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Closing Comments



Closing Comments


CONAB, Brazil’s equivalent of our USDA, raised its corn production estimate early today. The agency currently sees its corn crop at 79.1 million metric tons, up slightly from 78.7 mmt in December and up more significantly from USDA’s December estimate of 75 mmt. USDA will have the opportunity to revise its estimate on Monday in its highly-anticipated crop report. CONAB’s estimate of 79.1 mmt or 3.114 billion bushels would be very comparable to last year’s crop of 3.122 billion bushels.

Historically, roughly 60% of Brazil’s production comes from its safrinha, or second-crop corn. The late soybean crop this year means that the window is much narrower for harvesting the soybeans and planting the safrinha corn. That means that February needs to see normal to below-normal rainfall in key production areas of Mato Grosso, Mato Grosso do Sul and surrounding areas. That is currently the forecast for the region, so the current bias is for another big corn crop creating significant export competition for U.S. corn in the year ahead.

South Korea feed mill have significantly stepped up their buying of corn in recent days. U.S. corn is getting a share of that business, although not all of it. Buyers are looking to take advantage of the recent price break ahead of Monday’s USDA crop report, on the possibility that it could hold a bullish surprise.

Crude oil traded posted a new 5-1/2 year low on Wednesday and traded just above that level to close out the week. RBOB gasoline prices are trading just above $1.30 per gallon, while ethanol prices are trading better than 15 cents higher. That’s a red flag for the ethanol industry, especially as ethanol stocks rise.

There is some speculation that the EPA will make a bold move to restore the statutory ethanol mandate levels later this year, rather than substantially cut them as it proposed last year. That speculation is based on reports that the industry is back down from its law suit against the EPA, leading some observers to speculate that a deal may have been worked out with EPA, now that energy and corn prices have broken sharply. Ironically, Brazil recently raised its ethanol blending rate to 27.5% of gasoline based on recent research showing that it was safe to do so.

March corn traded nearly an 18-cent spread over the past week, finishing near the middle of that trading range. Gains generally had to occur against a tide of money moving out of the broader commodity sector, but an underlying bias toward a friendly report on Monday provided underlying support. Weakness in the crude oil market combined with a dollar trading at nine-year highs is a problem for corn, along with forecasts for a large corn crop in both Argentina and Brazil in the weeks and months ahead. However,  for now traders are focused on Monday’s report.

Traders have until 11 a.m. CST Monday morning to complete positioning for USDA’s crop report. That report then hits the reset button. My bias remains to the downside for corn prices because of the good crops growing in Argentina and Brazil, but Monday’s data could alter those dynamics. Corn fundamentals are not as bearish as soybean fundamentals, but I am concerned about the downward pull that we could see from soybeans spilling over into corn if the South American crop is as big as currently projected.


CONAB raised its soybean production estimate for Brazil to 95.9 mmt, up slightly from 95.8 mmt in December. That compares to USDA’s latest estimate of 94 mmt, which it will have an opportunity to revise on Monday morning. CONAB’s latest estimate of 3.524 billion bushels billion bushels comes in 10.6% above last year’s crop of 3.186 billion bushels.

USDA will hit the reset button for soybeans on Monday as well. It could change 2014 acreage and/or yield creating a significant shift in U.S. supplies for the current marketing year. It could also hold surprises in the quarterly stocks data as well as South American production estimates.

Based on what we currently know, the most bullish surprise that I can generate would drop ending stocks for the current year closer to 300 million bushels. That could produce an initially surge in prices as computer traders react, but it’s still a lot of soybeans, followed by a monstrous South American crop. There’s still time for adverse weather to cut the South American crop short, but the models are becoming increasingly confident that good rains are coming later this month to areas of central and northern Brazil that have been drying out.

One of the factors that I’ve been watching has been the soymeal market. I believe that it is still the key indicator going forward. New export sales are slowing, although shipments of previous orders are still strong. However, we saw a significant weakening of cash basis across the Midwest this past week, suggesting that the industry is starting to catch up and surpass demand.

We will likely see the National Oilseed Processors Association peg December crush by its members at an all-time record high above 170 million bushels on Thursday. As such, I see USDA eventually needing to bump its crush target by another 35 million and exports by up to another 20 million. That record demand pace is supportive near-term, but the focus increasingly shifts to the big supply coming south of the equator once we get past Monday’s USDA crop report, with a larger U.S. crop expected in 2015 as well.

March soybeans continue to find selling interest above $10.60. A bullish surprise Monday could provide a boost above that level, but longer-term I’m more concerned about a possible break below $10. Such a drop would reflect a significant shift in market psychology, setting up a possible retest of the fall harvest lows, and possibly much lower if South America’s crop is as big as it currently appears. Demand isn’t a problem, but supply is. That supply continues to expand.


Wheat traders saw a lot of talk about winterkill over the past two weeks, which provided support for the food grain. The Plains hard red winter wheat crop likely saw some scattered damage over roughly a quarter of the belt that had inadequate snow cover over the holidays. The cold then shifted to the Midwest soft red winter wheat belt this past week, which likely saw some damage on both Wednesday and Friday over about 30% of the belt.

However, weather scares in January typically need to be sold. That’s because we likely won’t know if/how much damage was done until late February or March. Some states did release crop ratings Monday, showing significant deterioration of the crop in Illinois and Kansas, but again, we won’t hear back from those states probably until February, allowing the trade to focus again on pathetic export demand. As such, traders bought the rumor of winterkill and sold the “fact.”

Minneapolis wheat followed the winter wheat markets lower over the past week, but still managed to gain ground against them. Asian millers are backing away from the wheat market, feeling that prices are too high relative to ample global supplies. However, demand for quality protein wheat is holding, which we saw reflected in Chinese interest in hard red wheat over the past week. As such, we may see Minneapolis hold a bit better than Kansas City, and particularly better than Chicago.

There is always the possibility of a significant surprise in acreage in the winter seedings report Monday morning. The average trade guess is for all winter wheat acreage climb a bit this year, largely due to a jump in hard red winter wheat acreage partially offset by a drop in soft red winter. However, a surprise in the seedings report would likely be overshadowed by developments in the other markets. In the end, wheat supplies are more than adequate to meet demand, leaving this market soft.


Cash trade emerged early this week in Kansas at $168 per cwt on a live basis, up $2 from the previous week in that region. Demand beat expectations, pulling prices to $170, followed by trade in Nebraska at $172 per cwt. Feeders report that they cleanup their showlists well on strong demand from packers, suggesting strong demand that would be supportive of strength in the live cattle futures market.

However, live cattle futures turned lower instead, even finishing the week locked the $3 daily limit lower. That’s because the trade knew that index fund managers would begin rebalancing their portfolios on Thursday, continuing through Wednesday. Some estimates put the number of contracts to be liquidated at more than 14,000. That could be easily absorbed in the corn market, but not in live cattle where recent liquidation dropped open interest to five-year lows.

Traders were wary of building ownership on stronger cash Tuesday and Wednesday ahead of expected index fund selling to start on Thursday. That selling did develop, pressuring prices to near-limit lower levels on Thursday and hitting the limit on Friday. This may have prevented some of the index rebalancing from occurring as prices locked the limit lower stopping trade.

The charts are turning bearish, suggesting more technical selling in the days ahead, in addition to the index fund rebalancing pressure. However, these are unprecedented times. One also needs to respect the strength of the fundamentals, especially for the lead contract, which is currently trading at a sharp discount to the cash market.

Cash cattle strength is also supported by strength in the product market. Boxed beef movement rose to 874 loads over the past week, up from 539 loads the previous week and an eight-week high. Movement one year ago totaled 712 loads. Choice cuts finished the week at $256.79 per cwt, up $2.22 on the day and up $8.96 on the week. Select cuts finished the week at $248.23 per cwt, up $2.89 on the day and up $8.91 on the week. That leaves the Choice/Select spread at $8.56 per cwt, up a nickel on the week. Packer margins are estimated at losses of $71.75 per head, versus losses of $49.90 per head the previous week.

Feeder cattle futures tumbled for similar reasons to the fat cattle market. However, demand at the sale barn continues to surge again following the holidays. The latest CME cash index rose to $235.22 per cwt, up on each of the past eight trading days. In fact, the cash index rose $20.76 per cwt over that eight trading day period.


Index fund rebalancing was less of a factor for the pork sector, with prices modestly below year ago levels. That weakness has largely been perpetuated by larger than anticipated supplies as the industry learns to manage the PED virus. That capability encouraged more rapid expansion of the breeding herd as well.

The cash market finished the week mostly steady, with product prices beginning to stabilize as well. The next test will be to see if both markets can actually build on that stabile foundation to support a rally. So far, they haven’t shown that capability.

The latest CME cash index came in at $77.61 per cwt, which is a bit below the February futures contract. The latest cash index is down $0.66 over the past week, but daily losses are declining. The index has slid on each of the past 19 trading days, with losses over that period totaling $10.90 per cwt.

The composite pork product price finished the week at $83.96, after falling to its lowest level since April 2013 earlier in the week. Those lower prices stimulated fresh demand, pushing overall product movement to 2,100 loads, up from 1,487  loads the previous week, the highest load count in more than a year. Last year’s load count at this point totaled 2,022 loads.

The PED virus problem will continue to be with us, especially after the University of Minnesota confirmed this past week that the disease is mutating, which likely explains why it has been reoccurring on farms that thought they had survived its best punch. Yet, those operations are increasingly learning how to manage the disease, leading to strong expansion as producers take advantage of cheap feed costs and tight global meat supplies. Demand isn’t the problem so much right now, despite the strong dollar. Rather, supply is simply over-whelming that demand.

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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