Commodity Index
The CRB/CCI index closed lower amid the weakening energy market and a US dollar that stabilized. Friday’s sharp drop in the US equity market is likely to produce additional selling with some spillover into the raw material markets. A test of the $420 CRB support will produce the next buying opportunity. The inside week argues in the CBR Index argues that the upside momentum is waning as crude futures stall against $67-69 resistance. Also, notice that the CCI index failed to exceed the 2015 and 2016 highs.
The week ahead promises a potential recovery in the US dollar and a further decline in the US stock market. Following a 9 year almost nonstop rally, a 10% stock market correction would produce a near 3,000 point drop in the DOW.
Rising US interest rates are offering alternatives to US and world investors with the 10 year note interest rate expected to surge above 3% on the tightening US labor force and budding inflation. Key in the week ahead will be whether investors reduced their stock holdings in move to alternative investments like raw materials?
Corn
March corn ended the week higher, driven by a deepening drought in Argentina, better than expected export sales, and to some extent the ongoing lack of any precip across the US Plains. ARC looks for CBOT corn to ebb & flow in the weeks ahead, but increasingly further rallies are most probable. There’s a better chance of rainfall in Argentina in the 11-15 day period, but this will be no means change the longer term trend in soil moisture depletion. And regardless of S American weather US corn is by far the world’s cheapest feedgrain into June, and so until S America’s surplus is available in mid-summer, US export demand will remain solid. We’re also not willing to chase breaks amid a rapid expansion in severe/extreme drought conditions in the US, and Central US dryness doesn’t likely change until La Nina fades sometime in early summer. End users are advised to extend coverage below $3.65, basis May, and 10-15 cent rallies are targeted to extend cash sales.
Wheat
US wheat futures ended widely mixed this week, with winter contracts higher and spring lower. KC continues to gain on all others as extreme drought expands across the Southern & Central Plains, and KC’s premium should rally further into late winter amid declining yield prospects. The US market is not benefiting from any boost in demand, and in fact Gulf wheat offers are well above all other origins. But the driest winter on record is plaguing parts of the US Plains, and amid unchanged winter wheat acres there’s potential for US end stocks to fall below 800 Mil Bu in 2018/19. The point is that until the US weather pattern shifts the goal of the market is to slow consumption. And it’s clear this season’s dryness is linked to La Nina, which is now forecast to linger into the latter part of spring. A bullish outlook requires adverse weather in yet another major exporting country, but additional premium will be added if above normal precip fails to appear by March 1. Target $4.90 basis July CME and $5.10, basis July KC to extend new crop sales.
Soybeans
Soybeans finished the week lower on technical selling and wetter weather forecasts for Argentina. Producers were big sellers on the early week rally, while funds joined in as the extended weather forecast showed hints of rain. However, the late week forecast stays dry thru the weekend and overall shows below normal rainfall over the next 10 days. And high temperatures push well above 100° in the week ahead. The Buenos Aires Grain Exchange’s initial crop estimate was at 50 MMTs or 6 MMTs under the latest USDA forecast. Meaningful rains need to fall in the next several weeks to avoid both yield losses and higher abandonment. As of last Tuesday, funds were still short 22,000 soybean contracts, while a weekly close over $10 would likely trigger fund buying and test of $10.40-10.50. Its all about South American weather.
Cattle
Cattle futures started the week higher following better than expected cash trade, and then turned down on profit taking ahead of the January cattle Inventory Report while cash markets began trading early in the week at $126, or a dollar lower from the previous. The cattle inventory report offered few surprises, but did confirm that the US beef cow herd was up 2% year over year. However, heifer retention was down and replacement heifer inventories were off 4% from a year ago. The report also showed larger January 1 feeder cattle supplies, but due to a sharp increase on feed, there were fewer feeder cattle outside feedlots. This is expected to lower placement rates in the year ahead, also sparked a strong late week rally from fund buying, though US beef production in the 1st half of the year is expected to be record large. US kill capacity will be strained this summer with weekly slaughter rates more than 660,000 head/week. US beef prices look to continue their decline into March.
Hogs
