Market Watch with Alan Brugler
September 6, 2019
Bears At Work
Coming off of Labor Day, it’s appropriate to talk about work. The bears in the commodity markets were hard at work this week. The bulls were also at work, but it was over in the stock market with the S&P up 2%. Most of our ag commodities were down, with corn and cattle taking the big hits. Wheat was basically a spread trading affair. Feeders were up only because corn was down. The oats gain is an illusion driven by the delivery process in September oats. The active December oats contract was UNCH for the week. The hot money isn’t in commodities, it is still chasing stocks, albeit the more defensive plays like utilities. This is not a short term phenomenon. The Bloomberg S&P 500 total return index (SPXT) was up 61.89% over 5 years as of August 31. Their Agriculture index (BCOMAGTR) was down 40.47%. Energy performed even worse, down 62.39% for that 5 year period (BCOMENTR). Keep in mind (and we do tend to forget) that the ag drop was exaggerated by coming off of the all time highs set in 2012 during the drought.
Corn futures sank another 4.3% this week. Monday’s Crop Progress report showed crop conditions improving by 2 points lower to 353 on the Brugler500 index. That’s still below the long term average and thus suggests a national yield below trendline. It could still be above the August USDA figure if it makes it to maturity. That’s still the BIG IF. Maturity remains a concern, with 41% of the crop dented as of last Sunday vs. the long term average of 63%. US export sales were screwed up by the sharp rally we had in June and July and are still not recovering. New crop export sales in the week ending August 39 were only 416,700 MT. Accumulated new crop export sales are the lowest for this time of year since 2004/05. CFTC data released on Friday afternoon showed the large managed money spec funds adding another 25,234 contracts to their new net short position. That put them at -119, 371 contracts as of September 3. Commercial elevators continued to unwind their record large short hedge position as they cleared out inventory.
Wheat futures were mixed this week. Chicago SRW was up 2% in the September. KC HRW was down 0.6%, while MPLS spring wheat was up 1.7% based on the Board settlement. September didn’t actually trade on Friday in that market. The CHI/KC spread widened back out a dime to 84 cents. Nearby MPLS futures traded at the lowest price since 2009. US Crop Progress data showed Spring wheat harvest 55% complete vs. the 78% average pace. There is adequate wheat in the pipeline despite the delay. USDA reported weekly export sales of 312,100 MT during the week of 8/29. That was less than half of the previous week. Export commitments are 43% of the full year USDA forecast. The 5 year average would be 48%. That said, outstanding sales on the books are 11% larger than last year at this time and the commitments are 21% larger. Friday’s Commitment of Traders report indicated money managers in Chicago wheat futures and options added 17,981 contracts to their net short position, taking it to -21,037 as of September 3. They added an aggressive 8,378 contracts to their net short in KC wheat last week to put it at -45,029 contracts. That’s the most bearish fund position in KC HRW since May. They reached a record large bear position in MPLS wheat, adding another 858 contracts to the net short.
Soybean futures dropped 1.4% over the course of the week, leaving us 2 cents above where we were two weeks earlier. Soybean meal fell 0.7% for the week, as soy oil was down 0.6%. Estimates of Chinese soybean imports for 2020 were cut to 80 MMT due to the substantial reduction in the hog herd via ASF. China has been aggressively importing US beans bought during the previous trade “thaw”. Keep in mind that most of the beans being shipped to China from the US right now are exempt from the tariffs because the buying firm is a state sponsored company or the cargo is for state reserves. New crop sales during the week ending August 29 jumped to 788,400 MT, with a big chunk of that sold to “unknown” destinations. Spec fund money managers trimmed 2,920 contracts from their CFTC soybean net short position in the week that ended on 9/3, taking it to -73,127 contracts.
Cotton futures were down 0.7% this week. China imposed an additional 5% tariff on US cotton effective September 1 in response to the US hiking tariffs on Chinese goods. Chinese firms are still cancelling purchases, but commitments to all destinations already total 51% of the full year US export forecast. They would typically be 46% by now. Outstanding sales on the books but not shipped are 10% below year ago at this time, but 46% larger than the 5 year average for this date. US crop maturity is running ahead of schedule, with 36% of the crop in the 15 weekly reporting states showing bolls open. The average would be 27%. CFTC data indicated the large managed money spec funds trimmed another 1,148 contracts from their previous record net short position, down to -39,281 contracts as of Tuesday.
Live cattle futures sank $4.05 for the week in new leader October. Cash cattle trade was only $99-100 in the South (-$3 for the week), with the North $160-163 in clean up trade on Friday. The 5-area weekly steer average frequently bottoms in September. Feeder cattle futures were up 0.7% for the week on the decline in feed costs. The CME feeder cattle index was $138.36, down 19 cents on the week. Wholesale beef prices declined after Labor Day. Choice boxes were down $4.46, or 1.9% for the week, with Select grade plunging $10.33 or 4.9% lower. Weekly beef production was down 12% from the previous week due to the holiday on Monday, and 2.5% smaller than the same week in 2018. Ready numbers are expected to decline monthly into year end, so week/week declines should not be surprising. With record numbers on feed, year/year declines drive concerns about whether feedlots are current. Year to date beef production is 0.2% larger than year ago on 1.2% higher slaughter. The Commitment of Traders report shows money managers at a net long 1,238 contracts on Tuesday, down another 1,021 contracts from last week. That is the second smallest net long for the funds since CFTC began the ‘disag’ data set.
Lean hog futures were up, and then they were down. They had rallied 7.1% the previous week and extended those gains after Labor Day. However, limit to near limit losses on Friday got most contracts into the red for the week. The CME Lean Hog index was $65.25, down $5.99 from the previous week. The two week slide is $11.79. The pork carcass cutout value was $1.01 higher this week (+1.4%). The pork belly primal rebounded by a modest 2.2% after it dropped 31% the previous week. Weekly pork production was down 10.4% from the previous week due to Labor Day, and 1.2% smaller than the same week in 2018. YTD pork production is now 3.5% above year ago on 2.9% more hogs. The managed money spec funds reduced their CFTC net long position in hogs by another 1,418 contracts last week, putting it at 28,133 contracts (futures + options) on September 3.
We’re back to a normal reporting schedule for the weekly reports. The Export Inspections report will be on Monday, as will the USDA weekly Crop Progress report. The weekly EIA ethanol production and inventory report will be out on Wednesday. USDA’s weekly Export Sales will be published on Thursday morning at 7:30 a.m. CDT. The big monthly USDA Crop Production and WASDE supply/demand estimates will be out on Thursday at noon Eastern, 11 AM Central. September grain futures and October cotton options will expire on Friday. The full moon occurs on Saturday.
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There is a risk of loss in futures and options trading. Similar risks exist for cash commodity producers. Past performance is not necessarily indicative of future results.
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