Small Fed Move and Big Questions

Published on: 23:02PM Dec 18, 2015

 

Market Watch with Alan Brugler

December 18, 2015

Small Fed Moves, Big Questions

Well, the Fed finally bumped up interest rates from their 0-.025% short term rate band to 0.5%. This was 7 years in the making. They had to be patient, as an early move, or too aggressive move, has in the past screwed up budding recoveries. Now that the hike is a certainty, instead of a very well advertised possiblilty, the markets are free to complete their interpretations of what it means. The stock market threw a tantrum (as we anticipated). The speculators like the leverage of cheap money and now the cost of business could be starting to go up. There are studies which show corporate earnings pulling back a little after Fed rate hike cycles begin, so the equities might just be lower the P in the P/E to match new expectations.

Lower stocks are often good for commodities, which are somewhat inversely correlated to equities. That sure seemed to be the case on Friday, with big morning rallies in the grains and livestock. However, Argentina’s moves on tariffs and devaluation of the peso threaten a fairly immediate increase in export competition. The spending bill passed by Congress on Friday had a lot of attached amendments affecting agriculture, anything from accelerated depreciation to repeal of parts of the COOL law to biodiesel blend credits.  There are still a lot of impact questions to be worked out, and lot of speculative traders appear to have just liquidated and decided to take the rest of the year off.

Corn futures were down a net 3/4 cent for the week.   The weekly USDA Export Sales report showed bookings of 677,600 MT during the week ending December 10, including 98,200 MT booked for the 16/17 marketing year. Ethanol production was the second highest of the year, despite several Abengoa plants being offline. That kept the corn and milo grind well over 103 million bushels for the week. Informa released its estimates for 2016 US planted corn acreage, pegged at 88.9 million acres (previous estimate: 90.1 mil ac). Its final 2015 production estimate was 13.725 bbu (Dec USDA: 13.654 bbu). Strategie Grains in France estimated 2016 EU corn production at 64.9 MMT, a sharp increase from the drought reduced 2015 figure.

Wheat futures lower in all three markets this week, but lost only a 1/4 cent in KC. The weekly Export Sales report showed wheat sales of 320,200 MT, up 42% from the week before. Trade analysts expected bookings of 250,000 to 400,000 MT. Informa estimates that 39.4 million acres of winter wheat was planted this fall, up from its previous forecast of 38.7 million acres. Japan purchased 123,275 MT of wheat from the US and Canada at the weekly tender, with 76% of the purchase coming from US sellers.

Soybeans were a big winner this week, gaining 2.1% or 21 1/2 cents. That offset a big chunk of the 35 1/4 cent loss seen the previous week. Weekly US Export Sales during the week ending 12/10 totaled 1,023,800 MT. USDA announced Thursday that 424,000 MT of US soybeans were sold to China for 2015/16 delivery. That will show up on the Export Sales report next Thursday, as will an additional sale announced on Friday.  New Argentine president Macri did cut soybean export tariffs to 30% from 35%. He was also able to move quicker than expected on the peso, devaluing the official rate from 9.8:1 vs. the dollar to a floating rate. This meant more pesos per bushel sold. Export firms had a deal with the government to immediately ship large stored stocks under their control following the implementation, in order to get cash flowing. The downside of that surge will be more competition for US beans and particularly soybean meal in the export market after we turn the page on the calendar. A major tax bill passed Congress on Friday, and included the $1 per gallon blend credit, which had been suspended. That is expected to increase soy oil use for biodiesel.

 

Commodity

 

 

 

Weekly

Weekly

Mon

12/04/15

12/11/15

12/18/15

Change

% Chg

Mar

Corn

$3.815

$3.753

$3.745

($0.007)

-0.20%

Mar

CBOT Wheat

$4.845

$4.905

$4.868

($0.038)

-0.77%

Mar

KCBT Wheat

$4.805

$4.825

$4.823

($0.003)

-0.05%

Mar

MGEX Wheat

$5.16

$5.08

$5.06

($0.015)

-0.30%

Jan

Soybeans

$9.060

$8.708

$8.923

$0.215

2.41%

Jan

Soy Meal

$284.90

$273.70

$281.00

$7.30

2.60%

Jan

Soybean Oil

$32.08

$31.36

$30.53

($0.830)

-2.72%

Dec

Live Cattle

$124.275

$121.450

$120.150

($1.300)

-1.08%

Jan

Feeder Cattle

$159.45

$152.13

$148.75

($3.38)

-2.27%

Feb

Lean Hogs

$59.100

$60.550

$56.625

($3.925)

-6.93%

Mar

Cotton

64.71

63.71

63.69

(0.020)

-0.03%

Mar

Oats

$2.410

$2.325

$2.265

($0.060)

-2.65%

 

 October cotton futures were down 1.08% for the week. The weekly USDA Export Sales report showed 120,700 RB of cotton was booked during the week ending last Thursday, including 9,100 RB of Pima. Total net upland sales were the smallest since the week ending Oct 22. Pima shipments at 15,000 RB was a new high for this marketing year. USDA showed that the average world price (AWP) was lower this week, raising the LDP/MLG back to 4.14 cents from 2.96 cents last week.

Live cattle futures lost another 1.08% this week despite a heroic limit up move on Friday ahead of the Cattle on Feed report. Feeders were down nearly 7% for the week,  with huge negative closeouts for un-hedged cattle constricting demand for replacements.  Weekly beef production was 10.1% larger than the same week in 2014. For the year the cumulative total is now only 2.6% smaller. Cash cattle trade took place at $116-117, well below December futures. Wholesale beef prices were lower this week, with choice boxes down 4.1%, while Select only dropped less than 1/10 of a percent (8 cents).  On Friday afternoon, USDA released the December Cattle on Feed report. December marketings were about as expected, at 103.9% of year ago. However, November placements were light, resulting in a December On Feed total of 10.794 million head. That was 99.8% of year ago, and a tighter number than the trade had expected.

Lean hog futures dropped 7% this week. The CME Lean Hog Index was $55.57, down $1.03 from the previous Friday. Weekly FI slaughter was estimated at a huge 2.493 million head, up 2.8% from the same week in 2014. Weekly pork production was up 2.8% from last week, but 7.3% above the same week in 2014. Carcass weights continue to run below year ago, but by less than a pound. Pork production YTD is 7.1% larger than last year at this time, on 7.80% larger slaughter.  Wholesale pork prices for the week were down 3.91%, putting some pressure on the cash hog market. Hams were down more than 16% for the week, as seasonal demand flips to other primals for New Year’s.

Market Watch

We’ll have an abbreviated  trading week this week, with Christmas falling on Friday and the markets closing early on Thursday. That will delay some reports until the following Monday. We will see the regular USDA Grain Inspections report on Monday morning and Export Sales on Thursday morning.  The monthly Cold Storage report will be released on Tuesday afternoon, and the quarterly Hogs & Pigs report will be out on Wednesday after the market closes. January grain options will expire on the 24th. The markets will be closed on Friday for the holiday, and it is likely that trading volume will be very thin all week. That can mean no big moves, and it can also mean big erratic moves if big orders come into the futures.

Note: We apologize, but both of our December Advanced Technical Analysis Workshops sold out quickly. We will offer another one before planting. If you are interested, please drop us a note by email at [email protected] or call our office to be put on the waiting list.

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