The 20% Problem

Published on: 22:58PM Jan 27, 2017

 

Market Watch with Alan Brugler

January 27, 2017

The 20% Problem

While not quite ready to come to a conclusion, the ag markets were on pins and needles all week after the Trump administration floated a 20% solution to the ‘Mexico problem’. The proposal was likely a trial balloon, which was quickly walked back as one of several possible actions as the President wants shrink the trade deficit with Mexico and also get a fence or wall built along the border to limit both Central Americans coming in and US cititzens leaving (see Berlin Wall). OK, so I think I am kidding on the last one. The 20% proposal was not so funny, with a proposed 20% tax to be imposed on imports from Mexico and zero tariff or fees on exports

These things do not happen in a vacuum. What makes ag producers I talk to nervous is a tit for tat countervailing duty that might be slapped on US grain or meat shipments into Mexico to counter the presumed duties paid to import Mexican feeder cattle, fruits and autos. What happens to prices? In the end, US consumers will pay more, so this would be a tax on all US consumers. Some will argue it goes the other way, with Mexico having to cut wholesale prices to be competitive after markup. However, it is more common to see US manufacturers raise prices under the protection against cheap competition created by the tax.  Verdict, potentially inflationary. What happens to US exports if Mexico counters with higher tariffs/duties/taxes on imported US goods? They still need food and feed grains, so either US prices drop to adjust to the added tax “friction” and maintain market share or Mexico imports more beans, corn,pork, etc from South America. That’s short term bearish to the US, but the world is a zero sum game. After a time lag or a price decline the US would likely be able to sell to somebody who would have bought South American origin if it hadn’t been shipped to Mexico.

There are a lot of ifs, ands, and buts in our quick and dirty analysis above.  You can find plenty of research papers on the Internet regarding global trade flows and protectionism if you want to know more. I will also have a Global Trade War? presentation at the Brugler Marketing Winter Seminars in Omaha on Feb 16-17 (www.bruglermarketing.com/omaha) and Dayton on Feb 20-21 (www.bruglermarketing.com/dayton).

Corn futures were down 2% this week, mostly on concerns about future export disruptions. Ethanol stocks jump to 21.728 million barrels as miles driven declined after the holidays and exports slowed. Production did drop off from the record pace of the previous week as margins deteriorated.  USDA showed solid weekly export sales through Jan 12 today, at 1.37 MMT. Export commitments (shipped plus outstanding) are 69% larger than last year at this time. They are 69% of the full year estimate, running ahead of the 5 year average of 65% on this date. The Friday CFTC report indicated that spec funds flipped their net futures/options position from net short to net long, with a 72,283 contract swing in the week ending 1/24. Farmer cash selling increased, with commercial shorts up and commercial longs down.

Wheat futures ended the week lower in all three markets, with KC HRW the weakest. HRW has the most burdensome ending stocks forecast of the five major classes, and the lift from reduced 2017 winter wheat plantings faded.  Weekly US export sales through 1/12 were more than double trade expectations at 853,356 MT for 16/17 and 103,900 MT for 17/18, Combined sales were 215.9% larger than last week and 175.9% larger than the same week last year but the bull market is over when good news fails to make it go higher. Egypt bought 410,000 MT of Russian wheat, catching up on March needs after limited buys in previous tenders. The CFTC Commitments report on Friday night showed the big spec funds adding 3,682 contracts to their big net short position in Chicago during the reporting week.  They were net short 88,699 contracts going home on Tuesday.  They were long 27,894 contracts in KC HRW despite the more bearish fundamentals for that class of wheat.

 

 

Commodity

 

 

 

Weekly

Weekly

Mon

01/13/17

01/20/17

01/27/17

Change

% Chg

Mar

Corn

3.585

3.6975

3.625

($0.072)

-1.96%

Mar

CBOT Wheat

4.26

4.2825

4.205

($0.077)

-1.81%

Mar

KCBT Wheat

4.49

4.43

4.3425

($0.087)

-1.98%

Mar

MGEX Wheat

5.8275

5.685

5.6

($0.085)

-1.50%

Mar

Soybeans

10.4625

10.675

10.4925

($0.183)

-1.71%

Mar

Soy Meal

333.9

348.7

343

($5.700)

-1.63%

Mar

Soybean Oil

35.6

35.15

34.27

($0.880)

-2.50%

Feb

Live Cattle

118.525

120.25

118.325

($1.925)

-1.60%

Mar

Feeder Cattle

129.30

131.28

127.45

($3.825)

-2.91%

Feb

Lean Hogs

65.6

65.3

66.9

$1.600

2.45%

Mar

Cotton

72.27

73.04

74.85

1.81

2.48%

Mar

Oats

2.425

2.6275

2.5325

($0.095)

-3.62%

 

Wheat futures ended the week lower in all three markets, with KC HRW the weakest. HRW has the most burdensome ending stocks forecast of the five major classes, and the lift from reduced 2017 winter wheat plantings faded.  Weekly US export sales through 1/12 were more than double trade expectations at 853,356 MT for 16/17 and 103,900 MT for 17/18, Combined sales were 215.9% larger than last week and 175.9% larger than the same week last year but the bull market is over when good news fails to make it go higher. Egypt bought 410,000 MT of Russian wheat, catching up on March needs after limited buys in previous tenders. The CFTC Commitments report on Friday night showed the big spec funds adding 3,682 contracts to their big net short position in Chicago during the reporting week.  They were net short 88,699 contracts going home on Tuesday.  They were long 27,894 contracts in KC HRW despite the more bearish fundamentals for that class of wheat.

Soybeans lost 1.7% for the week, dragged down by a 2.5% loss in soy oil. Suspension of recent EPA actions pending review is raising doubts about biodiesel use, as is the expiration of the blend credit at the end of December and little collective Congressional interest in renewing it. The USDA weekly Export Sales report saw soybean sales within the range of expectations at 539,353 MT for this MY and 126,000 MT booked for 17/18. Soybean export commitments are 23% larger than last year at this time. They represent 89% of the full year forecast, vs. the typical 86% at this time of year. The Bolsa de Cereale issued their first official Argentine crop estimate, putting it at 53.5 MMT. The Rosario exchange had indicated 52.9 MMT last week. USDA is at 57 MMT.

Cotton futures were up 2.5% for the week, building on a 1.1% advance from the previous week. Weekly US export sales of upland cotton were the largest of the marketing year at 457,003 running bales. Cotton export commitments are 70% larger than last year at this time, and 82% of the full year WASDE forecasted shipments are at least on the books. The managed money spec funds added to their huge net long in cotton by 2,706 contracts in the week ending January 24. They were still net long 87,341 contracts.

Live cattle futures were down 1.6% fo the week, cancelling out the previous week advance as bulls headed to the sideline ahead of the USDA Cattle on Feed report. Feeder cattle futures lost 2.9% from the previous Friday. Wholesale beef prices worked higher this week despite a bearish Cold Storage report. Choice and Select boxed beef were both up 1.2% for the week. The Choice/Select spread on Friday afternoon was down to $3.76, 2 cents tighter than the previous week. The bulk of live sales reported on Wednesday and Thursday were at $122 this week, UNCH vs. the previous week.  Weekly beef production was estimated at 480.1 million pounds. That is up 1.41% from the same week in 2016. YTD production is down 0.7%, but partly a function of fewer kill days. Slaughter is down 0.9% YTD, so average carcass weights have crept a little higher. The Commitment of Traders report showed the big spec funds adding to their huge net long in cattle. At 109,275 contracts, that is the most bullish position reported for that group of traders since November 2014.  Friday’s Cattle on Feed report showed a January 1 feedlot population that was 100.3% of year ago. The average trade guess had been leaning toward a 1% reduction, so this was not bullish news. December placements were up 17.5% vs. December 2015.

Lean hog futures were one of our two bullish commodities for the week, up 2.45% from Friday to Friday. Prices popped on Wednesday and then fought to hold those gains on Thursday and Friday. The latest reading on the CME Lean Hog index was $68.11, up $1.42 from the previous Friday. It still maintains a basis premium to the February futures. Weekly estimated FI slaughter is estimated at 2.367 million head. That is up 2.0% from the same week in 2016. Pork production YTD is 5.8% smaller than last year. Weekly slaughter was up 1.6% vs. year ago, so production will eventually catch up. The average pork carcass cutout value on Friday afternoon was up 4% for the week, with the pork belly primal up 17.4% after the Cold Storage report showed the tightest end of year stocks since 1970.

Market Watch

We are back to a normal trading week for the US, but China is out for Golden Week. Contrary to popular belief, this does not mean they are out of the world market. It just means their domestic markets are closed.  USDA export inspections will be out on Monday morning.  The EIA energy reports will be on Wednesday. USDAWeekly Export Sales will be published on Thursday morning The main monthly USDA releases will be Cattle Inventory on Tuesday afternoon and the CAIR reports on Wednesday (Grain Crushings and Fats & Oils). 

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