Evening Report (VIP) -- Advice -- January 10, 2014

January 10, 2014 09:16 AM
 

Hog producers: Claim profits on 1st-qtr. hedges... A seasonal low is past due in the hog market. While February lean hog futures continue to hold around a $5 premium to the cash index, cash hog bids are starting to inch higher and market-ready supplies should gradually ease. As a result, hog producers are advised to claim profits on the 50% 1st-qtr. hedges in February lean hog futures. Our exit was $85.80 for a profit of $3.90.

 

Breaking down USDA's January crop reports... Traders continued to look for "the price" that would increase corn use right up to the final second ahead of USDA's Quarterly Grain Stocks Report. Well they’ve found it. Unfortunately, they’d found it weeks earlier and hadn’t realized it. Corn use in the September-November period was a record for the first-quarter of any marketing year at an impressive 4.32 billion bushels. Stronger-than-expected feed & residual use is the reason, according to USDA’s Supply & Demand (S&D) Report. In it, USDA increased feed & residual use 100 million bu., to 5.3 billion bushels. Combined with the smaller-than-expected 2013 corn crop estimate, USDA cut estimated 2013-14 corn carryover 161 million bu. from December, to 1.631 billion bushels. At 13.925 billion bu., last year’s corn crop is still a record, it’s just not as big as traders expected.

While corn carryover is now estimated well-below pre-report trade expectations, there’s still plenty of corn in the system to satisfy all demand. Carryover could still work lower in upcoming S&D updates, but it will take increases in either corn-for-ethanol use or corn exports (or both) to drop estimated ending stocks from current levels. Right now, an increase in domestic corn use, which would hold carryover near current levels, does not seem likely.

Soybean use in the first-quarter of the 2013-14 marketing year was also a record at 1.28 billion bushels. That beats the year-ago usage pace by about 4%. The record usage pace was the result of stronger-than-expected U.S. crush and exports, as both estimates were increased in USDA’s S&D Report.

Estimated 2013-14 soybean exports were increased to 1.495 billion bu., which roughly matches total soybean export bookings at this time. With more than seven months left in the current marketing year, there is clearly room for an even higher bean export estimate in upcoming S&D updates and the current pace of shipments suggests exports could top 1.5 billion bu. this year.

What makes the smaller-than-expected Dec. 1 soybean stocks tally most impressive is that it includes a larger-than-expected 2013 bean crop estimate. That means the increase in 2013-14 total supplies was completely offset by a 10-million-bu. increase in estimated crush and the 20-million-bu. increase in estimated exports. The "risk" in the bean carryover estimate looking forward is down. Until the market confirms Chinese bean-buy cancellations, odds are usage estimates will work higher in months ahead. Bottom line: soybean carryover might not increase from year-ago by the time all demand is accounted for in the S&D balance sheets.

Wheat use in the second-quarter of the 2013-14 marketing year was down 6% from the same period last year. The reason is simple -- despite lower prices, wheat is still searching for "the price" that will give U.S. supplies a competitive edge in the global market. Unfortunately, we haven’t found that price yet.

Wheat stocks in all positions on Dec. 1 were 53 million bu. bigger than pre-report trade expectations, resulting in a nasty selloff in prices following the report. But, the market is working to "fix" the price-negative fundamentals. The bigger-than-expected Dec. 1 stocks flowed through to the bottom of the S&D balance sheet, resulting in a 33-million-bu. increase in estimated 2013-14 wheat carryover at 608 million bushels.

USDA’s Winter Wheat Seedings Report showed total acres well below pre-report trade expectations. With a smaller 2014 wheat crop likely, total supplies are likely to continue to shrink by the end of the 2014-15 marketing year.

 

USDA trims 2014 pork production forecast... USDA trimmed its 2014 pork production forecast in this morning's Supply & Demand (S&D) Report. USDA now expects pork production to be up 1.6% from 2013. USDA states, "The Quarterly Hogs and Pigs Report, released on Dec. 27, indicated that the September-November pig crop was fractionally below a year earlier, which will constrain supplies of slaughter hogs in early 2014. Although producers intend to farrow more sows in the first half of 2014, the impacts of the Porcine Epidemic Diarrhea virus (PEDV) will likely slow growth in pigs per litter and keep supplies of market hogs relatively tight during 2014."

As a result of the reduced pork production forecast, USDA raised its projection for 2014 cash hog prices to an average of $62, up from $61 last month, but down from $64.05 in 2013.

 

USDA raises 2014 beef production forecast... USDA raised its 2014 beef production forecast in the S&D Report, but it still expects production to be down 5.4% from 2013. The report states, "Beef production is raised for 2014 as higher-than-expected placements in the later part of 2013 and expected availability of winter pasture support increased cattle marketings and slaughter during the year."

But despite the slight increase in projected 2014 beef production, USDA raised its average 2014 cash steer price by $1 from last month to $133.50. This compares to $125.89 in 2013.

 

Unemployment declines despite dismal job gains... The U.S. Department of Labor reports the unemployment rate declined from 7% to 6.7% in December (the lowest level since October 2008) despite total non-farm payrolls rising a much-less-than-expected 74,000 last month. Pre-report expectations were for the addition of nearly 200,000 jobs. The report notes the civilian labor force participation rate declined by 0.2 percentage point to 62.8% in December to its lowest level since 1978, offsetting a change of the same magnitude in November. The labor force participation rate declined by 0.8 percentage point over the year, while the employment-population ratio was unchanged at 58.6%.

In 2013, jobs growth averaged 182,000 per month, about the same as in 2012 (+183,000 per month). In December, jobs gains occurred in retail trade and wholesale trade, while employment declined in information. Click here for more.

 

Perspective on the jobs report... The biggest focus from today's jobs report is on the decline in the civilian force participation rate to 62.8%. While most have focused on those just leaving the jobs market by giving up, the Fed included an interesting point in the FOMC minutes released this week -- some of the participation rate decline is due to retirements. So those are workers that most likely will not rejoin the jobs market at all, while those temporarily dropping out could still get added back into the mix.

The weather situation in December was a factor for the slowed jobs growth, and the frigid conditions that gripped most of the country to start 2014 could potentially build expectations that construction, in particular, will see another downdraft when the January data is released.

The key question is what does this do to the U.S. Federal Reserve and its tapering of asset purchases that started this month. A reversal seems unlikely based on just this one number. But what is starting to creep into the conversation is a hold on the tapering at the January meeting. Ahead of this report, the expectation was that the FOMC would take another taper step at the Jan. 28-29 session. Now, some are not as convinced that will be the case.

And don’t forget the end of emergency unemployment benefits on Dec. 28, 2013. That is also fostering talk now that the January participation rate could fall even further. The report will increase focus on the intervening economic data leading up to the January FOMC session and that will again put the sport of trying to guess the Fed’s next move back in the forefront.

 

Early week vote expected on stopgap spending bill in House... The House plans to vote next week on a three-day stopgap spending bill to prevent a government shutdown and to allow a bit more time to finish up a massive $1.012 trillion omnibus spending package. The current continuing resolution (CR) for FY 2014 expires Jan. 15. The stopgap measure would extend current spending through Jan. 18 to allow Congress a bit more time to consider and pass the omnibus measure. House Appropriations Committee Chairman Hal Rogers (R-Ky.) says the massive spending bill is expected to be introduced Sunday or Monday. Congress is expected to approve the FY 2014 omnibus spending package, though major policy arguments could be bumped to FY 2015 appropriations.

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