MARKET SUMMARY 12-5-2022
The feeder cattle market has been well supported by forecasts of tight supply of cattle, and the feeder market recent move higher in price reflects the improved competition of cattle. The feeder market closed last week on a strong note with the March futures trading 3.725 high on the week as prices rejected lows early in the week. With the trading strength on Monday, the feeder market looks to be testing higher levels, even possibly contract highs. The strength in the market has been a direct result of a softening corn market last week and a strong move in cash feeder markets. The feeder cash index jumped 5.49 higher last week, reflecting the strong domestic cash market for feeders. Feed lot numbers are down, and there is plenty of room for animals to be placed. The break in the price of corn last week opened the door for cash competition. Producers are battling for a shrinking supply picture for cattle, and the cow herd continues to shrink overall. The trend for higher-priced feeders will likely maintain itself in the near future, as the competition in the market for placement cattle will likely stay aggressive.
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CORN HIGHLIGHTS: Corn futures closed lower today along with most other commodities following a report from the Wall Street Journal that the Federal Reserve is now planning to raise interest rates to 5% or higher in 2023, which is up from previous expectations of 4% to 4.5%. Non-commercials have already been selling grains and this news encouraged funds to offload more of their long positions. Dec corn lost 6-1/4 cents to end the session at 6.28-3/4, and Mar lost 5-3/4 cents at 6.40-1/2.
On Friday, March corn broke below the 100-day moving average which had been acting as support and has been legging down since. Slow export sales and a drop in the price of ethanol have given funds the confidence to start exiting their long positions and when they start shorting the market and making money, the trend tends to continue. This has been evident in the wheat market which has been on a decline since the beginning of October as funds piled onto their net short position. The concern is that now some bearish news has hit the market, funds will begin unloading their long position. The USDA’s weekly report today showed corn’s estimated processing value fell 25 cents last week in Iowa to 8.63 a bushel, which leaves a margin of around 1.78 a bushel. Export inspections released today were an improvement from last week but still low at 20.6 mb. Brazilian corn is 6% less expensive than US corn and today’s rise in the dollar won’t help that margin. In Argentina, the forecast remains hot and dry and unfavorable planting weather, while the Brazilian crop is now 93% planted and has had good conditions. Right now, the fundamentals and charts for corn are not looking friendly and a bearish WASDE report on Friday could accelerate a downward move. There is a gap lower on the March corn chart at 5.91 which should be watched.
SOYBEAN HIGHLIGHTS: Soybean futures closed lower today but fared better than the rest of the grain complex with only a slightly lower close and higher trade throughout the day. Bean meal closed higher while bean oil closed lower along with crude. The possibility that the Fed plans to raise rates to 5% by 2023 will put pressure on commodities. Jan soybeans lost 3/4 cent to end the session at 14.37-3/4, and Mar lost 1-1/2 cents at 14.45.
Soybeans have been faring better than corn and wheat lately and have remained in their slightly upward range thanks to continued export sales and crush margins that have narrowed but have remained profitable for processors. Private exporters reported a sale of 4.8 mb to China for 22/23, and export inspections were good at 63.3 mb for last week. Total inspections for 22/23 are now at 778 mb, down 11% from the previous year. China has remained an active buyer of US beans, but when Brazilian new crop becomes available, they will likely turn their business to the cheaper Brazilian beans. Monday’s USDA report estimated soybean’s processing value in Illinois has dropped 66 cents to 18.94, but still shows a healthy margin of 4.14 a bushel. This slip in crush margins is due to the sell-off in bean oil prompted by lower crude. Funds are heavily long bean oil and any bearish activity like the drop in crude could cause them to start liquidating that long position. Part of the trigger for the sell-off in bean oil came from the EPA’s biodiesel announcement which actually came in as expected, so the aggressive selling seemed like an overreaction. Overall, soybeans have remained in their range and the main risk for a slip lower would be a decline in exports.
WHEAT HIGHLIGHTS: Wheat futures continue to trend lower. An increase to the Australian crop estimate did not help the fact that managed funds are net short roughly 60,000 contracts of Chicago wheat. Mar Chi lost 22 cents, closing at 7.39 and Jul down 22-3/4 at 7.57. Mar KC lost 29 cents, closing at 8.41-3/4 and Jul down 25-1/4 at 8.33-3/4.
ABARES, which is Australia’s crop agency, increased their wheat crop estimate to 36.6 mmt (vs the USDA at 34.5 mmt). This may have in part led to a weaker trade today, and lower corn and soybeans did not help matters. A rally in the US Dollar today was also unhelpful to wheat price, although the Dollar is still well off the September highs. Ultimately though, wheat futures are quite oversold from a technical standpoint. Fundamentally, global supplies (minus China) are tighter than last year and things do not look to improve any time soon. Argentina, for example, has been very dry already and 100+ degree temperatures are expected. Here in the US, the southern plains have also struggled with drought and crop conditions are at some of the worst ratings in decades. One bearish factor that has been pressuring the market are poor exports. Today’s data puts wheat inspections at 12.3 mb and brings the total 22/23 inspections to 401 mb. On Friday’s USDA report they could lower the wheat export estimate from 775 mb. Aside from all of this, the Ukraine war remains a large factor. Though the Black Sea corridor deal was extended, Ukrainian wheat production is estimated to be about half of what it was before the war began; this may have more of an impact down the road.
CATTLE HIGHLIGHTS: Live cattle futures finished mixed as retail weakness is tightening packer margins, which could weigh on cash bids. Feeders used the weak grain markets for moderate to strong gains. Dec finished 0.125 lower to 153.225, and Feb slipped 0.050 to 155.825. Feeders saw strong buying strength as Jan feeders gained 1.325 to 183.775.
After early session strength in the live cattle market faded as profit taking kicked in the late session, likely triggered by strong selling pressure in outside markets and weakness in the retail values. The softening retail market may be the biggest nearby concern as packer margins have tightened. Packers have stayed strong in the cash market despite the tightening returns as competition for cattle is still an issue. The market may be watching to see if bids will soften or at best hold steady. Cash market was undeveloped on Monday as show lists were being put together and Initial bids are still quiet. The retail market was softer overall last week, and that trend continued at midday on Monday. At midday, choice carcasses retreated 2.69 to 247.24 and select lost 1.47 to 223.09 on light movement of 68 midday loads. Today’s slaughter totaled 127,000 head, 1,000 below last week, but 6,000 greater than a year ago. Feeders traded higher, following through on last week’s strength, supported by weak grain markets. The Feeder Cattle Index was 0.89 softer at 178.14 and was 4.77. Jan feeders have stretched out to 4.05 premium to the index, which could limit gains. The index was strong last week and may reflect the cash market on the countryside. The feeder market looks strong, and prices are poised to test higher levels, especially is grains stay soft. Live cattle look tired, and with retail value drifting lower could be limited to the upside in the near future.
LEAN HOG HIGHLIGHTS: Lean hog futures finished mixed as prices fell off early session highs as profit taking triggered by the weak outside markets hit hog futures. Dec hogs softened 0.350 to 82.075, but Feb gained 0.100 to 90.525.
The Feb contract tried to push through resistance over the Feb futures at 91.000 but failed to hold those early gains. Outside market were strongly lower, and that likely triggered some profit taking as last week’s strong close. Dec hogs are moving closer to expiration on 12/14 and stay tied to the cash market and the index. The Lean Hog Index was softer, losing another 0.37 to 82.47. The cash index and Dec futures are trading near each other, which should limit gains or losses for the Dec futures. Feb is building a strong premium to the cash market, anticipating a turn higher in cash trade in the first quarter. That spread pushed over $8.00 during the session and may have been part of the trigger for the turn off the day’s highs. Direct cash trade was not reported due to “confidentiality”, but the 5-day rolling average was firmer to 84.99. Retail values at midday were firmer, gaining .88 to 89.82. The load count was moderate at 178 loads. The price action was disappointing after a strong start to the day. The selling was likely triggered by weak outside markets and some “risk off” mentality to start the week. The front month Dec futures will be limited as the fundamentals are still lagging at this time. The trend on the week may be choppy and lack direction, tied to the influence of the outside markets and any news in China regarding COVID restrictions.
DAIRY HIGHLIGHTS: Today’s action was quiet with mixed closes for milk futures, as the January Class III contract finished down a penny from Friday’s close but 17 cents off the daily low. Spot cheese was 1.50 cents higher to push back above the $2.00/lb mark after seven trading days beneath it, and cheddar barrels have narrowed the spread with blocks to 13.25 cents after moving to 39.50 cents a couple weeks back. Tuesday is all about dairy product demand as the first of two December Global Dairy Trade Auctions will take place along with the release of October export numbers. Spot butter will be the main focus as it has moved to an uncomfortable premium over the GDT butter price and September exports for the product, while still above many monthly totals in recent years, showed a notable drop from the June, July, and August totals.
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Author
John Heinberg