Red Screen At Night

Published on: 17:03PM Feb 20, 2009
Market Watch with Alan Brugler
February 20, 2009
Red Screen At Night
In folklore, a red sky at night is a sailor’s delight, meaning good weather ahead. In commodities, a red screen at night (lots of negative changes for the day) is probably more delightful for the bears than for the bulls. If that is the case, the bears should be ecstatic, because all of the ag commodities we track had red closes on Friday, and red closes for the week. A contrarian, of course, would see some bullish aspects to such a lopsided market, sensing that values will get too cheap and provide a buying opportunity.
Most of the selling appeared to be financially motivated, with big swings in the value of the US dollar during the week, and with some of the major US stock indices trading below their November lows. That wasn’t seen as progress, and certainly isn’t showing any faith that the economic stimulus package is going to work. The reality is that we had a “buy the rumor, sell the fact” reaction to the signing of the bill. Grains and livestock were hurt because of concerns that demand is declining, or that at least prices are reverting to more historical valuations rather than the record high levels of the past few years. Gold futures, not shown in our table, got back above the $1000/ounce mark in a bit of a flight to safety.
Soybeans were down a whopping 93 cents per bushel for the week, or 9.73%. That made them the largest loser for the week. Meal futures were also down 9.7%, again reflecting the constrained demand from the livestock sector. Bean oil was down 8.4%, with negative biodiesel processing margins restricting consumption by the industrial sector. With both products exerting that kind of pressure on margins, beans about had to go down. Weekly export sales for beans, meal and oil were all strong, with the weekly soy oil total the largest of the marketing year. Unwinding of March options positions ahead of expiration on Friday complicated the price action. South American weather kind of slipped off of the radar as there were enough showers to stabilize production potential in the view of most analysts. Argentine farmers went on a planned 4-day sellers strike beginning on Friday. It was not expected to immediately affect export supplies, as firms have stockpiled product in anticipation of such an action.
Below is a table showing the net weekly changes and 4 week history of selected agricultural futures contracts:
Market Watch
% Change
March Corn
March CHI Wht
March KC Wht
March MGE Wht
March Soybeans
March Soy Meal
March Soy Oil
Feb Live Cattle
March Feeder Cattle
Apr Lean Hogs
March Cotton
March Oats
March Rice
Corn was down 13 cents for the week, or 3.6%. Weekly export sales were above 1.33 MMT, and have been much stronger over the past four weeks than they were in the fourth quarter. Low prices cure low prices! Producer selling has dried up, as shown by both strong domestic basis bids and the smallest commercial short hedge positions in several years. That will have to change if the larger export sales continue. Downsizing of the livestock herd appears to be continuing, although Canada did show some interest in cattle feeding when their feedlot numbers were released.
Wheat futures were down 2% for the week in Minneapolis and 3% in Chicago and KC. KC tried to lead a bounce after early week weakness, with more talk about dryness spreading from OK and TX into higher acreage areas of Kansas. Minneapolis spring wheat production could be increased in response to price signals from the HRW market, and didn’t drop as far. Weekly export sales were about as expected. Commitments (shipped wheat plus outstanding contracts) are at 87% of USDA’s projection for the year. That’s down from last year’s 96%, but similar to the pace seen in 2004-2007.
Cotton futures were down 2.3% for the week. Net upland export sales for the prior week were 435,400 running bales. China was a larger buyer at 200,000 RB, with Pakistan and Turkey next in line. The declining prices for competing field crops allowed cotton to drift lower without risking further acreage losses in 2009. In fact, because cotton prices are already below loan rate, the equation becomes simply a question of whether the producer can make money at the loan rate or LDP plus a small rally premium. Essentially, the lower other crops go, the more attractive cotton could become as an alternative, despite 7.7 million bales of projected carryover.
Cattle futures were down 4% for the week. Futures wobbled back and forth, but ongoing declines in wholesale prices weighed on the market by limiting what packers could afford to pay for cattle. Cash cattle prices were lower, as feedlots dumped cattle at midweek when the equity market and banking situation appeared to deteriorate. Demand for lean trimmings continues to be supported by good fast food demand, but packer offerings of choice are described as heavy. Friday afternoon’s Cattle on Feed report showed slightly larger than expected January marketings, but placements were also on the upper end of trade expectations. The Feb 1 On Feed number was 11.288 million head, 94.3% of year ago.
Hogs lost more than 9% of their value in one week, using the April contract as the barometer. Cash prices as measured by the CME Index weren’t that bad, but the lean pork cutout took a hit. Loin prices in particular were under some pressure. On Friday afternoon, the Cold Storage report showed a buildup in most classes of cuts from the prior month. Only pork butts and variety meats were less abundant than in the December report.
Market Watch:  The cattle market will start the week digesting the Cattle on Feed report that came out on Friday afternoon. Grain traders will be dealing with the aftermath of Friday’s expiration of March grain options and the new futures positions resulting from the exercise of the in-the-money options. Cotton traders have to content with the beginning of March cotton deliveries. The main reports for the week will be the Census Crush and Cotton Consumption reports scheduled for Thursday morning. USDA will be back to a normal weekly schedule, with Export Inspections due on Monday, and Export Sales on Thursday. Feb pork belly futures expire on Tuesday. Feb Live Cattle will expire on Friday. Friday will also be first notice day for March grain futures deliveries.
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