Ahead of the Open: USDA's Corn Crop Cuts Provide Bullish Guidance

Posted on 06/12/2019 7:59 AM

Grain Calls 

Corn: Up 1 to 2 cents
Soybeans: Up 1 to 3 cents
Wheat: Up 1 to 3 cents

General Comment: After pausing last night, the corn, soybean and wheat markets are pushing back into the green this morning on worries about smaller U.S. and world crops.

Grains prices followed global stock values lower overnight as the White House's latest tough stance on China kept worries about a global slowdown intact. Meanwhile, Hong Kong's Hang Seng lost 1.7% as protesters clashed with police during a mass demonstration against legislation that would allow citizens to be extradited to China. A weaker demand outlook and a rise in U.S. crude inventories pushed oil prices lower.

The China-U.S. rivalry and trade tensions are rising quickly. President Donald Trump on Tuesday took credit for holding up a trade deal, and Monday he threatened massive tariffs on Chinese goods if Xi Jinping doesn’t meet with him at the G-20  The tough talk and U.S. tariffs put China President Xi Jinping in perhaps the toughest spot of his six-year presidency. If he caves to Trump’s threats, he risks looking weak at home. If he declines the meeting, he must accept the economic costs that come with Trump possibly extending the trade conflict through the 2020 presidential elections. With under three weeks to go before proposed talks between the Chinese and U.S. leaders, expectations for progress toward ending the trade war are low since there has been little preparation for a meeting. China's consumer inflation hit a 15-month high in May, fueled by food prices, the government reported today. The consumer-price index was up 2.7% in May compared with a year earlier, accelerating from 2.5% growth in April. Food prices in May rose 7.7%, the fastest pace in over three years, after rising to 6.1% in April. Pork prices rose 18.2%, up from 14.4% in April.

Cool and stormy weather affect the central U.S. over the next 10 days, producing widespread coverage of at least near-normal rainfall, and a moderate to high probability for above-normal totals in the Delta and southeast half of the Corn Belt, including Illinois, Indiana, Missouri and Ohio, where corn and soybean plantings are most delayed.  Forecasts hint on warmer weather and some storms out two weeks which if realized would be beneficial for more rapid crop growth. 

Could the rising production machine in Brazil slow? The crushing association, Abiove, warns that commodities traders may cut financing to Brazilian farmers by around 50% in 2019-20, due to a “breach of trust” between the traders and producers. Many Brazilian farmers trade a portion of their future crop in exchange for fertilizers and agrochemicals in loan and barter options. But a rising number of defaults and bankruptcy protection requests in top-producing Mato Grosso of late have eroded grain traders’ willingness to enter such agreements

USDA daily export sales reporting service did not report any new large export sales today.

Corn: Futures have recovered from overnight losses and may build on Tuesday’s strong rally today. A move above last month’s high could ignite a strong round of fund buying and a second rally period. The USDA shocked traders Tuesday by cutting the national corn yield estimate by a full 10 bushels per acre. This puts the average national yield at 166 bushels per acre. A reduction of 3 million was made to planted acres as well. This combination will take 1.4 billion bu. off the US corn crop, putting it at 13.68 billion bu. The USDA is also reducing corn demand as smaller supplies will need to be rationed. Old crop corn carryout was increased by 100 million bu. to a 2.195 billion bu. total. Even with reductions to usage, new crop ending stocks were reduced by 810 million bu. to a 1.675 billion bu. projection. 

Soybeans:  About   USDA did not make any changes to its 2019 soybean production estimates Tuesday, with yield holding at 49.5 bushels per acre and a crop at 4.15 billion bu. The USDA lowered old crop soybean exports by 75 million bu. due to recent trade issues though, which was enough to raise old crop ending stocks to 1.07 billion bu. The USDA also increased its new crop soybean carryout estimate 75 million bu. to 1.045 billion bu. USDA will be prepared to revise its U.S. soybean production forecasts next month, the agency’s chief economist Robert Johansson told Reuters on Tuesday. That hints at higher planted acreage but possibly lower national yields from late planting. Wilmar International Ltd. plans to increase its soybean crushing capacity in China, despite the spread of African swine fever among its hog-herd, according to a report from Bloomberg. The Singapore-based company says it is confident animal feed demand will eventually recover and it is bullish on long-term prospects for China. Wilmar also expects an uptick in poultry feed demand to offset some of the losses from hogs, according to people familiar with the plan.

Wheat: SRW futures rose to a six-day high overnight, building on Tuesday’s rally. Wet weather will threaten U.S. production while dry weather is creeping into parts of the Black Sea region, increasing crop stress. Australia on Wednesday cut its wheat production forecast for the 2019-20 harvest by more than 11% as an unrelenting drought across the country's east coast threatens crops for a third year in a row. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) pegged production of the country's largest rural export at 21.2 million metric tons (MMT), down from its previous estimate in March of 23.9 MMT. That would be 14% below the 10-year average of 24.7 MMT and mean a third straight year of lower-than-average production.

Livestock Calls:

Cattle:  Steady-firm

Hogs: Mixed

Cattle: Live cattle futures seen steady to firm on expectations for better cash bids this week. The market had overdone it to the downside and tighter showlists will pushed packer bids higher. Futures are still several bucks under last week’s cash trade. USDA on Tuesday cuts its beef production forecast. Boxed beef prices were mixed on Tuesday with Choice up 73 cents, erasing Monday’s decline while Select fell 54 cents giving back about a quarter of the gains on Monday. Sales were light to moderate.

Hogs: Futures seen mixed, trying to recover from weak close on Tuesday. The national average cash price rose 60 cents on Tuesday, but pork carcass cutout values fell 30 cents, reversing midday gains but sales were moderately active. Slaughter is up 58,000 head so far this week from a year ago. The USDA forecast for 2019 red meat and poultry production is reduced from last month as lower forecast beef, pork, and turkey production more than offset higher broiler production. Pork production this year is expected to rise to 27.270 billion lbs., that’s 65 million lbs. less than USDA forecast in May. The increase in output next year was also reduced by 60 million lbs. The more important data was a 220-million-lbs increase in the 2019 export forecast and a 270-million-lbs forecast increase for 2020. Traders want to see more pork sales and shipments to Mexico and China to help soak up the record U.S. pork production.

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