Market Watch with Alan Brugler
July 26, 2019
Long Term vs. Short Term
The futures market is by definition one that looks ahead. It is trying to anticipate the future value of a commodity, and allow buyers and sellers to lay off price risk if they don’t like the price that they see. The market adjusts constantly to new data inputs, plain old rumors, and also to the supply and demand of money available to that market. There is a famous market axiom which states that “the market can remain illogical longer than you can remain solvent”. Grain traders are currently caught between short term effects and potential future effects. The markets have rallied based on an assumed shortfall in US production. That’s the long term outlook, but is not supported by hard data from USDA, crop insurance or believable yield estimates. The short term effect has been poor US export sales for corn and soybeans. Price rationing is taking place, and the price drop to try to rekindle export sales looks illogical to those with the longer term short crop viewpoint. The market will come a little closer to consensus on August 12, but won’t really have solid numbers until after harvest. For now, I would remind you of one of my favorite Mark Twain quotes 'What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so.'
Corn futures dropped 3.8% this week, following a 5.2% decline the previous week. Most market participants believe the USDA acreage re-survey and first FSA Prevented Planting numbers will show a smaller crop in August than the one shown in the July USDA report, whether acreage or yield shifts to get there. However, that’s still two weeks away. Export business is shrinking today based on US prices higher than the competition, and the market is trying to address that bleeding. Export sales commitments are down 16% from year ago at this time, and 93% of the WASDE full year forecast. They would typically be 103% by now, indicating either a) a much larger shipping program in August or b) USDA revising the full year forecast downward again. The Commitment of Traders report confirmed that the large managed money spec funds are exiting their big long position. They reduced it by 34,044 contracts (futures + options) in the week ending July 23, taking the net position to 153,216 contracts. The commercial net short shrank 30,805 contracts in the week to 491,720 as they started to move some of the grain ahead of harvest.
Wheat futures were lower in all three markets, MPLS was down 0.8% for the week, with September CBT SRW down 1.3 and KC HRW down 1.9%. The CHI/KC spread widened to 64 cents premium Chicago from 63 cents last week. US wheat export commitments are 24% larger than they were at this time last year. They are 33% of the full year estimate, which is stronger than last year’s 28% for this date, but lag the five year average of 37%. Private production and export estimates for Russia declined sharply this week due to adverse weather impacts beginning in June. France is suffering record heat during harvest but is still optimistic about yields. The spring wheat Quality Tour estimated US spring wheat average yield at 43.1 bpa, up 2 bushels from last year. The Friday Commitment of Traders report showed the large managed money funds reducing their net long in Chicago by 6,972 contracts, dropping it to 11,779 net long. They added 2,181 contracts to their net short in KC wheat during the reporting week, bringing it to -18,337 on July 23.
Soybean futures dropped 2% this week and nearby August is now 30 cents below the price two weeks earlier. Soybean meal was down 2.6%, with soy oil up 1.3%. US soybean condition ratings were UNCH from the previous week, with the Brugler500 ratings index at 347 and still comfortably above 1993 at this point. Old crop export sales commitments are 16% smaller than last year, but fully in line with USDA’s reduced estimate for the year. In fact, they are 105% of the estimate and would typically be 103% at this point. Friday’s Commitment of Traders report showed the managed money spec funds trimming their net short position a little further, by 446 contracts in the week ending July 23. That put them net short 38,489 contracts as of Tuesday evening.
Cotton futures were up 2.1% this week after plunging to new life of contract lows the previous week. USDA’s trade war damage calculations clearly showed cotton as a major loser. The MFP payments announced this week top out at $150 per acre and the counties at that level are almost all major cotton production areas. Commitments for export are now 116% of USDA’s projected total, vs. the 107% average and 110% last year. Accumulated exports YTD are down 12%, however, and the marketing year ends July 31. It looks like a large roll over of sales will be made to the next marketing year. CFTC indicated the large managed money spec funds are getting even more bearish. They added another 960 contracts to their record net short position in the week ending July 23, putting it at 45,230 contracts.
Live cattle futures rallied 1% this week. Feeder cattle futures were up 2.7% as they built in lower feed prices and the modest rally in the fats. The CME feeder cattle index was $139.58, down 42 cents this week. Wholesale beef prices were lower. Choice boxes were down 0.6% for the week, with Select also down 0.6%. Weekly beef production was up 0.6% from the previous week. It was also 0.6% above the same week in 2018. Year to date beef production is 0.3% larger than year ago on 1.3% higher slaughter. Cash cattle trade was $111-112 on Friday, with $183-185 seen in the carcass based north. The Commitment of Traders report shows the spec funds adding longs. They added 1,375 contracts to their net long in the week ending July 23, taking it to 26,818 contracts.
Lean hog futures were up 3% this week, on top of 4% and 4.7% gains the two preceding weeks. Weekly pork export sales slowed to 20,910 MT in the latest reporting week. New Chinese business was about 1,100 MT, but China continues to ship US pork in increasing quantities. This week’s total was 9,426 metric tonnes. The CME Lean Hog index was $77.23, up $5.71 from the previous week. The pork carcass cutout value surged $5.85 higher this week (+7.4%). The two-week change is 20.59%! Weekly pork production was 2.7% larger than the previous week, and 20.2% larger than the same week in 2018. YTD pork production is now 4.2% above year ago on 3.5% more hogs. As a side note, average daily pork production in June was 11.2% larger than June 2018, giving a big boost to that YTD comparison. The managed money spec funds trimmed 470 contracts from their CFTC net long in the week ending July 23, taking it to 33,699 contracts.
Next week will see the end of one month and the beginning of a new one. We will start off the week as we always do with the Export Inspections report Monday morning and the Crop Progress report that afternoon. The monthly FOMC meeting will be on Tuesday and Wednesday, with some analysts expecting to see the Fed cut interest rates. Wednesday will show the release of the weekly EIA report for ethanol stocks and production. Thursday morning USDA will release the weekly Export Sales report. That afternoon, the monthly Fats & Oils and Grain Crushing reports will be released. Census will also release June trade data on Friday morning. All next week, Brugler will be hosting our Annual Summer Seminars, in Dayton, OH on July 29 & 30 and in Omaha, NE on August 1 & 2. Visit our website homepage for registration links or contact the number below for more information.
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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