Ahead of the Open: Quiet Retreat After Four-Day Grain Market Rally on China Trade Deal

Posted on 12/18/2019 7:57 AM

Grain Calls
Corn:  Down 1 to 3 cents
Soybeans: Down 2 to 4 cents
Wheat: Down 4 to 7 cents.

GENERAL COMMENTS:  Corn, wheat and soybeans are moving lower on light profit taking after recent strong gains tied to the Phase 1 trade deal with China. The markets will need to see actual Chinese purchases to push much above recent highs with many in the trade skeptical China can buy anywhere near the $40 to $50 billion the Trump Administration has claimed China has agreed to buy annually. Most estimates still come in closer to $31 to $34 billion.

The price outlook remains firm into the opening of 2020 and ahead of the final USDA crop forecasts on Jan. 10.  The Argentine government’s plan to boost grain/soy export taxes is being fine-tuned with higher rates. The new proposal puts the tax on corn and wheat exports at 15%, up from a prior target of 12%. The cap on soybean export taxes will be raised to 33%, from 30% previously. Final seedings may be affected, with corn planting to reach 56-57% complete this week and soybeans to reach 64-65% complete.

China's President Xi Jinping arrived in Macau on Wednesday to celebrate the 20th anniversary of its handover to China and is expected to announce economic perks as a reward for its stability and loyalty as protests rock nearby Hong Kong. Among the measures Xi is expected to unveil are plans to develop it into a financial center, including a new yuan-denominated stock exchange.

Meanwhile, Hong Kong soccer fans booed as the Chinese national anthem was played on Wednesday before their team's clash with China in South Korea as the political turmoil that has gripped the former British colony spilled over to the sports world. Hong Kong has been rocked by six months of sometimes violent demonstrations, with protesters angered by what they see as Beijing's stifling of freedoms despite a "one country, two systems" promise of autonomy when the city returned to Chinese rule in 1997. After the game, won by China 2-0, the Hong Kong fans sang "Glory to Hong Kong," a song that has become a rallying cry for democracy.

Fresh off a pair of wins with China and USMCA, President Donald Trump’s top trade official is shifting his focus toward to the biggest target of them all: the European Union. “We have a very unbalanced relationship with Europe,” U.S. Trade Representative Robert Lighthizer said Tuesday. “There are a lot of barriers to trade there and there are a lot of other problems that we have to address.” These issues will all be on the table when Lighthizer and Hogan sit down for their first meeting — which is expected to take place in January. The outcome will depend on whether the two are able to work together to find solutions to their disagreements rather than engaging in a tit-for-tat tariff confrontation.

USDA’s daily export sales reporting service said private exporters did not report any new larger grain sales in the past 24 hours. While none were expected, it fails to provide new support to the markets today.

Corn: Futures opened lower last night and are trading near session lows. Prices are well contained inside of yesterday’s range when prices touched the highest since Nov. 8. Chinese commodities trader COFCO, Brazilian grains group AMaggi and a Shell-Cosan joint venture are working on plans to build their first corn ethanol plants in Brazil. The wave of fresh interest from some of the world's biggest energy and grains players suggests corn ethanol is ready for the big time in Brazil, where sugarcane has been virtually the only source of ethanol in the world's No. 2 producer of the biofuel. The impact on commodity markets could be far-reaching, as new plants challenge U.S. ethanol for sales in northeast Brazil and dent corn exports, which grew fourfold in the past decade.

Soybeans: March beans are also trading lower and inside of yesterday’s range. Soybean oil futures are pulling back after reaching a new two-year high yesterday after U.S. legislators tentatively agreed to re-instate a $1/Gal tax credit to biodiesel blending as part of the broader tax credit extension plan. The biodiesel credit will be re-instated retroactively and be extended through end of 2020. U.S. biodiesel production has faltered in recent months, but on the margin will improve if the tax credit is extended as expected this week.

Wheat: Futures are leading to the downside after the rally got too far ahead of firming world prices. The world market remains well-supplied and U.S. wheat is not competitive into many importing nations.  China sold 50,599 MT of 2014 through 2018 wheat at its latest reserve auction, which represented just 1.7% of the total that was offered, the country’s trade center reports. The reserve wheat sold for an average price of 2,321 yuan ($331.74) per metric ton. U.S. wheat is offered at $258 to $298 for delivery into Asia.

Livestock Calls

Cattle: Lower

Hogs: Weaker

Cattle: Futures seen extending Tuesday’s weakness after Choice cutout values tumbled $4.27 and Select fell $2.04. Boxed beef prices are displaying increased volatility, not unusual for this time of year, as rib and loin values tumble lower and chuck and round values partially offset the decline in middle meats. The choice/select spread is seasonally collapsing too, under $10 Tuesday, the narrowest since March. The percent of beef grading Choice and Prime is just below the record reached in 2018 for a second week, keeping pressure on Choice cutouts. It is very quiet in the country; no bids have been noted. Packers will be reluctant to let more margin slip away and given that next week’s kill will be the smallest of 2019.

Hogs:  Market is likely to follow cattle and pork prices lower this morning. Pork cutout values fell 75 cents yesterday, although sales were moderately active. Cash hog prices were slightly higher yesterday with the national average price up 6 cents with Iowa-Minnesota gaining 29 cents. Cash hog should be bottoming but futures want to see stronger Chinese purchases of U.S. pork to push wide current futures premiums even higher. China is on a pace to buy $1 billion of U.S. pork this year and traders are uncertain how much that will increase in 2020 with the new deal.

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