both the fat and feeder cattle markets bounced to close out the week, correcting an oversold condition and allowing traders to position ahead of the USDA cattle-on-feed report.

Lower fat cattle prices amid firm corn prices certainly had a chilling effect at the sale barn, with cheaper cash prices seen throughout the Plains. The latest cash index came in at $231.42 per cwt, down $3.27 on the day. The cash index is now down $13.57 per cwt from its December 2 record high.

Packer margins continue to show estimated losses of more than $100 per head as the product market falls faster than the fat cattle market. Boxed beef movement dropped to 136 loads on Thursday, down from 204 loads the previous day and down from 159 loads the previous week.

Choice cuts were down another $0.46 to $241.95, while Select cuts were down $0.81 to $230.32 per cwt. That pushed the Choice/Select spread to $11.63 per cwt, up from $11.28 the previous day, but still down from $11.85 the previous week. Movement at mid-morning today was good at 123 loads, but Choice cuts were down a sharp $3.12, while Select cuts slid another $0.19 per cwt.

Thursday’s kill was estimated at 112K head of cattle, up 2K from the previous week, but down 9K from the previous year. Slaughter for the week through Thursday totaled 439K head, down 7K on the week and won 45K from the previous year.

USDA released its December cattle-on-feed report this afternoon. It showed that on-feed numbers as of December 1 were at 10.876 million head, up 101.4% from the previous year and only slightly above pre-report trade estimates. November placements were pegged at 1.792 million head or 96.0% of year ago levels or slightly below trade expectations of 96.2%. November marketings totaled 1.475 million head or 88.9% of year ago levels, or slightly below expectations of 90.1%. Overall, it was a fairly neutral report.

Pork

Traders turned to selling lean hog futures when both the feeder cattle and fat cattle futures contracts locked the daily limit lower, leaving them trapped in their long positions. That accelerated losses in the lean hog futures, but the market wasn’t without its own bearish fundamentals.

Demand has improved, but supply has risen much faster. Producers are pulling hogs forward fearing even lower prices. Packer margins are showing estimated profits near $15 per head, but they haven’t had to chase the market higher to get enough hogs to move through their plants. Rather, they’ve been flooded with supply. Product movement is good, larger than demand, pushing prices lower.

The latest CME lean hog index came in at $85.15 per cwt, down $0.80 on the day and down $3.29 on the week. Losses are accelerating as producers pull hogs forward. That’s not bullish for hog prices near-term, although we should see demand pick up in 2015 and next Tuesday’s USDA’s quarterly hogs and pigs report presents a wild card for the market, leading to some consolidation.

Product movement dropped to 325 loads on Thursday, down from an impressive 545 the previous day, but up slightly from 323 loads the previous week. The composite pork product price firmed $0.14 Thursday to $87.38 per cwt, but that followed losses of $6.22 over the previous two days. Movement at midday today was routine at 164 loads, with the composite price down $0.95 to $86.43 per cwt.

February lean hogs are consolidating ahead of Tuesday’s USDA quarterly hogs and pigs report. A Reuters’ survey of trade participants reveals expectations going into the report below:

December 23 Quarterly Hogs & Pigs

USDA

Trade Est.

Range

percent of previous year

All hogs December 1

101.5

100.8-102.5

Kept for Breeding

103.0

102.0-103.5

Kept for Market

101.3

100.6-102.4

Pig Crop

September to November

103.3

102.4-104.4

Weight Groups

Under 50 lbs.

103.6

102.5-105.8

50 to 119 lbs.

102.5

101.2-103.3

120 to 179 lbs.

99.7

98.4-101.0

Over 180 lbs.

98.0

97.3-99.6

Farrowings

September to November

103.8

103.5-104.0

Farrowing Intentions

December to February

103.7

1030-104.3

March to May

104.1

103.3-105.1

Pigs per Litter

September to November

99.9

98.9-102.4

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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