Commodity Index
Crude oil formed its seasonal lows and the rise in energy prices helped push the CCI/CRB index to a higher weekly close. Note that the index traded within the prior week’s range making any rise of fall below last week’s high or low important. The CRB index has been a general downtrend since the start of 2017 as China economic growth concern tied to the slowing of their shadow banking system have been widely discussed. Economic growth does appear to be slowing within China with interest rates on the rise. However, the remainder of the emerging world economy is expanding as the US dollar holds in sideways range. If the US greenback returns to a more bullish outlook later this year, the export outlook for emerging economies will be bright. ARC’s advice to commodity investors is to be a trader and not get fixed with either a bull or bear mentality as the general raw material market treks sideways. Reflationary pressures are emerging slowly.
Corn
Corn futures are bound in a rather narrow range and the USDA’s highly anticipated May WASDE did little to change this. The USDA provided no real different insight and the updated balance sheets are viewed as positive. Old crop global grain stocks were raised yet again, South American cash basis remains historically weak, and amid abnormal rainfall in Brazil over the next 10 days, massive exports beginning in July are nearly certain. This is a reminder that the corn market now is much less US-centric, and why the market has largely shrugged off this season’s relatively poor seeding start across the Plains & Midwest. Corn’s new crop US & world balance sheets, however, look to tighten, even amid trend yields, and so ARC does not advice chasing breaks below $3.60, basis spot. Planting dates are becoming a concern in parts of the Midwest, and key areas of Ukraine have been in a much drier than normal trend over the last 30 days. We remain patient with new sales, and be mindful that any perception of adverse weather this summer will allow for a test of $4.05-4.20 basis Dec.
Wheat
Wheat futures ended slightly lower on fund and producer selling. The CFTC’s report last week revealed a smaller than expected fund net short position, and selling resumed amid improving conditions in Europe, Ukraine and Russia. However, high protein US wheat inventories will be declining in 2017/18, and this has offered support on breaks. Via wheat’s monthly chart, a long term bottom was very likely established in 2016, and further downside risk requires confirmation of above trend yields across the Northern Hemisphere – which is several months away. ARC does caution against turning overly bullish on rallies, however. US exports next year will be a function of production elsewhere, and the lack of El Nino this year should bode at least somewhat favorably for the Southern Hemisphere. Old crop global stocks were raised (again), and demand needs to be sustained. As such we doubt rallies above $5.00 spot, can be achieved unless drought builds in the N Hemisphere. The downside price risk in wheat is limited with the upside potential tied to weather into late July.
Soybeans
Soybean futures were on both sides of unchanged through the week before ending lower. The May WASDE report did not offer any major surprises as changes to the USDA’s balance sheet estimates had been largely expected. Old crop exports were increased, crush lowered slightly and stocks slipped back to the March estimate level of 435 Mil Bu. New crop supply was also anticipated from the March acreage figure and the Outlook Forum yield. S American crop estimates increased slightly, but those figures have been anticipated for many weeks. Funds have started to cover, but are still heavily short, while only light hedge related selling was noted last week. But with prices still against harvest lows, world farmers are not anxious sellers. We see the market as largely range bound and target rallies to $10+ for our next sale. The soybean market is well priced until more is known about new crop weather/yield. Our bet is for a mid to late year rally.
Cattle
Volatile trade in the cattle market continued last week, which left futures lower on the week while trends in the cash market were mixed. Beef prices moved up every day, while cattle trade got underway at midweek with initial sales developing $7 lower at $138/cwt. The May WASDE slightly lowered quarterly beef production estimates slightly. The largest adjustments were in the price forecasts, where the USDA raised the 3rd quarter forecast by $4 and the 4th quarter by $3 to $118, which are all close to where the CME is pricing quarterly cattle values. Late week news for the beef and cattle markets was that China will soon allow for conditional imports of US beef. The US beef cannot contain hormones which means that sizeable imports will have to wait until late 2017 or early 2018.
Nearby, we see cattle futures as fully valued, with a further correction in cash prices to be underway by the end of the month. Longer, term we are not anxious to sell cattle beyond the 3rd quarter as placement rates will decline from the 6-10% pace of May. ARC sees value below $114 June futures.