Commodity Index
Crude oil prices rallied to a weekly close above $50.00 as the US dollar declined amid Russia’s promise to participate in a hoped for OPEC production cut. The rally kept the CRB recovery going with political uncertainty in the US and Brazil forcing investors to flee to the safety of Europe. US President Trump has left for his first international trip, but the investigation into his involvement with Russia will be a drawn out affair. ARC expects that the US dollar will weaken amid the investigation and the slowing Trump agenda of Health Care and Tax reform.
Funds started selling commodities early in 2017 on a rising US dollar. Now amid the weakness in the USD, there is a risk of a broad CRB rally. Moreover, should the US Central Bank not raise rates, inflationary pressures could build. ARC maintains a view of buying breaks into the end of the 2nd quarter.
Corn
July corn ended marginally higher, bound by very cheap South American fob offers on the upside, but supported by North American weather issues and a falling dollar on breaks. Producer’s suggest that lingering cool/wet weather is taking a toll on recently emerged crops in the E and S Midwest. A shift to needed warmth is not foreseen through early June. This is not the start that producers wanted and US corn crop ratings will suffer when released on May 30th. The US dollar has struggled amid US political turmoil and recent disappointing job growth. The Brazilian real aside, emerging market currencies have maintained stability in recent weeks. Betting on continued acreage expansion in 17/18 and beyond may be unwise, and so it’s possible that global grain stocks will have peaked in 2016/17?
But first, the market must work through a record S American surplus, and massive US wheat and corn ending stocks. Our strategy is to await weather driven rallies to extend sales. Funds are record short in corn futures heading into the heart of a new growing season.
Wheat
Winter wheat futures ended near unchanged on the week while spring wheat futures rallied 9 cents. Canadian planting remains behind last year, and as we’ve mentioned before the US HRS balance sheet tightens quite a bit even with trend yield. Wheat was also largely immune from this week’s Brazilian chaos, and in fact Egypt’s latest tender confirmed that the US is cheap in the world market through mid-summer. Meanwhile, managed funds through Tuesday were expanding their net short position.
Weather outside of N America so far has been rather favorable, but the climate community has a close eye on summer heat and dryness across E Europe & Russia. If this materialized, a quick run to $5.00-5.20, spot CME, can be expected. As such, we’re in no rush to extend sales, and the market is very likely establishing an intermediate bottom. Too much rain in the Plains will spark a strong rally on quality concern.
Soybeans
It was a sharply mixed week of soy trade. Early week strength was wiped out by Brazilian political chaos and the potential for another presidential impeachment. News of the political scandal sent the Brazilian real sharply lower on Thursday. This in turn, triggered large Brazilian cash selling that put spot soybeans back to $9.40 support. US planting progress last week was pegged at 32% complete, just slightly behind average. We estimate soybean planting progress to have reached 52-56% completed through Sunday evening. Rain and cold temps have moved across the Cornbelt at the end of the week, which will keep planters out of the field through the 1st half of the week. It’s been a less than ideal start to the year, but yield potential is not yet harmed. World oilseed demand is robust with Chinese import demand to be raised in coming WASDE reports with US 2016/17 soybean exports to rise to a record large 2,075 Mil Bu.
CBOT soy futures are caught in a range of; $9.40-10.00. A bearish breakout is not expected until the market has confidence that the US will produce another record large soy harvest later this summer.
Cattle
Cattle futures broke sharply from the open Monday and put in weekly low early Tuesday morning. The rest of the week was spent grinding higher, trying to recover early losses. Active cash trade held until Thursday, with cattle trading at $134-135, or $2-3 lower for the week but still $10-12 over June cattle. On the fundamental side of the market, cattle and beef prices typically top in late May and decline into the summer as demand seasonally declines while cattle supplies increase. The beef market started the week strong and then slipped off the highs late in the week, which could be the start of the seasonal break. However, this seasonal bearish trend is already priced into June and August cattle futures. Technically, June cattle futures are $10 under the early month high, with support expected on breaks back under $120.
Hogs
Early week selling in hogs found good demand, that left futures higher at the end of the week. June marked the contract’s best weekly close in nearly a year, and on a spot basis the hog market was at the highest level since last July. Fundamentally, hog numbers are on the decline, which along with good demand has supported a strong rally in cash and futures. However, hog inventories are still record large and a cash market top is expected around $80 this summer. Technical support in June is noted at $75-76, which leaves June hogs stuck in a broad range into expiration. We are neutral on rallies, though tight belly stocks and seasonal trends are still concerns. Longer term, the 4th quarter outlook is bearish on record large production. Hedgers should be looking at rallies to $65 December for hedges.