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Fed Throws a Curve Ball

Published on: 15:52PM Sep 20, 2013


Market Watch with Alan Brugler

September 20, 2013

Fed Throws Curve Ball 

Perhaps fitting for the end of the baseball season (and a tight race for the AL wild card slots), the FOMC threw the financial markets a curve ball on Wednesday. After months of hinting about a cutback in the easy money QE3 program (due to improving employment, auto and housing data) the Fed at the last moment decided to keep spiking the economic punch bowl and creating $85 billion per month in new money via the QE3 program and its buying of MBS and Treasury instruments. The initial market reaction was euphoric and inflationary, with gold and crude oil sharply higher and the stock market punching out new highs despite being badly overbought ahead of the Fed announcement. By Thursday and Friday, some apparently had stopped drinking and were suffering a hangover while stranded on base. After all, if the Fed thought it necessary to remain stimulatory, maybe the economy isn’t doing so well? For the commodity markets, it was mostly a case of good news (cheap dollar, easy money) failing to make prices go higher.

December corn futures lost 8 cents on the week. The trade, particularly the spec funds, continues to be bearish because of large anecdotal yield reports and some rainfall this week that should help the later maturing areas. The Commitment of Traders report on Friday showed the Managed Money added 39,525 new short positions, taking their net short position back above 100,000 contracts (521 million bushels). US ethanol production slowed this past week, as did imports, with ethanol stocks down 100,000 barrels. Chicken producers continue to expand, with egg sets up 5% and chick placements up 3%. This implies stronger domestic feed use from that sector. The overall stocks/use picture is still up in the air. The real tests will come with the Grain Stocks report on the 30th (tells us whether 661 million old crop carryover is accurate) and the acreage revisions in October (assumed to be lower due to additional Prevented Planting acres).

November futures lost 66 cents per bushel after gaining 14 cents the previous week. There were a variety of factors at work, including improved moisture for some areas, extended above normal temps that are shrinking frost/freeze risk, and expanded South American planting intentions. Technically, the failure to go up on bullish news triggered some profit taking selling, and closing the November chart (drought) gap chased other bulls out the door on Thursday and Friday. Weekly export sales were strong at 923,300 MT. The latest Commitment of Traders data showed managed money spec funds adding 1,818 contracts to their net long position in soybeans, now at 147,751 contracts as of September 17. Some of them clearly were leaving later in the week.

Wheat futures were lower in Minneapolis, but held on to small gains in Chicago and KC after a midweek rally evaporated going into the weekend. US export sales continue to be well ahead of the most recent years, with 57% of the USDA forecast for the year already on the books or shipped out. Japan has been a steady buyer, along with China. US production was not changed on September 12, but could be modified in the Small Grains report on September 30. A private forecaster in Memphis put projected winter wheat production at 1.541 billion bushels vs. the USDA September figure of 1.543 billion.

Cotton futures lost 2.2% this week. Weekly export sales of Upland cotton were 103,100 running bales last week, and net American Pima sales were 8,000 RB.  The large spec funds added 2,224 contracts to their net long position in cotton during the reporting week ending September 17. Crop development continues to run a little behind normal, but old crop stocks are adequate to carry us for a while and global stocks are still seen as being record large in 2013/14.
















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Cattle futures rallied 0.56% this week. Beef production this week was 3.8 larger than the previous week, and up 1.3% from the same week in 2012. Production year to date is down 0.8%. Weekly slaughter was 1.1% larger than in 2012 with estimated carcass weights within a pound per animal of last year’s 799#. Wholesale beef prices were lower this week despite the strong export sales (16,800 MT). Choice boxes dropped off 0.2% and Select boxes were down 0.4% on a Friday/Friday basis. Cash cattle trade on Friday was mostly $1 higher than last week at $124, with northern trade slow to develop in the $195-196 range. The USDA Cattle on Feed report was released after the close on Friday, and showed the smallest September 1 number on feed since 2003. On feed was only 92.76% of year ago, reinforcing ideas of tighter fourth quarter beef supplies.

Hog futures lost 0.72% to add to the 0.22% drop the previous week. The estimated weekly slaughter was off 9.2% from the same period a year ago.  Runs in late August and September were unusually large a year ago, but the drop off has still caught the attention of end users. Pork production for the year is down 0.9%. The pork carcass cutout value gained 2.14% this week following a 2.85% gain the previous week. The USDA weekly export sales report increased to 11,200 MT from 7,331 MT the previous week. Estimated week to date slaughter (including Saturday’s estimates) came in at 2.180 million head vs. 2.402 million a year ago this week.

Market Watch

Cattle traders will begin the week reacting to the COF results from Friday night. Grain traders will be dealing with any surprise futures positions resulting from October options expiration. This will a lull week in the grain news flow, peaking again with the Grain Stocks report on the 30th.   The regular Monday USDA reports (Export Inspections and Crop Progress) will be of interest, particularly the rate at which the crops are maturing and being harvested. Weekly ethanol production and stocks will be out on Wednesday. USDA weekly Export Sales will be released on Thursday. The monthly USDA Cold Storage report will be out on Monday afternoon. The big quarterly Hogs & Pigs report will be released on Friday evening after the market close.

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