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Closing Comments

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Closing Comments

Corn

Note: I will be off for the next week, returning January 5. Daily commentary will be covered by advisory staff. Best wishes and have a great New Year.  Sincerely, Arlan

Ethanol production continues at a record pace, necessitating more than 105 million bushels of corn per week. That pace is expected to slow in the first quarter of 2014 as margins drop, but for now it is holding strong. Ethanol prices finished the week on a strong note, more than 15 cents above gasoline prices. Export demand and livestock usage add another 130 to 140 million bushels of demand.

Meanwhile, farmer selling remains slow. We are seeing modest selling pick up on rally days, with an increasing number of locations pulling offers above $4.00 per bushel. As such, demand continues to be greater than the available supply, providing support for corn basis, and therefore corn futures, with positive chart signals to boot.

Sustaining that strength may prove difficult early next year if soybean futures break hard due to an approaching harvest in South America that at this point looks massive. That prospect is already tempering gains in the corn pit, which would otherwise likely see larger gains. Corn garnered some support from unwinding spreads with wheat to close out the week, but the primary focus going forward will likely be on whether soybeans can hold up in the face of the South American harvest.

Thin trade volume amplified gains to close out the week, along with corn/wheat spread unwinding. However, the lead March contract held below its December 23 high of $4.1575. The March contract has resistance at $4.20, and again between $4.23 and $4.26.

Soybeans

The soybean complex took advantage of thin holiday trade volume to close out the week to post impressive gains at times. Support came from several areas, allowing a seasonal bounce for the first trading day following Christmas, after a contra-seasonal sell-off on the last trading day prior to Christmas.

The worst flooding in decades is threatening palm oil production in Malaysia, pushing palm oil prices to one-month highs. That in turn supported strength in alternative soyoil prices, with gains amplified by thin holiday trading.

Strength in soyoil combined with chart-buying in soymeal to support strength in soybeans as well. Soybeans bounced off an area of chart support to rally upward to the $10.40 strike price to close out the week. That strike was attractive to traders holding January options ahead of expiration.

Positive momentum carried the January contract all the way to $10.45, where it encountered trend line resistance off the November and December highs. The contract probed above that level in the final minutes of trade, finishing the week just above it. However, the soon-to-be-leading March contract remained inside the wedge, leaving the question unanswered on the direction that this market will go. A probe to the topside can’t be ruled out in thin holiday trade, but the longer-term risk would appear to be to the downside as long as crop prospects look impressive in South America.

Wheat

Researchers at Kansas State University announced that they have identified a gene that can increase wheat tolerance to heat during grain fill. Early work with the gene suggests that yields could be boosted by 35% once implemented. However, that is more of a long-term story for the food grain.

Wheat traders are beginning to move past the Russia story as more information emerges to clarify export restrictions. Bloomberg reports that the wheat export duty probably will not be implemented until February 1. This seemed to be confirmed when Egypt’s supply minister stated that Russia had assured him that it would honor contracts to deliver 4.4 million bushels of wheat in January.

Furthermore, it appears that the export duty will be smaller than previously believed. Bloomberg reports that sources in Russia put the rate at 15% of the shipment’s value plus 7.5 euros, for a minimum of 35 euros. That currently translates into $1.16 per bushel when converted.

Additional support comes from forecasts for bitter Arctic cold to pour down into the Plains hard red winter wheat belt in the coming week. Readings could drop to -20 to -30°F in Montana, with temperatures in the single digits to double-digits below zero in parts of Nebraska, Colorado and northwest Kansas. Commodity Weather Group notes a variety of views from different models that could drop damaging temperatures over anywhere from 30 to 60% of the Plains hard red winter wheat belt, depending on actual intensity and duration of the cold.

Yet, traders remained skeptical, particularly as snow fell across areas expected to see the coldest readings. Traditionally, rallies are difficult to sustain based on weather threats at this time of year, as damage will be hard to document before February or March. However, prices moves can also become exaggerated in thin holiday trade, which will likely remain with us through the coming week. In fact, wheat had the most lethargic close to the week in the grain complex, with little clear direction in thin holiday volume.

Beef

Wednesday’s cash cattle trade was impressive. Trade volume was large, suggesting that packers had a greater need to acquire cattle than most had anticipated. Prices were impressive, with trade at mostly $162 per cwt on a live basis, up from $157 to $160 the previous week, with some cattle trading for $164 in Nebraska and $259 on a dressed basis.

That cash trade provided support for live cattle futures to close out the week, but all the focus was on the feeder cattle market to start trade on Friday. Trade volume was very thin, apparently allowing a few players who were giving up on the market to get out. The thin volume allowed feeder futures to briefly touch the newly expanded $4.50 per cwt daily limit lower.

Fortunately, feeder futures didn’t lock there and slowly began to recover late morning. Most sale barns are closed for the two week period through the end of the month due to the Christmas and New Year’s holidays, but overall demand appears soft due to the recent break in fat cattle prices amid firming corn prices. The latest CME cash index came in at $225.03 per cwt, down $19.96 per cwt from its December 2 record high.

Stabilizing feeder cattle futures allowed the fat cattle market to firm again on strength in the cash market just ahead of Christmas. Additional support came from forecasts of bitter Arctic air expected to plunge through the Plains feedlot region over the coming week, with coldest readings seen on New Year’s Eve. The fat cattle market led the feeder cattle market back into positive territory for most contracts.

Product movement Wednesday, dropped to 148 loads, down from 199 loads the previous day and down from 204 loads the previous week. Choice cuts were up $1.34 to $243.94 per cwt, while Select cuts were up $1.93 to $233.19. That dropped the Choice/Select spread to $10.75 per cwt, down from $11.34 the previous day and down from $11.28 the previous week. Movement at mid-morning today was extremely slow at just 30 loads, but at again firmer prices. Choice cuts were up $0.67, while Select cuts were up $2.72 per cwt, dropping the Choice/Select spread to $8.70 per cwt.

Pork

The lean hog futures market spent most of the week trading between $80 and $82 per cwt. Tuesday’s USDA quarterly hogs and pigs report confirmed that the industry is effectively managing the PED virus problem, with expansion a bit better than expected. Monday’s cold storage report showed that total pork supplies in the freezer were dropping, but virtually all of the decline came from strong demand for Christmas hams, with supplies for other cuts rising.

Meanwhile, the cash market continues to grind lower. Producers are pulling hogs forward fearing even lower prices. Packer margins near $18 per head provide incentive for packers to work at capacity, but they’re having no problems obtaining the hogs. Slaughter numbers continue to trend higher, although the Christmas break certainly pulled back on numbers this week.

The latest CME cash index came in at $80.59, down $0.96 on the day and down $5.36 on the week. It was the 10th consecutive trading day with a lower index, with losses over that period totaling $7.92 per cwt. February lean hogs have good support at $80, but that is contingent on see the cash market stabilize, which necessitates a rebound in product demand.

Product movement on December 23 was 349 loads, down from 413 loads the previous day and down from 545 loads the previous week. However, prices did stabilize. The composite pork product price came in at $87.39 per cwt, up $0.46 on the day. Movement at midday today came in at a mere 72 loads. The composite pork product price was down $0.25 to $87.14 in thin trade.

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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