Market Watch with Alan Brugler
August 23, 2019
Stop the Carousel
Stop the carousel, I want to get off! Like a scary movie where the carousel keeps whirling faster and faster, just about everyone is getting dizzy with all these tweets and tariff announcements and countervailing tariffs. And it is hard to get off a carousel moving that fast! Just like the Smoot-Hawley tariff spiral in the 1930’s, tariffs are escalating and spreading, slowing economic growth just about everywhere. In that case, we were building on the 1929 stock market crash and a long lasting Depression resulted. We have a strong stock market at the moment, but that only lasts as long as investor confidence. What does this have to do with ag? The US produces more of most major commodities than it can consume. Losing exports eventually costs jobs or ruins balance sheets. We need to find a way to slow down the carousel!
Corn futures fell another 3.03% this week for a two-week drop of 12.2%. During the week, reports came out of several ethanol plants either idling or reducing capacity, citing the small refinery waivers from last week. A weeklong crop tour by Pro Farmer saw projected yield each of the surveyed states across the Corn Belt dropping below last year. On Friday, separate from the tour, Pro Farmer released a yield projection of 163.3 bpa, pegging production at 13.358 bbu and implying an 81.8 million acre harvested number. Monday’s Crop Progress report showed conditions down 1% to 57% gd/ex and 2 points lower at 349 on the Brugler500 index. CFTC data released on Friday afternoon showed the large managed money spec funds bailing out of their net long position by 100,954 contracts as of Tuesday. During that week they flipped to a net short position of 56,441 contracts.
Wheat futures were down 1.43% in MPLS for the week, with KC HRW 0.19%. Chicago SRW was up 0.96% this week. The CHI/KC spread widened back out to 81 cents premium Chicago from 76 cents last week. Crop Progress data showed winter wheat at 93% harvested, with Spring wheat just a third of where they normally are at 16% complete. USDA reported weekly export sales of 594,551 MT during the week of 8/15. World prices were the weight that suppressed the market, with French milling prices the lowest since April 2018 this week. SRW is still uncompetitive vs. other major exporters. Friday’s Commitment of Traders report indicated money managers in Chicago wheat futures and options flipping by 5,337 contracts to a net short position of -1,249 contracts as of August 20. They extended their net short in KC wheat by 3,684 contracts to -36,956 contracts. They posted another new record net short position in MPLS wheat at 20,338 contracts.
Soybean futures lost another 2.77% over the course of the week. A majority of that came from Friday’s losses thanks to more trade war rhetoric. Soybean meal fell 1.70% for the week, as soy oil was down 2.71%. In response to upcoming September 1 US tariffs on Chinese goods, China announced another set of retaliatory tariffs on $75 billion of US goods Friday morning. That included adding 5% to the tariffs on US soybeans effective on Sept 1, taking them to 30%. Friday afternoon President Trump announced tariffs on $250 billion (Oct 1) and $300 billion (Sept 1) of Chinese goods will be increased by 5% on the respective dates. This week’s crop tour by Pro Farmer shows pod counts well below average in a number of the surveyed states, which is understandable with only 68% of the nation’s crop setting pods as of last Sunday. Friday’s projection from Pro Farmer showed US soybean yield at 46.1 bpa, with production at 3.497 bbu and sticking with the current USDA harvested acreage. Money managers added back another 5,982 contracts to their soybean net short position in the week that ended on 8/20, taking it to -72,432 contracts.
Cotton futures gave back last week’s gains, falling 3.24% this week. More tariff talk on Friday pressured the markets lower. China announced an addition 5% tariff on US cotton effective September 1 in response to the US placing tariffs on $300 billion of Chinese goods. President Trump shot back after the close adding 5% to tariffs on a total of $550 billion in Chinese goods. On Monday, NASS data showed cotton condition ratings nationwide down 7% to 49% gd/ex as of Sunday, with the Brugler500 index 14 points lower at 340. Weekly Export Sales data showed 163,964 RB of cotton sold in the week of 8/15, with shipments of 343,960 RB. CFTC data indicated the large managed money spec funds trimming another 3,443 contracts from their previous record net short position, now at 41,199 contracts as of Tuesday.
Live cattle futures gained back 4.7% in the August contract this week, as packer demand from the fire was not as hindered as originally thought. Cash cattle trade was around $106 in the South, up $1 from the previous week, with $108 to $110 in the North. Feeder cattle futures were up 2.06% for the week. The CME feeder cattle index was $139.72, up $2.12 on the week. Wholesale beef prices slipped this week as Labor Day buying was drying up. Choice boxes were down $1.17, or 10.3% for the week, with Select 0.3% lower. Weekly beef production was up 0.7% from the previous week, and 0.4% larger than the same week in 2018, as cattle were moved around to make up for the lost capacity. Year to date beef production is 0.3% larger than year ago on 1.3% higher slaughter. Estimated weekly slaughter will be UP 0.5% from last week due to a larger Saturday kill and 1.9% larger than last year. Packers have attractive margins, and cattle available. July 31 beef stocks in cold storage were reported at 455.102 million lbs, up 12.19% from June bust still down 6.02% yr/yr. The monthly Cattle on Feed report showed August 1 on feed numbers of 11.112 million head, up just 0.17% from last year. That came from the 2.12% fewer placements in July at 1.705 million head, with marketings up 6.89% at 2.002 million head. The Commitment of Traders report shows money managers at a net long 2,021 contracts on Tuesday, down 16,809 contracts from last week.
Lean hog futures were down another 4.35% for the week, pressured by limit losses on Friday. Trade riffraff on Friday was the main reason, as China added another 10% to the tariffs on US pork. The CME Lean Hog index was $77.04, down $2.30 from the previous week. The pork carcass cutout value was $6.61 lower this week (-7.7%). Large losses in the ham (16.7%) and belly (9.2%) were noted. Weekly pork production was up 1.3% from the previous week, and 0.2% larger than the same week in 2018. YTD pork production is now 3.7% above year ago on 3.1% more hogs. The managed money spec funds reduced their CFTC net long position in hogs by another 2,437 contracts last week, putting it at 31,613 contracts (futures + options) on August 20. Thursday’s Cold Storage report showed 601.79 million lbs of pork in freezers at the end of July, down 2.85% from June but still 9.01% larger than last year.
The Final week of August 2019 will start off with traders reacting from the Cattle on Feed report from Friday afternoon. The Export Inspections report will be out on Monday morning, with the Crop Progress report released later that afternoon. Wednesday will show the release of the EIA weekly ethanol production and stocks report. USDA’s weekly Export Sales will be published on Thursday morning at 7:30 a.m. CDT per the normal schedule. August Feeder Cattle Futures and Options expire that afternoon as well. August Live Cattle Futures and Options will go off the board next Friday afternoon, to be followed by a three day weekend (Labor Day in the U.S.).
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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.
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