Musical Chairs

Published on: 22:33PM Nov 07, 2014


Market Watch with Alan Brugler

November 7, 2014

Musical Chairs


There is no debate about whether the US corn and soybean crops are record large. The USDA report on Monday will give us fresh information about just how large, and update the World Board’s attempts to explain where it is all going to be used. The update won’t change the facts. It also won’t change the questions we are getting from non-clients who can’t understand why prices are rallying in the face of this record supply.

I have been suggesting to our clients around the world that the game of musical chairs might be a good concept to keep in mind. In that game, there are more participants circling (think supply) than the number of chairs to sit on (think demand). Over the course of the game (marketing year) there are halts in the music (key government reports and news events) that eliminate the excess players. A chair is also removed each time (ongoing consumption). At the end of the game, there is one chair and two people. The one who can sit is the winner (sold all the grain) and one loser (stuck carrying over inventory to the next marketing year). We will keep changing the # of chairs over the year, but there is a high probability that there will be too few next summer,  assuming anything close to normal 2015 crops. The worst price pressure would occur under that scenario, when we have leftovers and potentially a larger surplus for 2015. In the short run, the music is still playing, and producers are circling. They have a lot of bin space at home, and plenty of cash from futures and options hedges, livestock operations or prior year earnings. They are also pre-occupied with finishing harvest and not thrilled with the current price. With that setup, we can keep going around the circle for a while.

Corn ended the week 2.5% lower, ending a streak of 5 consecutive weekly gains. Net weekly export sales were even slower than the previous week at 478,200 MT. The cumulative commitments are 43%  of the full year USDA forecast. They would typically be 47% by now. Weekly ethanol production dropped slightly, while ethanol stocks increased.  In the weekly Commitment of Traders report, managed money accounts added 21,885 contracts to their net long corn position, bringing them to net long 163,673 contracts through Tuesday.  That was the largest net long position reported since June 2.

Soybean futures were down only 0.6% for the week after the 7.1% gain the previous week. A 9 cent gain on Friday dressed up the weekly close, but the main driver was a 0.36% gain in soybean meal. That advance came despite net export cancellations in meal. Weekly soybean export sales were again stellar at 1.6099 MMT, with China taking over 1.604 MMT of that total. To meet the USDA forecast for the year, China needs to buy almost 1.4 MMT per week from somebody, year round. Weekly soybean export loadings announced on Monday were record large for any week, any time, at more than 101 million bushels. The weekly Commitment of Traders report from the CFTC showed managed money accounts were net long 18,697 contracts on Tuesday ; a net weekly change of 10.315 contracts to the bull side.















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Wheat futures were down 3.4 to 4.9% this week,  with new crop planting and crop condition in pretty good shape. There are drought pockets in TX and OK, but nothing compared to recent years. US weekly export sales were weak at only 265,800 MT. Part of this is due to limited port capacity, with shippers focused heavily on soybeans. In the weekly report from the CFTC, managed money accounts were shown with a net short position of 31,517 contracts in Chicago, which is net buying of 11,763 contracts for the reporting period ending November 4.   

Dec Cotton futures lost 0.76%. The strong dollar is interfering with export sales. USDA reported weekly export sales through October 30 totaled 71,500 RB, including 6300 RB of Pima and 200 RB of Upland cotton for delivery to Japan in the 2015/16 marketing year.  How cheap is US cotton? The AWP for this week is 49.36,  2.64 cents below loan rate and thus generating LDP payments. The Commitment of Traders report from the CFTC showed managed money accounts adding a net 3,193 more contracts to their net long position, making them net long 12,826 contracts.  

Cattle futures gained 75 cents per hundred this week, a 0.45% gain occurring entirely on Friday. Wholesale beef prices were slightly lower this week.  Choice 600-900 pound boxes were down 0.8%, with Select boxes down 0.2%. Weekly export sales were down 66% from the big 20,100 MT of the week before. Weekly estimated slaughter was 7.7% smaller than the same week in 2013, with beef production down 5.0%. Beef production for the YTD is down 6.0%, with slaughter down 7.2%. The large managed money spec funds reduced their net long position by 2.081 contracts this week.  They were still net long 106,114 contracts in the CFTC report.  

Hog futures were down 2.55%. For 2014 YTD (year to date), hog slaughter is off 5.3% from the same point in 2013. Slaughter this past week was down 2.4% vs. year ago. Pork production was only down 1.3% vs. year ago due to higher average carcass weights. Pork production for the year is down 1.7% vs. Jan-Nov 2013. Pork carcass cutout values were lower this week, with the average price reported at $94.74 on Friday, a weekly drop of 2.84% .  Pork bellies sustained a loss of nearly 15%, magnified because they had rallied the previous week. Weekly pork export sales jumped 28,400 MT. The weekly report from the CFTC showed managed money accounts lightening up on their net long position by about 3,527 contracts vs. the previous week.  They were net long 47,832 contracts as of the Tuesday close. 

 Market Watch

Cotton and cattle traders will begin the week reacting to any surprise positions inherited on the Friday options expirations. The main monthly USDA reports on Crop Production and supply/demand will be released on Monday, November 10.  We’ll also get the regular Export Inspections and Crop Progress reports.   Weekly Export  Sales will be delayed until Friday by the Veteran’s Day federal holiday on Tuesday. Friday will also mark the expiration of the November soybeans, canola and rice contracts.

There is a risk of loss in futures and options trading. Past performance is not necessarily indicative of future results.

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