Market Watch with Alan Brugler

October 30, 2009

Scary Story

The US dollar came back from the dead and scared everybody, from the stock market to grains to crude oil. While the dollar is still in a pronounced downtrend, month end position squaring and short covering ahead of the Fed meeting boosted the buck. Many commodities have been trading inversely with the dollar, so when it rallied they dropped.

Corn was down 8% for the week, erasing last week’s rally and part of the week before. Liquidation of speculative long positions caused some of the selling pressure, along with the US dollar reaction. Fundamentally, more open weather expected for this week should  make more corn available to the cash market. Bears also focused on the poor weekly export sales pace seen while corn was above $3.70, and expect some improvement over the next week or two with this break in prices. Bulls pointed to rising hog prices and excellent ethanol processing margins are reasons for prices to see some support.

Wheat showed once again that its bull was just a ghost of the 2007/08 market. As soon as the cover from higher corn prices disappeared, so did the bullishness in the wheat. Prices were down almost 10% in Chicago, and off 9.2 and 8.6 percent respectively in KC and MPLS. Testing of the spring wheat crop shows excellent grading results, i.e. external quality. It is the protein that is the problem. That doesn’t show up in futures prices unless you are afraid of futures being a dumping ground for unwanted quality bushels.

Soybeans held up better than the feed grains, losing 2.83% on the week. Soybean meal lost $6.30/ton for the week, and soy oil was also down more than 4%.Weekly export sales and shipments were both on the high end of trade estimates, and supported prices along with the well known large export shipping program and need to originate bushels.  Soy oil was hurt by sliding heating oil prices that threatened to undermine biodiesel use.

Unlike grains, cotton eked out a small gain of 0.39% for the week. The weakness in the dollar and the stock market proved to be a limiting factor, but harvest delays due to heavy rains in the Mid-South and Delta are clearly reducing both yield and quality every day. It is notable that the LDP for cotton dropped to only .02 cents. That means producers are getting price signals more directly from the market action than they have in months, and that futures price has to do all the work at triggering sales.

Below is a table showing the net weekly changes and 4 week history of selected agricultural futures:

Cattle futures initially ignored heavy deliveries against the October futures contract at yards in South Dakota and Nebraska, focusing on a surging cash cattle market that featured some $88 transactions for the first time in a while. Wholesale prices seemed to tire at mid-week, as the Taiwanese indicated an easing of their restrictions on imports of US beef. That would normally be seen as a bullish item. However, on Friday prices dropped sharply as October futures expired and the musical chairs game with deliveries came to an end.  

Hogs saw a nice bounce this week, up 6.94%. Pork cutout values have been rising for several weeks, with hams in the lead, but other cuts also firming. Slaughter is still at typically elevated October/November levels, but has been running a little below year ago. That has translated to less buildup in cooler stocks. The wild card behind the rally was a comment from Ag Sec Vilsack that the Chinese would soon lift their ban on importing US pork. That had been implemented during the H1N1 scare last spring. Chinese officials also indicated that an announcement could be forthcoming, but has not actually been made. China was a huge buyer of US pork prior to the Olympics, but is expected to be a smaller player now because of herd growth there since 2007.

Market Watch:  We’ll start the week with traders arriving at work early, due to the weekend time change! The calendar also flips to November, when we’d expect the weather we had in October. Of course, early November weather is supposed to be warmer and drier than normal, so call it October Delayed! November delivery notices or lack thereof will preoccupy bean traders. Monday night’s USDA crop progress report will also be of interest, with the trade expecting only limited progress was made nationally in corn and soybean harvest. The Fed is scheduled to meet on Wednesday, but is not currently expected to raise interest rate targets despite the flood of money chasing commodities.  USDA’s weekly Export Sales report is due out on Thursday morning. Friday will feature the expiration of November live cattle and currency options. 

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