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Closing Comments

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Closing Comments

Corn

The euro continues to tumble on recession fears, but central banks still do not see it as a bargain. Instead, they are still liquidating their supply of euros in favor of the dollar, suggesting that the dollar has quite a bit of upside potential ahead of it yet unless something changes. A strong dollar makes U.S. commodities more expensive on the global market. The dollar pushed to a fresh 9-year high today.

Meanwhile, crude oil fell to a new 5-1/2 year low of $46.83 today, before erasing its losses to trade in positive territory late in the grain trading session. RBOB gasoline traded down to $1.3110 before bouncing modestly, but remaining in negative territory. That makes it difficult on ethanol processors, whose product is currently priced 14 – 15 cents above that level.

The Department of Energy reports that ethanol stocks rose to 18.8 million barrels in the week ending January 2, up from 18.1 million the previous week and up from 16.1 million barrels in the same week last year. Ethanol production dropped to 949K barrels per day during the week, versus 972K the previous week and 919K the previous year.

The data suggests that ethanol producers used 100.7 million bushels of corn in the week ending January 2, versus 103.2 million the previous week and 99.0 million the previous year. Corn usage to date for the marketing year that ends August 31 is estimated at 1.797 billion bushels, up 57 million or 3% from the previous year. Marketing year corn usage to date exceeds the seasonal pace needed to hit USDA’s target by 12 million bushels, but that is down from 14 million the previous week.

Index funds are scheduled to begin rebalancing their portfolios to bring them into balance with their new investment mix for 2015 over the next five trading sessions beginning tomorrow. Hedge fund managers have been pulling money out of the broader commodity sector as the dollar rallies and now it’s the index funds’ turn. The move is expected to result in modest selling by these funds of corn, soybeans and wheat over the next five trading sessions.

Corn traders turned sellers in light of all of the above factors today, with prices hitting sell-stops below $4 basis the March contract. The market recovered somewhat but failed repeated attempts to move back above $4. That led to late selling again that saw prices settle near their session lows.

The drop below $4 is significant, but nothing for should assumed until we see Monday’s USDA crop report. The trade expects it to show a smaller corn crop to result in ending stocks to fall more than 70 million bushels on Monday, but that would still leave supplies quite ample ahead of the South American harvest.

Soybeans

Index fund portfolio rebalancing is expected to provide modest selling pressure over the next five days, but the oilseed continues to see strong support from record demand. Supply is expected to eventually overwhelm that demand as the South American harvest comes to town, leading to greater weakness in the deferred contracts. However, it continued to provide support for the nearby contracts yielding modest gains.

March soybeans probed above resistance at $10.60, but could not sustain the move. That marks the top of the dominant trading range over the past month. I can’t rule out a move to higher levels based on chart signals or any emerging dryness in South America. A bullish surprise on Monday could support a move higher as well.

However, it’s difficult to conceive a sustained move above $10.60 based on what we currently know about soybean fundamentals, particularly if production prospects remain good south of the equator. Soymeal prices finished in the red today, adding further concerns about the ability of soybeans to sustain a rally, with deferred soybean contracts weaker as well.

The trade expects a smaller crop on Monday to result in declining stocks. 2014-15 soybean stocks are expected to drop to 393 million bushels by the trade, down 17 million from the previous month, but still more than ample with a big South American crop coming.

Wheat

Buy the rumor and sell the fact. That’s the mantra in Chicago and it played out today. We’ve seen strength in recent days over fears of winterkill as temperatures drop to double-digits below zero tonight in the Midwest. Snow cover will provide some protection, but we’ll likely have some damage in up to 30% of the belt. However, as I’ve warned, we won’t know the scope of that damage for many weeks, which makes sustaining rallies in early January based on cold threats difficult.

Chicago March wheat found support at the 50-day moving average of $5.78 for the second time in the past week. Minneapolis March wheat remains above the 50-day ma at $6.085, but Kansas City sliced through it without any problem.

The bottom line is that it will be quite some time before we know if and how much damage has been done, but in the meantime export demand is hurting. The trade expects USDA to peg this year’s ending wheat stocks at 666 million bushels on Monday, up 12 million from the previous month and more than ample to meet demand when we are over-priced on the global market.

Egypt released another snap tender to buy wheat this afternoon. The tender is for mid-February shipment. The results of that tender should give us a better feel for how close U.S. wheat is to being competitive, but also traders will be watching to see if any Russian wheat is offered.

Beef

Cash cattle traded at $172 per cwt on a live basis in Nebraska today. They started trading at $168 in Kansas on Tuesday and continued to trend higher as packers seek to acquire cattle. Yet, futures prices lacked energy today, with the deferred contracts showing losses of more than $1 per cwt.

Traders are skeptical of the ability of prices to hold current levels after packers restock supplies and they are also wary of index fund portfolio rebalancing that may create significant selling pressure over the next five days. As such, the tone was cautiously bearish in today’s trade ahead of the fund rebalancing.

Feeder cattle were under the same bearish cloud, but the lead January contract simply could not ignore strength in the cash market as it nears expiration. The latest CME cash index came in at $233.53 per cwt, up another $1.43 from the previous day. The index has posted gains over the past six trading days, with gains totaling $19.07 per cwt over that period of time.

Product movement on Tuesday rose to 180 loads, up from 155 loads the previous day and up from 157 loads the previous week. Choice cuts were up another $0.97 to $250.33 per cwt, while Select cuts dropped for the first time since December 19 to $240.05 per cwt, down $0.28 on the day. That pushed the Choice/Select spread to $10.28 per cwt, up from $9.03 the previous day, but down from $10.46 the previous week. Boxed beef movement at mid-morning today reached a strong 149 loads, with Choice cuts up $1.76, while Select cuts were up $1.73, providing more fundamental support for beef.

Pork

Today’s cash market was once again steady to $1 lower, continuing a trend that we’ve seen for some time now. The latest CME cash index came in at $77.79 per cwt or nearly $2 below where the lead February contract traded today. The index has been lower on each of the past 17 trading days, with losses over that period totaling $10.72 per cwt.

Product movement has been decent enough, but at lower prices. Movement Tuesday reached a strong 465 loads, up from 342 loads the previous day, but down from 473 loads in the holiday shortened week last week. The composite pork product price dropped another $0.89 Tuesday to $82.41 per cwt, its lowest level since April 2013.

The composite pork product price showed some stability at midday today, coming in at $82.49 per cwt, up $0.08 from Tuesday. Movement was also strong at 351 loads, although that isn’t unusual for a Wednesday.

Futures prices were modestly higher today, despite the above bearish fundamentals. However, I don’t put a great deal of confidence in the rally. The market was oversold and due for a bounce, but ultimately we need to see product prices stabilize and/or a decline in supply that would necessitate that packers pay up to get their needs filled. Index fund portfolio rebalancing could bring modest follow-up buying to the lean hog futures market over the next five days.

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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