Market Watch with Alan Brugler
July 12, 2019
Full Speed Ahead
Admiral David Farragut famously said, during the Civil War Battle of Mobile Bay, “Damn the torpedoes, full speed ahead”. His crew were nervous about Confederate defenses, but he deemed the reward from acting quickly worth the risk. Our ag markets had to deal with some USDA torpedoes this week in the form of WASDE estimates showing declining exports due to high prices and a corn acreage number this is widely disbelieved. The post report reaction was similar to Farragut’s, however, with the bulls certain enough of their position to buy anyway. To use another naval concept, a rising tide floats all boats, so once the initial buying worked, others jumped on board and the bears were soundly defeated.
Commodity Weekly Weekly
Month 06/28/19 07/05/19 07/12/19 Change % Chg
Sep-19 Corn $4.25 $4.39 $4.54 $0.155 3.53%
Sep-19 CBOT Wheat $5.27 $5.15 $5.23 $0.080 1.55%
Sep-19 KCBT Wheat $4.62 $4.45 $4.68 $0.223 5.00%
Sep-19 MGEX Wheat $5.54 $5.33 $5.43 $0.093 1.73%
Aug-19 Soybeans $9.05 $8.76 $9.13 $0.373 4.25%
Aug-19 Soy Meal $315.30 $305.80 $314.80 $9.000 2.94%
Aug-19 Soybean Oil $28.37 $27.56 $28.31 $0.750 2.72%
Aug-19 Live Cattle $104.35 $107.00 $108.48 $1.475 1.38%
Aug-19 Feeder Cattle $136.85 $138.83 $141.60 $2.775 2.00%
Aug-19 Lean Hogs $76.00 $77.05 $80.65 $3.600 4.67%
Dec-19 Cotton $66.08 $66.82 $62.68 (4.1400) -6.20%
Sep-19 Oats $2.77 $2.78 $2.82 $0.032 1.17%
Corn futures gained 3.5% this week on top of a 3.3% gain from the previous week. The rally paused for USDA to release its S&D numbers on Thursday and rallied the rest of the week in typical “sell the rumor, buy the fact” action. The USDA numbers themselves were not bullish, with old crop ending stocks hiked to 2.34 billion bushels, and new crop up to 2.010 billion after being estimated at 1.675 billion a month earlier. The new crop world stocks are also seen 8.4 MMT larger than they were a month ago. Why rally? Most market participants believe the USDA acreage re-survey and first FSA Prevented Planting numbers will show a much smaller crop in August than the one just described. The Commitment of Traders report confirmed that the large managed money spec funds still have a big long position. They added 5,520 contracts in the week ending July 9, taking the net position to 187,168 contracts. The commercial net short was huge at 501,979 contracts and still growing.
Wheat futures were higher in all three markets, with double digit gains following the USDA reports on Thursday. MPLS was up 1.7% for the week, with September CBT SRW up 1.6%. KC HRW was the full leader, picking up 5% and the CHI/KC spread unwound a little. NASS pegged the winter wheat harvest at 47% complete as of last Sunday, with warmer and drier weather likely allowing that to push north this week. The final winter wheat condition ratings of the year hit 64% gd/ex or 368 on the Brugler500. Spring wheat was shown at 56% headed (73% avg), with conditions improving 3% to 78% gd/ex or 383 (+5) on the Brugler500. The USDA reports were bull friendly for wheat, with the new crop ending stocks projection cut 72 mbu to 1 billion bushels. World stocks were where the action was. USDA trimmed Australian and Russian production further than expected, and cut estimated world ending stocks to 286.46 MMT. That would still be 11.3 MMT more than this year, but a welcome tightening from the June estimate.
Soybean futures rose 4.25% for the week. Soybean meal picked up 2.9%, with soy oil 2.7% higher. The USDA numbers on Thursday were generally bull friendly for beans. Old crop ending stocks were trimmed 20 million bushels on larger residual use (driven by the Grain Stocks report) and the new crop estimate plunged to 795 million from 1.045 billion in the June report. The WAOB team adopted NASS’s 80 million planted acres figure, and also reduced their average yield estimate 1 bpa from the previous month. Those moves trimmed the production estimate by 305 million bushels. The projected world stocks/use ratio for 2018/19 is still record large, but those US production cuts made the 2019/20 ratio a lot tighter by taking ending stocks down to 104.53 MMT from 112+. US soybean condition ratings also dropped last when the trade had expected some modest improvement, casting doubts on yield potential.
Cotton futures dropped 6.2% this week in the active December contract. Both October and December printed new life of contract lows. The WASDE report highlighted just how bad demand is right now. Old crop stocks were hiked 350,000 stat bales, and projected 2020 ending stocks were bumped up 300,000 bales from the June figure. That was with zero change in the production assumption. Commitments for export are now 112% of USDA’s projected total, vs. the 106% average and 110% last year. Accumulated exports YTD are down 13%, however, and the marketing year ends July 31. CFTC indicated the large managed money spec funds are getting even more bearish. They added another 4,062 contracts to their record net short position in the week ending July 9.
Live cattle futures saw a 1.4% pop in August futures this week. Feeder cattle futures were up an even 2% this week, fighting off higher feed prices via strength in fats. The CME feeder cattle index was $141.06, up an impressive $7.85 for the week. Wholesale beef prices were lower again this week. Choice boxes were down 2.2% for the week, with Select down 2.7%. The Choice/Select spread has ballooned to $23.20/cwt. Weekly beef production was up 14.7% from the previous week due to the July 4 holiday. It was 0.5% below the same week in 2018. Year to date beef production is 0.1% larger than year ago on 1.2% higher slaughter. Cash cattle trade on Friday was $112, with $115 seen in the north earlier in the week. The Commitment of Traders report shows the spec funds STILL trying to unwind their net long position in cattle. It shrank another 944 contracts in the week ending July 9, putting it at 21,753 contracts.
Lean hog futures shot up 4.7% this week, erasing several weeks of bearish price action. Weekly pork export sales were poor at only 11,300 MT. New Chinese business was negligible. China continues to ship US pork every week, with this week’s total 7,953 MT. Shipments to China have risen every month this year. The CME Lean Hog index was $70.65 on Friday, down $2.57 from the previous week. The pork carcass cutout value lost $1.52 this week (-2.1%) this week, at $71.65. Pork bellies are still not pulling their weight. Weekly pork production was 16.2% larger than the previous week due to the July 4th celebration, but also 8.8% larger than the same week in 2018. YTD pork production is now 4% above year ago on 3.3% more hogs. The managed money spec funds nibbled at the long side in hogs. They added 1,982 contracts to their net long in the week ending July 9, taking it up to 32,635 contracts. They have been very patient with those longs in the face of an extended hog market sell off that began around Memorial Day.
USDA’s Export Inspections report will be released on Monday morning, with the Crop Progress report out in the afternoon. NOPA monthly crush data is scheduled for Monday release. July hog futures and options will expire Monday as well. Wednesday will show the release of the EIA report for ethanol stocks and production as of July 5. Thursday will see the weekly Export Sales numbers out in the morning. Cattlemen and cattle traders get a double feature on Friday afternoon, with USDA releasing both the monthly Cattle on Feed report and the semi-annual Cattle Inventory. The latter will be closely watched for any signs of a turn in the cattle cycle (i.e. shrinking breeding herd) and a better handle on death losses from the miserable weather this spring.
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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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