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Morning Outlook

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Overnight Highlights

·         China’s main stock index, the Shanghai Composite Index, dropped as much as another 5.1% overnight, but then closed down just 1.7%. Some analysts expect additional losses over the next several weeks, but the panic appears to be easing, allowing commodity prices to focus a bit more on the fundamentals. China’s economy is still a concern for the Ag commodities long-term, but removal of some of the emotional panic allows traders to focus a bit more on the current state of the crops.

·         Crude oil continues to trend lower, falling to four-month lows again overnight below $47 per barrel. U.S. oil production continues to exceed expectations even as OPEC pumps record volumes.

·         The dollar is bouncing back today as the Federal Reserve begins two days of meetings to discuss monetary policy. The Fed is scheduled to release its revised monetary policy at 1 p.m. CDT tomorrow, with Wall Street watching closely for signs of when the Fed plans to push interest rates higher.

·         However, the commodity complex as a whole is bouncing this morning with money cautiously flowing back into it following its recent collapse to six-year lows. Soybeans are leading the way higher for the Ag complex, posting double-digit gains this morning on strong upfront demand and lingering concerns about the size of this year’s crop.

·         Even so, the overall gains within the grain complex remain rather tepid and cautious relative to recent losses. All concerns have not suddenly been swept out the door. Traders still have concerns that selling will return to the broader markets, which leaves them cautious about rebuilding ownership within the grain sector.

·         Meanwhile, Asian trade sources report that major funds in the region are looking for the right time to enter the grain complex. They see a strengthening El Nino weather pattern that is expected by some to linger deep into 2015, which could threaten production in a number of areas around the world, especially in Asia. While still early, this provides another sign of how the tide may be turning for the grain complex, with much hanging on the actual size of this year’s U.S. crops.

·         Monday afternoon’s USDA weekly crop progress report revealed that crop ratings for both the corn and soybean crop rose slightly over the past week at a time when they typically trend lower into harvest. That’s not unusual for wet years as weather risks become masked by developing crops in July. The fact is that a lot of problems continue to haunt this year’s crop, making it highly unlikely that they will reach the size currently forecast by USDA. However, the market may not realize that for many weeks as it continues to focus on crop ratings taken from the road rather than the middle of fields where the problems are located.

·         In the meantime, look for gains to be limited by a more favorable weather pattern that features relatively mild temperatures with periodic showers. The European forecast model does show a warmer/drier risk for southern areas of the Midwest where roots are shallow in the 6- to 10-day period that will need to be watched for signs of a flash drought, with southern Delta soybeans also subject to moisture stress over the next 10 days. We’ll also continue to see heat and dryness stress for European corn over the next 10 days.

·         The bottom line is that a lot of end users should see this break as an opportunity to extend coverage with recent losses being overdone. There will likely come a time when the speculative hedge funds will want to rebuild some ownership, but look for them to remain cautious in the near-term as they assess outside market risks.

Commodity Weather Group Forecast

In the Midwest/South, rains favored southern/eastern SD, southeast ND, western MN, northwest/central IA, northern NE, and northeast MO in the past day, filling in additional dry patches in the northwest Midwest. Rains today also fill in gaps near the IA/IL and IA/WI borders, with a few mid-week showers scattered into the eastern Midwest but otherwise drier conditions to finish the week.

Rains will then expand in the 6 to 15 day and should reach all but far northwest areas, although the most organized rains likely favor NE, KS, southern IA, and northern MO. While a few spots around the Great Lakes could still miss out, any dry patches in the Midwest should be very limited. Mid 90s or better were limited to KS/southern MO/Delta yesterday but expand into the southwest 1/4 of the Midwest today before moderating again.

The Euro guidance shows a similar warmup in the 6 to 10 day, but our forecast remains milder. Limited Delta coverage and hot temperatures will allow stress to continue to build in over 1/3 of the soy belt in the next 2 weeks, mainly impacting LA, southern MS, and southern AR. A mild 16 to 30 day pattern is still expected across the Midwest, with dry threats still largely focused on the Delta.

In the N. Plains/Canada, rains favored much of Saskatchewan, far southeast Alberta, northern MT, eastern SD, southeast ND, and western MN in the past day, and lingering activity today will further limit late stress to wheat/canola. Showers do occasionally occur in the northern Prairies over the next 2 weeks, but otherwise drier weather returns. Crop conditions should be stable for most of Canada for now, while maturing wheat will be favored in the U.S. belt.

Morning 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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