The Reflation Trade

(AG Web) –  Ag producers have had plenty to fret about in recent weeks, with concerns about export trade disruption and this week’s flap regarding biofuels. There is also a big positive, and that is the so called reflation trade. Investors are buying a variety of assets that typically increase in value in an inflationary environment, after years of disinflation or inflation so low that the Fed couldn’t safely raise interest rates. Commodities and the stock market have both benefitted from the reflation psychology, with fresh money pouring into the markets while things are “undervalued”.  With the exception of already strong markets like hogs and MPLS spring wheat, most ag commodities were up this week. Commodities overall (CRY) were down .4% for the week. Nearby crude oil and diesel futures traded at the lower reading since December 1 on burgeoning US inventories.

Corn futures were up 10 3/4 cents this week, or 2.95%. Ethanol stocks continued to grow, at 23.091 million barrels, hitting an 11 month high. Some relief via the export market or domestic driving demand is needed. The early week rally was based on ideas that E15 use would be expanded, but no White House deal or EPA Federal Register listing has been forthcoming.  USDA showed more bearish weekly Export Sales numbers, with old crop at 692,404 MT and new crop at 20,650 MT. That’s a weekly total of 28 million bushels vs. 40 million bushels the previous week. Export shipments were 24.3% ahead of last week at 1,497,808 MT, and 90% larger than the same week a year ago. The USDA Grains Crushings report showed 476.3 million bushels used for ethanol production in January, just 0.49% higher than December, but 7.28% more busheld than January 2016. The Friday CFTC report indicated that spec funds reduced their net long in corn by 10,081 contracts in the week ending Feb 28. That brought their total net long position to 82.135 contracts.

Wheat futures were mixed this week, with Minneapolis the only market lower. It was down 7 3/4 cents or 1.42% on the week. Both KC and Chicago were higher 1.82% and 0.58% respectively. USDA reported that 353,170 MT of old crop and 98,800 MT of new crop wheat were sold for the week of 2/23. Commitments met 90% of the USDA export forecast of 1.025 billion bushels. The 5 year average pace for this date would be 92%. On Tuesday state winter wheat conditions were released, with month/month changes slightly changed. KS conditions are 43% g/e down from 59% in February 2016, OK is 43% g/e vs. 68% last year. NE is 15% down from a year ago at 44% g/e and TX is at 34% g/e down 6%. Egypt purchased 535,000 MT of wheat on Tuesday, mostly Russian and Romanian origin. The Commitment of Traders report on Friday showed spec funds in CHI wheat futures and options (managed money) added 28,081contracts to their net short position.  They were net short 55,466 contracts as of Feb 28. At the peak of their bearishness in October, they were net short  151,417 contracts.

Soybeans gained 13 1/2 cents this week, getting a boost from soybean oil. Meal was down $2.50 and soy oil was 174 points higher, a 5.37% jump. On Tuesday a rumor started by the RFA was floating around of the Trump Administration passing an Executive Order (EO) changing the point of obligation from refineries to blenders. The change was supposedly including White House support for reinstating the expired biodiesel blend credit. The White House later came out and denied that there was any EO pending on the subject. USDA indicated that 427,739 MT of export old crop soybeans were booked last week. China purchased 201,101 MT of the total sales. Meal export sales were on the low side of trade ideas at 140,902 MT. Soy oil export sales for the week were 28,827 MT, on the high side of expectations. Information increased their estimate of Brazilian production 1.5 MMT to 108MMT.  CTFC data showed the spec funds cutting their net long position by 22,731 contracts in the week ending Feb 28.  On Tuesday the USDA released their Fats and oils report and announced 170.61 million bushels of beans was crushed in January. That was slightly above estimates, and 6.3% above January 2016. Soy oil stocks were 1.29% down from last January, but 11.37% above December 2016.

Cotton futures were up 2.47% for the week. Weekly export sales of old crop upland cotton were strong at 481,444 RB, with another 62,920 RB sold for 2017/18. Accumulated cotton exports since the beginning of the marketing year are up 73.38% from last year. Commitments (shipped plus outstanding sales) total 94% of the full year WASDE estimate. They typically would be 88% at this point. The managed money spec funds continue to maintain a near record net long position in cotton; it was 99,766 contracts on February 28. The Cotton Consumption and Stocks report showed 2,585 RB of extra long staple consumed, 22.5% larger than last January but 8.1% down from December. Stocks were at 2,467 RB, down 22.1% from last year, but 8.6% above December. The new cotton AWP for next week is 66.59 through next Thursday.

Live cattle futures rose $1.025 this week, with April the new nearby contract. Feb expired on Tuesday at $126.60. Cash rose $1-$2 on the week with $125-126 reported. Feeder cattle futures gained 2.07% since last Friday, $2.525 higher. Prices on the FCE averaged $124.99 on Wednesday with 2,855 of the 4,813 head sold. Pens with starting bids of $126 went unsold. Wholesale beef prices were sharply higher this week. Choice boxed beef was up 4.6% this week, with Select boxes up 4.4%. Weekly beef production was up 1% from the previous week and up 8.2% vs. the same week in 2016. Beef production year to date is up 4.2% from last year. The Commitment of Traders report showed the big spec funds adding 1,250 contracts to their big net long in cattle. They were net long 98,170 contracts as of Feb 28. Beef Export Sales for last week were 15,350 MT, up 47.7% from the previous week.

Lean hog futures dropped $1.275 this week, a loss of 1.87% with wild swings in the pork belly cutout convincing some longs it was time to cash out. The latest reading on the CME Lean Hog index was $74.01, down $3.72 from the previous Friday. The USDA pork carcass cutout value was $80.63 on Friday, and down 1.6% for the week. The belly primal was down 14.9% for the week. The two week decline in that cut is $44.60 per hundred pounds or 24.4%. Weekly estimated FI slaughter of 2.31 million head was up 1.9% from the previous week. Pork production YTD is 0.5% smaller than last year. Weekly production was 3.7% larger than the same week in 2016. USDA pork export sales for the week ending 2/23 were down 18.9% from a week ago at 16,863 MT.

Market Watch

The next week will be a normal weekly schedule, with the Wasde Supply/Demand estimates release on Thursday morning. USDA Export Inspections are released on Monday and weekly Export Sales on Thursday. The EIA weekly ethanol report will be on Wednesday.

There is a risk of loss in futures and options trading. Past performance is not necessarily indicative of future results.