Alan Brugler is the President of Brugler Marketing & Management, and the primary analyst and advisor.
Bird Flu II
Apr 05, 2013
Market Watch with Alan Brugler
April 5, 2013
Bird Flu II
As if we needed something else to be bearish about grains after the (much) larger than expected grain stocks report, an outbreak of H7N9 (commonly call the bird flu) in China is causing quite a stir in the news. So far six people have died from it, but all picked up the flu from animals; no person-to-person transmissions reported at this point. Speculators were treating it like a real reason to be bearish soybeans and they kept the pressure on through the end of the week. Media reports citing 20,000 birds being "destroyed" and thousands of dead pigs found floating in the Huangpu River, created some suspicion about future feed demand as well as some unpleasant imagery in the news and on the charts. The effect of this outbreak is already overblown, and the overall impact on Chinese demand for soybeans and soy products will be miniscule, but the hype and public confusion on the subject does affect the market in the short term.
A bigger issue for the market this week was that both the index funds, and all the new spec longs (from before the report) are all trying to get out of their May contracts at the same time. It creates an opportunity for the livestock producers to buy feed at a discount before everybody realizes that it got too cheap, and prices rally back toward where they came from. Grain producers win too (indirectly) because the price break keeps their main customers in business, and keeps them much healthier than if prices had gone the other way, which creates longer term support to grain prices instead of demand destruction. Now for a recap of the price destruction we witnessed this week…
Corn futures for the May contract lost 66 cents for the week, and that does NOT include the 40 cents it lost with the limit down move prior to the close last Thursday. Ouch! The damage to the corn chart this week was severe, but the hard break in prices will stimulate more demand for corn that is still "hard to find" and make for another Summer of tight stocks and strong basis. Weekly corn exports were the most reported since February 14th, and reflected export activity prior to the reports, so you can be looking for improvement in the weeks ahead. Ethanol production was reported for the previous week as slightly higher, but stocks also saw a slight increase and imports were higher too. Watch for an improvement in production next week as the $1 break in prices should make for a noticeable increase. Soil temperatures in most of the Corn Belt are still too cold to support good germination, but the typical planting-delay rally for new crop corn has yet to begin.
Soybeans broke a total of 43 cents between last Thursday’s close and the last trade today, just over a 3% hit. The May contract is off more than a dollar from the pre-report high last week, helped lower by the H7N9 fears in China and more long liquidation as the market participants can’t find a reason to get long again yet. Soybean meal was also down over 3%, losing $12.80 in the May contract. Soybean oil took back nearly 1/3 of its losses for the week though, ending the week down $1.28 after being down as much as $1.86. Soybean export sales reported on Thursday morning were substantial at 747,789MT, but the trade ignored it. The post-report break in prices should make US exports more favorable this week than they were last week. The total amount of soybean export commitments stands at 99% of the current USDA estimate for the entire year; a number we expect to increase when the April WASDE report is released next Wednesday.
Wheat futures lost a penny in Kansas City wheat, but gained 7 cents in Minneapolis wheat, and 11 cents in Chicago wheat. Dry soil moisture profiles, and a lack of precipitation in the forecast, combined with low crop condition ratings to support the wheat market despite the larger stocks reported at the end of last week. The Brugler500 index for Winter Wheat condition started out the year at 299. This is the same rating the 2011 crop started with, and is slightly better than our number for the same week in 2006, and 14 points better than in 2002. The index rating for SRW states was in the middle of the range for this week over the last five years, but the rating for HRW states came in lower this week than the same week in any of the previous 10 years. Export sales were below expectations at 315,984 MT, but that figure reflects export activity prior to the price break during last Thursday’s sell off. Total wheat export commitments for the marketing year that ends May 31st are at 91% of the USDA’s total estimate for the year, compared to the five year average for this date of 99% so they have a some catching up to do unless the USDA lowers its wheat export estimate on Wednesday.
Cotton was down more than 2% this week, despite the USDA’s confirmation late last week that intentions were still only to plant 10 million acres vs. 12.3 million last year. The cotton market fell victim to a weaker tone in the outside markets with crude oil settling at a two week low and the Dow down due to poor job numbers. The shining star in cotton’s book continues to be strong export sales, with a combined 207,607 RB reported for the week. Overall commitments stand at 93% of the USDA estimate for the marketing year. The five year average pace is 94% for this date. The comfortable Global supply still weighs on the market, but Chinese buying is expected to continue. CFTC data showed managed money was content with their long positions in cotton as traders added 167 long positions.
Cattle futures struggled on Friday, with the trade still unable to piece together a sustainable rally. For the week, the April contract lost 2.23%. Feedlot owners received some relief with the sharp sell-off in the corn trade, but the April contract still closed with a -$0.88 loss on the week. Boxed beef finished with a $2.27 or 1.2% gain on the week while Select was down $1.37 or -0.7%. This pushed the spread between the two to its highest level since February 13th. Cash cattle trade showed some improvement from last week with sales taking place in Nebraska at $1.29 while going for $204-205 on a dressed basis. The weekly slaughter numbers continue to run behind last year’s pace, with the expected slaughter for this week including Saturday estimates at 593,000 head. The year-to-date slaughter is 3.2% behind the pace set last year. Beef export sales for the week totaled 10,508 MT.
Hog futures finished Friday with the May contract having its largest daily loss of the year which pushed it to its lowest level since June. The weaker than expected job data did not help support hog futures. April lean hogs finished with a weekly loss of -$0.58 or 0.71%. The CFTC report, which runs Tues to Tues, shows managed money added to their short position with an increase of 1,823 contract. The pork carcass cutout lost -$0.26 or $0.34% for the week, with a 7% loss in loins partially offset by a 4.66% in butts. The weekly slaughter including Saturday is an estimated 2.088 million head including Saturdays projected kill. Hog slaughter is now running 0.9% behind a year ago. The CME lean hogs index finished with a $1.02 gain to settle at $78.01. Pork exports were reported by the USDA on a weekly basis for the first time, with 48,355 MT reported.
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