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Sunday Outlook

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Weekend Developments

* Wall Street continues to buzz this weekend about the dismal jobs report released Friday morning. The U.S. economy only created 142,000 jobs in September and July and August numbers were revised significantly lower and the jobs participation rate fell to a 38-year low. The data is believed to be sufficiently poor enough to put off a Fed rate hike until at least March, and possibly late 2016.

* The dollar fell sharply following the jobs report release on ideas that there will not be a rate hike anytime soon. A sustained lower trending dollar is needed to help entice renewed interest in the commodity sector currently near long-term multi-year lows. Yet, selling of the dollar is limited by calls for the European Central Bank to print more euros, which would be expected to pressure it.

* Volkswagen’s designated chairman reportedly warned managers that the current scandal it faces could threaten its existence. The warning has implications for the European economy, which is barely creeping along above recessionary levels, with some calls for the European Central Bank to expand its quantitative easing program being heard.

* Trade worries about global economic problems, including here in the United States, should not be under-estimated as to the impact that then has on grain and oilseed prices. Fund managers are becoming more reluctant to build ownership in the so-called risker asset classes. Grain prices could still sustain a rally in this environment, but they need to have a stronger fundamental case to entice fund managers to build ownership.

* Wheat provides one of the more interesting scenarios, considering the above, with Chicago rallying 60 cents over the past month despite poor demand and big stocks. Yet, hedge fund managers had already built large short (sold) positions as they pushed prices to multi-year lows pricing in the bearish fundamentals. That’s not to say that prices can’t go lower again, but fund managers would rather take profits, with other bargain hunters buying as well, seeing greater upside risk than downside at multi-year lows as many major-producing areas face adverse weather. Many areas of the U.S. winter wheat belt are dry, while the same is true for wheat in Australia, Ukraine and Russia. Global supplies are large enough that I don’t expect fund managers to build net long (bought) positions at this point, but they’re simply less comfortable holding large short positions.

* Hedge fund managers have reduced their net short positions of soybeans, down to 184 million bushels on September 29 according to Friday’s CFTC data release. However, they also lack the confidence needed at this point to go long. Demand fears are being answered as China becomes an aggressive buyer, along with good soymeal export demand. However, yield reports suggest that the crop may be large enough to meet that demand without the need for a price rise to slow the demand. As such, prices continue to chop sideways, with traders hoping that Friday’s USDA crop report will provide some clarity. Traders will be watching for a reduction in harvested acres in that report, as much as they will be an adjustment in USDA’s yield estimate.

* One of the more interesting dynamics in corn has been the basis market. Processors are pushing bids in the corn-deficit eastern Midwest to pull bushels out of the field before they get locked away in the bin. Even some western Midwest basis bids have been stronger than one would expect in a year when USDA and much of the industry continues to anticipate a big crop. Yield data can be interpreted through the prism of one’s expectations, so while many traders anticipate that the crop is smaller than currently suggested, they need to see confirmation of that in Friday’s USDA crop report to provide the confidence needed to sustain a rally above chart resistance at $3.95 and again at $4.00, followed by $4.06. Hedge fund managers are near neutral on corn ownership.

* Harvest interruptions in the Midwest remain relatively minor, with just light activity expected late this week. A few more showers could develop in northwestern areas mid-month, but harvest is expected to largely be free to advance rapidly over the next couple of weeks.

* Notable showers were seen in scattered areas of the southwestern Plains over the weekend, but many areas remain quite dry. Relief is expected by Thursday in much of Texas and southwestern Oklahoma, but showers are otherwise limited for the Plains hard red winter wheat belt the next two weeks. The longer-range CFS 16- to 30-day outlook trended wetter this weekend, but confidence is low. The overall weather pattern remains warm, enhancing dry conditions for harvest, but also hampering wheat planting and establishment.

* Rains are expected to expand into dry areas of Brazil’s northwestern corn & soybean belt in the 6- to 10-day period, improving germination. Elsewhere, cold dry conditions remain a problem for wheat in the Former Soviet Union the next 10 days. Showers will be confined to far southern areas, with frequent freezes starting later this week to prematurely stall any growth that is occurring.

Commodity Weather Group Weekend Summary

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In the U.S., weekend rains focused along the East Coast, as expected. Heaviest totals were in the Carolinas, but severe flooding (10 to nearly 15″ so far) continues to focus on central SC. While a small soy/cotton area at the national scale, significant losses are likely.

Interruptions to Midwest/Delta harvest remain minor, with weekend showers limited to a few spots in the eastern TN and OH Valleys and only brief interruptions expected from light activity late this week. A few more showers develop in the northwest Midwest and Delta by the 11 to 15 day, but harvest concerns remain minor. The rains would aid moisture for early soft wheat growth.

Plains showers were most notable in the OK Panhandle, northern/far western parts of the TX Panhandle, and a few spots in northwest KS, leaving much of eastern CO and parts of central/southwest KS, southwest OK, central TX, and eastern sections of the TX Panhandle most notably dry (1/4 of hard red wheat). Relief is likely by Thursday in much of TX and southwest OK, but showers otherwise remain limited in the belt through the next two weeks. The CFS guidance did trend wetter in the 16 to 30 day, but confidence is low. A generally warm pattern through the balance of October will continue to delay the first notable freeze in most of the Midwest.

In South America, widespread rains fell across Brazil wheat (.50 to 2.5″) this weekend. Rains return in the latter 1/2 of this week, with .50 to 2.5″ (locally 5″) leading to renewed quality loss and localized lodging damage. Additional substantial rains early in the 11 to 15 day will add to harvest problems. Rains expand into northwest Brazil corn/soy in the 6 to 10 day, improving germination. Rain potential for Brazil coffee has diminished though, with only isolated relief in the 6 to 10 day delaying bloom and hampering existing bloom retention. Wetness threats to sugarcane areas have contracted to the southern 15% of the belt.

Argentina rains (.25 to .50″) were limited to southeast fringes of the belt in the past 2 days. Rains (.25 to 1″) expand across the region early this week and again late in the 6 to 10 day to keep wheat heading and corn/soy germination in good shape across the belt.

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

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