Schwieterman: Cattle Follows Stock Market, Corn Supported By Strong Demand

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GENERAL COMMENTS:
The stock market retested the spike low from earlier in the month and the Dow Jones ended up being about 425 points lower for the week. However, that was also about 275 points off of Friday’s low, so the market did make a good recovery. In order for the rally to continue beyond one day there will have to be stability in the currency markets. With the Greek financial mess still unresolved, that is far from being certain.

CORN:
Trend:
Short Term Up – Long Term Up
Sentiment: More Chinese buying.

Despite the weakness in the stock market the corn was higher for the week. The July corn gained 6 cents and the December picked up 5 ¼. The July corn is back above the 50-day moving average again and the failure to push to new lows this week looks friendly on the charts. Expect to see follow through strength next week with another test of the $3.80 resistance in the July contract.

The most supportive aspect of the market right now is demand. The export sales report showed 1.35 MMT of old crop and 239,000 MT of new crop sales. China made large purchases, but the report would have been good even without the Chinese buying. USDA will almost certainly have to increase the export estimate in the next supply and demand report.

The fact that China is buying is very important, because they can have such a huge appetite for commodities. The Chinese import nearly 10% of the world’s cotton and 18% of the world’s soybeans. China is the world’s second largest user and producer of corn behind the US and if they need to import just 5% of their needs, which would represent over 300 million bushels of corn. Where would that come from? Most likely from the US because of both price and logistics. Steady business from China will put support under the market for the next 6 -12 months at least.

Action: Buy the July $3.80 call against forward priced corn. The market could move fast if there is any weather problem.

WHEAT:
Trend:
Short Term Down – Long Term Down
Sentiment: Still too much supply.

The July KW had a sideways week and ended up 5 cents higher. The market is oversold and Thursday’s outside day higher suggests that the market could see a short term recovery. Once again it seems that the technical indicators are looking much better than the fundamentals.

Export sales were poor again at 250,500 MT for the old crop and 205,200 MT for the new crop. It doesn’t look like there is any way we will meet the old crop export estimate and the June stocks report could be a bearish surprise. The wheat market needs better demand and it looks like the only way that will happen is if we start to see corn prices rise, there might be some additional feed usage this year.

Another fear is that basis may continue to erode. If the futures price does see some consistent strength for some reason, the cash market may not follow, especially since harvest is approaching and we already have too much supply. This isn’t a time to be holding out for better basis.

Action: Look for a bounce in the wheat, but use $5.00 as a selling point in the July KW. There is a great deal of technical resistance at that level and I doubt it can push through.

SOYBEANS:
Trend:
Short Term Down – Long Term Down
Sentiment: Sideways

The soybeans started the week under pressure, then went nowhere. The July contract lost 12 ½ cents and the November lost 18 ¾.

Bull spreaders were active this week due to the strong up front demand. Export sales were very good at 478,500 MT for the old crop and 86,000 MT of the new crop. Sales like that mean USDA is still probably too low with the export estimate. After the recent break in prices, we are once again competitive with S. America, so we could see quite a bit more Chinese business in the near future.

The oversold condition of the market, and the fact that demand is still good, suggest that we will see higher prices next week. A lot of it will depend on whether or not the crude oil keeps falling or not. A recovery in the stock market and the crude oil, would likely result in sizeable gains in the soybeans.

Action: Look for the July – November spread to move to 40. Sell November soybeans at $9.40.

CATTLE:
Trend:
Short Term Down – Long Term Down
Sentiment: Watching the stock market.

The cattle on feed was friendly with the on feed number at 96%, placements at 102%, and marketings at 99%. Supply fundamentals are still very supportive.

The key to the cattle market is which direction the stock market decides to go. With the cash market considerably higher than the June futures, stability or recovery in the stock market will likely result in sharply higher futures. Trend indicators are down though, so look at rallies as a selling opportunity.

Action: I look for the August LC to climb back to the $92.50 level next week, at which point one should place hedges. The stock market uncertainty can keep pressure on the cattle regardless of the fundamentals.


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