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Market They Name is Uncertainty

Published on: 20:41PM Aug 28, 2015

 

Market Watch with Alan Brugler

August 28, 2015

Market, Thy Name is Volatility

Price moves in several markets this week were large enough to bring back Flash Crash terminology. The equity markets were under severe pressure on Monday and Tuesday stemming from China, where the Shanghai market broke more than 28% in 7 days before government intervention reversed it on Thursday and Friday. The rallies in equities on Wednesday-Friday around the world were equally stunning. Not to be left out, Brent crude oil was up more than 15% in two days, and the October WTI contract was up 12% for the week.  Live Cattle gapped down on Monday, hit the lowest price for the October contract since May 2014 on Wednesday, but posted a net gain for the week.

There is uncertainty in commodities markets all the time due to weather, etc. but this was much larger. The China card was huge not because they are a big US trade partner (less than 1% of US GDP) but because they have been THE global market for copper, crude oil, soybeans and a host of other commodities. Losing even some of that demand threatens their trading partners when there is a scramble for exports and jobs. And China is now the world’s second or third largest economy. Timing of the news may also have been a factor in the volatility. Traders in several parts of the world are on holiday in August, leading to thin condition. Due to Dodd Frank rules, some major banks have also exited the commodities markets and removed some price buffering by reducing the number of well heeled players in the game.

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You have several chances this week to get a sampling of the type of insights you could be getting from Alan as a full time Brugler client. Alan will be a guest analyst for US Farm Report http://www.agweb.com/usfr/ next weekend (Sept 5), joining Tyne Morgan for the taping this Wednesday at 11:30 in the Channel tent at the Farm Progress Show. He will be also sharing some insights on WILL radio the same day. On Friday, September 4 he will be a guest analyst on Market Rally Radio http://www.agweb.com/market-rally/ with Chip Flory.

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Corn futures down down 2 cents per bushel this week as they continue to trade within the range marked out on August 12. Weekly ethanol stocks were UNCH, while weekly corn use for ethanol dipped to about 101 million bushels. Plants are beginning to take maintenance down time ahead of harvest. A bounce in gasoline prices on Thursday and Friday helped make ethanol blend margins look a little better. Yield reports from the South continue to be below trendline, as the wet spring and hot/dry August did a number on the corn crops in TX, LA and MS. On the other hand, crop condition ratings continue to be consistent with above trendline yields for the country as a whole. US Corn export shipments have hit 84% of the full year forecast, with 10 days remaining in the marketing year. They would typically be 97% by now.

Soybeans were down 12 cents for the week. The decline in prices is beginning to buy some additional export sales activity, with total sales last week rising to 1.326 MMT.   Keep in mind that USDA expects China to import 79 MMT of soybeans for the marketing year. That means they need to buy an average of 1.5 MMT per week from somebody, every single week.  They bought 887,000 MT from the US last week.  The problem continues to be an overhang of supply from South America following record production there. Barring shipping disruptions in Brazil or Argentina, the US is going to miss out on a lot of first quarter shipments that it made last year. The Commitment of Traders report confirmed that the large spec funds are still fleeing the long side of the market. They cut their net long by 18,909 contracts and were net long only 775 contracts as of August 25. 

 

 

Commodity

 

 

 

Weekly

Weekly

Mon

08/14/15

08/21/15

08/28/15

Change

% Chg

Sept

Corn

$3.640

$3.653

$3.633

($0.020)

-0.55%

Sept

CBOT Wheat

$5.065

$4.995

$4.770

($0.225)

-4.72%

Sept

KCBT Wheat

$4.898

$4.710

$4.578

($0.133)

-2.89%

Sept

MGEX Wheat

$5.185

$5.130

$4.905

($0.225)

-4.59%

Sept

Soybeans

$9.253

$9.053

$8.933

($0.120)

-1.34%

Sept

Soy Meal

$325.200

$326.900

$321.400

($5.50)

-1.71%

Sept

Soybean Oil

$29.080

$27.360

$27.790

$0.430

1.55%

Aug

Live Cattle

$148.450

$145.425

$146.525

$1.100

0.75%

Sept

Feeder Cattle

$209.53

$202.33

$202.40

$0.08

0.04%

Oct

Lean Hogs

$65.325

$62.825

$66.425

$3.600

5.42%

Oct

Cotton

67.160

67.640

63.750

(3.890)

-6.10%

Sept

Oats

$2.275

$2.143

$2.345

$0.203

8.64%

 

Wheat futures continued to grind lower in an attempt to buy consumption and export market share. Chicago was catching up with a KC HRW market that had been down 4% the week before. Chicago was down 4.7% this week, with KC down another 2.9% and MPLS September down 4.6% as it also is still seeing harvest pressure. USDA weekly export sales are still lagging, accumulated exports 21% smaller than last year at this time. Total export commitments have improved a bit, with 39% of the full year forecast now on the books. The 5 year average for this date would be 45%. The Commitment of Traders report showed the large speculative traders haave turned bearish on Chicago SRW, with a net short position of 7,217 as of Tuesday night.      

October cotton futures were down a huge 6.1% this week. US production prospects are still limited, with not a lot of disagreement regarding the USDA forecast for a little over 13 million bales. The sell off was a combination of technical and macro influences. Longs were taking profits after a run up, with concern that a slow down in the Chinese economy would result in less cotton consumption and potentially smaller imports. The CFTC confirmed that the spec fund net long position was still growing in the week ending 8/25 (just in time to get caught in the big sell off). The funds added 2,574 contracts to thei net long position, taking it to 53,313 lots as of Tuesday night. USDA dropped the average world price (AWP) to 48.21 cents.  That boosted the LDP/MLG to 3.79 cents through next Thursday.

 Live cattle futures regained $1.10/cwt or 0.75% last week. Tight finished cattle numbers are expected in September and October compared to year ago, although some calculations of 120 days on feed show larger numbers. Bulls got a little help from the weekly USDA Export Sales report, which showed a rebound to 12,800 MT after several slow weeks.  Weekly US beef production was up 1.4% from the previous week but still 5.2% smaller than a year ago for the same week. Year to date beef production is down 4.7% on 7.0% fewer cattle slaughtered. Yes, average carcass weights set another all time record high at 837 pounds and that is helping to fill in the production hole.  Cash cattle trade on Friday was disapopointing, with quotes as much as $4 below the previous week at $227-228 in Nebraska. Discounts as large has $10.50 have ben reported for carcasses over 1,050 pounds according to DTN.

Lean hog futures shot up 5.4% this week, offsetting a 4% drop the previous week.  The net gain for the 2 week period was $1.10. The CME Lean Hog Index was $78.68, up a bare 23 cents from the previous week. Weekly FI slaughter was estimated at 2.214 million head, down 0.5% from last week and 10.4% larger than the same week in 2014. Pork production YTD is 7.3% larger than last year at this time, on 7.9% larger slaughter. Average carcass weights continue to come down. Wholesale pork prices were down 3.6% for the week.  Bellies were down 1.75% and appear to be ending their seasonal advance. Hams typically start to carry the load, but were down 7.8% for the week.

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 live cattle futures expire on Monday the 31st. 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”. Monday is also first notice day for September grain futures deliveries.  The following Monday (9/7) is of course Labor Day in the US and a market holiday. Some traders are likely to make it a 4 day weekend and be absent on Friday.  

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