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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.

Guesses and Second Guesses

Jun 20, 2008
The flood waters are starting to recede, but the ripples will be spreading out in the grain and livestock markets for quite a while yet. For grains, there are still major questions about planted acreage. For livestock, plant operations have been disrupted as has transportation. That has tightened up meat supplies in the wholesale channel, and presumably backed up a few animals in the barns and feed lots. The acreage question will be partially addressed by the June 30 Planted Acreage report, but it will indicate the situation as of June 1, before the major flooding. We can hope that it shows how many acres shifted from beans to corn after the March Intentions report, and then deduct some for prevented or failed planting. USDA sources have already indicated that they will likely do a re-survey of selected states in order to measure changes since June 1.
Government steps are also expected to make it as easy as possible to keep right on planting. Different parties have different agendas, but some proposed steps have included liberalizing crop insurance planting and reporting dates to encourage late planting, opening the CRP (not clear how this would help 2008 production, but could mean more wheat in 2009), and reducing or suspending the ethanol protective tariff (in order to ruin plant profitability and force them to shut down for a while and quit using corn). We would note that corn and soybean prices were both lower this week, suggesting that the market thinks the huge rally from last week has accounted for most of the problem and that consumption has been or will be ratcheted down accordingly.
Below is a table showing the weekly change of selected agricultural futures products:
Market Watch
% Change
July Corn
July CHI Wht
July KC Wht
July MGE Wht
July Soybeans
July Soy Meal
July Soy Oil
Aug Lv Cattle
Aug Fdr Cattle
July Ln Hogs
July Cotton
July Oats
July Rice
July Crude Oil
Corn futures lost 11 cents per bushel for the week, all of it on Thursday. After a substantial run up in prices, traders started to look at drier weather forecasts that might at least halt the shrinkage of the crop. They also started looking ahead to the June 30 Acreage and Grain Stocks reports and took a little money off of the table.
July Soybeans were down 28 cents/bushel for the week. The Argentine farmer’s strike was still not settled, and that has allowed US old crop export inspections to run much stronger than previously anticipated. Soybean meal was also higher for the week, as export demand to replace missing Argentine supplies has been significant, and meal is also still historically cheap compared to corn on a per pound basis. Soy oil dropped 3.6% for the week, however. The energy markets were chopping around in a violent sideways pattern, but Chinese domestic demand for soy and palm oil appears to have cooled off seasonally, and in the face of significant imports. The drop in soy oil hurt crush margins and limited what end users would pay for futures. Of course, soybeans are also the leading candidate to plant on flooded out corn or wheat ground, and can be planted as late as July if you are willing to accept lower yields and an increased risk of frost damage.
Wheat was moving in different directions based on class. SRW in CHI was down nearly 2%, while KC HRW was down about half of that and July MPLS wheat (an old crop contract) was up almost 4% for the week. Weekly export sales were solid, but the northern hemisphere harvest is getting underway in earnest, and buyers are also getting pickier as availability improves. Egypt passed on a tender at prices they would have accepted two months ago.
Cotton held close to UNCH for the week. A stout rally early in the week appeared to be fueled by put options exercises, and traders subsequently buying back those short futures positions. USDA showed very poor weekly Export Sales and shipments on Thursday morning. Sliding prices for the other field crops also perhaps weighed on cotton. A Memphis based firm projected only 8.93 million planted acres in the US for 2008, which is below the USDA Intentions from March. The market response was limited, perhaps because we’re sitting on such large supplies of old crop cotton that are deliverable against July futures.
Live cattle futures jumped 2.5% for the week in the nearby June contract, which was constrained by the risk of cash cattle deliveries. Cash traded at $94 around mid-week, and we saw some $95 after the report came out on Friday. Speaking of the report, USDA said that Cattle on Feed June 1 had dropped to only 96% of year ago. This is a smaller number than either 2006 or 2007, but still above June inventories for 2003-2005. Marketings during May were a little larger than expected, with new placements on feed a little smaller. On paper the report is bullish, but the big rally on Friday may have done a lot of the price work to the upside already.
Hogs were the biggest gainer for the week, up 4.8%. Pork cutout values rebounded sharply, thought to be due to a strong export program. Export data lags the market by about 6 weeks, so it is difficult to verify. However, Friday’s Cold Storage report showed a substantial draw down in pork in Cold Storage. After the previous month’s report, the high level of stocks had been attributed to difficulty in obtaining refrigerated containers for export shipments. It looks like somebody found them. Pork values were also complicated by flood related plant closures and road closures.
Market Watch: We’ll start the week by sorting out the COF report and the Grain Options exercises. There are a number of new long futures positions stemming from Friday’s expiration of July options. The market has been known on occasion to want to see how deep their pockets are (look at how cotton went after those who exercised puts a week ago). The main USDA reports for the week will be the weekly Crop Condition ratings on Monday evening and the quarterly Hogs & Pigs report on Friday afternoon. We’ll also have the monthly Census Crush and Cotton Consumption reports released on Thursday morning. Not to be overlooked, the USDA Planted Acreage and Grain Stocks reports will be released on Monday June 30, so there could be a lot of position adjustments being made this week prior to those reports. It is also the end of the second quarter for some of the funds, and profit taking can mean bonuses for some of the fund managers.
There is a substantial risk of loss in futures & options trading. Past results are not necessarily indicative of future results.
Copyright 2008 Brugler Marketing & Management LLC
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