Weather, Spread Trading Rule Markets
The unwinding of the old crop/new crop bull spreads again dominated the last day of the week’s trading. The Goldman Roll kicked off Friday that added pressure to the trade. The first high pressure ridge talk of the year started Friday and that gave the new crop a boost of support. The ridge is showing up for the period of June 17th through the 21st. According to Drew Lerner of World Weather Inc., “The ridge of high pressure will be occurring after a significant rain event in the central Plains this weekend and into early next week. The rain will be fresh in the soil and as the ridge begins to evolve it will draw the moisture back out of the ground and lift it in the warmer than usual temperature bias that will be created by the ridge. Instability showers and thunderstorms will erupt under the ridge over the western and central portions of the Corn Belt which will weaken the ridge and limit its duration and intensity. For that reason World Weather, Inc. believes the ridge is overdone at mid-day, but it will go ahead and evolve for a little while.” The Buenos Aires Grains Exchange estimates soybean harvest is now 80.6% complete. This was an increase over last week of 6.8%. This was still 17.4% under last year. They see the crop at 55.5 million tonnes, over the government’s 54 mt estimate. USDA is also at 54 mt. Farmers are expected to make the next round of old crop soybean sales at the end of the month to help pay loans. In news out of China, the Agriculture Ministry estimated May soybean imports at 5.94 million tonnes. June levels were seen at 4.06. On Wednesday the USDA will be releasing their updated supply and demand estimates. Allendale looks for old crop ending stocks to come in at 119 mb due to increase in both the crush and export number. Last month the USDA project old crop ending stocks at 130 mb. We project new crop ending stocks to come in at 364 mb. Last month the USDA projected new crop endings stocks at 330 mb. Allendale is using different acreage and yield numbers than the USDA is currently using. We would look for the USDA make adjustments to planted acres after the June acreage report is released on June 30th. We look for acres to increase 1.7 million higher than they currently using. With the trade looking for the old crop ending stocks to continue to shrink due to continued strong demand we would look for old crop contracts to continue to find support on breaks. As long as the weather continues to hold out we would look for new crop stocks to work lower and look for fall low to hit the $9.75 level.….Jim McCormick
Lean Hog Commentary
Computing the weight problem from the estimated slaughter and pork production numbers showed something of interest. Slaughter was seen 3.8% lower than last year while their pork production estimate was 1.1% higher. In other words, weights are now a full 4.9% over last year. A 5% increase in tonnage, just from weights, is a serious issue. Though we are seeing PED numbers in the slaughter mix they are being offset by weights. It won’t be until later July or August that we see the 10% year over year reduction in slaughter. Think of the price impact on this issue though. A 10% year over year reduction in pork production, at the heart of the tightest supplies of the year (summer) would have a much bigger price impact than only a 5% loss (slaughter -10% offset by weights +5%). We are not discounting the rally we are seeing but simply pointing out the price impact should have been much larger than what we are going to see. Our general thesis over the past few months was that PED would give us a rebound to $130 in prices but no PED would mean $105. It appears the trade is feeling a bit more confident about the PED rebound. We would guess that Vilsack’s comments yesterday at the World Pork Expo brought this issue back in the trade’s discussion. In other news you could also suggest part of today’s rally was from the April pork exports release. USDA showed a 10% year over year increase for April. High prices when those orders were made were not deterring foreign buyers at the time.