Commodity Index
The CRB/CCI closed slightly higher and bounced to form a double bottom on the weekly chart. Crude oil futures have been weak on the continual rise in US rig counts and that most do not expect that OPEC members will be able to abide by their most recent agreement to hold down production. However, with the US economy gaining traction and it being at nearly full employment, the risk of inflationary price trends is growing with the world GDP rate rising to 3.6%. ARC research maintains that a rotation out of equities and into other assets, including commodities, is a developing investment theme that will play out into year end.
The US dollar tried to recover late week, but the rally ran into strong resistance and a deeper decline appears likely.
ARC research maintains a view of wanting to buy breaks in a host of commodities including energy and ag.
Corn
Corn futures rallied to new highs and a continuation basis spot corn rests at an 11-month peak. A close eye is being kept on developing drought across the Northern Plains, and while the forecast through late June is mixed/ uncertain across the heart of the Corn Belt (IA, IL, IN), it’s simply too hot and dry across western areas. ARC’s climate work suggests a warmer than previously expected summer lies ahead, and some 30-35% of the crop is at risk of declines in soil moisture over the next 2-3 weeks. This is the first real crop threat in several years.
Caution is warranted against turning bullish above $4.00, spot, as South American supplies continue to grow, and as Brazilian exports has started a bit earlier than normal – South American exports will limit any need to ration US supply near term – but there’s still a risk that 17/18 end stocks fall to 1.6-1.8 Bil Bu, which in turn suggest Dec corn will trade between $3.50-4.20 into autumn. Be patient with respect to advancing 17/18 cash sales until more is known about ’17 yield.
Wheat
Wheat futures ended sharply higher this week as drought intensifies across the Northern Plains, protein levels in TX are disappointing, and as the world cash market fails to decline ahead of harvest. The spring wheat balance sheet could get very tight and this will support winter wheat futures on breaks. Sourcing domestic supplies in Russia remains difficult amid new tax policies. Crop problems are mostly absent from Europe and Russia, and so the US market does lose export demand on rallies to $4.90+ basis Sept Chicago. Major world wheat exporter supplies are in decline and a post-harvest rally will be used to advance cash sales. Notice in the graphic that spot CME futures have broken through major technical resistance on the weekly chart, and so fair value is now pegged at $4.30-5.00 through summer. Wheat’s long term bear market ended in 2016 and a broad trading range is now expected throughout much of 2017.
Soybeans
Soybean futures finished the week with solid gains as warm/dry weather pushed funds to begin covering their significant short position. The June WASDE did not offer any significant changes, with just a slight reduction in the old crop crush rate. The market initially broke at the report release, but within minutes the focus was back to Central US weather. Last week’s Drought Monitor showed that 7% of the total US soybean crop was experiencing drought, most of which was located in the N Plains states. 81% of the ND crop and 43% of the SD crop was under moderate or severe drought conditions. The forecast has some rains scheduled for early next week, but not nearly enough to change declining soil moisture conditions. Across the Midwest, the extended forecast is showing the chance for light rains at mid month, but stays warm/dry into late June. The CoT report showed that as of Tuesday, funds had pressed their short position futures position to 101,752 contracts, but had increased their length in the options market. A soaking rain is needed across the Midwest, and we expect the market will continue to add premium until the Central US weather pattern turns more favorable.
Cattle
It was a mixed week of trade in the cattle market that left CME futures mostly lower at Friday’s close. June cattle stopped just short of contract highs early in the week, and then sold off sharply. But they were still over $130 at week’s end. The beef market once again remained surprisingly strong, pushing above the May highs and reaching the best price since July of 2015. Strong beef prices and slaughter margins continue to lend support to the cash cattle market, where initial sales for the week were near steady. Cattle basis has quickly narrowed in the last several weeks, while fed cattle carcass weights now look to be stabilizing, but are still the lowest since 2012. Cash cattle traded at $137 late Friday which will be seen as bullish come Monday. Our view remains that August cattle futures find support under $120 and that cash holds stout.
Hogs
Hog futures traded on both sides of unchanged through the week, with early week selling finding good demand that carried the market higher into late in the week. Fundamentally, support was offered from ongoing strength in the cash market, which was once again higher every day this week and just under $80 on Friday. The pork cutout is still priced over $90, and estimated slaughter margins are holding at multi year highs. This, along with sliding carcass weights continues to place a bid in the cash hog trade. However, the lower slaughter weights will not be enough to offset the number snouts being shipped to the packer, and the outlook for record production continues.
Momentum in the CME has slowed over the last several weeks as basis has narrowed, and our market stance has shifted to neutral. We favor late year hedges/sales on rallies. A test of the 2016 highs on the weekly chart should be used for sales.