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Market Watch

RSS By: Alan Brugler,

Alan Brugler is the President of Brugler Marketing & Management, and the primary analyst and advisor.

Cats and Mice

Dec 05, 2008
There’s an old folk saying that “When the cat’s away, the mice will play”. After this week’s price action, it is pretty clear that the ag commodity market bulls seem to share some DNA with the mice, and the bears seem to have a bit of cat in them. Futures prices rallied in the light volume Thanksgiving week, when in hindsight the cats were away. The bullish mice were playing. When the big cats (or at least those on a mission to sell stuff) came back on Monday the bear markets resumed.
Corn sustained the most damage, losing 16% of its value in a single week. On Friday, prices dropped below the low for calendar year 2007 on the continuation charts, and closed below that marker. Technically, we continue to see hedge fund investors asking to withdraw cash by December 31, and the managers of those funds selling commodity index positions and in some cases individual commodities in order to generate the liquidity. Corn open interest declined as those former long positions were unwound. Fundamentally, exports, feed use and ethanol use are all declining and threatening much larger 2009 ending stocks.
Below is a table showing the net weekly change of selected agricultural futures contracts:
Market Watch
% Change
Dec Corn
Dec CHI Wht
Dec KC Wht
Dec MGE Wht
Jan Soybeans
Dec Soy Meal
Dec Soy Oil
Dec Lv Cattle
Jan Fdr Cattle
Dec Ln Hogs
Dec Cotton
Dec Oats
Jan Rice
Wheat is a feed grain in many parts of the world. With record 2008 production there are a number of countries taking desperate measures to sell product and generate cash. Argentina is cutting the export tariff, and Russia is subsidizing feed wheat exports. The EU has authorized 9.9 MMT of export licenses. You get the picture. With all that competition (and Stats Canada boosted their Canadian wheat crop estimate again this week), sales of US export wheat are dragging.
Soybeans dropped more than 11% for the week. The main culprit was soy oil, and more directly crude oil. With January crude oil futures dropping as low as $40.50 on Friday, heating oil/diesel futures got down below $1.42. That is putting a lot of pressure on biodiesel prices, and soy oil has been dropping in lockstep. The 433 point drop in bean oil futures was worth 50 cents per bushel to the value of the bean. Meal was down $15.50/ton because of large Census stocks and the weakness in feed grains which limited the pricing power of the crushers.
Cotton futures also had a pretty tough week, down 14%. That included a limit down Thursday, which came despite “as expected” weekly export sales. Those sales were poor, less than 100,000 running bales. However, most of the cotton selling pressure came from the spec community exiting longs or actively going short because of perceived diminished global textile demand.
Cattle futures also took a nasty fall of more than 6%. Demand is the issue, as cattle supplies aren’t really all that burdensome. Both export and domestic demand are concerns. Some major South Korean retail firms have finally started offering US beef, but that hasn’t translated into increased export sales. Weekly export sales have tailed off. Per capita consumption in the US is expected to be smaller in the 4th quarter, and again in 2009, because of the weak employment situation. While US gasoline prices have dropped sharply, the 6.7% of the work force currently not working are presumed to be eating out less often, and those who are working aren’t hitting the restaurants as frequently. On a positive note, average carcass weights are down and feedlots appear to be current. They just don’t appear to have a lot of leverage right now.
Hogs were another case of the mice at play. Some of the shorts took profits during the holiday week, and a few may have tried the long side. Rising pork cutout prices allowed cash hogs to advance, but post-Thanksgiving demand has been less than stellar. December futures still hold a premium to the cash index, and will have to pull back before expiration if cash hog prices fail to advance.
Market Watch: The “big” report day this week will be Thursday, when USDA releases its monthly crop production and WASDE supply and demand updates. Increased ending stocks for corn are a distinct possibility, due to ethanol plant closures and downtime, as well as sharp cutbacks in poultry production. A number of analysts look for USDA to raise projected soybean exports, which could tighten the balance sheet for that commodity. Friday will be the last trading day for December grain contracts, and also for December hog futures.
There is a substantial risk of loss in futures & options trading. Past performance is not necessarily indicative of future results.
Copyright 2008 Brugler Marketing & Management LLC. Reproduction or rebroadcast of any portion of this article without written consent of Brugler Marketing & Management LLC is strictly prohibited. Call 402-697-3623 for information on Ag Market Professional or SRR subscription information or visit the web site @
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