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Closing Comments

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Closing Comments

Corn

Crude oil prices dropped to a new 5-1/2 year lows, trading as low as $47.55 so far today. Meanwhile, the dollar consolidated just below Monday’s 9-year high. Wall Street fears that a major global economic slowdown will reduce demand for raw commodities, leading fund managers to go from long (bought) to short (sold) in the broader commodity complex. Grain and oilseed prices have been able to firm against the tide of that bearish money flow near-term, but it still remains a threat.

We’ll get updated data from the ethanol industry tomorrow, but it’s a big red flat when ethanol futures are trading at $1.50 per gallon when RBOB gasoline is trading at $1.36. That’s simply not sustainable. Ethanol stocks have been manageable, but they are growing as margins tighten. We’ve been producing near record levels, but that is expected to change as we move deeper into the year.

Corn futures pushed higher in follow through buying early in today’s session, but then bullish enthusiasm waned. Fund managers rebuild ownership after the first of the year, based on a bias toward a friendly crop report from USDA next Monday. However, USDA needs to provide a bullish boost to offset rising production prospects from South America beyond next week’s report. Dryness is a concern for 10 to 15% of Brazil’s crop, which could spread if rains in the forecast fail to verify. However, overall production prospects remain quite good currently.

March corn traded back within its late 2014 trading range of primarily $4.05 to $4.15 early today, but couldn’t hold the strength, settling 1-cent lower to settle at $4.05. Look for the market to consolidate a bit more as traders position for Monday’s USDA reports, which are known for their surprises and daily limit moves. A bearish surprise would likely create a bigger price move than a bullish surprise, since the market is already leaning to the bullish side.

Soybeans

USDA’s daily export reporting system today reflected more demand from China. The world’s largest soybean importer bought another 4.5 million bushels of old-crop and 4.4 million bushels of new-crop soybeans. This keeps soybean exports and crush both on a record pace. Demand is not the problem. Supply is the concern. The combination of massive U.S. and South American crops is expected to overwhelm that strong demand in the weeks ahead.

The primary potential threat to that development is the weather. Dryness in northeastern Brazil received a lot of chatter to justify traders re-establishing their ownership to start the year, but that enthusiasm is waning now that the positions have been bought. Yes, we could see dryness spread, but only if rains already in the forecast fail to verify. Otherwise, we’re looking at very good crops from both Argentina and Brazil, which USDA will likely confirm on Monday in its January crop report.

We saw follow-through buying early today, after Monday’s rally took us back into the primary trading range of December largely between $10.35 and $10.60. Enthusiasm waned midday, before returning to push prices to $10.57, settling just below that level. The lead March contract hasn’t settled above $10.60 since November 11, making that a significant area to watch. A move below $10 would likely see this market tip over. Once again, the greatest strength was in the nearby contracts with greatest weakness in the deferred contracts, reflecting the market’s belief that short-term tightness will likely lead to longer-term surpluses.

Wheat

It’s cold in Chicago, with traders facing double-digit negative temperatures Wednesday night. That provides a fresh reminder to wheat traders that the crop will be at risk of winterkill. A fresh blanket of snow will protect much of the vulnerable crop, but up to 30% could still be at risk of some loss. Unfortunately we simply won’t know how much damage, if any, until the crop breaks dormancy in late February to early March.

Yesterday’s sharp drop in Illinois and Kansas crop ratings from the previous month add to those concerns, suggesting that the crop is already vulnerable. That provides a legitimate reason for a possible rally in late February into March, but historically it’s been difficult to sustain rallies in early January on these concerns.

Additional support for the hard wheat markets today came from China. Trade chatter indicates that China is shopping for high protein hard red wheat. China is expected to raise its imports of high protein wheat this year to blend with its own supplies, but overall imports of wheat are expected to drop dramatically.

Buying enthusiasm waned today, suggesting bullish fatigue already over the weather concerns. We could see more consolidation ahead of Monday’s USDA reports, but sustaining rallies will likely be difficult near-term due to the high prices of U.S. wheat relative to the rest of the world.

Beef

Cash cattle trade emerged today at $168 per cwt, up $2 from the previous week in that region, but then it quickly jumped another $2  higher to $170. Yet, the impact on futures prices was restrained, with traders worried that the beef complex could come under pressure from index fund rebalancing starting on Thursday. Some estimate that rebalancing could necessitate the sale of more than 14,000 live cattle futures contracts starting on Thursday and continuing over five sessions. As such, futures may remain under pressure until traders see that index fund activity better defined.

Feeder cattle were the anchor of the beef complex that weighed on prices today, with far deferred contracts trading more than $4 lower at times. Nearby contracts found support from renewed strength at the sale barn following the holiday break. The latest cash index came in at $232.10 per cwt, up about $8 from the lead January contract and up more than $14 over the past two days.

Boxed beef movement reached 155 loads Monday, up from 105 loads the previous day and up from 114 loads the previous week. Choice cuts were up $1.53 to $249.36 per cwt, while Select cuts were up $1.01 to $240.33. This firmed the Choice/Select spread to $9.03 per cwt, up from $8.51 the previous day, but down from $9.16 the previous week. Movement at mid-morning today was routine at 84 loads. Choice cuts were up another $1.16 per cwt, while Select cuts added another $0.41.

Pork

Reuters carried a story today confirming that the University of Minnesota confirmed a positive find of a mutated version of the PED virus in hogs, with no known cure. There was little reaction by the markets as it confirmed what was largely already suspected. Reoccurrence of the disease on farms has generally been believed to be a factor of the disease mutating. Yet, producers have become very good at managing the disease that has dramatically reduced its impact on national production, although some individual farms are still feeling the pain.

Futures prices continued to trend lower today, following the leadership of both the cash and product markets. Today’s cash market was mostly 50 cents lower across the Midwest, although Indian markets were closer to $1 lower. The latest CME cash index came in at $77.91 per cwt, down $0.20 on the day, but still at a discount to the lead February contract. The index has been down for the past straight 16 trading days, with losses over that period totaling $10.60 per cwt.

Product movement Monday totaled 342 loads, with a composite price of $83.30 per cwt a nearly one-year low. Movement at midday today was again fairly decent at 268 loads, but prices continue to slide. The composite price was down another $0.87 to $82.43 per cwt. February lean hogs are approaching contract lows, but the cash market continues to drag the contract lower. Next significant support is close to $70.

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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