After the Bell: Strong Rally on China Trade Optimism, Short Covering

Posted on 09/12/2019 3:09 PM

Corn:  December corn futures closed up 7 1/4 cents at $3.67 1/4. Prices closed near the session high and scored a bullish “outside day” up on the daily bar chart today.  Heavy short covering was featured in corn futures today, most of which was likely from the large speculative funds that have been heavily short. After today’s USDA report that came out mostly close to market expectations, many of those fund managers now likely reckon the slide in corn futures prices has run its course and are abandoning their shorts. Don’t be surprise to see some more fund short covering on Friday. Today’s monthly USDA supply and demand report showed U.S. corn production at 13.799 billion bu. compared to trade expectations of 13.672 billion bu. and compares to 13.901 billion bu. projected by USDA in August. USDA cut its national average corn yield by 1.3 bu. from last month to 168.2 bu. per acre. Harvested acres are unchanged from last month at 82.017 million. U.S. corn carryover was pegged by USDA at 2.445 billion bu. for 2018-19; up from 2.360 billion bu. in the August report, and at 2.190 billion bu. for 2019-20--up from 2.181 billion bu. in August. It appears that the U.S.-China trade war tensions ratcheted down a notch this week, which is also friendly for the corn futures market. Weekly U.S. export sales fell short of market expectations. In the week ended Sept. 5, private exporters sold just short of half a million metric tons of corn. USDA daily export sales service announced that private exporters sold 113,036 MT of corn for delivery to Mexico during the 2019-20 marketing year, adding to earlier sales announcement this week.

Soybeans: Soybean futures finished 25 to 29 cents higher through the July 2020 contract, which was on or very near session highs. Meal futures gained in excess of $6, while soyoil climbed 30-plus points in most contracts. Soybean futures surged to their highest level in a month amid signs of improving trade relations between the U.S. and China. President Donald Trump pushed back a planned increase in tariffs on some Chinese goods by two weeks to Oct. 15 to boost trade negotiations. A Chinese government official says firms are inquiring about prices for U.S. ag goods, including soybeans. Reuters reported this afternoon Chinese buyers bought at least 10 cargoes of U.S. soybeans for fall delivery. Whether there’s sustained followthrough buying tomorrow will go a long way in determining if today’s recovery rally has “legs.” USDA’s September crop reports featured a smaller-than-expected cut to the soybean crop estimate, but traders anticipate it will continue to come down. New-crop ending stocks were cut more than expected.  Weekly soybean export sales were also supportive, as USDA reported net new 2019-20 sales of 1.172 MMT for the week ended Sept. 5.  

Wheat:  December SRW wheat futures closed up 6 1/4 cents at $4.83 3/4 and hit a four-week high today. December HRW futures finished up 5 cents at $4.03 1/2. Prices closed nearer the session high today. Wheat futures followed corn higher today. Look for the wheat market to continue to be led by actions in the corn market. USDA today reported U.S. wheat carryover for the 2019-20 marketing year unchanged from last month. In fact, USDA made no changes to the supply or demand side of the balance sheet. However, USDA projects the national average on-farm cash wheat price for the 2019-20 marketing year at $4.80, down 20 cents from last month. USDA will update its crop forecast on Sept. 30. The wheat market continues to find underlying support from dry weather in Australia and Argentina that is threatening to trim production and improve demand for supplies from the U.S. However, the world remains awash in wheat from Europe and the Black Sea region. USDA raised its forecasts for world ending stocks to a record 286.51 million metric tons, up from 285.71 MMT last month and a revised 277.74 MMT last season. Rains are threatening yields and quality of spring wheat in the Northern Plains and Canadian Prairies.

Cotton:  Cotton prices exploded higher, reaching the highest since Aug. 1. December futures rose 2.84 cents to 62.21 cents. Futures jumped more than 5% on speculation of a thaw in the ongoing U.S.-China trade tensions. U.S. trade advisers have discussed offering China a limited trade deal that would delay and even roll back some tariffs for the first time in return for Chinese commitments on intellectual property and agricultural purchases, Bloomberg reported, citing people familiar with the matter. However, uncertainties prevailed as Bloomberg's report was contradicted by a CNBC report that a senior White House official said an interim deal was "absolutely not" on the table. The USDA lowered its U.S. cotton crop forecast 654,000 bales to 21.9 million, largely due to a decline for the Southwest Exports are projected 700,000 bales lower due to reduced U.S. production and a lower projected U.S. share of world trade. The 2019-20 season-average price for upland cotton is forecast at 58 cents per pound, down 2 cents from last month. Net sales of 74,600 RB for 2019/20 marketing year were down 54% from the previous week, while exports of 166,900 RB were down 28%, the USDA said in its weekly export sales report. The developments surrounding trade helped offset slight headwinds from a monthly USDA world supply and demand report, which projected lower demand in the United States and higher world ending stocks for the 2019-20 crop year. World ending stocks for 2019-20 are projected to be 1.3 million bales higher than last month's forecast, at 83.7 million bales, which is 2.9 million bales above the revised 2018/19 estimate.  

Hogs: Lean hog futures closed limit up today, meaning the daily trading limit expands to $4.50 for Friday’s trading session. The hog market reacted strongly to news of thawing trade tensions between the U.S. and China. President Donald Trump pushed back by two weeks a tariff increase on some Chinese products that was supposed to go into effect at the start of October. A meeting between the two sides is widely expected to happen before the new deadline of Oct. 15 for the tariff increase, leaving room for a further postponement or even a cancelling of some of the tariffs. Also, a spokesman for China’s commerce ministry says Chinese firms have started to inquire about prices for U.S. ag goods, including pork. China has been increasing its pork purchases, including from the U.S., despite hefty tariffs, as it tries to combat surging pork prices due to production cuts from the African swine fever outbreak. China needs a lot more U.S. pork, it’s just a matter of when and how much they buy – and how aggressively the market reacts. Today's price action shows the market will react aggressively on even talk of more Chinese purchases, which tells us prices are undervalued – something we’ve long thought.  The problem for the hog market is falling cash hog prices. The average national direct price was down another $1.02 this morning. Packers continue to drop cash prices amid record slaughter supplies. But slaughter numbers typically reach an early fall peak soon, which normally allows for a relief rally from mid-September into October.  

Cattle:  Cattle started higher with the surge in hogs, fell back at midmorning and then rallied to close near session highs. October cattle rose 22.5 cents to $98.725 and December jumped $1.325 to $104.95. The market is supported by ideas packers will begin to share the record profits with producers. Packers have raised bids from earlier this week, but feedlots have been more stubborn. Packers probably have a fair amount of inventory bought ahead for the next two weeks and that may limit the cash market rally. October and December are trading at steep discounts to February and April cattle on worries about picking up the slaughter slack that won’t come back until the Tyson plant in Kansas comes back online in January.  Any improvement in export demand could see a quick rally with funds sitting on one of the smallest net long positions in more than 10 years. Earlier today, USDA said export sales of beef were 18,000 MT, unchanged from the prior week but up 11% from the four-week average. Hong Kong bought 11,1000 MT last week. Shipments fell 7 % below the prior four-week average. Today’s supply and demand report reduced 2019 beef production 90 million lbs to 26.95 billion lbs. and 2020 production was raised 110 million lbs. to 27.67 billion lbs. The USDA estimated beef exports down 10 million lbs. to 3.141 billion and left 2020 exports unchanged at 3.245 billion lbs. USDA slashed its average steer price forecast for 2019 by $3 to $113.52 and reduced its for2020 forecast $4 to $115.25.  


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