Ahead of the Open: Renewed Weakness on Rising U.S.-China Tensions, Rain Forecasts

Posted on Fri, 05/22/2020 - 06:27

GRAIN CALLS

Corn: Down 1 to 2 cents
Soybeans: Down 2 to 4 cents
Wheat: Down 5 to 9 cents.

GENERAL COMMENTS:  Corn and soybeans are weaker this morning and testing key support. The grain markets are ready to quietly slump into the long holiday weekend and today’s June option expiration with rains on the way after recent additional planting progress. The start to the 2020 growing season supports a strong yield outlook. The bigger reasons for a lack of speculative buying interest this morning are escalating China-U.S. tensions and new concerns about a weaker rebound from a coronavirus-led economic slump. Oil prices fell more than 3% and world markets are lower overnight.

On Friday, China reiterated its pledge to follow through on its commitments in the phase-one trade deal, which has led to a four-month ceasefire on tariff increases. A continued truce is in President Donald Trump’s political interests ahead of a re-election bid in part because China's pledged agricultural purchases will be key for economic recoveries in Midwest farm states. China is importing U.S. ag and other goods a bit slower than originally hoped for, but the Phase 1 trade pact is still being successfully implemented, National Economic Council (NEC) Director Larry Kudlow said Thursday in a Washington Post interview.

Wheat is in retreat on forecasts for beneficial rains in parts of the U.S. Plains, southern Europe and the Black Sea region. Prices rebounded sharply earlier this week on speculation dry weather would trim production in the three regions and may boost demand for U.S. supplies.

The daily USDA export sales reporting service announced failed to announce any new large sales of grains or soybeans by private exporters this morning. The lack of new sales to China this morning may add to the negative tone in grain and soybean markets this morning. The lull in new sales announcements has tempered market optimism this week after Chinese purchases last week.

The opening day of the delayed annual gathering of lawmakers in China saw a mixed bag of developments for Sino-U.S. relations. Premier Li Keqiang told the assembly that Beijing remained committed to implementing the phase-one trade deal, despite the coronavirus hit to the economy and tensions between both sides. The uncertainty over the growth outlook means the country's government also confirmed that it is abandoning a hard growth target for this year, saying it will instead concentrate on employment.

China will draft and carry out in 2020 a response plan for ensuring food security amid the global coronavirus pandemic, the country's state planner said on Friday. Beijing will also draw up a new national medium-to-long-term plan in the new year to secure food supplies, China's National Development and Reform Commission said in an annual report to parliament.

The positive talk on trade has been overshadowed by China's power grab in Hong Kong, with Beijing moving to effectively bypass the city's legislature to implement national security laws. Residents fear the move will erode freedoms of speech, assembly and the press. The Hang Seng Index plunged 5.6%, with real-estate firms the worst hit. Democracy advocates called for protests against the legislation, and President Donald Trump said he would respond "very strongly."  Meanwhile, two U.S. senators, meanwhile, are proposing legislation to punish Chinese entities involved in enforcing the new security laws and penalize banks that do business with those entities.

President Xi Jinping’s renewed push to ram through national security legislation on Hong Kong signals China’s Communist Party is feeling the pressure. The Covid-19 outbreak has put millions out of work in China and ravaged the economy, forcing Xi to abandon goals to improve livelihoods that have underpinned his legitimacy. At the opening of the National People’s Congress in Beijing today, the party didn’t announce an annual growth target for the first time in decades due to “great uncertainty” in the world economy. The focus was squarely on creating jobs: Defense spending this year is set to grow at the slowest pace since 1991, while China dropped a second key measurement on energy conservation used to mark progress in the battle against climate change.The party faces other risks, most immediately in Hong Kong. Pro-democracy activists quickly called for protests to oppose the plan to impose a national security law, a move groups in the city have resisted for decades out of fear it would curtail any dissent.

In line with the slower economy, China will raise defense spending by 6.6% this year, the slowest in three decades, while the budget for environmental protection will increase a modest 4%.  Monetary policy will be more flexible, Li said, adding that growth in M2 - a broad gauge of money supply - and total social financing will be significantly higher this year. The People's Bank of China (PBOC) will guide its benchmark lending rate lower, he said.  

CORN: July corn fell to a six-session low but held above last week’s low at $3.14 ½ overnight. The failed to hold above the last week’s high earlier this week. A close below last week’s low tonight would be negative.

SOYBEANS:  July beans  fell to the lowest since April 21 last night and have pared losses into the break this morning. The market is headed for a lower weekly close and a close below $8.30 would be bearish.

WHEAT:  Wheat futures are paring this week’s strong gains heading into the weekend. Look for a choppy trade. Crop scouts who conducted a three-day tour of hard red winter wheat fields in Kansas, the top U.S. wheat producer, estimated the state's crop at 284.4 million bushels, organizers said in an online meeting on Thursday. The average yield from fields scouted on this week's tour was 44.5 bushels per acre (bpa). Tour scouts noted the effects of freeze damage, drought and stripe rust in some areas - but also a few scouts got wet Thursday as much-needed rains arrived, aiding some crops.The tour's figures compare with the U.S. Department of Agriculture's estimate this month for a 305.5 million-bushel Kansas crop with an average yield of 47.0 bpa. French crops are reported to have improved in condition marginally this week with 57% of the soft wheat crop now reported to be in good to excellent conditions, up from 55% last week and 79% a year earlier, the current proportion of the crop in G2E condition is still as a nine year low for this time of year reflecting the significant damage that the dryness has had and continues to have on crops across Europe.

LIVESTOCK

CATTLE: Steady to firm

HOGS: Steady to firm

Cattle:  Cattle are seen steady to firm but the key is closing higher for the week. Prices close Thursday above last week’s settlement so it’s up to the bulls to prevent a late selloff today. USDA reported that inventories of frozen beef fell 12.3 million lbs. from March to April, which was a bigger drop than is typically seen. But this decline is more a reflection of reduced production than increased demand. Boxed beef prices continue to slide, but the severity of the decline has moderated, which signals prices will likely remain elevated for some time. Choice dropped $2.23 on Thursday while Select tumbled $8.65. Some additional cash cattle trade took place Thursday from $116 to $120, up from week ago levels. After the close, USDA is set to release the April Cattle on Feed Report. Traders look for on feed numbers to fall about 5% from a year ago on May 1 as placements last month fell about 22% and marketings dropped 25% from last year.

Hogs: Futures seen steady to firmer after shaking off weak new export sales data on Thursday and closing mixed to higher.  USDA’s weekly export sales data showing China cancelled more of its prior purchases. But export shipments hit a marketing-year high with China as the top destination. USDA’s Cold Storage Report for April reflected a contra-seasonal drawdown in pork stocks during April as Covid-19 upended processing and supply chains. The big news is that processing continues to improve, with Thursday’s kill coming just shy of the 400,000 head threshold. Cash hog bids climbed an average of $1.42 on Thursday. The pork cutout value dropped $2.07 on Thursday, with prices now down $12 from week-ago. Pork’s affordability relative to beef has retailers aggressively featuring the other white meat heading into Memorial Day.