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Morning Outlook

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Overnight Highlights

* The dollar pushed modestly higher once again overnight on renewed ideas of a possible rate hike by the Fed following yesterday’s consumer price index data showing that inflation was nearing the Federal Reserve’s target. Even so, the dollar remains in a longer-term downtrend, with Fed fund trading suggesting that Wall Street doesn’t expect a rate hike before March at the earliest.

* Yet, the recent rebound in the dollar and drop in crude oil has weighed on the broader commodity sector. Crude oil managed a modest bounce overnight, but remains well off its session high. Early-morning money flow is net negative for the broader commodity sector, but lacks any clear direction to close out the week.

* Corn futures added to their recent losing streak, with the lead December contract slipping below the September 21 low of $3.75, opening up a possible move to $3.65 or $3.60 per bushel. Sentiment in the corn market currently reflects ideas that big crops get bigger and that export demand is weak, with little help currently coming from the outside markets as crude oil struggles to find firm footing.

* Reuters reports that China will revive its corn-based ethanol program. It had suspended the program in 2006 over food security concerns. However, China is currently more worried about its massive reserves of corn and apparently sees ethanol as a viable way to draw down those large reserves. Reduction of these reserves could finally reopen the door for U.S. corn imports down the road.

* Global surplus corn reserves are currently projected to be a 69.9-day supply, down from 72.4 days last year, but up just 15 days from the 40-year low set four years ago. In other words, the world is operating on just-in-time supplies, but the markets are comfortable with that as long as no significant threats are seen. That could change over the next six months to a year.

* There’s no real trend in growing season weather for the Midwest in year’s following an El Nino. However, there is a much stronger tendency for a hot dry Midwest growing season when conditions in the equatorial Pacific transition more quickly from El Nino toward a La Nina pattern. As such, the speed of the transition is the key. The transitions tend to be quickest following strong El Nino patterns. The current El Nino pattern is on track to be one of the strongest on record. None of this is a certainty, but the odds of a problem next year would appear to be elevated at a time when global supplies of corn are relatively snug.

* Soybeans pushed higher overnight on strong demand and dryness concerns in Mato Grosso, but most of those gains have dissipated. The overall trend remains higher, but the rally has stalled in recent days as crude oil struggles to find direction. Global soybean stocks remain large enough to meet strong demand at this point, but another growing season is just getting started south of the equator with less than ideal conditions. The seasonal charts favor strength in the soybean market in the weeks ahead, with expectations that it will help produce modest gains in the broader grain sector, but weakness in the dollar and strength in the crude oil markets would certainly be expected to help.

* Wheat found firmer footing overnight after initially dipping to test support at the 50-day moving average in Chicago and Kansas City. The hard red winter wheat market continues to slowly gain on Chicago after trading at big discounts the past several months. History says that Kansas City needs to trade at a premium to Chicago to sustain a rally. Confidence grows if Kansas City is able to move above an 8-cent premium to the soft wheat market.

* The big shift in this morning’s forecast models is a stronger upper-level trough coming in from the West, setting off showers across the Plains hard red winter wheat belt in the latter half of next week. Showers are also expected to then stretch to the northeast across Iowa to the Great Lakes, shifting to the east in the 11- to 15-day period.

* Brazil showers continue to focus on southern areas the next 10 days, creating quality problems for the wheat crop and slowing row crop planting, while leaving northern soybean areas mostly dry. The best chances for relief in northern areas comes in the 11- to 15-day period, but the models are currently in disagreement, leading to a lack of confidence. Yet, Commodity Weather Group continues to favor relief for hot/dry areas of Mato Grosso. The 16- to 30-day models then revert drier in the north, but may be too aggressive.

* Rains are likely across the Former Soviet Union wheat belt next week, but the driest areas in Eastern Ukraine are still not favored for relief. The showers should provide some improvement in growth for drier areas in central Ukraine and parts of South Russia. Northern Russia will struggle to see any real benefit as cold weather leads to frequent freezes that limit growth and limit winter hardiness heading into the area’s typically harsh winters. Light rains are expected in the driest areas of the southern quarter of Australia’s wheat belt early next week.

Commodity Weather Group Forecast

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In the U.S., only light showers (.10 to .50″) fell in western OK/northern AR yesterday. Harvest conditions should remain favorable in the eastern Midwest/Delta through the next 10 days, with showers likely to be limited to the western Midwest during the latter half of next week. The big shift today was model support for a stronger upper-level trough coming in from the West and setting off showers across the Plains hard red wheat, improving germination/early growth.

Eastern Midwest/Delta rains do pick up in the 11 to 15 day period but will only interfere with late harvest. The rains will improve germination/early growth for the soft red winter wheat. Southeast harvest should continue to recover in the next two weeks, as dry weather dominates.

In South America, Brazil showers scattered from central Rio Grande do Sul into far southern Parana in the past day. Southern areas remain favored in the next ten days, causing minor quality declines for the southern 1/2 of the wheat belt but no notable damage concerns. A few showers are possible into the coffee belt next Friday/Saturday, but the best chances for northern Brazil arrive by the middle of the 11 to 15 day period as tropical enhancement (MJO event) occurs.

The GFS guidance trended much wetter at that point and is wetter than our outlook, while the Euro ensembles are relatively unchanged and remain split between wetter and drier outcomes. This keeps confidence low, but our forecast continues to favor relief from heat/dryness in coffee and Mato Grosso soy areas. The 16 to 30 day models revert drier in the north but may be too aggressive.

Argentina returned to a dry pattern yesterday, but wetter guidance is favored for shower events on Monday night and again late in the 6 to 10 day given recent dry biases in the models. This should keep concerns limited. Cool weather will continue to slow wheat growth, preventing much concern from occasional light frost in southwest Buenos Aires.

Morning Market Snapshot

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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(r) | 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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