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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.

Crude Realities

Apr 08, 2011


Market Watch with Alan Brugler
April 8, 2011
Crude Realities
The crude oil market surged to the highest prices since 2008 this week, aided by instability in what seemed like half the countries in the Middle East. Word that some of the Libyan oil production facilities had been directly attacked made the loss of the Libyan production look more permanent, even in a week where a cargo of Libyan oil was successfully shipped out by the rebels. The US dollar also sank to the lowest level since November of 2010 after the ECB raised interest rates in Europe to 1.25%. The US target rate is still 0.25%, so the hot money is selling dollars and buying euros. With the dollar weakening, gold set new all time highs and silver rose over $40 per ounce. All of this is a crude reality, that there is a lot of printing press money chasing a fixed quantity of commodities. That helped buoy most of the agricultural commodities we track, whether they are fuel molecule sources like soy oil and corn, or substitute feeds like SRW wheat. 
Corn posted a fourth higher weekly close, up 32 cents on the week. USDA tried to slow down the bulls on Friday morning, suggesting that large quantities of SRW wheat would be fed after harvest in lieu of corn. That allowed USDA to leave projected ending stocks of corn UNCH at 675 million bushels instead of dropping them 100 million bushels or more as they would be based on typical second half feed consumption. The trade is skeptical whether that much feed substitution can occur, since it is dependent on Chicago wheat futures maintaining an unusually narrow price spread with corn, and maintaining it even after supplies of SRW start to tighten due to the assumed use. The poultry market has not been shy about feeding wheat, but cattle and hog producers have typically been more reluctant to use the grain without at least a 3 month local supply to draw on. While the USDA number was more bearish than expected, the projected ending stocks are still at or perhaps below pipeline required levels. Thus, futures were able to continue to rally after the report came out. The weakness of the dollar was supportive to potential export sales, and the surge in crude oil and gasoline prices makes using ethanol even more important to the US economy. Ethanol makes up more than 10% of the US gasoline supply, and is not subject to Middle East violence and supply interruptions.
The soybean complex was higher this past week. Soybean futures were up 36 cents for the week. Meal futures were boosted by the rise in corn and DDG prices. Soy oil was up 3.24%, buoyed by tighter than expected Census soy oil stocks that implied more biodiesel use. Global veg oil use for biodiesel is also rising, with Argentina and Brazil confirming rising domestic use. The USDA Grain Stocks report on Thursday put March 1 soybean inventory at 1.249 billion bushels. That was about 40 million bushels below the average trade estimate, and implied a large residual use for the quarter. Futures were up 35 cents or so on Thursday because of that tighter stocks estimate. Soybean planting intentions were below the average trade guess at 76.609 million acres, but some recent private surveys had suggested only 75 million, so there was some backlash on Friday.
Wheat continued to rally, gaining another 2.9 to 5% for the week. The presumed bull leader, KC HRW, got help from very low weekly crop condition ratings released on Monday evening. However, KC lost leadership status on Friday after USDA projected a sharp jump in SRW wheat feeding as a substitute for corn. To offset the amount of corn USDA did not show being used, wheat feeding will have to nearly double. Since USDA sees that being SRW, Chicago gained on KC. Of course, if SRW prices rise enough, wheat will no longer be cheaper than corn. Based on bushel weights, wheat should be 7.14% higher than corn to match up tonnage. If corn is $7.68, the equivalent SRW price would be $8.23. Chicago May was only $7.975 on Friday. USDA did show a slightly smaller than expected ending stocks projection of 839 million bushels.
Cotton futures were up 3.79% for the week, despite losing 5.25 cents on Friday. That was a “buy the rumor, sell the fact” reaction to USDA cutting projected US cotton ending stocks to 1.6 million bales from 1.9 million in the March report. USDA reduced the old crop production estimate to 18.1 million bales, a move that had been expected since the release of the annual ginnings report. However, they also raised projected domestic mill use by another 100,000 bales. The world cotton ending stocks estimate was also tightened on Friday, to 41.55 million bales from 42.33 million in March. Projected Chinese ending stocks were trimmed by 500,000 bales.
Here are the Friday night closes for the past four weeks, along with the net change for this week vs. the previous week:

% Change
CBOT Wheat
KCBT Wheat
MGEX Wheat
Soybean Meal
Soybean Oil
Live Cattle
Feeder Cattle
Lean Hogs

Cattle futures lost 2.66% of their value this past week. Cash cattle prices backed off from the record levels of the previous week, and wholesale prices were also weaker. The USDA supply/demand report. increased projected beef production for 2011 by 20 million pounds. USDA showed beef production for the week was down 1.5% from the previous week, but 3.5% larger than the same week in 2010. Estimated carcass weights are still running 11 to 12 pounds above last year. Wholesale prices were mixed on Friday, but choice boxed beef was up 0.4% for the week and select was up 1.1% on a Friday/Friday basis.
Hog futures were down 1.14% for the week. USDA shows hog weights are still running about 4 pounds above last year, resulting in pork production since January 1 being 0.9% above year ago despite slaughtering 1.5% fewer hogs. USDA increased projected pork production for 2011 by 30 million pounds in the Friday morning WASDE report. The value of the pork carcass cutout rose 0.5% for the week, to $94.60.
Market Watch:  The USDA April WASDE report provided more excitement than expected on Friday, but that doesn’t mean report surprises are over for the month. This week’s lineup of USDA reports includes Export Inspections on Monday and Weekly Export Sales on Thursday. Monday will also include the first planting progress report for corn, and the second week of 18-state condition ratings on wheat. It is unclear whether any of these reports will be issued if the government is shut down due to a failure of budget talks that were still ongoing as this was written.  NOPA monthly soybean crush is expected to be released on Thursday morning. Thursday will also be the last trading day for April hog futures.
Looking to enhance your existing Ag Marketing Professional subscription? Add free futures market quotes sent to your cell phone via our Market Monitor service. Or “push” the daily recommendations out to your phone as they happen with Market Messenger 2. Call in consulting service with Alan is also available for a limited number of new customers in our Ag Marketing Professional Premium package. Call our office for details on either service at 402-289-2330. 
There is a risk of loss in futures and options trading. Such trading is not appropriate for all individuals. Past performance is not necessarily indicative of future results. Comments made in this article are in no way to be seen as an endorsement of futures and options trading. 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 individualized subscription and consulting services.
 Copyright 2011 Brugler Marketing & Management, LLC

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