Commodity Index
The CRB/CCI index recovered strongly to end the week and confirmed a more bullish outlook for broad US commodity prices. Crude oil futures lurched back to $50/barrel and the metal markets gained on the weakening US dollar and lack of a Central US rate hike. ARC expects that the FED will raise their lending rate by another .25% into late year on improving US and world economic conditions. The weaker US dollar is accelerating raw material demand in the emerging market economies. ARC looks for the CRB spot index to reach 420 by late summer and test the late 2016 highs by late year.
For the ag markets, one has to be careful about being too bearish either livestock or grains with the US dollar down 8% on the year. ARC remains steadfast in looking to use breaks for new purchases.
Corn
CBOT corn futures ended the week slightly lower and the trade will be cautious about establishing any large new positions ahead of the USDA’s August report. US corn export sales will remain lackluster through late autumn as South American corn is historically cheap & abundant, and as old crop global corn stocks still may be understated by 2-4 MMTs. So any CBOT rally is based totally on a further loss of US corn supply. ARC research argues for a deeper erosion in US yield potential, with several of our models indicating a national yield of 161-164 Bu/Acre, which assuming unchanged harvested area would strip 550-750 Mil Bu from the US balance sheet. This would put 2017/18 US end stocks closer to 1.7-1.8 Bil. This will also have a measurable positive impact on the major world exporter balance sheet.
Fair value is pegged between $3.60-4.20 basis spot futures. Rallies should be rewarded in both 2017 and 2018 production. However, the downside price risk has been curtailed and December corn is no longer expected to fall below $3.60 during the throes of harvest.
Wheat
Wheat futures ended lower on the week, but found some measure of support on Friday. Like corn, old crop supplies remain abundant – excessive even – while major changes to the new crop world and major exporter balance sheets lie ahead. NASS is fully expected to lower spring wheat yield further and modestly hike abandonment. Canada’s wheat crop is trending closer to 24-25 MMTs, vs. the USDA’s 28, and harvest losses are likely in Northern Europe as a pattern of above normal rainfall will continue there into the middle of August. The net result of all of this is that world cash markets remain well supported, and are at higher levels than at this time a year ago.
The trend through late fall is yet higher cash fob offers, and at current prices, the US Gulf market is somewhat competitive for export demand. We advise against chasing breaks below $4.80, Sept CME, and target $5.35-5.60 to extend or catch up on 2017/18 sales. A longer term low has been set in wheat.
Soybeans
Weather market volatility kept soybeans on the move through the week and had November beans nearly 28 cents over the lows at Friday’s close. A wet weather forecast on Tuesday put in the week’s low, while limited rains and a drier weather outlook supported prices into the end of the week. This was the 4th consecutive weekly close in November above $10.00!
Old crop US soybean exports are picking up and offering support for soybean basis, while limited rains across large portions of the W Midwest and N Plains is whittling away at the new crop supply. Rains last week fell across the parts of the Midwest that didn’t need it and avoided the areas that do. The August Crop Report is now 2 weeks out, and we expect NASS’s initial yield estimate could be as much as 2 BPA under the July WASDE prediction of 48 BPA. Such a yield would likely limit harvest lows this year to $9.50 November.
Cattle
It was a lower week of trade in the cattle market as live and feeder cattle futures responded to the results of the July Cattle on Feed and Inventory Reports. The On Feed report showed larger than expected June feeder cattle placements and on feed supplies, while the Inventory Report showed feeder cattle supplies outside of feedlots at their largest level since 2010. Cattle started the week with limit losses and the market remained under pressure into the end of the week. Basis against both August and October cattle remains exceptionally strong, which is expected to offer short support in the upcoming weeks, but the July cattle report confirm USDA’s forecast for record large 4th quarter beef production.
Longer term, Chinese demand for US beef is expected to ramp up in 2018 and offer a demand pull to prices. Cash cattle are near seasonal lows
Hogs
Hog futures were back and forth through the week with August/October contracts finding support on breaks from firming cash bids. Rallies struggled against record supplies and an outlook for record large pork production in the last half of the year. The cash market continues grind lower, but at the end of the week was more than $8 over August hogs. The NASS Monthly Cold Storage report confirmed another month of record low pork belly stocks, and the pork belly values continue to trade at historic prices. Strong cash prices look to keep support under hog futures on breaks, while strong rallies will struggle on record large inventory. The transition from a demand led bull market (bellies) to a supply driven seasonal bear market looks to keep CME futures in a broad range over the next several weeks. Longer term, a supply bear market lurks into yearend.