Howdy market watchers. It’s been quite a week of headlines on the U.S. political stage. First of all, the Iowa caucuses for Democratic presidential contenders had the opposite effect of revealing the lead candidate as the app designed to tally the votes created anything but a result.
This created uncertainty for the Democratic party right up to President Donald Trump delivering his campaign-style State of the Union address highlighting a strong U.S. economy that ended with House Speaker Nancy Pelosi ripping up his speech on national television. A day later, Trump was acquitted by the U.S. Senate of both impeachment charges. The market’s response? Well, U.S. equities traded to new all-time highs Thursday before concerns of a slowing global economy, particularly in China, from the spreading coronavirus led to profit taking on Friday.
The U.S. dollar also has surged back to early October highs at 98.6, which makes U.S. commodities more expensive to overseas buyers. This includes our agriculture commodities at a time when more help, not more headwinds, is needed to bring confidence back to the markets. While wheat, corn and beans managed to eek out small gains this week, cattle contracts closed lower with lean hogs surged after last week’s 3-day, $10 plunge.
The U.S. Meat Export Federation, which I interacted with a lot while in China, this week released the 2019 U.S. beef and pork export numbers. U.S. pork exports were most impressive, setting a new record last year reaching nearly $7 billion.
Monthly exports in December helped accelerate the annual totals, up 34% on a volume basis and 44% on a value basis. This jump was led by exports to China/Hong Kong that were more than quadruple the prior December numbers and six times the value. For the year, this helped take pork exports up 10% above 2018, while the value was a 9% increase. Exports to Mexico also rebounded. Beef exports were strong, but 2.5% below 2018’s record. Total beef export value totaled $8.1 billion in 2019, 3% below the prior year, but from a larger base given growth of $1 billion in value in 2018 alone.
Tariffs and other market entry restrictions caused some headlines in 2019, although beef exports still performed relatively well considering. With tariff reductions coming in 2020 from trade agreements and hopefully the opening up of the China market, we are set up for another strong year if consumer demand holds up. The resilience of the U.S. economy recently also provides hope that demand in this country will be supportive of the cattle market remaining current despite large numbers of cattle on feed. The jobs number for January reported this past week suggested that momentum continues coming in at 225,000 jobs added versus only 158,000 expected.
The rebound in lean hogs this week from oversold conditions could bring interest back to longs in the cattle market this next week after recent long liquidation. However, the concern over demand from the spreading coronavirus remains a headwind that we need to watch. Should a vaccine come to market or the spread slow, the market may view this as a positive sign for risk-on trading to really return to the meat complex.
China this week reduced tariffs on $750 billion of U.S. imported products, including agriculture items. This could be seen as a sign that imports could be stepped up, as I mentioned in last week’s column, with facilities hesitant to restart operations in China after Chinese New Year due to the virus. The prices they pay would definitely better now after the scare of the virus has all markets in oversold territory.
The cash market remains strong for lighter weight calves as witnessed while at Enid Livestock Market on sale day this Thursday. I will be in the office every sale day going forward, so stop by and see me to discuss market strategies. Heavier cattle prices remained under pressure. Should these CME board prices stay lower through the time that you sell your physical cattle, a strategy to consider is buying call options to stay exposed to the market after you’ve sold your cattle in case the market pops back. March feeder cattle settled the week at $135.20, May at $139.575 and October at $150.35. April fats settled at $119.80 and October at $113.10. Next Tuesday will be the release of USDA’s monthly WASDE and Crop Production reports.
While updates on the supply side including yield and harvested acres will again be watched, what the USDA does with demand numbers considering the coronavirus remains the wild card. The USDA has yet to include elevated imports from the Phase 1 deal given no actual volumes have been released. March options expire on Feb. 21, so consider protecting or locking in gains ahead of the report as there will be little time to recover should the report turn the market against your position where small gains can quickly vanish given limited time value.
Open interest in the wheat market is the highest level its been since November 2018, which could suggest active buyers on pullbacks. Rains across the U.S. winter wheat belt should improve crop conditions, and with Russia upping estimates of this year’s wheat crop despite lower old crop exports, the demand side of the balance sheet in Tuesday’s report is going to be important with limited supply concerns.
July new crop KC wheat settled Friday just above $4.85. December new crop corn finished the week at $3.94. November beans at $9.18½. The next tranche of the MFP funds have been approved by Trump, but more is needed from the market to get these prices above breakeven levels. Should grain prices not rebound, we likely will see more wheat acres grazed out, especially considering recent precipitation to help boost forage production. However, start watching for first hollow stem as we’ve been surprised at reports of such in some earlier varieties that were planted early. The relatively warm winter we’re having has also not slowed down growth.
Call (580) 232-2272 or stop by our office to get your account set up and discuss strategies to protect your exposure to these markets. It is never too late to start and there is no operation too small to get a risk management and marketing plan in place. Wishing everyone a successful trading week ahead.
Sidwell is a Series 3 licensed commodity futures broker and principal of Sidwell Strategies. He can be reached at (580) 232-2272 or at email@example.com. Futures and options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at http://www.sidwellstrategies.com/disclaimer.