Prices are Rising, the Devil's to Pay

By: Alan Brugler

I started out with this week’s theme being rising temperatures, with much above normal temps in the forecast for much of the eastern 2/3 of the country over the next 14 days. I was remembering a song lyric ‘temperature’s rising, the devil’s to pay’. As with a lot of songs, I wasn’t exactly right on the words. The actual phrase was "Prices are rising, the Devil’s to Pay" from the 1970’s group Three Dog Night in Family of Man. Then I realized it didn’t make any difference! Prices and temps are both rising, and somebody is going to pay whether it is the grower, the processor the feedlot or the consumer. Ideal weather was needed to make the grain balance sheets work, and we don’t appear to be getting it.

Above normal temps are seen for most of the next two weeks in the central US as the drought area in Texas refuses to move. The long range weather forecasts suggest drying and likely planting progress in OH and IN but with further delays in the Dakotas as above normal precip continues there. "Planned flooding" by the Army Corp of Engineers will be required from Montana to St. Louis, and low lying corn has already been lost in NE and IA along the Missouri River. Larger water releases are planned for this week to keep the dams from overflowing. Quantifying acreage losses is a real challenge, and USDA is doing the June Planted Acreage surveys right now! For those with the crop planted and regular rains and with no river nearby, life is good...

Corn had a nice up day on Thursday, with December futures posting new life of contract highs. Nearby July was down 4 ½ cents for the week, all of it coming from the 12 ½ cent Friday sell off. Open interest in the July contract is still more than 2.5 billion bushels, requiring a LOT of both long liquidation and short covering over the next 30 days. The big index funds have already begun rolling out of the July, but another one is scheduled to begin on Tuesday. USDA weekly export sales were neutral on Friday morning as USDA put the actual number at 700,900 MT. Crop condition ratings were historically low for late May, but the correlation to final yields is very weak.

Soybeans rallied a sharp 2.5% this past week. Meal was up 3.6% despite the weaker tone in corn, due to low crush rates and thus less meal output. Egg sets and broiler placement data do not show any consistent cutbacks in the broiler industry (which is engaged in a market share battle). Soy oil was up 0.2% for the week. Prices in China were up sharply, as the price controls on veg oils were apparently allowed to expire on May 31. If that situation is allowed to continue, it might take pressure off of the crush plants and allow more of the imported beans piled up at the ports to be used. US weekly export sales are typically light this time of year. USDA put the actual net sales for last week at 155,500 MT.

Wheat futures were higher in MPLS for the week, but settled lower in Chicago and KC. MPLS was up 4 cents per bushel, with the CWB indicating that Canadian acreage would be down. US planting is also still lagging and acreage estimates are slipping with each passing week. Wheat prices were sharply lower on Tuesday after the Russians announced the end of the export embargo on July 1. However, Russian internal prices quickly rose to match global values, and calls for export tariffs began to surface within the Russian political structure. The intent of those would be to slow exports and limit the internal price increases.

Cotton futures showed the largest advance for the week, up 5.87%. This came despite a 9^th consecutive week of old crop export sales net cancellations. The bull story for the July came from cert stocks. A merchant de-certified most of the existing warehouse inventory, suggesting that it would be shipped out and thus not available for the July delivery process. That had shorts scrambling to get out. Mills also appear to have a large book of unfixed on call purchases tied to the July contract. That did not go well for them in March, with the bulls pressing them right into deliveries.

Here are the Friday night closes for the past four weeks, along with the net change for this week vs. the previous week:

	Commodity					Weekly	Weekly
Month		05/13/11	05/20/11	05/27/11	06/03/11	Change	% Change
July	Corn	6.82	7.595	7.585	7.54	0.0450	0.59%
July	CBOT Wheat	7.2775	8.065	8.1975	7.7375	0.4600	5.61%
July	KCBT Wheat	8.695	9.3325	9.43	9.1425	0.2875	3.05%
July	MGEX Wheat	9.0025	9.9975	10.5625	10.605	0.0425	0.40%
July	Soybeans	13.295	13.8025	13.7975	14.145	0.3475	2.52%
July	Soybean Meal	345.4	360.6	355.6	368.4	12.80	3.60%
July	Soybean Oil	56.14	57.46	58.61	58.73	0.12	0.20%
June	Live Cattle	109	104.975	104.1	104.175	0.08	0.07%
Aug	Feeder Cattle	132.45	125.75	122.72	124.25	1.53	1.25%
June	Lean Hogs	94.55	91.975	88.925	89.225	0.30	0.34%
July	Cotton	145.15	155.61	152.67	161.63	8.96	5.87%
July	Oats	3.445	3.64	3.8275	3.78	0.0475	1.24%
July	Rice	13.98	15.1	15.185	14.475	0.7100	4.68%

Cattle futures were actually up 7 ½ cents for the week, a surprise to some after the pasting they took on Tuesday and Wednesday. However, the sell off appeared to be overdone technically, and cash cattle for the most part traded even with the previous week. Estimated beef production for the week was 2% smaller than last year and down 8.5% from the previous week because of the holiday on Monday. Wholesale prices were mixed for the week, with choice boxed beef up 33 cents for the week, but select down $1.32/cwt on a Friday/Friday basis. One problem has been the slowdown in South Korean purchases. The emergency buying program needed to compensate for the FMD losses boosted overall US exports earlier in the spring, but the Koreans now appear to be back to more typical purchasing levels.

Hog futures also closed 30 cents higher this week. The cash hog market was volatile, in terms of day to day changes. Futures are still discounting another $2+ drop in the CME Lean Hog Index between now and June contract expiration. Pork production for the week was 1.3% smaller than the same week in 2010, with YTD production 1.2% larger than a year ago. The cutout value of the hogs held up fairly well, losing 0.3% or 27 cents on a Friday/Friday basis. Pork loin values had more than a $12 range for the week.

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