Commodity Index
The CRB Index finished slightly higher with a close in the middle of the week’s range. Energy futures are losing their upside momentum while the ag markets are expected to closely follow US trade announcements amid the upcoming NAFTA talks in mid March. ARC research calls for a stall in the CRB rally as the US dollar recovers and the Trump Administration focuses on US trade issues in the weeks ahead, rather than new investment in US infrastructure. ARC maintains a longer term bullish outlook for commodities, but a pause is due.Technically, the CRB needs to accelerate its rally or risk a correction. Our CRB research argues for weakness heading into the end of the quarter with energy and meat markets pacing the decline. The next low should arrive in April.
Corn
Corn’s rally continues amid the ongoing Argentine drought (a late season pattern shift, such as the one that occurred in the US last year is unlikely), as the US’s share of world trade continues to balloon. Export sales through the week ending last Thursday were 69 Mil Bu, again more than three times the pace needed to meet the USDA’s forecast! And still US corn is the world’s cheapest feedgrain for Mar-May delivery. Argentine harvest progress has reached 5% complete, and until the domestic pipeline is refilled, South American exports will be absent. South American corn surpluses are typical available in mid- to late summer. Our work suggests that the USDA’s US 2017/18 US corn export forecast is some 50-150 Mil Bu too low. Old crop stocks are inching closer to 2.0 Bil Bu; implied new crop stocks are likely in a range of 1.8-2.0. We doubt highs are in, but as a new Northern Hemisphere growing season starts, we maintian a strategy of selling rallies close to $3.90 May. Note on the attached chart that corn is testing a long term down trend line.
Wheat
Wheat futures this week surged to new 7-month highs on continued expansion in drought across the Plains (and associated drop in crop ratings there), and as Russian logistical issues push up fob offers for Mar-Apr delivery. We point out that this rally is not being driven by demand – like corn’s – and so it’s prudent to scale into old crop, new crop and 2019 sales at current prices. To sustain the rally through summer, adverse weather will be needed in at least one more major exporting country (Russia, namely), as otherwise US exports in 2018 will be limited to captive markets, which may account for just 750-800 Mil Bu. The point is that the rally is no doubt doing its job of slowing consumption, and as such US wheat end stocks will stay elevated. However, we do favor extending flour coverage below $5.30, July KC, as it above normal rainfall is needed over the next 45-60 days to adequately salvage US HRW yield potential. Fair value lies between $4.80-5.20 basis spot CME.
Soybeans
Soybean/meal markets extended their gains with spot soybeans marking its best close in nearly a year. Soymeal traded at the highest price since July of 2016. Funds continued pile into the soy markets as conditions in Argentina worsened through the week, while US farmers have been big sellers on this rally. However, end of week forecast for Argentina show limited rain, while 76% of the crop has been rates as either poor or very poor. The USDA’s March WASDE will be out at the end of the week, and significant reduction to S American production are expected, which will likely keep the forecast for US soybeans steady. Brazilian soybean basis rallied this week, and through the middle of harvest offers are 10-15 cents over US offers, which is likely why US exporters were able to book sales last week. Our view stays bullish on breaks, with the next target near $11.
Cattle
It was a mostly lower week of trade in the cattle market, that had April futures falling under major moving averages and trading at 6 week low. Funds sold out length in cattle and feeder cattle futures, as the cash cattle market traded a couple dollars lower at midweek, at $126-127. Fundamentally, fed cattle supplies are known to be well above a year ago, and there is no change in the outlook for 2nd quarter US beef production, which will be at least 10-12% larger than a year ago. Seasonally beef prices tend to gain into the summer on an increase in grilling demand. However, rallies this year are expected to be slowed by a 8-9% rise in on feed totals. The high in February at $130 likely marks a seasonal top, with a drop back to $106-110 to unfold in the coming months. US trade of all ag products becomes more important amid rising US beef production.
Hogs
Hog futures closed the week lower as sliding cash prices pressured the CME in early week trade, while fund liquidation took the market sharply lower into the end of the week. Funds have been steadily selling out their long position, and a market low is expected once funds are back near flat in hog futures. Fundamentally, supply pressure remain large as weekly kill totals hold well over a year ago, while carcass weights have also held nearly a pound heavier than a year ago. Any small slip in demand leaves the hog/pork markets vulnerable to corrections. Technically, hog futures fell back below a longer term trend line, and the next level of chart support is noted near $64. This would likely confirm a seasonal low. Longer term, we expect a seasonal summer rally will be limited to the mid $80’s, while we continue to favor 4th quarter sales in December at $65 or better. Record large US meat supplies will cap rallies
