The Markets Are Not Like A Hockey Stick

Published on: 20:31PM Sep 04, 2015


Market Watch with Alan Brugler

September 4, 2015

The Markets Are Not Like A Hockey Stick

Yes, I know, it is college football season and not hockey season (except for those who are always and everywhere hockey fans). The statement is appropriate, however, There are a lot of folks in this business who seem to think that price charts should be shaped like a hockey stick, i.e. fundamental news requires a change in level, the market moves there, and then prices reach equilibrium. That would be the classic supply/demand price intersection in Econ 101.

However, the markets are NOT a hockey stick and rarely look like one on a price chart. Traders are acting on imperfect information, lumpy flows of the physical commodity (affecting hedging activity) and human emotion.  The markets are more like a pogo stick, jumping around. They go too far down, compress the spring, and bounce higher. Then gravity and declining momentum do their thing to pull prices back to the middle. The reality is that markets are usually “mean reverting” as in coming back to average from both extremes. As we seek lows during the current sell off in commodities generally, keep this priniciple in mind.

You have several chances this week to get a sampling of the type of insights you could be getting from Alan as a full time Brugler client. Alan is a guest analyst for US Farm Report this weekend (Sept 5). He also joined Chip Flory for the September 4 edition of Market Rally Radio


Corn futures dropped 4% this week, drifting down to test the August 12 intraday low. Weekly ethanol stocks jumped 400,000 barrels despite reduced production (and thus lower corn grind). However, Labor Day weekend typically results in a lot of gasoline consumption. Export news was also positive for ethanol, with official July exports at 77.2 mgal and the Jan-July total at 514.5 mgal. That is equivalent to 182 million bushels of corn exported in liquid form.  July DDG exports were also record large at 1.367 MMT. China took 932,942 MT of that total. On the bear side, private analyst Informa agreed with the August USDA yield estimate of 168.8 bpa.  Other estimates are in the 165-166 range. US new crop export sales have also been disappointing in recent weeks and are several million tonnes behind year ago to start the marketing year.

Wheat futures continued to grind lower in an attempt to buy export market share. Chicago was down another 4.1%,  with KC down 2.1% and MPLS down 1.6% as spring wheat harvest was wrapping up. US weekly export sales were disappointing, but shipments were strong at over 500,000 MT. Export commitments YTD are now 40% of the full year forecast. They would typically be 47% by now. The Commitment of Traders report showed the large speculative traders getting more bearish on Chicago SRW, with a net short position of 27,003 as of Tuesday night.      

Soybeans were down 16 cents for the week, about 1.8%. The decline in prices is beginning to buy some additional export sales activity, with total sales last week over 1.4 MMT.   Keep in mind that USDA expects China to import 79 MMT of soybeans for the marketing year. That means they need to buy an average of 1.5 MMT per week.  With available South American supplies dwindling, they are stepping up US origin purchases for their late fall and wintere shipping slots. The Commitment of Traders report confirmed that the large spec funds are now actively bearish. They added 14,740 new short positions in the week ending 9/1.  The crushers continue to like their work and added to their long futures ownership against future cash bean purchases.  They are long 1.4 billion bushels.














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October cotton futures were down 1.08% this week. There is now some talk about China becoming a net exporter of bargain priced cotton in an effort to shed the huge stockpile they have built up. We question whether the government there will want to finance the huge write off that would be needed to do so (gap between world prices and the support price). WTO minimum imports are more likely the strategy. Weekly cotton export sales totaled 73,800 running bales last week, including 5,100 RB of pima. China booked 9,700 RB of upland, and 4,400 RB of pima. US cotton export sales commitments are only 29% of the full year forecast. They typically would be 47% by now. Unshippped sales commitments are down 52% from last year at this time. USDA dropped the average world price (AWP) to 46.60 cents.  That boosted the LDP/MLG to 5.40 cents through next Thursday.

 Live cattle futures dropped a sharp 2.5% this week. Tight finished cattle numbers are expected in September and October compared to year ago. Wholesale prices were caught in the pre-Labor Day dead period, and cash cattle prices in the north were weak.  Farmer feeders wanted to get cattle moved ahead of harvest, and weights had built up a bit. The South appears to be more current. Weekly US beef production was up 2.5% from the previous week and 8.2% larger than a year ago for the same week due to timing of the Labor Day holiday. Year to date beef production is down 4.4% on 6.6% fewer cattle slaughtered.  Choice boxed beef was down 1.3% for the week, with Select product down 2%.

Lean hog futures were up almost 4% this week, adding to a gain of 5.4% the previous week. The CME Lean Hog Index was $76.39,  down $2.29 from the previous week. Futures were able to rally primarily because they are still at a discount to the cash.  The basis is $7.24V. Weekly FI slaughter was estimated at 2.171 million head, down 1.9% from last week and 22.1% larger than the same week in 2014. Pork production YTD is 7.6% larger than last year at this time, on 8.2% larger slaughter. Average carcass weights continue to come down. Wholesale pork prices were up 0.92% for the week, 78 cents per hundred pounds.   

Market Watch

Monday (9/7) is of course Labor Day in the US and a market holiday.  That means the usual USDA Export Insepections and Crop Progress reports will be delayed until Tuesday, and the weekly Export Sales report will be on Friday instead of Thursday morning. Friday will also feature the release of the September Crop Production and WASDE Supply/Demand reports. Traders aren’t expecting major yield or acreage adjustments in these reports, with the latter more common in October. The direction of any shifts will be seen as important. Friday will also mark the expiration of October cotton options.

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