Deja Vu

Published on: 19:12PM Oct 11, 2019

Market Watch with Alan Brugler and Austin Schroeder
October 11, 2019
Deja Vu

Over the last 48 hours, we’ve gone from double digit losses in the grains to double digit gains. While much of that had to do with USDA numbers on Thursday, we have also had a couple of other major stories in that time frame. Friday’s action was in part to traders calling USDA’s bluff, as they focus more on the potential for production losses in the Northern Plains due to winter seemingly making an early entrance. The other part of that has to do with the anticipation of progress in the Trade War with China. Much of this brings us back to late June, when USDA reported more corn acreage than anyone expected. In what seems to be a Déjà Vu moment, where we think to ourselves, these numbers can’t be right. NASS data is typically a week or two old when it is released, and they normally go off what the producer surveys say when they were submitted, in this case October 1. From that they “assume normal weather for the remainder for the growing season,” as stated in the first paragraph of the Crop Production report. In other words, the report did not factor in this week’s storm, because they can’t accurately forecast what the damage would be. The true impacts will come in future reports. Thus, in typical “buy the rumor” fashion, we were back up on Friday, as traders’ price in this week’s weather.

Corn futures posted another 3.38% gain this week, on the cold weather in the Plains. Dec is up 6.99% in the past 2 weeks. On Monday NASS showed just 58% of the US corn crop mature by last Sunday, with harvest tallied at 15% complete (lagging the normal 27%). Condition ratings also slipped 2 points on the Brugler500 index to 348. In the latest update to Crop Production, NASS showed a modest 0.2 bpa increase to projected yield at 168.4 bpa. With the help of an acreage cut, production was actually down 20 mbu, pegged at 13.779 bbu, but still well above expectations. Parts of the crop have yet to reach maturity in the Northern Plains. Freezing conditions late in the week are causing concern for some losses to production. That will be reflected in later Crop Production reports, if realized. Carryout for 19/20 was down only 261 mbu to 1.929 bbu on Thursday. Demand was cut via exports (-150 mbu) and FSI (-85 mbu) as both of those have been sluggish to start the new MY. EIA data showed a third consecutive week with sub-1 million bpd production (@ 963,000 bpd for the week ending 10/4). Ethanol stocks also had a record draw-down to the lowest point in 2 years at 21.224 million barrels. Export Sales of corn remained low, with 284,456 MT sold in the week of 10/3. Commitments are now 51.7% below this point last year. As of Tuesday, the large managed money spec funds cut 35,506 contracts from their net short position in corn futures and options putting them at -90,668 contracts.

Wheat futures saw gains in all three exchanges this week, with KC leading the way up 4.21%. CBT was up 3.57% higher since last Friday, with MPLS up 1.77%. Crop Progress data on Monday showed the spring wheat harvest is 91% complete, a 1% move on the week. It also indicated the winter wheat crop was 52% seeded, slightly behind the 53% average, with 26% emerged by Sunday. USDA’s WASDE update showed US ending stocks projected to increase by 29 mbu from Sept to 1.043 bbu for 19/20. That was largely due to a 25 mbu cut to exports and a 30 mbu drop for feed and residual. Weekly export sales for the week ending October 3 were 521,940 MT, a 65.34% increase over the previous week. Friday’s Commitment of Traders report indicated that spec funds in Chicago wheat futures and options cut back 2,376 contracts from their net short position last week, taking it to -19,138 as of October 8. They added 2,296 contracts to their net short in KC wheat last week to put it at -35,076 contracts. Managed money also continued to unwind their record large bear position in MPLS wheat, trimming it by 668 contracts in the week ending 10/8. They were still net short 11,777 contracts on Tuesday night.

Soybean futures saw another 2.16% gain this week, with the help of trade talks and winter weather conditions in the North. Soybeans also hit the highest price since June 22, 2018 on the front month continuation chart this week. Soybean meal was up 2.34%, with soy oil gaining 0.37% in 7 days. Snow accumulation and below freezing temps swept across the Northern Plains in the last half of the week. That is not good considering the US soybean crop was listed with 72% of the leaves dropped by 10/6, vs the 87% average. Harvest is moving at a slow pace, with 14% harvested lagging the normal 34%. Condition ratings were down 6 points on the Brugler500 index at 342. Progress was made in this week’s trade discussions between US and China, as President Trump announced we have come to a substantial phase one deal with China. Under the agreement, China will purchase $40-50 billion in US ag goods annually by the second year. Crop Production data on Thursday was a little friendlier for soybeans, with yield cut by 1 bpa to 46.9 bpa and acreage trimmed. Production was down 83 mbu to 3.55 bbu, which caused a 180 mbu reduction to stocks at 460 mbu, with the help of a lower carryover from 18/19. USDA’s weekly Export Sales report indicated 2.092 MMT in soybean sales for week ending on 10/3, exceeding trade estimates. China purchased 1.177 MMT of that total. CFTC data released on Friday showed spec fund money managers flipping 15,231 contracts to a net long position of 6,501 contracts as of Tuesday. That was their first time being reported net long since Feb.

Cotton futures ended the week with December up 3.78%, as most of that was from gains on Friday. US and China have come to a partial agreement in principle on trade, with President Trump stating it may take 4-5 week to get this phase one deal on paper. He stated China agreed to purchase $40-50 billion in US ag goods by year 2 of the agreement. The weekly Crop Progress report showed 83% of the US cotton had bolls open by Sunday, 8% above than normal, with harvest progressing 5% faster than average at 25%. NASS trimmed production to 21.71 million bales on Thursday, with yield cut 6 lbs to 833 lbs/ac. That helped carryout to be reduced by 200,000 bales to 7 million bales. Weekly export sales were 188,841 RB for 19/20, the second largest weekly total this MY. That was up 6.19% wk/wk and well above the same week last year. The total accumulation of exports this MY is 1.905 million RB, which is up 18.9% from this time last year. Export commitments for the year to date are 58% of the full year USDA forecast, better than the 51% average pace. The large managed money spec funds continue to trim their net short position in cotton futures and options, cutting it by 5,489 contracts as for the week of 10/8 to -19,306 contracts.

Live cattle futures were up another 1.96% for the week. Cash cattle trade was $109-$111 live and $172 in the North, with little action as of Friday afternoon in the South. Feeder cattle futures were 1.5% higher on the week. The CME feeder cattle index was $143.63, up 71 on the week. Wholesale beef prices bounced from their post-Labor Day decline. Choice boxes were up $3.70, or 1.7% for the week, with Select product $1.76 higher or 0.9%. Beef export data from Thursday show 16,386 MT of beef were shipped out in week ending 10/3. New reductions of 29,079 MT were reported for that week, coming from 36,000 MT in cancelations from Hong Kong. Weekly beef production was down 1.3% this week, and 1.2% smaller than the same week in 2018. Year to date beef production is only 0.1% larger than year ago on 1.0% higher slaughter. USDA showed 2019 beef production now estimated at 26.948 billion lbs in Thursday’s WASDE, down 5 million lbs from last month. Projected production for 2020 was unch at 27.670 billion lbs. CFTC data showed spec funds adding 6,125 contracts to net long after a brief in the week ending October 8. That left them net long 12,012 contracts on Tuesday.

Lean hog futures clawed back most of last week’s losses, up 3.49% this week. The CME Lean Hog index was up $1.93 for the week at $60.65, still $2.275 back of October futures. USDA tallied 2019 pork export bookings at 31,324 MT in the week of 10/3, with a massive 123,504 MT sold for 2020 delivery. Last week’s exports to China were 6,749 MT of pork with 2019 sales of 19,462 MT and 2020 sales of 123,362 MT. The pork carcass cutout value was $2.35 higher this week (+3.1%). The pork belly primal was up another 7.3%, with the rib, down 0.3%, the only primal lower. Weekly pork production was up 2.1% from the previous week, and 9.2% larger than the same week in 2018. Estimated slaughter of 2.725 million head would be the second largest weekly total on record. YTD pork production is now 4.2% above year ago on 3.7% more hogs going through the plants. An update to USDA’s pork quarterly production table showed 2019 production estimates at 27.578 billion lbs. Production in 2020 is now projected at 28.680 billion lbs, up 270 million lbs from last month. The managed money spec funds trimmed 1,049 contracts from their CFTC net long position in hogs last week, taking it to 18,416 contracts (futures + options) by close of business on 10/8.  

Market Watch

We will likely begin next week with traders reacting to the Friday’s US/China accountment, now that more of the facts are known. USDA will be off Monday in observance of Columbus Day, however the markets will be open. October Lean Hog futures and options expire on Monday, as well as October futures for Soy Meal and Soy oil. The Export Inspections and Crop Progress reports will be delayed until Tuesday, with the monthly NOPA report released on Tuesday as well. Due to the one-day delay, EIA data will be released on Thursday morning, with the weekly Export Sales report out on Friday morning.

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