Ahead of the Open: U.S./China Trade Truce Lifts Ag Markets, New China Purchases Needed to Sustain Rally

Posted on 12/03/2018 8:00 AM

Grain Calls

Corn: Up 3 to 4 cents     
Soybeans: Up 13 to 16 cents
Wheat: Up 3 to 6 cents

General Comment:  U.S. President Donald Trump and Chinese President Xi Jinping agreed on Dec. 1 that they would not escalate tariffs while they take 90 days to negotiate a trade deal. Stock markets are rising and commodities are stronger in the wake of a conciliatory outcome at the G-20. The week ahead will be spent getting details of the Trump-Xi agreement, as well as examining economic cues from members of the U.S. Federal Reserve and Friday's Nonfarm Payrolls report. Trump said that China will purchase a “very substantial amount” of agricultural, energy and industrial products from the United States. Trump and Xi agreed to begin talks on Chinese structural changes on forced technology transfers, intellectual property protection, non-tariff barriers, cyber thefts and other topics. If no agreement is reached in 90 days, U.S. tariffs on $200 billion in Chinese goods will increase from 10% to 25%. China will need to drop its steep tariffs imposed on a range of American farm products earlier this year before it can fulfil its pledge to buy a "very substantial" amount of U.S. goods. That skepticism on immediate purchases has trimmed early gains overnight in the soybean and grain markets. China could send an immediate good will signal to the U.S. by scrapping its tariffs. Expectations for a China move on tariffs will keep a firm undertone to the farm markets this week.

Corn is seen stronger after the U.S./China trade deal. Prices rose to the highest since Nov. 9 overnight before slipping back from the day’s best levels. Still, March futures left behind an upside gap that will need to remain open this week to cement a bullish outlook. A close above the Oct. 15 high at $3.90 ½ would target $4.00 to $4.05.

Soybeans are expected to hold much of the overnight gains that initially pushed futures to the highest in almost four months. Prices are trading near session lows but still up almost 2%. Market will need some new Chinese purchases announced to push out above the August highs. Traders want to see actual cuts in Chinese tariffs that may spur new purchases.  Also capping gains are generally good growing conditions in Brazil, where farmers will be harvesting by early January and shipping soybeans by February. Argentina will be dry in the central and east this week and the rainfall next week may not trend toward the light side, limiting the potential relief. Warming temperatures will accelerate drying and may lead to some pockets crop moisture stress. Timely rain will be needed in the second half of this month to maintain favorable crop conditions. This morning, USDA announced that private exporters sold 147,500 MT of soybeans to unknown destinations for dleivery in the 2018-19 marketing year. 

Wheat futures are seen rising on signs of improving exports. U.S. wheat was offered at the lower prices for Iraq’s tender for 50,000 MT on Monday. Australia cut is wheat crop forecast 11% to the smallest in a decade after drought cut production, reducing supplies for exports from the world’s fourth-biggest supplies. The government forecast output at 16.95 milllion tons, down from the prior estimate of 19.1 MMT.

Livestock Calls

Cattle: Higher

Hogs: Higher

Cattle futures seen moving higher after cash cattle traded about $2 to $3 higher late last week ahead of the weekend’s winter storm across the plains and western Midwest. Beef prices were steady to lower on Friday and that may limit strength early this week.

Hog futures seen firmer on the U.S./China trade truce after USDA’s weekly export sales report last week showed China bout 3,348 metric tons of pork for shipment before year end and another 9,400 for shipment in 2019. Share of the world’s top pork producer WH Group Ltd rose as much as 14% before closing up 11.2% in Shanghai trading. WH Group owns U.S.-based Smithfield Foods.

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