Hammers and Nails

Published on: 17:04PM Aug 16, 2019

Market Watch with Alan Brugler
August 16, 2019
Hammers and Nails

There is a saying in Japanese candlestick charting that “the nail which sticks up gets hammered down”.  That pretty much sums up the corn market since last May. We had a huge rally based on planting delays and prevented plantings. The nail was sticking up. It has been hammered back down by price rationing on the export side, and larger corn production prospects (at least in the current USDA narrative) than what most traders and farmers thought possible 6 weeks ago. Of course, we also know that some nails become bent by an off center hammer hit, and nails can also be backed out of the board by either flipping the board over and hitting the point, or by using that claw and applying a little leverage on the face side. The off center hammer could be the yield estimate in our market example, or perhaps somebody’s satellite is mistaken on what is growing in that field. Our suspicion is that the job isn’t done yet!

Corn futures were absolutely hammered following the Monday USDA reports, dropping 9.7% for the week. That sell off dwarfed the 2.7% rally from the previous week.  USDA’s analysts hiked projected old crop carryover to 2.36 billion bushels due to smaller ethanol use. They dropped planted corn acres by 1.7 million vs. the July report, to 90 million. However, they also raised projected national average yield to 169.5 bpa from 166. As a result, anticipated production rose to 13.901 billion bushels instead of dropping to 13.2 billion as the average trade guess anticipated prior to the report.  FSA did confirm more than 19 million acres were prevented from being planted by weather, of which 11.21 million were claimed as corn. The market spent the rest of the week trying to second guess the acreage and yield numbers and assessing how low prices would need to go to a) buy back lost export market share and b) discourage acreage expansion in the Southern Hemisphere this fall (spring there).  The Friday afternoon Commitment of Traders report confirmed the large managed money spec funds were continuing to exit their big long position but were not flat as had been rumored. They reduced it by another 34.994 contracts (futures + options) in the week ending August 13, taking the net long position down to 44,513 contracts.

Wheat futures were lower in all three markets this week. MPLS was down 2.5% for the week, with KC HRW down 5.3% and Chicago SRW off 5.8%. The CHI/KC spread narrowed from 83 cents premium Chicago to 76 cents. That is still huge historically speaking. USDA reported a solid 462,200 MT in weekly export sales. The Export Performance report showed 37% of USDA’s full year forecast has now been either shipped or is an Outstanding Sale on the books. The average would be 44% for this date. Unshipped sales are 10% larger than last year at this time. The WASDE report was modestly bearish, with ending stocks hiked 14 million bushels but the average cash price trimmed 20 cents per bushel to allow export growth and thus limit stocks growth. The Friday Commitment of Traders report showed the large spec funds shrinking their net long in Chicago by 2,131 contracts, taking it to 4,088 net long as of Tuesday.

Soybean futures were down 1.3%, mitigated by 9 cent rebound on Friday. Soybean meal was down 1.2% for the week, with soy oil down 1.5%. USDA’s big changes on Monday drove trading action. They reduced projected planted acreage to 76.7 million and left projected yield at 48.5 bpa. That shrank production to 3.68 billion bushels. However, the export forecast was trimmed 100 million bushels due to reduced Chinese needs and extended competition out of South America as the trade war goes on. The ending stocks estimate is still 755 million bushels.  The NOPA crush report for July was surprisingly strong at over 168 million bushels. If the Fats & Oils report picks up that same trend, the cut in old crop crush use last Monday may prove to have been unnecessary. Friday’s Commitment of Traders report showed the managed money spec funds reducing their net short position by 6,363 contracts this week to take it to -66,450 contracts on August 13.

Cotton futures rose 2.1% this week after a 1% crop the previous week. The WASDE report on Monday was not bull friendly on paper.  USDA hiked projected US cotton production 520,000 bales on larger harvested acreage and a 10 lb per acre higher average yield estimate. They bumped up projected 2019/20 exports to 17.2 million bales, but ending stocks are still seen increasing from 5.25 million in the season just ended to 7.2 million by July 2020. CFTC indicated the large managed money spec funds cut 2,786 contracts from their net short position in the week that ended August 13. That put them net short 44,642 contracts on that date.

Live cattle futures plunged 7.5% this week, starting the week with two limit down sessions. A fire took Tyson’s Garden City plant offline for an unspecified period, leaving 5,000 to 6,000 head of finished cattle per day needing to find harvest capacity elsewhere. Futures dropped in anticipation of plunging cash cattle prices in that area, with ripple effects. Cash cattle traded at $105, down $6 or more from the previous week. The cattle will find a home, and futures are now at a discount to cash. Feeder cattle futures were down 3.1% for the week. Those animals won’t be marketed until the afflicted plant is likely back online, so prices took less of a hit. The CME feeder cattle index was $137.60, down $4.06 for the week. Wholesale beef prices were sharply higher with the loss of production in Kansas during a key purchasing period for Labor Day features. Choice boxes were up 10.3% for the week, with Select up 10.0%. Weekly beef production was up 1.6% from the previous week, but 2.5% below the same week in 2018. Year to date beef production is 0.2% larger than year ago on 1.2% higher slaughter. Estimated weekly slaughter will be UP 1.4% from last week due to a much larger Saturday kill.  Packers have attractive margins, and cattle available. Cash cattle trade was mostly $105, with $172-178 reported in the North. The volume was closer to $172. The 5 area average was $105. 78. The Commitment of Traders report shows the spec funds reducing their net long by 4,355 contracts, dropping it to 18,830 by August 13.  

Lean hog futures were down 7.4% for the week. USDA showed pork export sales of 20,393 MT in the week of August 8, with 10,211 MT sold to China. Shipments were at 26,413 MT, as 6,835 MT was headed to China. The Chinese business may have been booked before the announcement restricting new purchases from the USA. China confirmed that their hog herd in July was 32% smaller than in July 2018, so they do need the meat.  The CME Lean Hog index was $79.34, down $3.51 from the previous week. The pork carcass cutout value was $4.18 lower this week (-4.6%). Weekly pork production was up 5.6% from the previous week, and 1.9% larger than the same week in 2018. YTD pork production is now 3.8% above year ago on 3.2% more hogs.  The managed money spec funds reduced their CFTC net long position in hogs by 6,928 contracts last week, putting it at 34,050 contracts (futures + options) on August 13.

Market Watch
We’ll have a normal weekly schedule of Export Inspections on Monday morning and Crop Progress that afternoon. EIA’s ethanol production and stocks data will be released on Wednesday morning. USDA weekly Export Sales will be released on Thursday morning at 7:30 a.m. CDT.  The monthly Cold Storage report is scheduled for Thursday afternoon at 2:00 PM CDT, with Cattle on Feed coming out the same time on Friday afternoon.  Friday will also mark the expiration of the September grain options contracts.

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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