Rough Railroad Tracks

Published on: 20:50PM Apr 22, 2016


Market Watch with Alan Brugler

 April 22, 2016

                                  Rough Railroad Tracks

Riding the rails is reasonably smooth when you are going the same direction as the tracks! Tracks are graded to remove a lot of the ups and downs in the actual terrain. However, railroad tracks are pretty bumpy if you are trying to cross them on a bicycle, and trains have also been known to jump the tracks. The latter can be ugly and sometimes leads to a hazmat cleanup.  Some of the cases of trains jumping the tracks are due to shifts in the stability of the railroad ties and gravel under the rails. Our grain markets were riding the rails in fine fashion at mid-week, reaching higher altitudes and with plenty of power.  On Thursday and Friday they jumped the tracks. While the investigation is still underway, it is likely that we will find some rotted out railroad ties, i.e. fundamentals and technicals that weren’t as bullish as they were being seen to be from a mile down the tracks.

First they were up, then they were down. For the week, they lost 1.8%. Corn futures rallied during the first part of the week on short covering, commercial end user pricing, and some concerns about Brazilian weather. On Thursday and Friday it was all forgotten, with a bullish weekly export sales report ignored and funds taking profits ahead of the weekend or perhaps early month end. Weekly export sales were excellent again  in the week ending April 7 at 1.326 MMT. Commitments YTD are now 83% of the full year forecast from USDA, still lagging the 5 year average of  90% for this date.  Unshipped sales on the books are 9% smaller than last year, although gaining on that moving target. Brazilian corn production estimates dropped anywhere from 4 to 8 MMT due to drought stress during pollination of the safrinha crop.  The Commitment of Traders report confirmed that spec funds had exited 107,796 short positions in the week ending 4/19, but were still net short 30,909 contracts as of that date.














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Wheat futures took a big hit on Friday, but were still higher for the week in all three markets. The MGE spring wheat market had outstripped the other two for several weeks, but was the laggard this week.  The US nationwide winter wheat condition improved by 2 points week over week to 355 on the Brugler500 Index as of Sunday night. Kansas and Texas saw statewide condition ratings slip by 3 points and 1 point respectively from the week before, while the Oklahoma wheat condition improved by 5 points. US weekly export sales were responding nicely to the weaker US dollar, with 295,100 MT of old crop booked for near term shipment and another 325,600 MT sold for 2016/17. Total US export commitments are 94% of the WASDE figure for the year. Stats Canada reported smaller wheat planting intentions for that country vs. 2015, at 23.846 mil acres. That would be down from 24.111 mil acres to wheat in 2015.

Soybeans shot up 3.1% this week after a 4.1% advance the prevous week. They hit the highest price for nearby futures since August. They then promptly collapsed into the weekend and gave back 35 cents per bushel on Friday. Weekly soybean export sales were improved from the previous week at 407,700 MT for old crop and 339,700 MT for 2016/17.  Soybean commitments are 98% of the full year forecast, close to the 98% average for this date. Unshipped sales are 1% smaller than year ago.  The BAX (aka BACE) reduced their estimate of Argentine soybean production to 56 MMT this week, due to flooding, sprouting and other wet weather maladies afflicting their16% harvested crop. They would typically be pushing 50% harvested by now. The Commitment of Traders report confirmed that the spec funds were still adding to their net long position as of April 19, taking it to 135,410 contracts.

May cotton futures were up 4.8% for the week, creating another arbitrage opportunity for producers between the weekly MLG calculation and the futures/cash market. Heavy rains slowed planting progress in the US. There were 139,037s RB of US cotton sold to international purchasers during the week ending April 14, including 14,000 RB of Pima. Net upland sales were up 21% week over week, but were down 17% from the previous four week average.  US Export commitments are still behind, with 87% of the full year total on the books, The average for this date is 100%, so we will need unusually large weekly export sales between now and July to catch up. The old crop marketing year ends July 31. The USDA AWP for the upcoming week is 50.53, up from 49.45 cents last week. The new MLG is 1.47, down from 2.55 cents last week.

Live cattle futures were down 5.4% for the week. Beef production this week was up 6.6% from the previous week and 9.1% larger than the same week in 2015.  Slaughter was up 7.1% vs. year ago, with the rest made up by higher average carcass weights. Beef production YTD is now up 2.8% from last year.  Wholesale prices were lower this week, with Choice boxes down 2.1% and select down 2.3%. Those had been up 4.8% and 5.1% respectively the previous week.  Cash cattle trade was soft, with live sales at $127-128 on Friday and dressed sales anywhere from $196-202. That was down $12 from the previous week.  On Friday afternoon, the USDA Cattle on Feed report was supportive, showing less expansion than expected. March placements were up only 4.6% vs. year ago, and March marketings were up 7.11% from last year. The net result was a 0.52% increase year over year in April 1 On Feed.  USDA also released a Cold Storage report, which showed inventory down 5% from February and down 3% from a year ago.

Lean hog futures were up 1.7%  this week after futures corrected their excessive premium to the cash.  The CME Lean Hog Index was up 65 cents for the week to $67.36 the previous week.  That left the basis at -$8.34K on Friday, even after a $1.32 slide in the May futures.  The average pork carcass cutout value rose $0.50 last week,  to $79.76. Weekly hog slaughter is estimated at 2.241 millino head, up 2% from the previous week and 3.5% larger than year ago. Average carcass weights are even with year ago. Pork production YTD is down 1.2% from last year at this time due to a 0.6% drop in slaughter. US pork export commitments were 109.5% of 2015 through last Thursday, based on the portion reported in the weekly USDA Export Sales report.  

Market Watch

Many ag traders will be in reaction mode to start the week.  The livestock group will be reacting to the USDA Cattle on Feed and Cold Storage reports released on Friday after the market closed.  Grain traders will be reacting to surprise futures positions they now hold following the huge price swings at options expiration on Friday.  While the market wasn’t terribly close to pinning May 370 corn or May 980 beans, the news was that May 380 puts and May 1000 puts were in-the-money and exercised into short futures. That didn’t seem likely back on Wednesday. Routine reports of interest this week will include weekly USDA Crop Progress and Export Inspections on Monday, and the weekly USDA Export Sales report on Thursday morning. The Fed will also be meeting on Tuesday and Wednesday.  The recent commodity price volatility argues for a rate hike to squelch speculative excess, but few of the other indicators suggest a move before June at the earliest.

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