Creeping Suspicion

Published on: 21:00PM Jul 24, 2015


Market Watch with Alan Brugler

July 24, 2015

Creeping Suspicion

The quote screens were pretty red this week across the ag complex. It wasn’t due to the usual villain, as the US dollar was actually 0.7% weaker for the week. Rather, it looks from here like a creeping suspicions that US average yields won’t be quite as bad as they looked two weeks ago, coupled with a meltdown on Wall Street that had money heading for the sidelines. Gold and crude oil were also diving. Keep in mind that commodities are generally negatively correlated to equities, and if the equity sell off continues we would expect to see some macro money eventually coming into commodities. As to that yield story, the 6-10 day forecast looked pretty benign, but we’re a long way from the bin. There are also questions about prevented plant acreage, with some ECB insurance agents reporting the largest claims activity they’ve ever had.

Corn futures lost 7% of their value this week, extending the 3.5% loss from the previous week. Drier weather in the ECB and predicted rains in the upper Midwest were both seen as likely to improve yield prospects. Plunging wheat prices didn’t encourage the spec bulls to hold onto corn, but wheat is still not cheap enough to feed in quantity. The corn demand side is holding together. Old crop total export commitments have hit 100% of the recently increased USDA forecast for the full marketing year. They would typically be 103% by this date. Ethanol stocks continued to tighten as use outstripped production. Corn use for ethanol production is still running over 100 million bushels per week. The Friday Commitment of Traders report showed the large spec funds adding another 76,918 contracts to their net long position in the week ending July 21. This means a lot of money was leaning the wrong way during the 7% break this week.  













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Wheat futures dropped all week, losing a whopping 8.3% in Chicago. MPLS was down “only” 5.5% because it had been the largest loser the previous week and the inter-market spreads were correcting. Net  US weekly wheat sales rebounded smartly to 502,800 MT this week. Shipments were the largest reported since the week of April 23, but accumulated shipments still lag this time a year ago by about 28%. Unshipped sales commitments for 2015/16 are still 18% smaller than last year at this time, but last week showed hints that low prices will eventually cure low prices.   


Soybeans were down 23 cents per bushel for the week in nearby August, with ECB basis levels backing off as crush plants suggested they had purchased enough old crop beans to support operations. Nearby meal futures were also down 1.8% for the week and soy oil lost 4.3% to put extra pressure on previously fat crush margins. Chinese new crop purchases are still very light compared to year ago at 2.5 MMT vs. 8.3 MMT.  The tide has begun to turn, however, with sales to China or “unknown” reported on multiple days this week. This suggests available South American supplies are beginning to tighten for October and November, swinging business back to the US. US old crop commitments now total 102% of the increased full year forecast. They would typically be 103%. The Commitment of Traders report confirmed that the large spec funds still had a very modest net long position of 90,219 contracts as of July 21.

October cotton futures fought to a near draw, losing only 3 ticks for the week. Net upland export sales were 137,000 RB for the week ending July 16, including 91,500 RB of old crop needing to be shipped before July 31. US export commitments (previous ships plus outstanding sales) are 107% of the full year USDA number, but would typically be . Shipments are 99%, however, with two weeks remaining.  The WASDE number looks pretty solid. USDA found the AWP to be 50.02 cents and increased the LDP for this week to 1.98 cents from 1.14 last week.

 Live cattle futures dropped 2.5% this week. Feeders were down 2.6% because of the weakness in both feed grains and fats. Friday cash cattle trade was mostly $145-146 in the south, $2 below the previous week. Weekly beef production was up 0.6% from the previous week and 4.1% smaller than a year ago for the same week. Year to date beef production is down 4.7% on 6.9% fewer cattle slaughtered.  Wholesale beef prices were lower for the week, with Choice losing 1.1% and Select down 0.5%.  The USDA Cattle on Feed report issued on Friday night was bearish on paper, with June marketings only 94.6% of year ago and June placements 100.9%. The net was On Feed July 1 at 101.9% vs. trade ideas of 101.4%.  Initial calls are lower, but the sell off coming into the report may limit the impact.

Lean hog futures shot up 2.6% for the week on top of 2.7% for previous week. The CME Lean Hog Index was 78.93, down $1.62 but still 27 cents above two weeks ago. Weekly FI slaughter was 2.107 million head, up 1.2% from last week but a huge 13.1% larger than the same week in 2014. Pork production YTD is now 7.0% larger than last year at this time, on 7.3% larger slaughter. Yes, average carcass weights are running below year ago. Wholesale pork prices firmed this week, with the cutout up 2.7% on a Friday/Friday basis.

Market Watch

The grain markets will begin the week with traders adjusting to any surprise positions resulting from options exercises on Friday at expiration. August beans saw the $10 puts in the money, but pin attempts for 30 cents in soy oil and $350 meal did not succeed.  Cattle traders will be reacting to the Cattle on Feed report released on Friday after the close. USDA will have a fairly typical report lineup this coming week, with Export Inspections and Crop Progress on Monday, followed by Export Sales on Thursday. The FOMC meets on Tuesday and Wednesday.  The concensus is that they will not increase short term interest rates at this meeting, but will strengthen the signal for a September hike.  We will also be dealing with month end position squaring and asset allocation adjustments, capped on Friday by first notice day for August futures deliveries in the soy complex.

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