Black Hole or Water Well?

Published on: 15:24PM Jul 25, 2014


Market Watch with Alan Brugler

July 25, 2014

Black Hole or Water Well? 

There is a definite downward bias for commodity prices right now, with the CRB Index in retreat. There are exceptions such as cattle, but most markets are leaking lower. The question becomes this: Are we looking at a black hole or a dried up well? Black holes absorb everything around them (i.e. any bullish grain news quickly disappears off the radar). They keep gaining mass and destroying their surroundings. If you keep throwing things into a well on the other hand, it will eventually fill up and you no longer have the hole. While at times this current market has looked like a black hole (no bullish reaction for a huge 2.4 MMT of weekly soybean export sales) we suspect that it is really a well. We just haven’t had enough bullish grain news yet to fill up the well and start building a rally on the site.

Corn lost 8 cents for the week after slipping 7 cents last week. Nearby September is now down 46 cents since July 3. The highest early July weekly crop condition ratings since 1994 kept a lid on corn prices all week, as they make it easy to believe in upward revisions to the US yield forecast. That would presumably mean more burdensome ending stocks. New crop gloom and doom were fed by national average yield estimates from Lanworth and Allendale, with the latter at a bin busting 174.1 bpa. Old crop export sales were also disappointing in the Thursday USDA report. The one bright spot was ethanol production, consuming nearly 104 million bushels for the week and without a stocks buildup. RFA pointed out on Friday that there are 3,349 E-85 locations in the US now. EPA is only assuming 2,391 locations in their calculations about how much ethanol could be used over and above E10 blends.

Soybean futures ended the week 3% higher. Old crop export sales continue to be made, despite the need for the US to import beans from South America to offset the bushels being shipped.  Timing is everything! Gulf basis bids were firm in trying to attract export bushels away from crush plants. There were also phenomenal new crop bookings made as soon as November futures dropped below $11 per bushel. USDA confirmed 2.451 MMT of 2014/15 sales last week, with 1.2835 MMT slated for delivery to China. Chinese purchases of US new crop beans still lag the record 2013 pace by 2.47 MMT. Sales commitments to all destinations are slightly ahead of last year.
















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Wheat futures ended the week higher in Chicago for the second week in a row.  KC was down 0.2% for the week and MPLS was down 0.4% for the week.  The Spring Wheat Tour projected average yield of 48.6 bpa, an all time record. The 5 year average for the group is 44.7 bpa. That put a small bit of downward pressure on MPLS. They projected durum yield at 36.6 bpa. USDA reported that net weekly sales through July 17 totaled 443,200 MT.  The largest buyer s were Japan and Nigeria. The total was comfortably within the range of estimates, i.e. no bullish surpise. Australian sources are concerned about likely dry conditions over the next  60 days in eastern Australia. Canadian producers are still hoping to dry out, but draw some comfort from the yield numbers on the Spring Wheat Tour.

October Cotton futures plunged 5% this week.  The over arching concern in the market is a ballooning US ending stocks estimate coupled with large Chinese stocks that could further constrain US exports. USDA reported net weekly export sales of US cotton for last week totaled 373,200 RB, including 3,700 RB of upland.  2013/14 sales of Upland cotton were actually posted as a net reduction of 1,900 RB for this week due to cancellations and rollovers. The USDA marketing year for cotton ends July 31. Any unshipped sales at that point will be applied to 2014/15 outstanding sales. This Export Sales report was through July 17.  

Front month cattle futures were up 4.93% for the week, with nearby futures trading at a discount to the cash market and then seeing cash cattle prices skyrocket $6 or more. Cash cattle traded $165-166 on Friday as packers had money to spend and contracts to fill.  What they don’t have is enough ready cattle to buy. Wholesale beef prices hit record highs again this week. Weekly beef production was 10% smaller than the same week in 2013. Beef production YTD is down 6.3%, with USDA expecting the third quarter production to be smaller than even 2003. Average carcass weights are running about 7# above year ago.  The USDA Cattle Inventory report showed the combined beef factory (beef cows + heifers for replacement) down 2.5% from the July 2012 report. Most if not all of that decline likely occurred in 2013, the year USDA did not issue the report due to budget issues.  The monthly Cattle on Feed report showed fewer cattle placed in lots during June than had been expected, with marketings above estimate at 98.2%. That left July 1 inventory at 97.6% of year ago vs. ideas of 98.1%.

August Hog futures were down 2.7%  this week.  Pork production for the week was up 1.4% from the previous week, but down 1.6% from the same week in 2013. Year to Date production is now below year ago by 1.1% as the cumulative effect of reduced slaughter runs offsets the increase in average  carcass weights. Slaughter YTD is down 4.7% with the pork production down 1.1% . The difference is the extra pounds of pork per animal, with this week estimated at 213# vs. 203# a year ago (carcass). Pork carcass cutout values continued to rise, with the average at $131.79 on Friday vs. $137.56 a week ago.  

 Market Watch

Cattle traders will begin the week reacting to the Cattle on Feed report results from Friday evening. Grain traders will be dealing with any futures positions inherited via August options exercises at expiration.  USDA will give us updated crop condition and maturity ratings on Monday evening in the Crop Progress report. Not to be overlooked, the Fed OMC meeting is Tuesday and Wednesday.  In general they are expected to continue to wind down the QE3 program and send some additional warning shots about inflation, tightening labor markets  and the eventual need to start raising short term interest rates.

Thursday will feature the USDA weekly Export Sales report, with some large numbers already "known" via the daily reporting system. Thursday is also first notice day for August futures deliveries in the grains. Friday will turn the calendar to August and mark expiration of the August live cattle options. In the background we will have the usual end of month asset allocation trades with funds selling winners and buying losers.

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