Commodity Indexes
The Continuous Commodity Index marked an inside week of trading and was higher at Friday’s close, as a host of commodity groups closed higher as the US dollar index briefly traded at a multi year low on Friday. Energy markets on average were up 2% for the week, led by $2.48 bounce in the crude oil market. Metals marked the strongest weekly gains, with spot gold, copper and silver markets averaging a 5% increase at Friday’s close, led by scorching 7% rally in copper. CME Ag markets were higher in the grains and mixed in livestock, while soft commodity markets were mixed. The longer term monthly chart the Index shows a bottoming pattern still developing, while a weekly close above the late January high would confirm a technical upside breakout. We expect that commodity fund managers will continue to accumulate raw materials through the 1st half of 2018 as US equity markets remain highly priced.
Corn
Corn futures rallied another 5 cents, hitting new highs for the move, and while fund short covering has been rather noticeable, the move higher has been driven more by fundamentals. Argentine drought has been well documented, but still private crop estimates there look a bit too high – note that Dec-Feb rainfall this season has been the lowest in at least 18 years. Adverse weather in Argentine has driven basis there to further gains, which along with rising barley & feed wheat prices bode well for US exports into spring/early summer. US export sales in recent weeks have ranged from 70-78 Mil Bu, while just 22 Mil per week is needed to meet the USDA’s forecast. There’s a growing body of evidence to suggest old crop US end stocks will be closer to 2.2 Bil Bu (vs. the USDA’s 2.35), and new crop stocks will fall to 1.9-2.0 Bil without steady/higher seedings this spring. Upside risk remains until normal weather can be confirmed in Brazil in Apr/May. A close above $3.75, March, will attract more fund buying.
Wheat
Wheat futures ended higher by varying degrees, and once again this week’s rally was led by contracts in KC. Managed funds on Tuesday maintained a moderate net long position in HRW futures, and covered another 27,000 contracts in Chicago. Funds’ rapid paring of short positions is noteworthy, but still this rally is being led by cash prices in the US and elsewhere. Interior HRW basis is now just $.05 below futures, and Russian fob offers hit new seasonal highs this week. Russia’s interior market is equally firm. Our work still indicates that until a major weather pattern shift occurs in the US, downside risk is limited, and any breaks of 10-15 cents should be used to extend wheat & flour coverage. And corn supply & demand is changing enough to support all US grain markets. Wheat remain in a weekly uptrend, and March KC’s chart pattern is targeting $4.90-5.00, a level that looks to be hit if operational models fail to show meaningful precip across the Plains in the next 10 days.
Soybeans
Soybean and meal markets both broke out to the upside on Argentine weather and crop concerns. At the end of the week spot soybean futures marked the highest weekly close since March 2017, while spot soybean meal charted the best weekly close since July 2016. Limited rains fell across Argentine crop growing areas last week, and the forecasts project less than 1” across much of the soybean belt over the next 10 days. Private Argentine crop analysts have now cut crop size estimates to 45-46 MMTs versus the USDA’s latest estimate of 54 MMTs. The loss of 8-10 MMTs of soybeans looks to be felt directly in the world soybean meal trade, which has pushed CBOT crush margins out to $1.47/Bu. The USDA has Argentine soybean exports penciled in at 8.5 MMTs, which is likely to be cut be cut in half, which improves the outlook for US soybean exports later this year.
Our initial target is at $10.40, but a much stronger rally could unfold if Arg crops do not soon get rain.
Cattle
Cattle futures traded higher all week on chart related buying and ideas that this week’s cash trade would be higher. On a spot basis, February cattle traded over $129 and were at the highest level since last June, while cash trade was at $130. Weekly beef production rates are massive, and cumulative production for the year is up 3% year over year, however, US beef export demand has so far been exceptionally strong, and beef export commitments are record large. All of which has kept cattle prices far higher than expected. The unknown in the market, is whether export demand can keep up with or exceed the 12% increase in beef production that is expected in the 2nd quarter. In the near term, spot cattle looks to be aiming for technical targets near $135, and we think such a rally should be used to price spring and summer feedlot production.
Hogs
A lower start to the week in the hog market found good demand, and hogs traded higher into midweek. However, the cash market was down every day this week which limited gains at the CME, and took the market back to new lows through Friday’s trading. February hogs expired midweek at $73.50, and the roll to April on the nearby chart put spot hog futures sharply lower for the week. Hog carcass weights are holding nearly 2 Lbs heavier than a year ago, while cumulative hog slaughter is up nearly 2% year over year. Packers are struggling to move products, and slaughter margins remain thin as wholesale pork prices are holding just above hog prices. The near term outlook is neutral as the CME has already priced in a spring correction, while a seasonal summer high is expected in the mid-80’s.