Commodity Index
The CRB/CCI recovered on the week with the US dollar index to test a critical level of support early next week at $.92. The US dollar is down 9% on the year, and further losses are expected as EU Central Bank Head Draghi indicated that the EU economic outlook is brightening and that EU Central Bank was not yet ready to wind down its massive $71 Bil bond buying program. Nor did the EU Central Bank head complain about the strengthening euro which allowed traders to push the greenback lower. A further weakening of the USD would fuel new investment in raw material markets.
US political/legislative uncertainty persists as the Trump Administration has lacked the force to enjoin the US Congress to pass key tax or infrastructure bills. As emerging economies recover, a further drop in the US dollar is anticipated.
Corn
Corn futures set new contract lows, mostly amid a lack of fresh demand news and unexciting reports from Farm Journal’s Crop Tour. Somewhat surprisingly the tour found more issues with the bean crop than corn. ARC maintains that the most probable US corn yield lies within a range of 165-166 Bu/Acre, which still will strip 300-400 Mil Bu of supply from the US balance sheet. The chart below features spot futures on a monthly basis, which have been rather boring, and barring a yield below 163, this range is very likely to continue into winter, when S American prospects will be assessed. US export demand will be lacking in 2017, but there are signs of growth in biofuel demand. And amid a collapse in Brazilian cash prices, we doubt acreage expansion there will be very robust in 2018. It pays to be neither bullish nor bearish, and recall seasonal lows are very often scored in late Aug/early Sep (Aug 31 in 2016), and so we advise patience with respect to extending sales. Fair value over the next quarter is pegged at $3.35-3.90, basis spot futures.
Wheat
Wheat futures also fell to new contract lows as Russia’s wheat crop estimate continued to get bigger, and the trade fiercely debates Russia’s ability to export more than 29-31 MMTs. Part of this will hinge upon the severity of winter weather, but our work suggests that without abandoning corn and barley exports altogether, Russia’s export capacity is indeed roughly 30-31 MMTs. Russian production, which will stay robust for years to come, will simply spill into end stocks without massive investment in infrastructure. The market has digested the USDA’s boost in major exporter stocks/use. Moving forward, a supportive outlook is advised and a demand-led recovery is anticipated this autumn. Amid current world fob spreads, the US market is well positioned to exceed the USDA’s export forecast by 75-100 Mil Bu. This along with a fall of another 20-40 Mil Bu of US spring wheat due to a 1-1.4 Mil acre rise in abandonment would drop US 2017/18 wheat stocks closer to 800-850 Mil Bu. The sharp fall in the US dollar will reduce seeding globally and the market is starting to more closely focus on Aussie weather.
Soybeans
It was a firm, but quieter week of trade in the soybean market that left prices moderately higher at Friday’s close. Strong new crop sales, along with the US Commerce Department’s ruling against Argentine/Indonesian biodiesel imports were supportive. And the Farm Journal Crop Tour that had the market’s attention. Based on crop samples collected across the Cornbelt states, the tour estimated a national soybean yield of 48.5 BPA, down 0.9 BPA from the USDA’s August forecast. On average, the Tour’s yield projection has been within 0.6 BPA of NASS’s September crop report. ARC would note that collective pod counts were the lowest since 2013 and that to achieve a 48.5 BPA yield requires another year of high pod weights – which is doubtful. Moreover, August will be the 7th or 8th coolest since 1895, which is likely to harm the soyoil yield – further tightening US soyoil supplies. A test of $10-10.20 is expected with Chinese demand strengthening on any break to $9.30 November next week.
Cattle
Cattle futures traded mostly higher through the week, with the market finding support from short covering ahead of the August Cattle On Feed report. The beef market continued to trend lower as both choice/select cutout values slipped to new lows, while initial cash trade for the week was down $3 at $107. October cattle have turned range bound over the last 2 week’s with support developing from $105 to $106. However, the outlook into the end of the year is more bearish on record large 4th quarter beef production. The August Cattle on Feed report did not offer any major surprises, but did confirm Aug 1 cattle on feed at a 5 year high. Spot futures look to be targeting the 2016 lows at $98-102 later this year and any late summer or early autumn rallies should be used for sales against 4th quarter feedlot production.
Hogs
Hog futures were lower through the week with prices under pressure from a mix of technical trading and weakening cash prices. Hog slaughter rates have turned higher and a major correction in the pork belly market is underway. Despite record low August 1st belly stocks, cash pork belly prices fell more than $25 this week, and are off more than $50 in the last 2 weeks. This week’s hog kill totaled 2.338 Mil head, up 4,000 from last week and 71,000 head more than a year ago. October hogs found support at midweek and bounced higher on short covering. However, the market turned back down ahead of the weekend. The price outlook is bearish into the 4th quarter on record hog inventories and pork production and any rallies ahead of the next USDA Inventory Report should be used for sales through the end of the year. Our initial target for spot futures holds at $50-55.00.