Commodity Index
The CCI/CRB Index ended sharply lower as the sum of its parts traded noticeably weak. The rally in crude has paused ahead of the winter months, in which demand slows rather quickly, and as abnormally warm temps look to be maintained across the western two-thirds of the US. Gold fell as the dollar rose, with much debate now occurring over the effect of the US’s new tax proposal, and ag markets ended lower amid bearish data released from Stats Canada early in the week amid hints of needed rainfall in Argentina in late December. ARC doubts a lasting wetter pattern change in Argentina and S Brazil can be established into January amid the arrival of La Nina, but like in the US during summer, markets will fluctuate with each new extended forecast. The CCI’s chart looks more neutral, but it remains that the equity/commodity ratio is near historical highs, which is unsustainable longer term.
Corn
March corn fell 6 cents following new contract lows in wheat, and as the GFS weather model tries to include a shift to wetter weather in Argentina by late December. Whether this shift occurs will be important to near term price direction, beginning with Sunday night’s model runs, but our climate work suggests that it’ll be rather difficult to sustain a lasting period of normal rainfall amid the arrival of La Nina. There’s also a long way to go before Brazil’s ‘18 corn crop is determined. Otherwise, US Gulf corn is the world’s cheapest feedgrain for Dec/Jan arrival, and any renewed bearish trend must be led by South American cash markets, which won’t show much sign of weakness until late winter. Use short-covering rallies to catch up on sales, and we await a test of $3.90-4.00, basis Dec 18, to extend new crop sale & hedges. Longer term, the issue is whether farmers maintain US acreage at 90+ Mil amid decreasing profitability?
Wheat
Wheat futures across the world ended lower this week with fresh contract lows found in KC & CME markets. The December delivery period has proven bearish, but unlike recent years cash basis levels are on the rise. HRW basis in KC rests at a 3-year high, and so we maintain that producers should not sell breaks. A demand driver is lacking to encourage much beyond short covering bounce, but longer term, the US balance sheet looks to tighten amid a loss of acres and a below trendline yield. The US will lose world export market share assuming normal weather in Europe & the Black Sea. Drought continues to build across the S Plains, and there’s just not much incentive to extend sales below $4.50 basis March, and $4.90 basis July CME. Note that the US is now competing much better for Jan-Mar export demand, but US sales will remain slow as EU farmers are likely to ramp up their cash sales pace.
Soybeans
January soybeans gapped higher at the start of the week on worries over adverse S American weather. On a spot basis CBOT soybeans traded at the best price since July. By the week’s end, the weather forecast models had added better rains in the extended outlook. Trading the prospect of rain in 10-14 days is a high risk occupation for any producer or trader. Fundamentally, US soybean supplies are record large, while China continues to import world soybeans at a record pace. Brazil has been able maintain large late season export program, which has come at the expense of the US market. China is on track to import record tonnages of beans this year, but the outlook for US soybean prices now hinges on South American crops. With average yields, Brazil should be able to fill China’s additional demand and US exports will fall after March, while a short South American crop will fuel record large US summer exports. This means that S American weather will continue to drive CBOT soy markets well into early 2018. Fund managers remain committed to securing soybeans for a weather diminished South American crop.
Cattle
Cattle futures were mostly lower through the week on technical liquidation and expectations for lower cash trade. Initial cash business started on Wednesday with early sales coming in $2-3 lower from last week at $117. Technically, spot cattle futures closed out a chart gap at $115.50 that was left just ahead of the October expiration. February cattle are now at the most oversold level since August, though key chart support is still another $2 lower. Fed cattle numbers are expected to tighten into the end of the year, while the CME this week is still telling feedlots to hold cattle into the start of next year. There could be another $.50-2.00 of downside price risk in February futures, but our outlook has turned more bullish under $117.50, with 1st quarter sales advised on a rally back to the mid-$120. This is place to accept risk in the cash market and lift short hedges.
Hogs
Hog futures traded down through the week on technically related fund selling, with February hogs slipping back under the 50 day moving average in late week trading. The cash hog market moved the other direction and marked gains through every day. Fundamentally, there is no change to the outlook for record US hog supplies. The USDA has likely begun the process of surveying producers for the December Hogs and Pigs report, and a record large autumn pig crop is expected. Technically, February hogs have held in a $7 range since October, which is expected to hold into late in the year. But with pork production to again expand in the year ahead, we hold to a view of using strong rallies for sales. Rallies in February back above $70 can be used for 1st quarter sales, while summer hog futures over $85 should also be sold.