Market Watch with Alan Brugler
September 13, 2019
Bulls At Work
Just a week after our “Bears at Work” column highlighting the underperformance of commodities vs. equities over the past five years, we had a week where ALL of the ag commodities we track were higher for the week. Was this an undervalued asset receiving recognition? That was the case this week! The bulls got back to work, with notably large price advances in soybeans and hogs. Chicago wheat wasn’t far behind.
Corn futures rallied 3.7% this week, countering most of the 4.3% loss from the previous week. More than half of the advance was on Thursday. USDA cut projected US average corn yield by 1.3 bpa to 168.2 bushels per acre and cut projected production to 13.799 billion bushels. Unfortunately for the bulls, old crop ending stocks went up 85 million bushels from the previous estimate due to weakness in both exports and industrial use. That meant more bushels in the bin on September 1 to begin the new marketing year. The old crop ending stocks estimate of 2.445 billion bushels is the largest since 1988. Crop maturity remains a concern, with only 11% of the crop having reached black layer by last Sunday. CFTC data released on Friday afternoon showed the large managed money spec funds adding another 17,399 contracts to their net short position. That put them at -136,399 contracts as of September 10. Commercial elevators continued to unwind their record large short hedge position as they cleared out cash inventory.
Wheat futures were higher in all three markets. Chicago SRW has the tightest fundamentals and was up 4.3%. KC HRW hit a 13 year low on the continuation chart, and bounced 1.5%. MPLS spring wheat was up 2.1%. The CHI/KC spread widened back out a penny to 85 cents. USDA made no changes to the domestic US balance sheet on Thursday, other than reducing the estimated cash average price for the year by 20 cents to $4.80. This is an all wheat average, but multi-year lows in the (normally) premium priced HRW and HRS varieties dragged down the weighted average in the first quarter of the marketing year. Friday’s Commitment of Traders report indicated money managers in Chicago wheat futures and options cut 6,648 contracts from their net short position, taking it to -14,389 as of September 10. They cut 3,463 contracts from their net short in KC wheat last week to put it at -41,566 contracts. They reached yet another a record large bear position in MPLS wheat, adding another 1,657 contracts to the all-time record net short, putting it at -22,026.
Soybean futures shot up 4.8% this week, with the bulk of the advance on Thursday. Soybean meal was up 3% this week, with soy oil up 2.9%. USDA cut projected US average soybean yield to 47.9 bpa from 48.5 bpa back in August. That pulled down the expected crop size to 3.633 billion bushels. Anticipated 2020 ending stocks dropped to 640 million bushels, aided by a 65 mbu downward revision in the old crop carryover. August exports were excellent, as China shipped large quantities of previously purchased beans ahead of the end of the marketing year. Speaking of China, the main driver for the Thursday rally wasn’t the USDA numbers, but rather a report that Chinese buyers were booking new crop cargoes from the PNW for shipment this fall. USDA confirmed 7.5 million bushels in sales under the daily reporting system on Friday. The original trade report from Reuters was 3x that number, so we’ll be watching for additional USDA confirmation on Monday or Tuesday. Spec fund money managers added another 18,610 contracts to their CFTC soybean net short position in the week that ended on 9/10, taking their bearish net soybean position to -91,737 contracts just in time for the 27 cent rally on Thursday.
Cotton futures were up 6.3% this week. The December futures chart had been showing a Bollinger pinch, a formation indicating a big move to come. On Thursday, we got the breakout to the upside on hints of possible trade reconciliation with the Chinese. We’re not holding our breath, as they appear to be offering to resume buying our stuff if we give up on our efforts to curb the intellectual property theft, currency manipulation, and other practices the US is trying to get changed. USDA reduced projected old crop cotton ending stocks to 4.85 million bales on Thursday. They also cut projected new crop yield to 839 pounds/acre from 855 due to deteriorating conditions. Due to a 700,000 bale cut in projected exports, however, the forecast for 2020 ending stocks remained at a burdensome 7.2 million bales. CFTC data indicated the large managed money spec funds trimmed another 4,717 contracts from their previous record net short position, taking it down to -34,564 contracts as of Tuesday.
Live cattle futures were up 3.4% for the week. Cash cattle trade was $99-$101, with the higher values on Friday. Feeder cattle futures were up 2.4% for the week on the decline in feed costs and higher fat cattle prices. The CME feeder cattle index was $136.09, down $2.27 on the week. Wholesale beef prices continue their post-Labor Day decline. Choice boxes were down $6.43, or 2.8% for the week, with Select product dropping $3.34 or 1.7%. The decline did make beef more competitive vs. pork, with the choice beef/pork cutout spread down to $149.50 from $162.69 in late August. Weekly beef production was up 11.5% from the holiday week, but 5.4% smaller than the same week in 2018. Year to date beef production is only 0.1% larger than year ago on 1.1% higher slaughter. The Commitment of Traders report shows spec fund money managers net short the cattle futures for the first time in history at -6,232 contracts on September 10.
Lean hog futures were up 4.7% for the week, with limit up moves on Thursday and Friday in the December contract. Options were trading synthetically $5.50 higher on Friday, with the futures up $4.50. The CME Lean Hog index was $60.69, down $4.56 for the week. The pork carcass cutout value was $5.11 lower this week (-7.0%). The pork belly primal sank another 17.5% this week. That component is now down 49% in 30 days. Bacon should be really cheap in the grocery stores by mid-October! Weekly pork production was up 18.5% from the previous week due to Labor Day, and 12.1% larger than the same week in 2018. YTD pork production is now 3.7% above year ago on 3.2% more hogs. The managed money spec funds reduced their CFTC net long position in hogs by another 8,707 contracts last week, putting it at 19,426 contracts (futures + options) on September 10. Those who got out missed the back to back limit up moves on Thursday and Friday, or were chasing the market to get back in.
We’re expecting a regular schedule for the weekly reports. The Export Inspections report will be on Monday, as will the USDA weekly Crop Progress report. NOPA monthly crush is also scheduled for Monday. The weekly EIA ethanol production and inventory report will be out on Wednesday. The FOMC is meeting Tuesday and Wednesday, with any potential short term interest rate cut announcement likely to be on Wednesday afternoon. USDA’s weekly Export Sales will be published on Thursday morning at 7:30 a.m. CDT. The monthly USDA Cattle on Feed report will be out on Friday afternoon. October serial grain options also expire on Friday.
Visit our Brugler web site at http://www.bruglermarketing.com 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. Similar risks exist for cash commodity producers. Past performance is not necessarily indicative of future results.
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