Second Guessing

Published on: 21:36PM Jun 21, 2019

Market Watch with Alan Brugler

June 21, 2019

Second Guessing

Markets can and do get ahead of themselves. We have been in a realizing bull market in the grains since mid-May, with the balance sheets for 2020 tightening significantly depending on which acreage and yield forecast you were willing to accept as most likely. There is still significant variability in those forecasts, magnified by the alarming drop in corn and wheat export sales as prices have risen. Some analysts have factored that in, others seem to be ignoring it. The bottom line is that we got a little second guessing this week about whether prices had climbed enough to reflect the known fundamentals and not just the hypotheticals. The fund short covering had also run its course in corn and was slowing down in soybeans.  














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Corn futures were down 2.4% this week. There is likely some rotation of ownership coming into the end of the quarter and the often-surprising June 28 NASS reports. Export sales commitments are 87% of USDA’s projected total, trailing the 99% average pace for this date. Unshipped sales on the books are 54% smaller than last year at this time. USDA is likely to reduce their old crop export forecast in July based on this data. The weekly CFTC Commitment of Traders report showed the large managed money spec funds again adding to their net long position. They increased it 32,303 contracts in the week ending June 18, taking it up to 143,515 contracts net long.  Commercials now hold the largest net short hedge position since May 2018.  They were still about 54 thousand contracts from the peak position seen in 2018.

Wheat futures didn’t have any directional questions this week. All three markets were lower, with KC HRW down 5% to lead the bear parade. The sell off has little to do with US production. Despite minor downward tweaks by some private forecasters, Russian exports are expected to be large again this year and their wheat is being offered at aggressively low prices in the FOB market. Egypt has purchased US wheat on several occasions this year, but the most recent buys have been new crop Russian and Romanian offerings. The Commitment of Traders report showed the funds adding 20,972 contracts to their net long position in Chicago during the reporting week, taking it to 22,713 in the week ending June 18.

Soybean futures were up 0.67% from last week as the market entertained the idea that soybean plantings might be below the March intentions despite some presumed switching from corn. Soybean meal was down 2.4% to pressure product value.  Soy oil was up a sharp 3%. Old crop soybean export sales were a stout (for this time of year) 571,500 MT in the week ending June 13. New crop sales were a little better than they have been at 200,000 MT. Total soybean export commitments are 103% of the recently revised full year WASDE forecast. They would typically be 100% by now. Unshipped sales on the books are up 34% vs. last year, and the largest in at least 5 years. A big chunk of those are committed to China, so shipment is still problematic. Per the Commitment of Traders report, the large spec funds were still net short -55,307 contracts of futures and options on June 18.  That reflected net buying of 35,848 contracts for the week in the CFTC reporting period.

Cotton was down a sharp 7.2% for the week, with July posting a new life of contract low on Thursday. Cotton export sales commitments ran in reverse, with net cancellations of 119,300 RB for the week ending June 13. The big reductions came from Turkey and China. Both were buyers for 2019/20 shipment, so some of this was just likely cotton they didn’t need or couldn’t take before the end of the marketing year on July 31. It still doesn’t help the already larger old crop carryover estimate. The Commitment of Traders report showed that the large spec funds increased their net short in cotton by 144 contracts in the week ending June 18. That put them net short -30,385 contracts.

Live cattle futures dropped 2.1% this week. The large managed money spec funds continue to liquidate their long position, with the Commitment of Traders report showing another 4,418 contract reduction in their net long position last week. That left them net long 36,720 on June 18. Cash cattle trade was $108 in KS on Friday, down $5-6 from the previous week. Most of the trade for the week was at $110, however. Futures are discounting further cash weakness by the end of the month. Feeder cattle futures were down 1.4% this week, aided by the pull back in feed ingredients but hurt by lower cattle. The CME feeder cattle index was $131.37, down 47 cents for the week. Wholesale beef prices were lower. Choice boxes were down 1.1% for the week, with Select down 1.6%. The deficit in cold storage beef stocks continues to widen. They were 13.15% below last year as of May 31, and down 6.2% from April. Weekly beef production was down 0.7% from the previous week and down 1.2% from the same week in 2018. Year to date beef production is now 200,000 pounds smaller than year despite 1.1% higher slaughter.

Lean hog futures dropped 6.3% this week, reaching a long held downside technical objective (Head & Shoulders top count) on Thursday. To paraphrase Sherlock Holmes, ‘the problem is elementary my dear Watson”. Weekly pork export sales were modest at 19,700 MT, with China cancelling 100 MT. China continues to ship US pork every week, with this week’s total 5,800 MT.  Cold storage stocks are rising, with the May 31 number the largest for that date since 2015. The CME Lean Hog index was $79.55 on Friday, down $1.01 from the previous week. The pork carcass cutout value was down a sharp $6.48 (-7.8%) this week. That put it at $76.73. Weekly pork production was 0.7% larger than the previous week, and 16.4% larger than the same week in 2018.  That pretty much explains the absence of the summer rally in hogs. It is usually driven by declining slaughter. YTD pork production is up 3.6% on 3.0% more hogs.  The Commitment of Traders report showed the large speculative managed money funds reducing their net long by 3,814 contracts in the week ending June 18. They were still net long 35,111 contracts despite the sharp decline in futures over the past month.

Market Watch

Cattle traders will begin the week reacting to Friday’s Cattle on Feed report from NASS. We start the new week with the USDA Export Inspections report per normal on Monday morning. That afternoon, NASS will release the weekly Crop Progress report. The EIA ethanol report is to be released on Wednesday morning, with Export Sales data on Thursday. That afternoon, NASS will release the quarterly Hogs & Pigs report. Friday will be one of the more anticipated days of the year, with USDA releasing both the quarterly Grain Stocks report and what is likely to be a controversial Planted Acreage report followed by some price volatility.

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There is a risk of loss in futures and options trading. Similar risks exist for cash commodity producers. Past performance is not necessarily indicative of future results.  


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