Pogo Sticks Not Hockey Sticks

Published on: 21:24PM Dec 04, 2015


Market Watch with Alan Brugler

December 4, 2015

Pogo Sticks, Not Hockey Sticks

It never ceases to amaze me that people (who should know better) underestimate the volatility of commodity prices. How many times have you heard a university economist, commodity broker or talking head say something like “Prices have dropped hard and we don’t see them going up anytime soon.  We have big carryovers. Producers will be big sellers on a 10 cent rally and kill the market.” I’m betting you have heard it frequently in 2015.  It doesn’t work that way. As I share frequently in our Ag Marketing Professional advisory service, price charts in commodities rarely look like a hockey stick. They don’t just drop and lay there. Typically, they go too far down and then jump back up.  The stuck here commentators are often looking at a price below value and below the eventual average price for the year. I say that markets more closely resemble a pogo stick.  They bounce, they land, they compress the spring and they bounce again. In economic terms they are mean reverting. Given enough time prices will return to the mathematical mean, i.e. average.  Those averages can drift higher or lower over years, due to long term shifts in supply/demand, but in shorter term scenarios we get volatility!

Corn futures posted the highest prices since November 10 on Friday. For the week, they were up 4.5%. The weekly USDA Export Sales report showed 499,400 MT of sales, at the low end of trade estimates. Ethanol stocks increased by 400,000 barrels to 20.0 million barrels last week despite a slow down in production due to the Thanksgiving holiday. Informa estimated the Argentine corn crop at 21 MMT, up from its previous estimate of 18.5 MMT. The consultant trimmed its Brazilian production estimate by 0.2 MMT to 81.3 MMT (USDA: 81.5 MMT). Stats Canada put Canadian corn production at 13.6 MMT on a 164.7 bpa average yield. This was an 18% increase in production from last year.

Wheat futures were higher in all three classes. The big run in the CHI/MPLS spread continues to unwind. Chicago was up 5 1/2 cents for the week, while MPLS December was up 13 3/4. For the week ending Nov26,  USDA reported 392,200 MT of net export sales. This was up from the previous week and included a 98,300 MT to China. The latter was seen as bullish even though almost the entire purchase was already on the books as an “unknown destinations” sale. Stats Canada put Canadian all wheat production at 27.6 MMT vs. the October estimate of 26.06 MMT.  The trade has been expecting an increase of around 500,000 MT. The French Farm Ministry predicts a 1.5% increase to planted wheat acreage in 2016, to 12.85 million acres.

Soybeans were up 33 cents for the week, or 3.6% on top of a 1.8% advance the previous week. The USDA reported in its weekly Export Sales report that only 878,300 MT of US beans were sold to foreign importers during the week ending November 26. US soybean export commitments YTD are 71% of the full year export forecast. The 5 year average pace for this date would be 77%.  Soybean oil was up a sharp 9.6% for the week, boosted by both the higher EPA blend requirements announcement and the move to apply the biodiesel tax credit at the producer level.  The latter would raise the cost of imported biodiesel from South America. Soy oil export commitments are 43% larger than a year ago at this time. Higher palm oil prices were also supportive, and offset bearish Canadian canola production numbers released on Friday. Stats Canada estimates a 17.2 MMT canola production for 2015, higher than the average trade estimate of 15.6 MMT. Canadian soybean production reached a record high for the seventh consecutive year but is still minimal compared to the U.S. Brazilian soybean production estimates published by Informa hit 101.4 MMT, up from 101.0 MMT previously (USDA: 100.0 MMT). The Argentine crop is estimated at 58.5 MMT, down 0.5 MMT from the previous estimate (USDA: 57 MMT). Safras in Brazil estimates the 2016 production to reach 100.4 MMT, down 0.1 MMT from the previous projection.

October cotton futures were up 1.2% this week in the March contract. US Export sales of Upland cotton during the week ending Nov 26 were up 7% from last week, and a new high for the marketing year. Total sales were 292,100 RB including 2,600 RB booked for new crop, and 2,400 RB of Pima sales. Cumulative commitments to China (sales shipments) are down 86% from last year at only 169,540 RB. China is focusing on reducing domestic stocks rather than importing cheaper US cotton. US cotton export commitments are 32% smaller than year ago at this point, mostly due to the cut back in Chinese buying. USDA showed that the average world price (AWP) was higher, cutting the LDP/MLG for this week to 4.05 cents from 5.11 cents per pound the previous week.














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Live cattle futures lost a whopping 6.1% this week as December options expired and futures tried to converge with the cash market ahead of first notice day for deliveries against the December contract. Weakness in the hogs didn’t help close the cattle/hog spread.  Feeders were down 4.1%. Year to date beef production is down 3.0% on 5.4% fewer cattle slaughtered. We were running 6.8% light on slaughter for the year on Labor Day, so numbers have clearly picked up relative to year ago. Weekly production was 2% larger than the same week in 2014. Cash cattle trade was pretty much confined to Thursday, with business between $123-125. Bids on Friday at $124 were not being met with feedlot offers, due to huge negative closeouts that would result on unhedged cattle.  There was some Nebraska trade reported at $191. Wholesale beef prices were lower this week, with choice boxes off 0.9% and select down 2.1% from an unusually strong Friday price a week ago.

Lean hog futures were down almost 3% for the week.  According to the USDA Export Sales report, 24,800 MTs of US pork was booked on the export market during the week ending 11/26. This is a partial measure of US pork export business, focusing on muscle cuts. China was in the market, buying 1,600 MT across 2015 and 2016. The CME Lean Hog Index was $56.13, up 49 cents from the previous week. Weekly FI slaughter was estimated at 2.424 million head, up 13.9% from Thanksgiving Week and 8.4% larger than last week. Weekly pork production was up 7.4% from the same week in 2014. Pork production YTD is 7.1% larger than last year at this time, on 7.90% larger slaughter.  Wholesale pork prices for the week were up $1.33 or 1.84%.

Market Watch

We’ll have a normal 5 day trading week this week, with USDA Export Inspections out on Monday, and weekly Export Sales on Thursday. The national crop progress reports are suspended until April 2016.  Cattle traders will begin the week addressing any surprise futures positions resulting from the December live cattle options expiration on December 4. The main news “point” for the week is the monthly USDA supply/demand or WASDE report, scheduled for noon EST on Wednesday.

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