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Alan Brugler

The bullish attitude is still out there for the grain markets, with ongoing talk about the strong pace of US export shipments, dryness in South America, a declining US dollar, and notions of big inflation returning next year as world economies distribute the COVID-19 vaccines and all of that stimulus money results in too much money chasing too few goods. That is the classic definition of inflation. While not on the front page (the kiss of death for a commodities bull market), the Wall Street Journal helpfully ran an article Friday talking about the bullish aspects of the current La Niña weather pattern. Despite all of the above, the bullish balloon was losing altitude. For Exhibit A, see all the red net changes in our weekly change table.  What happened?  Part of this is profit taking after a multi-month rally (extending all the way back to April in the case of cotton). Asset allocators are taking profits out of their winners to re-invest in other, cheaper looking assets. The bull stories that got us this high have turned a little cold. To get the hot air balloon headed higher, you have to turn up the burners. A fresh bullish story is needed to provide some heat. It could literally be heat, as in a more intense and long lasting La Niña drought. The critical yield development period is in January and February for Brazil, and later than that for much of Argentina.

Corn futures retreated 2% this week, down 8 ½ cents. USDA’s weekly Export Sales report showed an 18% drop from the previous week, to 1.37 MMT.  Mexico was the largest buyer. This report week included the Thanksgiving holiday, keeping a lot of the numbers on the low side. Sorghum export sales totaled 238,600 MT, down 33% from the previous week. The FAS showed total export commitments through November 26 were 38.293 MMT (1.507 billion bushels), 57% of the full year WASDE export estimate. We would typically only have 44% booked by now. Unshipped sales on the books on Nov 5 totaled 27.920 MMT vs. the five year average for that date of 12.706 million. Official Census US DDG exports in October was the lowest for that month since 2014. October corn exports were 145 mbu, up 59.75% from October 2019.  The CFTC Commitments report on Friday afternoon showed the large managed money spec funds reducing their net long in corn by 16,966 contracts in the week ending December 1. That still left them net long 270,633 contracts. The commercial short position was reduced by 41, 585 contracts, but they were still hedging 1.142505 million contracts (5.7 billion bushels) sold to them by producers.

The three wheat markets were all sharply lower, with a big jump in the projected size of the Australian crop to 31.17 MMT, and a hike in the Stats Canada estimate to 35.183 MMT. That’s 7.7% larger than last year. CBT futures were down 5% for the week, with KC HRW down 4% from the previous Friday. Minneapolis spring wheat was down 3.4% this past week. The Export Sales report dropped 44% from the previous week (MY high 795,698 MT) to a more pedestrian 446,400 MT. Total commitments for 20/21 exports are now 18.644 MMT, 70% of the USDA full year forecast. That matches the average progress for this date and suggests no need for USDA to tweak the export number in December.  The Commitment of Traders report on Friday showed managed money spec funds flipping to a net short position (-4,397 contracts) in the week ending 12/1. They were still net long 44,506 contracts in KC, but trimmed the position 3,915 contracts during the reporting week.

Soybean futures were down 2.4% or 28 3/4 cents this week, breaking the winning streak for the bulls. Nearby meal and soybean oil were both down, with the former dropping 2.8% while the latter lost only 2 ticks or 0.05%. Stats Canada confirmed that the Canadian canola crop was the smallest in 5 years,  with canola prices rising to levels not seen since 2013.  Palm oil was also well supported, with Indonesia ramping up their biodiesel blend rate and adjusting the export environment to keep more of the oil in country. The weekly Export Sales report indicated just 406,900 MT of soybean sales for the week ending November 26. That was a marketing year low. There were significant cancellations by both China and the infamous “unknown destinations”. Meal bookings totaled 163,800 MT, with bean oil sales of only 2,500 MT vs. 26,302 MT the previous week. Friday’s Commitment of Traders report showed spec funds net long 194,683 soybean contracts on December 1, a reduction of 9,127 from the previous week. 

Cotton futures were down 2.3% as asset allocators were selling some of last month’s winners and looking for underpriced assets to replace them. December posted the highest spot month futures price since May 2019 on November 23 but has been selling off since then. The weekly Export Sales report showed current year upland cotton export bookings dropping 22% to 277,900 RB during the week ending November 26. Total commitments are now 9.866 million RB, down 7% from last year at this time. They are 73% of the full year WASDE forecast, well above the 64% average pace.  The managed money spec funds were net long 60,460 cotton contacts as of Dec 1, cutting their CFTC net long 825 contracts from the previous week. 

Live cattle futures lost 1.6% vs. the Friday after Thanksgiving. Cash cattle trade was stable at mostly $110, but options expiration on Friday resulted in a late week sell off. Feeders were down 0.04% from Friday to Friday, with lower feed costs cushioning the drop in live cattle value. The CME feeder cattle index was $139.18, up $2.28 from last week. Weekly beef production was down 18.1% from the depressed Thanksgiving holiday week, but down 0.9% from the same week last year. Total YTD beef production is still 1% lower than 2019 on 3.4% fewer cattle slaughtered. Wholesale beef prices were sharply lower this week. Choice boxes were down $7.83 per cwt or 3.2% on the week. Select boxes were down 3.17%, a 1.4% drop. The USDA Export Sales report showed combined 2020 and 2021 sales of 16,900 MT, a welcome improvement from net cancellations the week before. The Commitment of Traders report showed the spec funds still net long 39,813 contracts on December 1. That was down only 210 from the previous Tuesday.

Lean hog futures (December) were UNCH for the week. The CME Lean Hog index dropped another $0.83 from the previous week, to $66.55. US pork production was up 18.9% from the previous week because of the holiday, and up 0.7% from year ago. YTD production is 1.8% higher on 0.8% more animals harvested. The pork carcass cutout value dropped 2.2% this week, or $1.79/cwt.  Bellies and hams were higher on the week but outweighed by losses in the other primal cuts. USDA’s weekly Export Sales report showed 31,300 MT in 2020 export bookings for the week ending 11/26. Another 4,200 MT were sold for 2021 delivery. Weekly pork export shipments dropped 17% to 34,100 after the previous week was the largest since May at 40,935 MT. CFTC data released on Friday showed the managed money spec funds increasing their net long 1,926 contracts in the week ending December 1, taking it to 38,359 contracts of futures and options.

Market Watch

USDA will release their weekly Export Inspections report on Monday morning. On Wednesday EIA will release weekly ethanol production and stocks data. USDA weekly Export Sales will be in their normal Thursday morning release slot. Thursday will also include the monthly Crop Production and WASDE supply/demand estimates from USDA, although typically not much is done for Crop Production in this report.

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March corn futures had a tough week, beginning with a hook reversal from new life of contract highs on Monday. It was not as key reversal (which are more reliable) because it did not close below the previous day low. It was enough bearish action to trigger a new MACD sell signal, albeit on a low ADX. With the low trendiness, it was easy for the quants to stem the sell off at the lower regression channel boundary, buying at or near it on Tuesday, Wednesday and Thursday. The computers are often reluctant to take new positions on Friday afternoon, and we closed about a penny below the line.  If they still want to chase the trend, expect buying interest between there and the 40-day moving average ($4.16 ¾) on Monday.  Failing to hold there would open the way to the 1/3 speedline support at $4.09.

Lateral resistance is $4.395, the contract high.  The overarching question for this market is whether it is yet another opportunity to buy the dip, like those at the end of September and end of October, or the “real” top for this move. One can argue a Wave 5 has been completed on this daily chart, and we are now into the a-b-c correction phase.  The argument against it is an old one, “the trend is your friend”.

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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