Commodity Index
The CCI/CRB continued its uptrend with energy/metal prices pushing higher on the elevated political tensions across the Mideast. Note that the CRB index reached its highest price level since February, with the early January highs now in sight at $437.00. Raw material prices are in an uptrend heading into the US Thanksgiving Day holiday, which is not going unnoticed by investors. It has been a long time since geopolitical concern gripped the commodity market. In the last decade, the focus of the broad raw material market has been on low interest rates and building supplies/stocks. The potential for a sharp fall in Mideast oil production due to conflict between Saudi Arabia and Iran has raised the risk profile of energy users worldwide. $60 WTI price no longer seems outlandish with January crude reaching $57.50 this past week. The US stock market is also acting as it has reached a seasonal peak as US tax legislation will be pushed back into 2018, which will become ensnared with the midterm US election. Investors are facing a normalization of US interest rates, rising political tensions in the Mideast, and uncertain US tax legislation heading into ‘18. This will heighten financial market volatility
Corn
A 2017 record yield in the US pulled CBOT futures to new contract lows, but only briefly. NASS added yet another 300 Mil Bu to US corn supply, but the net record short position of funds kept prices underpinned. Farm cash selling of corn is now needed to keep prices under pressure. So far, this selling is not evident. Longer term, ARC holds to a $3.30-3.80 price range into April. AgResource expects the long-established range in corn futures to hold until more is known about South American harvest potential. Amid US carryover stocks of nearly 2.5 Mil Bu, a major weather issue or the loss of 3-5 Mil acres of US corn is needed to really tighten the US balance sheet. However, the odds are high that funds will not be able to maintain a record large short position into 2018 and that a South American weather problem will produce 10-20 cent rallies. Producers should be waiting for those rallies and then making sales in back month futures to capture the carry. A sideways corn market looks to persist.
Wheat
Wheat futures ended higher this week as, for once, monthly USDA data was not overly bearish. World wheat stocks were lowered 1 MMT, US stocks were cut very slightly amid forthcoming export demand, and even major exporter stocks/use ratios was left unchanged from the USDA’s October report. Cash markets barely reacted to the outright bearish data in corn, and Russian fob offers ended the week at $191-193/MT for delivery into January. Wheat’s stability doesn’t foreshadow a major bullish run, but does suggest the long established price trend will hold until more is known about N Hemisphere acreage and winter wheat crops next spring. ARC expects that US wheat inventories to decline further into 2019, but the overall structure of the wheat market won’t change without severe drought in the EU or Black Sea region next year. Use any test of $4.90, basis July CME, to catch up on new crop sales & hedges. It will take years for world wheat stocks to be drawn down to spark a structural wheat bull market.
Soybeans
Soybean futures took back all of the early week gains and closed steady. The USDA left the US 2017 soybean yield at 49.5 BPA (unchanged from August), but NASS did trim US soybean production by 5 Mil Bu. Which allowed WASDE to drop their end stock forecast by a like amount to 425 Mil Bu. ARC would note that WASDE did raise their 2018 Brazilian soybean crop estimate to 108 MMTs as better rains arrived across N Brazil. The USDA’s soybean data was neutral. The chart reflects that soybean futures could fall back to a trendline at $9.50-9.60 to test key support with a 50% correction of the autumn rally coming in at $9.64. This support should hold with the heart of the South American growing season still ahead in December, January and February. China’s demand for US and world soybeans has slowed since late October, a concerning trend for the demand side of the marketplace. ARC research argues that USDA is overstating US 17/18 soybean exports by 50-75 Mil Bu. This would push 2017/18 US soybean stocks closer to 500 Mil Bu. For now trade soybeans within a range of $9.50-10.00 spot futures.
Cattle
It was a disappointing week for CME cattle futures as prices retraced a good portion of the prior week gains as cash cattle traded steady to lower, and packers looked forward to securing cattle for a holiday shortened week. Packers pulled hard on their own captive supplies this week while USDA tried to assure the industry that’s its camera/grading system was sound. Rib prices have skyrocketed higher as grading cameras were dialed back on resolution which produced less choice beef and more select. Choice boxes closed the week $4.00 higher at $212.74 while select beef gained $5.22/cwt to $193.08. Select boxes gaining on choice hinted that the “grading” rally was near an end. The weekly cattle chart reflects that December is attempting to drop into a chart gap and $115-118.50. This means that short term, futures have $2-5.00 of downside price risk before finding support. Funds have been very active this week in rolling long December futures forward to February, April and June. The premium of back month futures will prod feeders to feed longer to a heavier carcass weight to fill an early 2018 marketing hole. A cattle top has formed a seasonal top in ARC research.
Hogs
US pork futures closed lower following the drop in nearby live cattle futures, and on the abundance of cheap US corn that is likely to continue to fuel a further expansion of the US pork herd. A rising USD was also viewed as slightly bearish as it could slow US pork export sales. ARC would note that some of the rally in US pork prices since September has been based on 2 new packing plants coming on line – one in Iowa and one in Michigan – along with a seasonal rise in belly prices. Bellies have rallied strongly from $.96 to $1.24 as of Friday’s close. The industry will be watching to gauge if the same strong demand is evident in 2017 as last year? The US killed 2.495 Mil hogs this past week, but packers will be buying next week for a US holiday reduced slaughter and weaker cash hog prices are expected. So far, 2017 US pork production is running 2.4% above last year. ARC’s outlook is bearish on rallies with February hogs a sale over $72.00.
