Howdy market watchers. It was a cold, dreary finish to the week and not just for the weather. In anticipation of Friday’s monthly Cattle-on-Feed report for November released after the close, feeder cattle futures plummeted, with January and March contracts down $4+ during the session to finally settle around $3.2-3.3 lower on the day.
The driver? While the USDA’s numbers did in fact come in largely in line with expectations, higher October placements and on-feed numbers were the concern and drove profit taking. With average trade guesses for placements at 111.4% over last year, the official number came in slightly lower at 110.2%, still a 9-year high. Nov. 1 on-feed was on the nose of expectations at 101.2%, an 8-year high, while marketings were slightly lower at 99.4% versus expectations at 99.7%. Overall, the report was considered neutral, but the large placement number could see upward adjustments to production for the first half of next year that will need to be met with stronger demand in order to retest early November levels. January is now the front month, with the November feeder contract expiring Thursday. By Friday’s close, January feeders were down $3.33 to $139.275, March down $3.20 to $139.600 and May down $2.90 just above $142.
Live cattle contracts faired better on the day with the December front-month down 65 cents at $118.675 while February slid $1.20 to $123.850. While we await Monday’s market action to the report, take today to consider break-evens and how much of your exposure you’d consider protecting should we see a relief rally ahead of Thanksgiving. This week’s three-day, $5 sell-off just reminds us how quick it can happen. We are now $8 off the Nov. 12 high.
Friday was expiration day for December corn and wheat options. It was mostly a quiet day in both contracts, with KC wheat continuing its sideways chop to finish up 3 cents on the day at $4.24 on the December futures. Poor conditions for Australian and Argentine wheat crops continues to support as has concern over late planted wheat from southern Kansas north. Clients with expiring out-of-the-money December wheat positions rolled to the March contract on Friday to continue upside exposure. Christmas corn futures, as we call the December contracts, stabilized after recent losses to finish up slightly on Friday just below $3.69. This week’s USDA crop progress report showed corn harvest at 76% complete, just behind expectations and still well short of the average 92%. Demand has picked up with respectable exports in the face of a stronger U.S. dollar and ethanol stocks on the decline, now the lowest since January 2017. The Reuters article this week reporting that the Phase 1 trade deal with China may not be signed until next year added pressure to corn and soybean contracts, particularly the latter.
Despite soybean exports slightly above expectations, the January bean contract lost nearly 23 cents this week to finish at $8.97 after touching on the $8.95 ½ support level taking us back to late-September. With favorable rains on Brazilian beans and the U.S. crop over 90% harvested, positive news on the trade front may be a requirement to reverse the downward trend. Managed money remains long soybeans despite buybacks this week and the recent selloff will test these remaining longs. Beijing this week invited U.S. negotiators to China for face-to-face talks preferably before Thanksgiving, as the Wall Street Journal reported. However, we doubt anything will happen next week especially given that the U.S. has asked China for conditional agreement on IP protection, forced technology transfers and specific ag purchases prior to traveling. Conversely, China has asked for a roll back in tariffs with the next round set to come into effect on Dec. 15. Given these new upcoming tariffs, I suspect that the next meeting, wherever it may be, will either take place before then or not at all in 2019.
All the while, the equity market seems to be taking all this in stride with the Dow and S&P making new all-time highs again this week. The strength in the equity market and perhaps consumer confidence seems to move higher unabated, and there is no doubt President Trump wants to have a strong finish to 2019 going into an election year. However, recall what happened last year on the turn of the calendars to December followed by one of the worst months since the 2008 financial crisis. While that was near the beginning of the trade war with China, we seem to be no further along and with uncertainty building after this week’s passage by the U.S. House of the Hong Kong Human Rights and Democracy Act that President Trump eventually will have to sign, it will only serve to muddy the waters in getting something done with China. This was support for democracy in Hong Kong, but also a clear political move by the Democrats to make a Trump deal more problematic to get done.
With a China deal, grains and beans should find renewed support, as should the cattle market perhaps indirectly through U.S. pork purchases by China. However, in the absence of, we advise a more conservative approach to risk management as we could very well move into a period of inaction until 2020 after the holidays. In the meantime, a deadlock in China discussions, escalating Hong Kong protests and political battles on the domestic front could dominate headlines and undermine support. To stay updated day-to-day on market commentary, download the free Sidwell Strategies app for Apple and Android. We have updated market prices and commentary on the trading day’s activities. Give me a 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.
And finally, be sure to tune in to KGWA AM960 every Friday morning from 6:30-7 a.m. to catch our weekly radio program on the airwaves with Alan Clepper where we discuss latest trends influencing our industry, marketing strategy ideas and commentary. 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 firstname.lastname@example.org. 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.