Commodity Index
The CCI/CRB index closed the week slightly lower, but near the high as crude oil tried to recover late week. US tax legislation is being hotly debated, but the odds of passage before the New Year is low. Moreover, it’s tough to fundamentally justify a rally much above $60.00 spot WTI crude oil futures amid warm weather forecasts for the US during December.
The CRB index is likely to consolidate recent gains and measure emerging market growth before heading higher. The value of the USD has technically broken down and a test of the September lows is expected in coming months. The greenback decline is occurring during the US tax reform debate, which is unfavorable for a more lasting recovery. Emerging markets look to remain strong well into mid- 2018, which should longer term favor world raw material demand. ARC is shifting to a neutral view on the CRB.
Corn
Corn futures another ended fractionally lower amid additional post-USDA selling and an otherwise lack of fresh news. The trade continues to digest US old crop stocks of nearly 2.5 Bi Bu, which will provide a rather sizeable buffer against adverse S American weather (this winter) or adverse US weather next spring/summer. ARC acknowledges a sideways price forecast into 2018.
Interior basis is rallying as farmers halt sales altogether, and as harvest is still pretty sluggish in pockets of the Central US. Climate forecasts are dry in Argentina amid the arrival of La Nina, but it’s premature for any undue yield concern.
US crude/gasoline inventories are well below last year, and so a collapse in crude and biofuel margins is not expected. Sub-$3.30 futures require above trend yields in S America. Rallies to $4.00, Dec ‘18, should be used for sizeable new crop sales amid abundant old crop world supplies. We expect such rallies lie in the offing, as South American weather won’t be perfect over the next 90 days. Friday’s strength also helps confirm that a secondary low was scored last week.
Wheat
US wheat prices ended lower, as some measure of long liquidation returned to spring wheat futures in Minneapolis, and as recent tender results indicate it’s still a “buyer’s market”. Russian fob quotes this weekend are down another $1/MT to $191/MT, vs. $194 in October, and so there’s just no spark available to trigger any lasting recovery. However, ARC maintains a neutral outlook as Southern Hemisphere production is in danger of quality damage. The GFS includes potentially new rain in eastern Australia next week – and long term climate guidance there remains wet through December. Argentine yields so far suggest the USDA’s production could be some 2 MMTs too high. And we’ve cut our US acreage forecast in 2018 to 46 Mil, unchanged from last year. Rallies above $4.75, basis spot CME, require widespread adverse weather. But support will emerge below $4.10 Dec Chi ahead of 1st notice day.
Soybeans
Soybeans were lower through most of the week, but January was able to build support just above the October lows, and then rallied sharply on Friday to end the week with modest gains. Short covering and concern for dry Argentine weather supported Friday’s bounce. However, its premature for any undue concern for Argentine weather with it being like late April in the US.
Fundamentally, US December 1st soybean stocks are expected to be record large. However, world demand (China) has also been ahead of last year on both imports and crush rates. Planting in S America is underway, and new crop exports of significant quantities are 3-4 months away. Technically, spot soybeans rallied back to a longer term down trend line on Friday, and the question for next week is weather this will trigger a fund break out trade, or whether funds and farmers will both be sellers on a spot rally back to $10? Our bet is that they will be sellers with record large US supplies known, and the current export pace running behind a year ago, our view is to use S American weather rallies for new sales.
Cattle
It was a mostly lower week of trade in the cattle markets weaker cash trade, long fund liquidation and confirmation of larger cattle on feed supplies. Fundamentally, cattle supplies remain well over a year ago, while demand appears to be softening through what is typically the most bullish period of the year. The larger supplies look to be keeping up with holiday demand and the beef market traded softer through the week. Seasonally, the beef market tends to forge highs in either late November or early December, so the bulls are quickly running out of time.
The latest Commitment of Traders data shows that funds have added more than 30,000 contracts to their cattle position since early October, much of which is either breakeven or under water. A weekly close under $122 Feb (the old contract high) could trigger new liquidation. Hedgers should continue to sell into rallies with prices to decline into June
Hogs
It was a lower week of trade in the hog market, with fund liquidation developing at the end of the index fund roll, while the cash market traded down every day. Fundamentally, supplies and weekly production figures remain historically large, while packer demand has retreated as margins have narrowed. Hog plants will operate under a holiday schedule next week, and there is just 4 full work weeks left in the year. Cash hog prices are expected to trend steady to lower into the end of 2017, and any type of recovery is likely to hold off until at least late January. Technically, February hogs found support against major moving averages, but a recovery back over $70 will offer the next sales opportunity against 1st quarter production, while summer hog futures in the mid/upper $80’s should be sold. The US pork industry is on track for the 4th consecutive year of expansion, with record production again expected. Another year of significant demand growth is needed to be overly bullish pork futures during 2018.