Ahead of the Open: Grains, Soy Starting Firmer Amid Weather Risks Reducing U.S. Crop Potential

Posted on 06/24/2019 7:56 AM

GRAIN CALLS:

Corn: Up 4 to 6 cents
Soybeans: Up 5 to 7 cents
Wheat: Up 6 to 8 cents

General Comment: Corn and wheat are rebounding from last week’s rally pause and soybean futures are expected to add to last week’s gains amid ongoing concerns about U.S. production from this year’s unprecedented wet, cold weather.

In the absence of hard, reliable numbers on planted area and yield potential, the firming corn and soybean basis last week was the best signals that commercial are very concerned about final supplies. While a few farmers will continue to plant soybeans into the end of the month, weekend rains were

bigger than expected, and for all intents and purposes the planting season is over in many areas. Today’s forecast is similar to Friday’s, but uncertainty is higher than normal as models over-simplify excessively wet soils, creating rainfall uncertainty this week.  The most likely scenario remains for temperatures to turn much warmer through midweek, then cool for early July as a couple cool fronts pass, and then warmer after July 5 for about a week before cooler weather returns.  After rain and showers the next two days drier weather is expected but saturated soils will help to trigger showers with the increase evaporation rates.

It could be volatile week with several reports and meetings plan that could lead to wide swings in grain and livestock prices. President Donald Trump and China’s Xi Jinping meet over trade war issues at the G20 summit late this week in Osaka, Japan. The leaders are expected to relaunch trade talks between the two nations. Meanwhile, USTR Bob Lighthizer meets with his counterpart in Japan regarding a proposed trade accord that is expected sometime after July elections in Japan. The first Democratic presidential primary debates occur Wednesday and Thursday in Miami. Congress is in this week with both chambers considering border-funding bills. USDA releases its Quarterly Hogs & Pigs Report Thursday and its Acreage and Grain Stocks reports on Friday.

U.S./China trade talks later this week will be complicated by President Trump looking to require next generation 5G cellular equipment used in the United States to be designed and manufactured outside China, the Wall Street Journal reported on Sunday, citing people familiar with the matter. In May, the Trump administration took aim at China's Huawei Technologies Co Ltd, banning the firm from buying vital U.S. technology without special approval and effectively barring its equipment from U.S. telecom networks on national security grounds.

The Chinese government in an editorial in their state run “People’s Daily” indicated that China has the strength and patience to fight the US trade war to the end. China is demanding that the US drop all tariffs imposed on China if it wants to start new negotiations on trade – and that only equal dialog can resolve the issue and leads to a settlement.  China's Vice Commerce Minister Wang Shouwen said on Monday that tariffs imposed by certain countries are a threat to the world economy, and that China hopes for progress in the necessary reforms of the World Trade Organization.   While China has raised trade tariffs on U.S. exports during its recent trade war with Washington, it has been quietly lowering tariffs for other countries, Peterson Institute for International Economics. Beijing has cut tariffs on competing products from other nations it trades with to an average of 6.7% since the start of last year,  That compares to a 20.7%  average tariff rate on American products over the same period, the US-based group found in its latest report .

Gold rose above $1,400 Friday, reaching the highest since August 2013 and is challenging last week’s highs this morning after the U.S. Federal Reserves dovish stance on monetary policy. The dollar fell to a three-month low against a basket of currencies this morning on bets the Fed will start lowering interest rates next month. Stronger gold and weaker dollar provide a strong background support for grains and soybeans this morning.     

The CFTC Commitments of Traders report on Friday showed substantially less fund buying in the corn than expected in the week ended June 18,  net selling in meal by funds when the trade had been looking for buying, and a bit more buying in the wheat than had been expected. Hedge funds and other money managers increased bullish bets in corn futures and options to 143,515 contracts from 111,212 in the previous week, that was about 50,000 contracts less than expected. But the U.S. government already made a healthy 9% reduction to the domestic corn harvest a week earlier, and that may have set expectations low enough for last week. It means there is a lot buying on the sidelines on further confirmation of smaller yields and production. Wheat has been riding corn’s coattails in recent weeks and speculators have expanded their bullish stance in SRW wheat, despite global fundamentals remaining relatively bearish. In the week ended June 18, money managers increased their net long to 22,713 futures and options contracts from 1,741 a week earlier.

The CBOT wheat longs could pose a problem to corn bulls down the road if the two markets stay coupled. The number of gross shorts in the CBOT wheat market are among the fewest in the past several years, and that could pull both wheat and corn prices down if investors decide to pile back onto the short side. In the week ended June 18, money managers cut their net short in CBOT soybean futures and options to 55,307 contracts from 91,155 a week earlier. While world soybean stocks are at record levels, investors are starting to consider scenarios where the harvest is sharply reduced, potentially normalizing U.S. and world inventories quicker than expected. However, funds trimmed their net long in soybean meal to just 18 futures and options contracts from 4,665 in the week before.

USDA daily export reporting service reported no new large sales this morning.  

Corn: Prices are slightly higher and right in the middle of last week’s range. The key market direction is a close above $4.73 or close below $4.49, last week’s range in December.  Today’s weekly USDA crop report will provide the last estimate of corn planting progress. That number could be 94% to 98% complete, up from 92% estimated on June 16. The difference will be whether USDA scouts count prevent plant acres as planted or just look at progress relative to what was expected to be planted this year. The weekly corn conditions are unlikely to change much from the 59% rated in “good” and “excellent” condition last week. The focus will be on the June 28 USDA reports updating acreage and estimated June 1 inventories. The USDA acres survey probably won’t provide a clear look at the number of prevent plant acres since it was taken earlier this month. But it will be starting point. The average estimate of traders surveyed by Bloomberg showed planting would fall to 87.03 million acres, down from 92.79 estimated by USDA in March. Our estimate is 88 million. June 1 inventories are expected to come in at 5.335 billion bu., up from 5.305 billion bu. a year earlier, according to the average of analyst estimates in a Bloomberg poll. We forecast the stocks at 5.275 billion bushels.

Soybeans: Soybeans are rebounding from Friday’s decline and overnight losses. November futures are about 14 cents below last week’s high at $9.48, which is key resistance for he bulls. Trading will start this week with the latest USDA Crop Progress report on Monday that should show planting progress rose to 85% to 90% done, up from 77% report this week. The first crop condition report will also be released, and the percent of crop rated in “good” and “excellent” condition may come in near 55% to 57%, a relative low rating and supportive feature. On June 28, the USDA will update 2019 planted acreage forecasts but traders are fully aware this will not be the final number. Traders surveyed by Bloomberg forecast acreage will rise to 84.68 million acres, on average, up from 84.62 million projected by farmers in the March intentions report. Our estimate is 85.5 million acres. Also, on Friday, USDA will release its March 1 inventory report with traders surveyed by Bloomberg looking for 1.865 billion bushels, up more than 50% from a year earlier and record large. Our estimate is 1.879 billion bushels.

Wheat: The approaching U.S. winter wheat harvest will be aided by drier conditions, especially across the HRW belt.  Rains will be beneficial for wheat in parts of the Canadian Prairies but more will be needed amid low subsoil moisture reserves. Scattered rains also may help parts of Europe and the Black Sea region this week, but overall amounts are expected to be light and variable enough that when warm, dry weather returns next week some wheat crops will be stress

LIVESTOCK CALLS:

Cattle:  Lower
Hogs: Lower

Cattle: Live cattle will follow boxed beef cutout values lower. The Choice cutout declined $0.90 per cwt from the day before to $219.82 per cwt and down from $222.23 on June 14. Select cutout declined $1.93 to $199.55, down from $202.76 a week earlier. The Choice-Select price spread was $20.27 per cwt versus $19.47 per cwt last Friday. The reported boxed beef trade for the week was 459 loads, 2.0% higher than the 450 loads last week. The week’s cattle slaughter was an estimated 662,000 head, versus 658,496 head last year.  On June 21, USDA said cattle feeders placed 2.8% less cattle on feed in May than a year ago and a smaller decline than most expected. The total number of cattle on feed on June 1 rose 1.6% from a year ago., about 187,000 head more than last year and 27,000 head more than traders expected  Also on Friday, USDA estimated May 31 U.S. beef stocks at 403.552 million pounds, which was down sharply from 430.2 million at the end of April and  464.652 million pounds a year ago  The monthly drop of 26.7 million pounds more than doubled the 10-year average, suggesting underlying beef demand isn’t as weak as many had thought  
 

Hogs: Futures seen defensive on amid the drops in both cash hog and wholesale pork cutout values last week. Slaughter rose to 2.449 million head last week, up 18,000 from a week earlier and 285,000 above a year ago. U.S. pork stocks held in storage at the end of May totaled 628.66 million pounds represented a 7.2-million-pound increase from April and a 4.9-million-pound rise from May 2018. The bearishness of this number is best represented by the contrast to the 10-year average, which usually drops 22.3 million from April to May. It obviously suggests pork demand is quite poor, especially considering the recent slaughter surge didn’t start until late May.

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