You Go First

Published on: 17:27PM Aug 09, 2019

Market Watch with Alan Brugler
August 9, 2019
You Go First

We get a lot of questions about the US/China trade situation and likely impacts on ag exports. Negotiators are notoriously tight lipped unless they have a trial balloon that they need the other side to see. At the moment, both sides in the Trade War seem to be hunkered down in defensive positions along the main line. However, there is another theatre of operations.  The move toward the middle involved the US potentially allowing US tech firms to sell components to Huawei after waiving an existing ban, and China buying increased quantities of US ag goods. Some of them, like soy oil and pork they clearly need. However, our analogy is of two adolescent boys at the mouth of a dark cave. They both think there is buried treasure in the cave, but also bats and snakes and maybe booby traps. You already suspect the dialog---“You go first”, “No, YOU go first”.  Based on the Thursday Export Sales report, the Chinese made some small steps toward the cave, but the US side either didn’t see them or thought they were a fake out. Now, both have put entry into the cave on hold, or gone to look for another entrance.

Corn futures rallied 2.7% this week on pre-report short covering after weekly losses of 3.6% and 3.8% the two previous weeks. Weakening demand has been a huge factor in the recent drop from the June high. Corn export sales shipments are down 11% year to date vs. last year.  Outstanding sales on the books are down 58%, however, so there is not much to put in the pipeline during the last month of the marketing year. The weekly EIA report indicated ethanol production in the week that ended on August 2 averaged 1.04 million barrels per day. That was a jump of 9,000 bpd but well below the same week in 2018. Ethanol stocks showed the largest 1 week crop on record (1.351 million barrels) to 23.117 million barrels. EPA issued a boatload of hardship waivers to refineries on Friday, rejecting only 6. US crop conditions declined overall last week, down 3 points higher on the Brugler500 index and back to where they were two weeks ago. The Commitment of Traders report confirmed the large managed money spec funds were continuing to exit their big long position. They reduced it by another 32,445 contracts (futures + options) in the week ending August 6, taking the net long position down to 79,507 contracts.

Wheat futures were down again in the two hard wheat markets, but Chicago SRW was up 1.8% from Friday to Friday.  MPLS was down 0.7% for the week, with KC HRW down 1.2%. The CHI/KC spread widened to 83 cents premium Chicago from 63 cents last week. The weekly Crop Progress report from NASS showed 82% of the winter wheat crop harvested as of August 4, a 7% move on the week and 10% below normal. The spring wheat crop was shown at 2% harvested, with the normal pace at 14%. Condition ratings were tallied at 73% gd/ex, unch from a week ago, as the Brugler500 index was up 1 point to 378. The Export Performance report showed 36% of USDA’s full year forecast has now been either shipped or is an Outstanding Sale on the books. The average would be 41% for this date. Unshipped sales are 24% larger than last year at this time. The Friday Commitment of Traders report showed the large spec funds shrinking their net long in Chicago by 8,391contracts, taking it to 6,219 net long as of Tuesday. They added 6,553 contracts to their net short in KC wheat during that reporting week and were thus short 20,768. In MGE wheat, they again added to their all time record net short position by another 663 contracts, to go to -17,249 as of August 6.   

     Commodity                   Weekly    Weekly
Month        07/26/19    08/02/19    08/09/19    Change    % Chg
Sep-19    Corn    $4.15    $4.00    $4.10    $0.108     2.69%
Sep-19    CBOT Wheat    $4.96    $4.91    $5.00    $0.088     1.78%
Sep-19    KCBT Wheat    $4.32    $4.22    $4.17    ($0.053)    -1.24%
Sep-19    MGEX Wheat    $5.25    $5.22    $5.19    ($0.035)    -0.67%
Sep-19    Soybeans    $8.89    $8.56    $8.79    $0.233     2.72%
Sep-19    Soy Meal    $304.90    $294.50    $298.50    $4.000     1.36%
Sep-19    Soybean Oil    $28.63    $28.32    $29.58    $1.260     4.45%
Aug-19    Live Cattle    $108.65    $107.65    $108.05    $0.400     0.37%
Aug-19    Feeder Cattle    $143.73    $139.63    $138.90    ($0.725)    -0.52%
Oct-19    Lean Hogs    $79.45    $65.73    $66.98    $1.250     1.90%
Dec-19    Cotton    $64.54    $59.42    $58.84     $ (0.5800)    -0.98%
Sep-19    Oats    $2.58    $2.66    $2.75    $0.093     3.48%

Soybean futures rebounded 2.7% this week. Soybean meal was up 1.4% since last Friday, with soy oil up 4.45%. World veg oil traders got excited about the potential for Chinese buying, with rumors of increased TRQs or tariff waivers. China isn’t importing the beans to make meal, but still needs the cooking oil. Dalian futures rose, Malaysian palm oil hit the highest price since April, and Chicago BO futures rose in tandem. US soybean export sales commitments are 106% of the full year forecast vs. the 103% average for this date. Accumulated exports to date are only 91% of the full year figure, lagging the 96% average. An unusually large August shipping program will be needed to meet the full year WASDE estimate. Friday’s Commitment of Traders report showed the managed money spec funds adding 19,241 contracts to their net short position to take it to -72,813 contracts on August 6. They blew out of some of those on Thursday and Friday. China imported 8.64 MMT of soybeans in July, up from 8.0 MMT a year ago and rebounding from a light 6.51 MMT in June.

Cotton futures dropped 1% on the week. USDA data showed 95% of the cotton crop squared as of last Sunday, with 59% setting bolls. Condition ratings took a tumble, down 7% to 54% gd/ex, with the Brugler500 index down 14 points to 350. CFTC indicated the large managed money spec funds added 3,637 contracts to their net short position in the week that ended August 6. That put them record net short 47,428 contracts on that date, with the commercials unusually close to even.  The big longs are the index funds and swaps dealers.

Live cattle futures were up 0.4% this week after a 0.8% drop the previous week. Feeder cattle futures were down 0.5%. The CME feeder cattle index was $141.66, down 8 cents week over week. Wholesale beef prices were higher, with the Chc/Sel spread at $22.56. Choice boxes were up 0.8% for the week, with Select up 1.7%. Weekly beef production was up 3.2% from the previous week, but 1.6% below the same week in 2018. Year to date beef production is 0.3% larger than year ago on 1.3% higher slaughter. Cash cattle trade was not well established with some $110 in the South and $113 North, with $183-185 in the carcass based.  The Commitment of Traders report shows the spec funds reducing their net long by 7,218 contract, dropping it to 23,185 by August 6.  

Lean hog futures were up 1.9% for the week in a dead cat bounce after dropping 18.54% the week before. According to an industry group, Brazilian July pork exports hit 67,900 MTs, 0.4% below July 2018 but the highest of 2019 on Chinese demand. USDA Export sales data showed 13,738 MT of pork sold in the week of August 1, an increase of 55% over last week. Sales of 1,350 MT were reported for China, with shipments of 8,569 MT. Overall pork exports totaled 26,736 MT in that week. The CME Lean Hog index was $82.85, down $1.26 from the previous week. The pork carcass cutout value was $3.80 higher this week (+4.4%). It had increased $2.26 the previous week. Weekly pork production was down 0.1% from the previous week, but 1.2% larger than the same week in 2018. YTD pork production is now 3.9% above year ago on 3.3% more hogs.

Market Watch
We start off next week with a normal weekly schedule of Export Inspections on Monday morning and Crop Progress that afternoon. Monday will not be normal, however, with the release of the much anticipated USDA August Crop Production and WASDE supply/demand estimates at 12 noon EDT.  FSA’s Prevented Planting and certified acres totals for August will also be released at the same time. EIA’s ethanol production and stocks data will be released on Wednesday morning. August hogs and soy complex contracts also expire on Wednesday. USDA weekly Export Sales will be released on Thursday morning at 7:30 a.m. CDT, with NOPA monthly soy crush for July out later that morning.

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