Ahead of the Open: Fund Short-Covering Ahead of Tuesday's USDA Report, Slightly Threatening U.S. Weather

Posted on Mon, 06/29/2020 - 06:00

GRAIN CALLS

Corn: Up 2 to 4 cents

Soybeans: Steady-mixed

Wheat: Up 1 to 4 cents

GENERAL COMMENTS: Corn is rebounding from new six-week lows on fund short covering ahead of the USDA’s Acreage and Grain Stocks Reports on Tuesday morning as heat and dryness concerns are beginning to develop heading into pollination.  These end of June USDA reports have a history of producing surprises, both bullish and bearish. Soybeans are seen drifting today as lower vegetable oil prices and uncertainty about new Chinese buying offset some new weather concerns. Wheat is seen firmer on a smaller increase in Canadian planted acreage and waiting for results of a tender on Tuesday by Algeria, the largest buyer of European wheat, for signs of world demand after the slide in prices recently.

Don’t forget this is a short week, with U.S. markets closed Friday for Independence Day. Fed Chair Jerome Powell and U.S. Treasury Secretary Steven Mnuchin testify Tuesday before Congress on June 30 in what’s expected to be a broad overview of the economy and monetary policy. The U.S.-Mexico-Canada (USMCA) trade deal that replaces the North American Free Trade Agreement (NAFTA) comes into effect on Wednesday.

The weather situation is mixed but showing signs of potential crop problems. Rains through Wednesday this week over the Pacific Northwest, south central Midwest and South will be followed by the development of a high-pressure ridge over the Great Lakes that could last into the middle of July. That could lead to the development of drought conditions in areas that miss this week’s rains. Temperatures will be much above normal from Texas to North Dakota and east into the eastern Corn Belt.   

The corn crop last week was rated 72% good or excellent, up from 56% at the same time a year earlier, and 70% of the soybean crop earned top ratings, up from 54% last year. Traders are looking for 1 to 2 percentage point improvements in both crops in USDA’s weekly crop progress report this afternoon.  

Friday’s CFTC Commitments of Traders report showed bigger-than-expected fund buying in beans offset by Index selling, bigger than expected fund selling in wheat, and less selling in corn than expected.  Speculators in the week than ended on June 23 held a net-long position, or bets on higher prices, of 43,028 soybean futures contracts, the CFTC said in a report. That’s up from 19,879 contracts a week earlier and the largest such position since the seven days that ended on Nov. 5, government data show. Investors, however, raised their bearish bets on corn last week to a net-short position of 285,942 futures contracts. That’s up from 277,603 contracts a week earlier. Funds were heavy sellers the final three days of last week and may have pushed that net-short position close to 325,000 contracts. In wheat, hedge funds and other large speculators held a net-short position of 45,176 soft-red winter futures contracts, up from 26,663 contracts a week earlier and the largest bearish position since May 2019, the CFTC said. Money managers were more bearish on hard-red winter wheat as well, raising their net-short to 37,507 futures contracts, up from 27,655 contracts seven days earlier. That’s the largest negative position on hard-red winter wheat since Sept. 17.

Without a serious yield problem, there is no incentive for shorts to cover, and the end of the quarter could see some funds “dressing down” the settlement on Tuesday to make their positions look better. The Chinese are back from holiday and should have a bit of pent up pricing to do, supporting the beans, but a lot of that will depend upon on whether their crush margins improve.

This morning’s daily USDA export sales reporting program did not announced any new private exporter sales of grains or soybeans.  Not a surprise with China closed the last two days of last week for holidays. That will increase the importance of new sales this week after the break in prices.  

U.S. exporters are willing to sign safety declarations rather than complete China’s coronavirus-free certification letters. China has been pushing U.S. food and feed exporters to sign declarations guaranteeing shipments are free of coronavirus. Instead, the U.S. is signing letters assuring the safety of their cargoes, according to the Agriculture Transportation Coalition (AgTC). The statements assure importers that shipments have been harvested, processed, and handled consistent with industry safety standards and guidelines from medical experts. Health experts continue to say Covid-19 does not live on food/food packaging. Exporters cannot guarantee their cargo will remain free of the virus after it leaves their facilities, notes Peter Friedmann, executive director of AgTC.  There is no word as to whether these safety assurance letters will suffice for China.

Worries about deteriorating U.S./China relations continue. The Wall Street Journal on Friday reported China has told Washington that “meddling’” in Hong Kong, Taiwan and other matters could jeopardize Chinese goods purchases under the Phase 1 trade deal. According to some Chinese officials, by using words like “atmosphere,” Chinese leader Xi Jinping’s point man on U.S.-China trade negotiations, Vice Premier Liu He, was delivering a reminder to the U.S. of growing hard-line sentiment in China and the difficulty its leaders will have at home justifying massive purchases of U.S. goods amid a firestorm of Washington criticism.

World shares outside the U.S. were hovering near two-week lows on Monday as the relentless spread of the coronavirus in the U.S. curbed optimism over the global economy and raised worries that some reopening plans will be delayed for longer. Global COVID-19 cases surged past the 10 million mark as rising numbers in Australia and a big spike in Southern and Western United States threatened to slow down economic recovery. California ordered bars to close on Sunday, following similar moves in Texas and Florida amid rising cases. Washington state and the city of San Francisco have paused re-opening plans. The global death toll from COVID-19 reached half a million people on Sunday, with a quarter of those in the United States, where cases have surged in southern and western states.

U.S. stock futures pointing to a stronger opening, rebounding from the steep drop on Friday as investors bet on more government and central bank stimulus. The U.S. dollar has generally gone in the opposite direction, sliding 0.2% against a basket of currencies. Oil prices are slightly higher erasing earlier declines and gold is holding near its highest level since early 2012.  It is an important week for U.S. data with the ISM manufacturing index on Wednesday and payrolls on Thursday, ahead of the Independence Day holiday.     

CORN:  The immediate focus is Tuesday’s USDA stocks report to gauge old-cop supplies. Ethanol production and gasoline demand improved in the past week and needs to continue to grow to help prices stabilize.  Weather is more threatening and will be the daily features through the next three weeks. The potential for regional droughts is worrisome but not expected by all the weather models. Key support in December corn at $3.18 to $3.25 is under attack and may hold into the holiday weekend.

SOYBEANS:  Futures will likely follow corn and soymeal prices which are showing some stability today. Strategie Grains has cut its estimate of this year’s European Union (plus Britain) rapeseed crop from 16.68 MMT to 16.54 MMT. This marks the consultancy’s sixth consecutive monthly cut, with this year’s crop expected to be the smallest since 2006. Strategie Grains explains the cut was due to “rains returning too late in June to improve conditions for rapeseed crops in western and south-eastern EU countries.”

WHEAT:  Canadian farmers increased planted acreage less than expected. Farmers planted 25.0 million acres, up from 24.6 million last year but below the 25.2 million expected by analysis polled by Reuters. Russian wheat export prices fell last week as the harvesting of the new crop started. The market expects the new crop from the Black Sea to push wheat prices further down. First yields in Russia confirm that there should be no disaster with the new wheat crop in Russia's south, SovEcon said. Most Russian regions saw rainfall last week, but hot and dry weather is expected over the next few weeks. France will certainly be closely monitored along with a few neighboring areas in the U.K., Germany, Belgium and Netherlands during the next couple of weeks. A part of this region will become too dry. Some of this region is already too dry and additional drying is going to worsen crop stress. Eastern Europe crop conditions will remain very good with timely rain and sunshine along with warm temperatures supporting aggressive crop development.

LIVESTOCK

CATTLE: Weak

HOGS: Weak

Cattle: Futures seen slightly defensive on worries about a second wave of Covid-19 slowing restaurant reopenings. Last week’s cattle slaughter came in at an estimated 680,000 head, versus 670,311 head last year, with Friday’s kill 119,000 head and Saturday’s kill 82,000 head.  Boxed beef cutout values were somewhat lower. The Choice cutout declined $1.09 per cwt from the day before to $207.17 per cwt on June 26 (versus $213.72 last Friday) and the Select cutout declined $1.08 per cwt to $198.85 (versus $203.91 last Friday). The reported boxed beef trade for the week was 610 loads, 14.9% lower than the 717 loads the prior week.

Hogs:  Lean hogs remains pressured by last week’s Quarterly Hogs & Pigs Report weighted heavily on the lean hog market the latter half of the week, as it showed kills will run 12% to 13% above year-ago levels through July. And talk Friday that China is warning the U.S. that pressure regarding Hong Kong and other matters could jeopardize the Phase 1 trade deal adding to the negative tone. Pork production topped year-ago 13.6% the week ending June 27, with slaughter up 10.7% from year-ago. These big numbers are needed given backlogs, but they will also make it tough for product or cash prices to firm.