Commodity Index
The CRB/CCI fell to sharp losses on the week with energy, metal and ag markets continuing their decline. The CRB has now retraced 50% of the 2016 rally and key in the week ahead will be if any technical support is uncovered heading into the end of the month and quarter?
Index funds will suffer another quarter of losses and questions abound on whether investors will more fully vacate the raw material space? Commodity index fund investors have endured a long period if negative returns. Patience has to be running thin as US and world equity prices soar.
There is no evidence of cracks in the demand profile for world raw material demand. The Global GDP rate looks to improve to 3.2-3.3% in the last half of 2017. The recent CRB decline is related to growing supplies and not demand destruction. Large supplies get quickly discounted by the marketplace and we cannot advise turning bearish of commodities.
Corn
CBOT corn futures fell 25 cents on improved Central US weather, and the elimination of any high pressure Ridging for early July. Rather abruptly, abnormally cool temps have been established across the heart of the Corn Belt, which in the near term will ease concerns about dryness and provide a modest boost in crop ratings across IL, IN & MO. Argentine fob basis has sunk to record lows (just a penny over CBOT futures for spot delivery) and US export demand will be slowing over the next 10-12 weeks. However, unlike recent years, there’s not a clear North American climate signal. Record warm ocean temps (globally) are causing fits for the model output, and our best guess on the reminder of summer is wild swings in weather conditions. Heat & dryness is expected to reveal itself a few more times between now and September.
Technically, the market failed at recent highs, and so the long-established range will continue until weather in the second half of July is known. Longer term corn likely will maintain the range as drawn in attached chart.
Wheat
Wheat futures ended mixed, but firm relative to neighboring corn and soy markets. CME futures fell a penny, KC fell 5 cents, while spring wheat futures rallied to new highs for the move at $6.60/Bu, basis spot. Major world exporter production is in retreat and weather concern exists across the Northern US, Southern Canada, E Europe, Ukraine and Australia. And ARC is concerned about the arrival of heat and dryness in the Black Sea next week. Combined major exporter production may be down 4-5 MMTs from the USDA’s forecast, and thus down roughly 20 MMTs from last year. The world cash market is beginning to account for this with spot offers some $10/MT ($.30/Bu) above last year, and still we doubt spring wheat prices are high enough to trigger needed rationing. Wheat’s premium to corn will widen further in the weeks ahead, and fundamental support is pegged at $4.50, basis spot. Await a test of $4.90-5.00, Sep CME, to extend cash sales. Longer term wheat has bottomed.
Soybeans
Soybeans were under pressure at the start of the week as the extended weather forecasts turned cooler and wette. Reduced weather threats, and selling ahead of key USDA June reports kept the soybean market under pressure through the week. Spot July tested $9 in late week trade, while new crop November slipped to 9 month lows. Key USDA reports will be released at the end of the week with NASS’s count of June 1 soybean stocks and updated estimates of new crop acreage. Trade estimates have soybean stocks at a decade old high (like last quarter), while the average estimate calls for a slight increase in soybean acres from March. The soybean market is back to deeply oversold levels, and we are not willing to advise sales at current prices, but adverse weather is needed to spur any kind of recovery into late summer.
Cattle
It was another week of liquidation in the cattle market that left both live and feeder cattle prices lower at the end of the week. Weak technical conditions along with lower cash trade and a turn in the beef market all weighed on trade through the week. Cattle in the cash market began trading at midweek and initial sales were $9-10 lower for the week at $121-122.
The USDA reported US beef production in May was 6% over a year ago, while beef stocks dropped 10% during the month. Beef demand appears to have been quite strong over the last 6 weeks. But after hitting multi year highs, the beef market turned down this week which is likely marking a seasonal top. Domestic US beef demand is expected to slow following the July 4th holiday. June cattle expire next week, while August cattle continue to trade significantly under the cash market. Strong basis levels have repeatedly supported CME futures on corrections all year.
Hogs
It was another sharply mixed week of trade in the hog market with spot July pushing on to new highs for the year, while the rest of the market turned down in the last half of the week on selling ahead of next week’s Inventory Report. The pork cutout value was sharply higher through the week and briefly traded over $100 for the 1st time since late 2014, with the week’s rally led by strength in the pork belly market, which briefly traded at multi year highs. Strong pork prices has maintained very strong slaughter margins and lifted cash hog prices. The quarterly USDA Inventory Report is expected to show record hog supplies and steady to higher farrowing rates. At week’s end producers could still lock in a $64 average 4th quarter price versus $50 last year. The rebound in demand, especially bellies has been incredible, but a top in belly prices will mark a high in the cash hog market by late summer.