Flight to Cash

Published on: 20:52PM Aug 21, 2015


Market Watch with Alan Brugler

August 21, 2015


Concerns about slow economic growth around the world (including the US) accelerated after the meltdown in the Shanghai stock market and ineffective Chinese government actions to support the market and stimulate their economy. China is the world’s largest exporter, and has the 3nd largest GDP at an estimated $8.36 trillion. The US is in second place at $15.68 trillion, 88% larger than China. The EU is the largest at $16.63 trillion, all based on 2012 data. The EU is likely back below the US here in 2015. With global surpluses of a number of commodities, growth is needed to absorb inventory and prop up prices. That isn’t happening at this particularly moment and the markets got nervous. The S&P 500 E-Mini futures erased 10 months of gains in a single week, trading at the lowest price since October 30,2014 on Friday. They lost 6.2% from the Tuesday high to the Friday close.  Front month crude oil was a model of decorum, losing only 5.3% from Friday to Friday. Commodities typically outperform equities when the latter are selling off, and in fact the CRB Index was down less than 1% for the week. For the most part it was a flight to cash, however. The money was being parked in Treasuries, ala 2008, with the 10 year T-Note futures posting their highest close (lowest yield) since April 28. That is indicative of large scale purchasing of the government paper. 

Corn futures looked promising all week but gave most of it back on the Friday mass exodus from the markets. They did post a gain of 1 1/4 cents or 0.34% for the week, keeping company with soybean meal.  Weekly ethanol stocks rose 100,000 barrels, but weekly corn grind continued to be more than 100 million bushels. Weekly export sales were improved. The Pro Farmer crop tour provided a steady diet of state level crop yield estimates all week. On Friday, the publication estimated the US crop will be 13.323 billion bushels, with an average yield of 164.3 bpa. They emphasize that the estimate is not directly derived from the Tour but informed by it. Stats Canada estimated Canadian corn production this morning at 12.3 MMT, up 7.2% from last year due to larger acreage and also a higher average yield in Manitoba and Quebec.














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Wheat futures continued to grind lower in an attempt to buy consumption and reduce global carryover stocks. Chicago was down 1.4%, with KC down a full 4% and MPLS down 1.1% for the week. USDA weekly export sales are still lagging, with commitments for 37% of the full year USDA forecast. They would typically be 43% by now. The US is still not competitive into Egypt due to freight costs, but other destinations are in play. Russian and EU export sales are also down year/year since July 1. The Commitment of Traders report showed the large speculative traders clinging to a small (1,392 contracts for Chicago SRW) net long position going into the Wednesday crop reports. Stats Canada Canola production is estimated at 13.34 MMT, below trade estimates at 13.5 MMT.        

Soybeans were down 20 cents for the week.  The PF crop tour was generally finding soybeans to be in great shape excluding Ohio and Indiana, with rain during the tour adding yield potential. Pro Farmer on Friday afternoon projected a US crop of 3.887 billion bushels on a 46.5 bpa national average yield. China imported 6.37 MMT of Brazilian, and 2.28 MMT of Argentinean beans during July.  Monthly Chinese imports totaled 9.5 MMT, the first month ever with more than 9 MMT.  The Stats Canada Crop Production report on Friday  put Canadian wheat production at 24.63 MMT (trade estimates were 25.95 MMT).  The Commitment of Traders report confirmed that the large spec funds were fleeing the long side of the market. They cut their net long by 39,669 contracts and were net long only 19,684 as of August 18. 

October cotton futures were up 0.7% for the week, holding onto gains from the previous week. There are typically 3-4 commodities going counter to the trend of the multi-commodity CRB Index due to their own fundamentals. Cotton gets that label, as USDA cut both projected acreage and yield to surprise the market with a production cut of 1.42 million bales a week ago and that was still influencing trading. The CFTC confirmed that the spec fund net long position nearly doubled in the week ending 8/18 from 28,147 contracts to 50,739 as of Tuesday night. USDA dropped the average world price (AWP) to 49.46 and USDA put the LDP at 2.54 cents through August 27.

 Live cattle futures gave back 2.08% last week. Tighter finished cattle numbers are expected in September and October compared to year ago, although some calculations of 120 days on feed show larger numbers. The big question is whether packers can move the product at a high enough price to pay up for the cattle. Pork and chicken supplies are larger than year ago, and exports aren’t bleeding them off.  Weekly beef production was up 0.4% from the previous week and 8.0% smaller than a year ago for the same week. Year to date beef production is down 4.8% on 7.0% fewer cattle slaughtered. Yes, average carcass weights set another all time record high. The Friday afternoon Cattle on Feed report was about as expected, with August 1 On Feed at 102.6% of year ago. Placements were slightly smaller than the average trade estimates, but were offset by smaller than expected July marketings.

Lean hog futures plunged $2.50 or 4% this week. The CME Lean Hog Index was $78.45, down 63 cents from the previous week. Weekly FI slaughter was 2.226 million head, up 0.6% from last week and 9.8% larger than the same week in 2014. Pork production YTD is 7.2% larger than last year at this time, on 7.8% larger slaughter. Average carcass weights continue to come down. Wholesale pork prices were down 1.88% for the week.  Bellies were down 5.9% and appear to be ending their seasonal advance. Hams were higher. The Commitment of Traders report showed the speculative longs adding 1,406 contracts to their net position between 8/12 and 8/18. 

Market Watch

We will get the usual contigent of weekly USDA reports, with Crop Progress and Export Inspections on Monday and weekly Export Sales on Thursday morning.  August feeder cattle futures expire on Thursday the 27th. Other than that we are looking at the usual month end asset allocation gymnastics as winners for the month are sold and losers are purchased for future “mean reversion”. 

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