Ahead of the Open: Grains Rally Pausing On Fears of Protracted Trade War, Overbought Conditions

Posted on 05/22/2019 7:56 AM

Grain Calls

Corn: Down 2 to 4 cents
Soybeans: Steady to narrowly mixed
Wheat: Down 3 to 7 cents

General Comment:  Corn, wheat and soybean futures are under pressure from profit taking after the recent surge in prices reached overhead resistance. Wet weather rallies tend to be short in duration but this one may have legs with more wet weather forecast into June. The pause is also tied to fears the U.S./China trade negotiations will take longer as the issues are moving from trade to economic and political disagreements.

Overnight, President Xi Jinping said China must prepare for difficult times as the international situation is increasingly complex. During a three-day trip this week to the southern province of Jiangxi, one of the cradles of China's Communist revolution, Xi urged people to learn the lessons of hardship of the past. and “win new victories for socialism with Chinese characteristics,” state news agency Xinhua paraphrased Xi as saying. The report did not elaborate on those difficulties, and nor was there a direct mention of the trade war or of the United States.

Meanwhile, the White House is considering adding five Chinese companies involved in the manufacture of surveillance equipment to the blacklist that bars them from using U.S. components or software. The Trump administration had held off targeting Chinese tech companies while trade talks were ongoing. But after the most recent round hit an impasse, the decision was made to proceed with move against Huawei Technologies Co., with this latest development adding to fears of a tech cold war.

On Saturday, Trump will depart for Japan to discuss prospects for a bilateral trade deal. The trip comes a week after Trump on Friday delayed a decision for six months on whether to impose new tariffs of automobile and auto-part imports from Japan and other countries. This meeting could have positive impacts on opening Japan to more U.S. productions with lower tariffs.

Soybeans dropped yesterday after a Bloomberg report said the Trump administration is considering payment rates around $2 per bu. for soybeans, 63 cents per bu. for wheat and 4 cents per bu. for corn in a second round of tariff aid payments for producers impacted by the trade war with China. The Bloomberg sources said the administration is considering basing payments on the acreage farmers plant this year and their historic yield of crops per acre. But USDA in an e-mailed statement in response to the Bloomberg report said the program is being designed to avoid skewing planting decisions one way or another. A plan may be official announced this week. The last thing the markets need is to reduce corn planting incentives for higher soybean acres.

The central U.S. will be sharply divided by coolness in the northwest and mildness southeast over the next 10 to 14 days.  Storm systems of varying intensity and size ride the temperature gradient to produce rain in different areas every day, culminating in 2.50” to 5.00” across the middle third of the central U.S. where flooding and wetness continue or worsen, while lesser but substantial totals fall far north and south.  Storms occur with less frequency over May 29 - June 5, but the much larger point remains that scattered rains will continue.

USDA daily export sales reporting service did not report any new large export sales in the past 24 hours.

Corn: July corn opened lower and pressed down near the upside gap left to start this week and found light buying interest. The market remains well above moving average support and with the current wet forecast into next week and ahead of the three-day holiday weekend should find light buying interest despite all the political uncertainty on trade and aid packages. The increasing threat to China’s corn crop from the infestation of the fall armyworm could increase food insecurity and may increase pressure on China to make a trade deal for access to tariff-free U.S. supplies. The armyworm could now spread to the north and northeastern regions of the country as early as July, according to Hu Gao, professor of Entomology at the Nanjing Agricultural University,

Soybeans: Futures are seen mixed. Prices tried to gain back some of the losses sustained Tuesday after the report on how new aid payments might be made led to traders incorrectly concluding that it would lead to farmers halting corn planting and planting more soybeans. Still, the market faces intense export competition from South America after big crops this year.  A spate of farmer defaults in Brazil’s top grain-producing state is creating headaches for global traders who are among their main creditors and posing challenges to the widespread use of barter in the world’s largest soybean exporter. If traders keep getting stiffed on barter contracts, grain traders will become more stringent about new deals, pinching a key source of credit for farmers ahead of the planting season later this year.

Wheat: Global weather is leaning more negative despite the slow U.S. planting pace of spring wheat and excessive rains in the winter wheat belt. Rains in northern and eastern Europe and the Black Sea region have improved soil moisture and yield potential.

Livestock Calls:

Cattle:  Steady to weak

Hogs: Steady to lower

Cattle: Cattle futures are expected to be on the defensive amid steady to weak packer cash cattle bids Tuesday and the sharp drop in wholesale beef prices. Choice cutout values fell $1.87 on Tuesday and Select carcass prices fell $1.45. Sales were moderate. After the close, the market will get a better look at both beef and pork demand when the USDA releases is monthly Cold Storage Report for April.

Hogs: Hog futures seen steady to weaker on rising U.S./China trade tensions. Cash hogs were mixed Tuesday with the national average price down 11 cents but Iowa/Minnesota average prices rising 23 cents on Tuesday. Average hog weights fell 1 lb. last week in the region, a sign of current marketings. The pork cutout value rose 54 cents as gains in ribs, hams and loins offset belly, butt and picnic losses. Sales remains light to moderate. Slaughter the first two days of this week rose to 942,000 head, up from 921,000 head last week and 919,000 a year earlier.

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