Taught Not To Lose Money

Published on: 21:28PM Jul 27, 2018


Market Watch with Alan Brugler

July 27, 2018

Taught Not To Lose Money

In case you missed it, the founder of Facebook Mark Zuckerberg lost more than 17 billion dollars (yes, with a B) in net worth on July 26, which is more than the value of a number of largish companies like say General Electric. He isn’t likely to lose his house or anything, but it did knock him back a few pegs on the world’s richest men list. I was struck by one of the commentaries discussing the one day plunge from 218 to 174 in Facebook stock, which is a 20% drop. The quarterly news from Facebook wasn’t bullish, but the writer suggested that the steepness of the slide was aggravated by algorithmic computer trading systems that are “taught not to lose money”. Unlike humans who when hit with a loss will sometimes dither, the computers said, “this is bad” and dumped the stock.  Since they were all doing it at once, nobody was buying and it was a race to the bottom.

Here’s the connection for our ag readers. Those same computers or their cousins are trading grains, livestock, cotton, diesel fuel, etc. When you see soybeans drop 60 cents per bushel intra-day like they did on June 19, or KC December wheat rally 33 cents as it did on Wednesday, the steepness and volatility is being fueled by those same computers and their “taught not to lose” bias. They may in fact be losing money (and aggravating your cash market losses) as they exit some positions, but cutting losses short has always been a marker for survival in the pits. They may also be gifting you higher prices than you would otherwise see in their desire to participate in the move.

What do you need to do about all this? You can’t react as fast as the algos, but you also can’t ignore them.  Nor can you just skip hedging, because your cash market is also affected by the price movement.  You need to know where the market is likely to go (Brugler tools like Price & Probability Forecasts or Techno-Fundamental price targets are excellent) in your time window and be prepared to pull the trigger (or ignore the dip) when news and the electronic trading drive prices to extremes. Be prepared so that you can act when things go somewhere in a hurry. 

Corn futures rose another 1.9% this week, continuing the bounce from the 2018 lows set in early July. NASS reported 81% of the corn silking vs. the average pace of 62% for this date. About 18% of the crop has reached dough stage vs. the typical 8%. Reporters rated 72% of the crop in good or excellent condition, with 9% poor or very poor. The Brugler500 Index rose 1 point to 382, with the long term average around 370 for this week and the 10 year average at 363. The FAS Export Sales report showed old crop corn sales on the lower side of expectations at 338,514 MT in the week of 7/19. New crop export sales were strong at 747,491. Forward sales commitments for 2018/19 are 54.25% larger than they were this time last year. Friday’s CFTC report showed the big spec funds continuing to add to their net short position in corn, but only by 874 contracts for the week. That took the net short to 130,197 as of July 24 as they fought against the rally.














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Wheat futures put in some hefty gains this week. Spring wheat was the strongest this week with a 6.8% advance after the Wheat Quality Tour estimated the spring wheat yield at 41.1 bpa. While that was 3 bpa higher than the drought afflicted 2017 crop, it was 4.3 bushels below the 5 year average. If USDA is also 4 bushels below THEIR five year average, US production and all wheat yield will likely be cut, as well as spring wheat ending stocks.  The other two markets were no slouches with gains of 2.8 and 4.7%. USDA NASS reported that 80% of the winter wheat crop has been harvested, just slightly ahead of the five year average pace.  Spring wheat is 96% headed, vs. 95% last year and the average maturity of 83%. Spring wheat condition ratings were put at 79% good/excellent, down 1 from last week. The Brugler500 Index was UNCH at 388. USDA reported run of the mill weekly export sales of 385,900 MT for the week of 7/19.  The Commitment of Traders report shows the managed money spec funds nearly doubling the size of their net long position just ahead of Wednesday’s 30 cent rally. They added 20,385 contracts to their net long in CBT futures in the week ending July 24, taking it to 23,942 contracts.

Soybean futures tacked on a 20 ¾ cent gain to go with the 31 cent per bushel advance from the previous week. Nearby soy meal was up 1.7%, with nearby soy oil up 1.2%. Monday's Crop Progress report showed condition ratings improving more than traders had expected. The Brugler500 index rose 3 points to 378. USDA reported the soybean crop was 70% good/ex, with 8% of the acreage rated poor or very poor. They showed 78% of the crop blooming as of last Sunday, still well ahead of the five year average of 63%. USDA reported 538,127 MT of old crop soybeans were sold in the week ending 7/19. New crop sales totaled 963,820 MT, as total 18/19 sales this year are 63.2% larger than the same time in 2017. The EU and US announced an agreement for the EU to buy more US soybeans and eventually US LNG, while continuing to negotiate on tariff and balance of trade issues. It should be noted that South American supplies are being diverted to China due to the 25% Chinese tariff on US beans, leaving the EU in need of another source. CFTC managed money net position showed the funds net short -61,315 contracts of futures and options on July 24, which was 2,916 contracts more bearish than the week before. 

Cotton futures rose 1.45% for the week after breaking through some pesky chart resistance. NASS reported that 78% of the cotton crop was squaring as of Sunday, just slightly behind the 81% average for this date. They rated 39% of the crop good or excellent, down from 41% last week. The Brugler500 Index dropped to 299 on a 500 point scale from 310 the week before. USDA weekly export sales were 201,400 RB for upland and 10,400 RB for pima. Old crop export commitments are 108% of the full year projection vs. the typical 106%. As of July 19, 95% of the full year forecast had been shipped, a little below the average of 97%.  Two big shipping weeks will be needed. The CFTC report on Friday afternoon showed the spec money adding another 406 contracts to their net long position last week, taking it to 81,458 as of July 24.

Live cattle futures were down 0.28% for the week, with selling concentrated on Thursday. Feeder cattle were off 0.9%, needing to price in those higher feed costs and a little lower cattle board. Cash trade was very slow to develop, as was the case the previous week. All offers in the electronic auction were passed. Wholesale beef prices were up again this week. Choice boxes were up 97 cents to $205.14, while Select was up 0.6% or $1.27 at $198.27. Weekly beef production was up 0.9% from the previous week, and up 1.4% from year ago. Average carcass weight is about 7# lighter. US beef production YTD is up 3.5%.  

Lean hog futures lost 4.2% for the week. The Board continues to have a $10 discount to cash, but to sell off every time cash goes lower. The cash seasonal has topped for both the cutout and the CME Index. The CME Lean Hog index dropped to $74.43, down $4.19 for the week. The pork carcass cutout value was down $3.89 this week, a 4.8% drop. The pork belly primal dropped more thatn 14% for the week. Pork production YTD has been 3.2% larger than in 2017. Production this week was down 16.8% from last week due to planned plant down time, and 10.6% smaller than the same week in 2017. Weekly slaughter was down 11.1% vs. year ago.  Carcass weights were about 1# higher. The CFTC Commitment of Traders showed the managed money spec funds exiting some short futures and options (down 3,291 for the week) taking their net short position on July 24 to 3,000 lots.

Market Watch

Soybean traders will begin the week reacting to any surprise positions inherited upon expiration of the August options. The Brugler Marketing summer seminar in Dayton, OH is being held Monday and Tuesday. The USDA Export Inspections report will be out on Monday morning, and the Crop Progress report will be released that afternoon. The weekly EIA ethanol production/stocks report is scheduled for Wednesday morning. USDA will all release their monthly Grain Crush and Fats & Oils reports on Wednesday, detailing grain use for ethanol and soybean oil respectively. Thursday will feature the weekly USDA Export Sales report at 7:30 a.m. CDT.  That will also be the first day of the Brugler Marketing Des Moines seminar. August cattle options will expire on the Friday August 3.

Visit our Brugler web site at http://www.bruglermarketing.com or call 402-289-2330 for more information on our consulting and advisory services for farm family enterprises and agribusinesses. Sound analysis and advice makes a difference!

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.

Copyright 2018 Brugler Marketing & Management, LLC.