Ahead of the Open: Small Short Covering Bounces in Grains on China Trade, Weather

Posted on 11/25/2019 8:00 AM

Grain Calls          

Corn: Up 1/2 cent to 2 cents
Soybeans: Steady to up 2 cents
Wheat: Up 4 to 6 cents

General Comment: Commodities and equities are slightly higher this morning after the Global Times, a tabloid run by the Communist Party, said China and the U.S. were very close to a Phase 1 deal, discounting negative media reports. China has been reducing government owned inventories of corn, soybeans, soybean meal, soybean meal and wheat when they are normally building stocks.

The weekly CFTC Commitments of Traders reports showed fund selling in wheat, corn and soybeans and commercial buying.  Funds also sold soyoil oil and bought meal while commercials did the opposite. Seasonals call for lows this week in corn and wheat, and soybeans historically rally the day before and the day after Thanksgiving. The markets are oversold technically, so the probabilities are that we get some chart short covering this week.  

China this weekend announced new guidelines aimed at stopping intellectual property theft that became the latest positive signal for trade talks. But we are still in a murky endgame for a Phase 1 deal that Donald Trump on Friday declared “very close” and Xi Jinping earlier that day insisted he wanted too. Trump’s comment on Friday that the Hong Kong protests are a “complicating factor” for the trade negotiations got more complicated yesterday. China had a swift and forceful response after the U.S. Senate passed legislation supporting Hong Kong’s pro-democracy protesters, with multiple government agencies threatening unspecified retaliation. But President Xi Jinping has a problem: Any strong measures against the U.S. also risk backfiring on China. Pro-democracy forces won 86% of the seats on Hong Kong’s local district councils in Sunday’s voting, a stunning repudiation of the city’s Beijing-backed government after months of increasingly violent protests seeking meaningful elections. The results will add pressure on the government to meet protester demands including an independent inquiry into police abuses and the ability to nominate and elect the city’s leader, including one who would stand up to Beijing. However, that’s a red line Beijing won’t let Hong Kong cross and underscores why China hates elections.

Meanwhile, China has increased U.S. farm good purchases. China imported 3.793 million metric tons (MMT) soybeans from Brazil in October - down 42% from 6.53 MMT in the year-ago month, data released from the General Administration of Customs showed on Monday. China's October imports of soybeans from the United States, meanwhile, came in at 1.147 MMT, up from just 66,955 metric tons (MT) a year ago, according to the data, as cargoes booked during a Sino-U.S. trade truce arrived. China corn imports are up almost 33% in the first 10 months of 2019 but wheat imports ae down 6.9%.
China's pork imports in October doubled from a year earlier to 177,426 MT, and up from the previous month's 161,836 MT. Imports during the first ten months of the year stood at 1.5 MMT, up 49.4% from a year earlier. Imports of beef, usually more expensive than pork, are also benefiting from the meat shortage, with October arrivals at 150,829 MT, up 63.2% on a year ago. For the first ten months, beef imports were 1.28 MMT, a jump of 54.5% from a year ago, customs said.  Chicken meat imports have also jumped, with October shipments at 66,921 MT up 64% on the year. U.S. chicken processors are moving fast to resume chicken export to China after Beijing authorized imports last Friday.

The weather should be the other main factor for traders to watch this week. More Midwest rains and snows firing up on Tuesday and extending to the end of the week, if not beyond. Traders are looking for USDA report harvest near 84% to 85% completed as of Sunday, up from 76% last week.
South America gets some rain. Argentina’s Friday through Sunday morning rainfall was not significant in the key grain, oilseed, cotton and rice production areas. Showers are expected Tuesday. But top and subsoil moisture continued to decline in many areas, but dryness was most significant in the far north and southwest. Brazil’s bottom line is mostly very good through the first third of December with exception of the far northeast where dryness will prevail. Some needed timely rain will occur in southern Brazil early this week, but the area will need to be closely monitored for returning dry biased conditions a little later in the forecast period.

USDA daily export sales reporting service said private exporters did not make any large sales on Friday.

Corn: Futures seen rebounding from last week’s slide tied to December option expiration and oversold technical signals. Argentina’s corn pre-harvest sales for 2019-20 touched 12.6 MMT, the highest ever and almost three times the average in the last three years. Farmers are keen to sell their produce before the incoming government of President Alberto Fernandez raises taxes on agricultural exports.

SoybeansJanuary beans are due a bounce after tumbling to eight-week lows last week.

Brazilian farmers had planted 79% of their intended soybean area by Nov 21, compared to 67% a week earlier, 89% in the same period a year ago and 80% on the five-year average, according to AgRural. Brazilian farmers risk losing part of the European market for soy products estimated at $5 billion per year if they scrap a so-called soy moratorium barring grain traders from buying oilseed from areas in the Amazon that have been deforested, according to the director general of FEDIOL, the group representing the European Union vegetable oil and meal industry told Reuters. Aprosoja, the main group representing Brazilian soy growers, wants to end the moratorium, which applies to land in the Amazon that was cleared after 2008.

Wheat: Futures are seen building on last week’s first rally since mid-October amid rising world prices that are increasing the U.S. competitive position on the world markets and worries U.S. planted acreage fell to a record low this year. In the wheat market there were 650 of the in-the-money December $5.15 SRW wheat calls abandoned off a settlement of 515 ¼, and there were 792 of the out-of-the-money December $5.15 puts exercised. Russia's November exports of wheat, barley and corn are estimated at 3.0 MMY, down from 4.1 MMT in October. Russia exported 19.4 MMT of grain, including 17.0 MMT of wheat, between the start of the 2019/20 season on July 1 and Nov. 21, SovEcon said. Total grain exports were down 16% from a year ago.

Livestock Calls

Cattle: Steady to mixed
Hogs: Steady to weak

Cattle:  Cattle are seen weaker after the retreat in beef prices last week. Choice cutouts fell $8.23 last week with Select slumping $3.01. On Friday, USDA reported U.S. feedlot inventories totaled 11.831 million head as of Nov. 1, which was right in line with the average pre-report estimate and up 1.2% from last year. Placements surged 10.2% from year-earlier levels in October, while marketings dropped 0.6%. USDA Cold Storage report showed U.S. inventories of beef declined slightly, whereas they normally build during October. Beef stocks totaled 466.2 million lbs. as of Oct. 31, down 2.8 million lbs. (0.6%) from September and down 49.4 million lbs. (9.6%) from last year. The five-year average is a 9.5-million-lb. increase in beef stocks during October.

Hogs:  Lean hog futures seen steady to weak after pork cutout values fell $5.06 last week on moderate sales. USDA said on Friday that pork stocks in frozen storage increased contra-seasonally during October, the first sign that record slaughter supplies may be overwhelming demand. But the strong movement of pork into frozen storage could also be positioning for increased export shipments, primarily to China. Pork stocks totaled a record 614.5 million lbs. at the end of October, up 15.8 million lbs. (2.6%) from September and up 43.6 million lbs. (7.6%) from last year. Over the past five years, pork stocks have dropped an average of 30.4 million lbs. during October.

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