Commodity Index
The CRB/CCI index declined and confirmed a more bearish technical profile as prior week lows were exceeded. In fact, the drop below the July low argues for a retest of the June bottom when spot crude oil futures tested $40.00 support. ARC doubts that crude on this break can fall too far under $45.00 on declining US stocks and a seasonal rise in demand. However, the ag markets, including livestock, are in a bearish position with the US dollar rising.
The post August USDA crop report reaction has been bearish, but local field surveys argue for yields that are far different. The market always accepts the USDA data at face value, but some of the best trades into autumn have been set up by August USDA misses. Although there will be some additional decline in the CRB in the week ahead, this is no place to turn bearish.
Corn
Corn futures ended at new 11 month lows and following the USDA’s bearish report last week, summer weather premium has been completely extracted. South American corn exports are ramping up, Black Sea milling wheat cash prices have fallen rather quickly, and early/mid-August is seasonally a weak time of year for price. However, our work continues to point towards a measurable decline in US yields (to 161-166 Bu/Acre), and the growing season looks to finish much drier than normal in IA & IL. And somewhat quietly, moisture deficits have been growing in the Eastern Corn Belt for IN/OH/KY. Perhaps most importantly, the S American cash market bottomed in late July and in Argentina has rallied some 40 cents in recent weeks. Brazilian farmers are slow sellers of the new crop harvest preferring to store at current prices. A bullish outlook is not advised, but neither is a bearish one, and like a year ago we expect sideways trading through autumn. Await rallies to extend sales with lower US corn yields expected to bump prices higher thru the harvest.
Wheat
Wheat futures ended sharply lower for a fourth consecutive week on fund selling. Spot CME futures have fallen to meet a longer term uptrend, and early trading next week will go a long way in determining whether seasonal lows have been scored. The wheat decline has been dramatic, and largely a function of record combined Ukraine/Russian production. However, ARC nots that logistic issues will prevent Russia from exporting more than 29-31 MMTs (similar to last year), and demand beyond this will be forced to other markets – including the US. Canada’s crop continues to decline and despite a likely wetter pattern in Australia in Sep/Oct, production there is likely to better than 22-23 MMTs, vs. 35 MMTs a year ago. Excluding the Black Sea, world wheat exporter supplies will be down 40 MMTs! Seasonal trends point upwards beyond late August, and as such no new sales are advised. Gulf wheat is the world’s cheapest supply, basis fob. Wheat is just too cheap and the US will uncover additional demand and will likely see a further fall in spring wheat production on greater abandonment.
Soybeans
Soybeans were lower sharply lower in the first half and recovered a large portion of early losses in the last half of the week. Chinese demand was uncovered on the break, and fund short covering offered support ahead of the weekend. Some rain fell across IA, but amounts were lite which looks to keep weekly crop ratings at no better than unchanged. Monday’s Pro Farmer Crop Tour and the relentless stream of tweets from the field that will have the markets attention. The Tour has a fairly good track record for estimating the USDA’s September Crop Report yield. Key figures will be pod counts in IN, IL and IA where crops are enduring dry conditions.
Longer term support rests at $9.20 November and we note that strong US export demand has pushed the Sept/November soybean spread to even money.
ARC research maintains a 47 BPA yield which is 2.4 BPA or 212 Mil Bu less than NASS issued in August. Such a production decline would return the market back to the summer highs. Our bet is that early seasonal lows are forming.
Cattle
It was a sharply mixed week of trade in the cattle market that left futures lower for the week. October cattle futures were lower to start the week out, rallied to strong gains through Tuesday, and then fell sharply in the last half of the week in technical trading and confirmation of lower cash trade. Cash markets turned active on Thursday, with cattle across the 5 area region selling $5 to $6 lower at $109-110. Hope for a seasonal August beef market rally have been dashed by large weekly kills. Falling beef prices are squeezing slaughter margins, and continuing to weigh on CME cattle prices. CME cattle futures are oversold, but based on large summer placement rates, the longer term outlook is bearish and any late summer rallies at the CME should be use for 4th quarter sales. Any turn longer term hinges on Chinese demand in early 2018 and a fall decline in placement rates.
Hogs
October hogs were higher in early week trade, but fell sharply in the last half of the week on sliding cash markets and technical trading. The cash pork belly market fell to an 8 week low, and cash hog market dropped to the lowest since early June on increasing hog supplies and narrowing slaughter margins. The drop in the pork belly market confirms that a seasonal top is in, with a more bearish trend to continue into later this year on record large hog slaughter rates. December hogs closed the week more than $4 under the early week high, but were still more than $20 over last year’s low. 4th quarter production is expected to be 5% larger than last year, which presents significant downside price risk. ARC is bearish hogs on any late summer rally with fall lows expected between $50-55.00.