Would Ya Look at That!

Published on: 21:27PM May 20, 2016


Market Watch with Alan Brugler

 May 20, 2016


In my seminars and outlook presentations (1200 and counting!) I have often talked about the recency effect. This is the tendency for behavior to be more heavily influenced by recent events than by those buried deeper in our memory. We remember the most recent events, or the last things in a list, better than those in the middle past. If you burn your hand, you are more careful around the stove or curling iron or torch for a while. If you get a speeding ticket, you might be a little more careful going through that small town for a while. In market terms, producers and other traders tend to be influenced most heavily by recent events. A 50 cent rally gets everyone bulled up, and a limit down cattle market generates more put buying volume.

On a broader scale, the 2007-2012 grain rally had folks generally thinking prices would not back off by more than 15-20%. There was a reluctance to lock in $6 corn because we had just been to $7 and even $8 per bushel. We’re now on the flip side of that psychology. The grinding decline from 2012 to 2015 had a lot of folks (notably university economists and ag lenders) convinced that ag prices couldn’t rally until 2018 or later because of burdensome stocks. That resulted in a lot of soybeans being sold in the $9.00-9.50 range because the recency effect made those prices look pretty good compared to what had been seen in recent months. Now, I get calls of amazement that soybeans are over $10 and “Would ya look at that” exclamations with the 45% rally in nearby soybean meal

My purpose here is to remind you that your brain is working against your marketing performance in a variety of ways, one of which is the recency effect. The best antidote to the recency effect is good historical data.  If you know that the average marketing year price range in soybeans is $2.20 per bushel, you won’t be in such a hurry to sell on a $1 rally. Conversely, if you know the average annual range in cattle futures is $21.06 since 1996, and the market is off $8 from a top, you will get more hedges in place because you can see the full extent of the downside risk.

Corn futures were up 3 3/4 for the week, with all of the net advance on Friday.  Strong export sales have been the feature, with USDA reporting 79 million bushels sold for last week, and several announcements under the daily system that will go in next week’s reported  total.  Brazilian second crop production is still a guessing game, with MG, BA and GO states still getting drier. There were reports of desperate livestock feeders harvesting safrinha corn at high moisture because too much of the first crop corn was exported and local prices were sky high. US ethanol stocks continued to decline, with the summer driving season picking up and exports active. DDG prices hit the highest reading of the year, chasing soybean meal and improving margins for ethanol plants. The EPA’s proposed blend requirements for 2017 imply corn based ethanol at 14.8 billion gallons. That would mean more corn use than in 2016.













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Wheat futures were down in all three markets this week, with KC the weakest at -1.56%. USDA weekly Export Sales were 748,700 MT, with all but 175,200 MT of that business slated for new crop delivery as we approach the end of the marketing year. USDA shows commitments for 98% of the full year export forecast, but we would typically be 104% by now. Unshipped sales on the books are 21% larger than last year, hinting at strong shipment levels in May and/or large carryover business to start off the new marketing year in June.

Soybeans were 0.86% this week, adding to a 2.8% advance the previous week.  Soybean meal is in a full fledged bull market, up 7.56% for the week as South American exports will be smaller than previously anticipated over the next few months. Soy oil was down nearly 4% on weakness in palm oil, unwinding of oil/meal spreads, and a little disappointment that the EPA proposed biodiesel use for 2017 wasn’t larger. USDA Weekly Export Sales for soybeans were much improved at 648,500 MT of combined old and new crop business last week.  Old crop soybean commitments are now 99% of the WASDE full year forecast.  They would typically be 100% at this point. Soy oil bookings have been excellent at 91% of the full year figure when the average commitment would be 84% by now.  Argentine soybean harvest has been picking up with drier weather, but is still only 61% completed.

July cotton futures were up 1.7% this week, ending a multi-week correction. Combined old and new crop export sales for upland cotton were 239,632 RB, with a net 50,247 RB of the total booked for 2016/17. China booked 28,870 RB in this report; the largest for that country since the last week in March. US Export commitments are still behind, with 97% of the full year total on the books, The average for this date is 103%. The old crop marketing year ends July 31. The USDA AWP for the next week is 50.42, up from 50.19 last week. That cuts the LDP/MLG to 1.58 from 1.81.

Live cattle futures were down 2% this week, erasing a good chunk of the 2.2% gain the previous week. Beef production this week was down 2.7% from the previous week and up 3.4%  vs. the same week in 2015.  Slaughter was up 2.8% vs. year ago, with the rest made up by higher average carcass weights. Beef production YTD is up 3.0% from last year on 1.8% larger slaughter.  Wholesale prices were sharply higher this week despite a pull back on Thursday and Friday. Choice boxes were up 3.6% for the week. Select boxes were up 1.3% from the previous Friday.  A few cash cattle had traded at $204-206 ahead of the USDA report, with $210 asked for the remainder. The USDA Cattle on Feed report on Friday night was modestly bearish. April placements were much larger than the trade expected, up 7.5% from April 2015. April marketings were up from year ago, but only by 1.2%. A larger number had been expected.

Lean hog prices dropped 2.6% for the week at the Merc. The CME Lean Hog Index at $78.43 was up $2.38 from the previous week. Convergence is working from both ends, with 26 days remaining until June futures expire. The average pork carcass cutout value was up 90 cents per cwt for the week, or 1.09%. Weekly hog slaughter is estimated at 2.119 million head, down 1.9% from the previous week and 0.5% smaller than a year ago. The seasonal decline in slaughter runs now appears to be underway. Pork production YTD is down 0.7%% from last year at this time due to a 0.3% drop in slaughter. The CFTC Commitment of Traders report showed the spec funds net long 58,111 hog contracts on May 17, up 7,711 from the previous week.

Market Watch

We’ll start out the week with cattle traders reacting to the Friday night Cattle on Feed report. They get another news point on Monday, with the release of the Cold Storage report for April. We’ll have the regular USDA grain releases, with Grain Stocks on Monday morning and Crop Progress at 3 pm CDT on Monday afternoon.  Weekly Export Sales is scheduled for Thursday morning. May feeder cattle are scheduled to expire on Thursday as well.  Friday has a thin news line up (1Q US GDP), coming ahead of the 3-day holiday weekend for Memorial Day in the US.

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