Asset Allocation

Published on: 16:06PM May 02, 2014


Market Watch with Alan Brugler

May 2, 2014

Asset Allocation

An underappreciated aspect of normal commodity and equity markets is the asset allocation trades. Some risk management practices say to regularly reduce the size of your winners (take money off the table) and look for undervalued assets to buy. This is because markets are generally mean reverting and you will give back those gains if you wait long enough. Often the asset allocation adjustments happen on a monthly or quarterly cycle. Monthly adjustments can be just prior to month end, or at the beginning of the following month. As an example, a fund with 1000 bean contracts gained 83 1/4 cents in July futures during April. That was a $4.1622 million gain. If we assume the overall fund size was static except for the beans, and was initially $200,000,000 (it would really be much larger to be trading that many beans), the % of their portfolio in beans went from 35.7% to 37.0% just from the gain in the beans. To keep the risk exposure to beans the same, they had to sell some of the beans, either at the end of April or the first part of May. We saw that selling, and mirror image buying in cheap commodities, on May 1-2. The question for Monday is whether they are done yet.

Corn lost 2.56% this week, neatly offsetting the 2.5% gain from last week. The USDA weekly export sales report was at 951,700 MT.  That was about the middle of the trade estimates, but new crop sales were a poor 13,800 MT. Old crop commitments are 99% of the USDA total for the year compared to 93% last year and the 5 year average of 88%. Ethanol stocks rose to the highest level of the year, despite ethanol imports dropping back to zero. The Commitment of Traders report on Friday night showed that the large speculator funds added 27,756 contracts to their net long position in the week ending April 29.  


Soybean futures lost 57 cents on Thursday, which put a huge dent in the performance for the week. They were down 17 cents for the week. Meal was up 0.12%, but soy oil was crushed (pardon the pun) with a 3.8% loss after May delivery notices were much larger than expected. Trade guesses for USDA weekly export sales were in the zero to 550,000 MT range. USDA put the actual figure at 62,500 MT (including 78,900 MT for 14/15 and net cancellations of 16,400 old crop). Total soybean commitments as a % of total exports are at 104% compared to 100% last year and the 5 year average of 97%.

The Commitment of Traders report on Friday showed the spec funds adding to their soybean net long position by 3,725 contracts in the previous reporting week.


Wheat futures were higher again this week, up 1.07 to 7.25% across the various classes. The KC HRW contract was the bull leader. The worsening of drought conditions in TX and KS this week was a supportive factor, confirmed by the Wheat Quality Tour and its estimate that Kansas average yield would be only 33.2 bushels per acre. That is down from 41.1 last year despite similar Kansas crop condition ratings (Brugler500 index of 272). The Oklahoma yield estimate was only 18.5 bpa. USDA put weekly export sales on the low end of estimates at 434,500 MT (including 219,600 MT for 14/15). Total commitments are 98% of total projected exports compared to 101% last year and the 5 year average of 102%.

Cotton futures were up 1.3% this week on top of 3.1% last week. USDA reported slower weekly export sales for Cotton at 86,500 RB, including 80,300 RB of upland and 6,200 RB of pima. Total US cotton export commitments are at 89% of the USDA annual number, compared to 88% last year and the 5 year average of 88%. Speculative longs added 4,653 contracts to their net position in the last reporting week, bringing the CFTC total to 61,901.  The National Cotton Council (NCC) lowered its projection for US cotton production to 15.25 million bales, citing dry weather in Texas.















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Cattle futures were up 1.2% this week. Cash cattle trade was slow to develop, but trading did start to develop at $147 and up. Some $238 trades were reported in Nebraska. Estimated weekly slaughter of 608,000 was above last week but still 14,000 head below the same week in 2013.  Beef production YTD is 5.5% below last year. Production this week was 0.5% smaller than the same week in 2013. Average carcass weight is about 14# above last year. Wholesale prices lost 1.9% this week in both the Choice and Select boxed beef. USDA weekly beef export sales backed off to 11,400 MT from 18, 000 MT the previous week.


June Hog futures were down 1.8% this week. The pork carcass cutout lost 1.86%% this week. The product value is down $19.77/cwt since April 3. Weekly FI slaughter was projected at 2.019 million head vs. 2.091 million a year ago. That meant weekly slaughter was down 3.4% from last year, but due to higher carcass weights the pork production was actually up 0.7%! Average carcass weights are up 8 pounds from year ago. USDA weekly export sales for pork dropped hard, from 15,100 MT two weeks ago to 9,800 MT on Thursday.


Market Watch


We start out the week with Children’s Day in Japan. This is not an excuse for the rest of the market to act like children! USDA will give us the weekly Export Inspections report on Monday morning, and the much anticipated Crop Progress report on Monday night.  Wednesday will mark the last trading day for May cotton futures. Thursday we have USDA Export Sales at 7:30 am CDT.  The main USDA report event of the week will be Friday, with the monthly Crop Production and WASDE supply/demand reports. The latter will include the first ‘official’ estimates for US 2014/15 production and use, as well as global estimates. These are still computer models. There will be no survey based NASS yield or production numbers until August.


Visit our Brugler web site at, find our iPad app "AgMarket" in the app store, or call 402-697-3623 for more information on our consulting and advisory services for farm family enterprises and agribusinesses.


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.                  

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