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Market Watch

RSS By: Alan Brugler, AgWeb.com

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

Inflation Hopes and Fears

Mar 20, 2009

 

           

 

Market Watch with Alan Brugler

March 20, 2009

 

Inflation Hopes and Fears

 

All of our tracked commodities except for hogs were higher for this past week. There is a common denominator, which was an expectation of commodity price inflation and/or at least a weaker US dollar. A weaker dollar results in higher commodity prices for things priced in dollars, if no other change to the supply/demand balance is underway. A weaker dollar also tends to make US commodities appear cheaper in terms of the buyers’ currency. That presumably results in increased export sales. The exception of course is countries that have a de facto peg of their currencies to the dollar. China did allow the yuan to rise slightly against the dollar this week, but it has essentially been moving parallel to the buck since last fall.

 

The Fed can take credit for the inflation and weak dollar assumptions. At the meeting on Wednesday, they left the target interest rate alone at zero to .25%. However, they announced a plan to buy back over one trillion dollars worth of long term Treasuries and various types of mortgage debt. This is an effort to stimulate and stabilize the housing market through lower interest rates. They are effectively printing money, thus the weakness in the value of the dollar. We would point out that they have 6 months to buy the Treasuries, so the market reaction could be ahead of the fact.

 

Rice and the soy complex were the most “inflated” for the week, with the thinly traded May rice up 10.3% for the week. May beans were up 8.6% (75 cents per bushel), supported by a similar 8.6% gain in soybean meal. Soy oil was up a more modest 6.9% as it again was considered as a possible fuel molecule. Palm oil prices were sharply higher on reduced Malaysian stockpiles, and a seasonal increase in export activity. Crude oil futures also rallied above the $50 mark, with diesel futures rising 15 cents per gallon. At roughly 7 pounds of BO per gallon of biodiesel, such a move would add 2.14 cents to the price of soy oil. It was up 2.08 cents for the week.  Looking past product value, soybeans also rallied in response to political developments in Argentina, and ignored smaller Chinese purchases.

 

Below is a table showing the net weekly changes and 4 week history of selected agricultural futures contracts:

 

Market Watch

 

 

 

 

 

 

 

 

 

 

 

Weekly

Weekly

 

02/27/09

03/06/09

03/13/09

03/20/09

Change

% Change

May Corn

$3.59

$3.62

$3.89

$3.97

0.08

2.06%

May CBOT Wheat

$5.22

$5.27

$5.18

$5.50

0.32

6.17%

May KCBT Wheat

$5.60

$5.74

$5.70

$6.03

0.33

5.79%

May MGEX Wheat

$6.06

$6.13

$6.09

$6.36

0.27

4.35%

May Soybeans

$8.72

$8.67

$8.77

$9.52

0.75

8.61%

May Soy Meal

$269.80

$265.30

$276.70

$300.50

23.80

8.60%

May Soy Oil

$31.11

$31.03

$30.17

$32.25

2.08

6.89%

April Live Cattle

$85.93

$82.45

$84.65

$85.20

0.55

0.65%

March Feeder Cattle

$92.60

$90.50

$91.95

$93.67

1.72

1.87%

April Lean Hogs

$60.90

$62.50

$63.20

$61.75

1.45

-2.29%

May Cotton

$43.26

$41.43

$42.83

$44.08

1.25

2.92%

May Oats

$1.94

$1.83

$1.86

$2.00

0.14

7.53%

May Rice

$12.61

$12.33

$11.63

$12.83

1.20

10.32%

 

Feed grains were not as robust as the oilseeds, but did rally. Corn was up 2.06% for the week despite poor weekly export sales. Outstanding sales (sold but not shipped) are 47% smaller than last year at this point. The rising fuel market did offer some hedging opportunities for ethanol plants. Potential future corn consumption for ethanol was also enhanced by the purchases of Verasun’s 17 ethanol plants at an auction this week. The combined capacity of those plants is 1.5 billion gallons, or approximately 525 million bushels of corn consumption per year. AgStar Financial is expected to shop its plants to a different buyer, so they will not be operational for a while. Valero, which bought 7 existing plants plus the site at Reynolds, IN is expected to keep the 4 currently operating plants going, and eventually start up the other 3 that have been in “hot idle” status.

 

Wheat futures were higher at all three exchanges. The dryness argument for the Plains HRW is wearing a little thin, although clearly still a fact. Some rains were expected for the weekend, but the 7 day forecasts for soil moisture call for an additional net drying. The US continues to lose competitive export tenders because prices are too high compared to those being offered from other origins. The inflation argument carried the day, along with some unwinding of corn/wheat spreads that meant wheat buying. MPLS futures had the smallest advance, suggesting that the market was in no way trying to buy additional acres for 2009 (spring wheat is the only place to send that signal).

 

Cotton was up nearly 3% for the week. Total export commitments are actually fairly high compared to the USDA forecast for the year. With new paperwork barriers to sell cotton to China the last half export numbers could drop enough to get in line, but for the moment it makes export demand look good. The inflation play certainly was a factor, and the higher stock markets for most of the week offered hope of an improvement in consumer buying interest.  ICE announced an expansion of the trading hours, effective March 29.  Trading will now begin in the evening (US time) instead of the middle of the night.

 

Cattle eked out a 55 cent advance for the week. Choice beef continues to suffer an imbalance between production and consumption, resulting in price pressure. For the second time this year, the choice/select spread went negative. Cash cattle were on a different page, trading $1-2 higher in the north on Thursday. Packers were reluctant buyers, but tighter numbers required them to pay up for at least minimum numbers. Friday afternoon’s Cattle on Feed report showed lighter than expected February placements and slightly larger marketings than the average trade guess. The net result was March 1 numbers at 94.7% of year ago.

 

Hogs were net losers for the week, down $1.45 per hundredweight. Futures continue to maintain a premium to cash hogs, and if cash isn’t moving up aggressively, the Board has to drift lower or mark time. Summer futures are already priced high enough to cover the annual average cash hog rally to the summer peak. The USDA Cold Storage report on Friday showed frozen pork supplies building 5% from last month, and up 4% vs. 2008. Pork belly stocks were larger than the published trade estimates, at 77.748 million pounds. That was a 12% rise from January, and only 2% below last year.

 

Market Watch:  Cattle and hog traders will begin the week reacting to the numbers from Friday afternoon’s Cattle on Feed and Cold Storage reports. Grain traders have Export Inspections on Monday and weekly Export Sales on Thursday. Census will also release the monthly Census Crush report on Thursday morning, along with Cotton Consumption. On Friday, USDA will release a quarterly Hogs & Pigs report, which is expected to show some reduction in the size of the herd. Friday will also be the last trading day for April serial grain options. Lurking in the background are the usual month end position squaring by the managed money crowd, and the 800 pound gorillas. Those would be the Planting Intentions report on March 31, and the quarterly Grain Stocks Report on the same morning. The latter isn’t getting much attention, but provides the numbers that USDA uses to make changes in projected feed use.

 

There is a risk of loss in futures and options trading. Past performance is not necessarily indicative of future results.  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 our more extensive paid content, or visit the web site @ www.bruglermktg.com.

© 2009 Brugler Marketing & Management, LLC

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