Ahead of the Open: Wheat Sinks on Profit Taking; Corn, Soy Weak Amid Ongoing China Uncerrtainties

Posted on 02/19/2020 7:42 AM

GRAIN CALLS

Corn: Down 1  to 3 cents
Soybeans: Down 3 to 6 cents.
Wheat: Down 5 to 7 cents.

GENERAL COMMENTS: Wheat futures slid on Wednesday, as the market took a breather after surging more than 4% yesterday, the biggest daily gain since May. Soybeans are heading for a third straight drop after last week rising to the highest since Jan. 29 on rising crop estimates in South America and worries about lower demand from China. Corn is expected to pare some of Tuesday’s strong gains as prices failed to close above short-term resistance yesterday and traders are evening up positions ahead of the USDA’s annual Outlook Forum that starts Thursday.  

Competing theories circulate the market about the impact of the coronavirus and African swine fever will have on Chinese demand for agricultural products.  One idea is China’s demand base has been reduced and will not generate the demand enough to fulfill the Phase 1 agreement. The other theory is China will buy U.S. ag products and store them to honor the agreement. China will grant exemptions on retaliatory duties imposed against 696 U.S. goods starting on March 2.  

USDA’s daily export sales reporting service did not report any new large sales of grains or soy this morning. The markets remain focused on daily new sales in the weeks ahead after China announced tariff exemptions.  

Asian stocks rallied overnight on reports that China is considering direct cash injections and mergers to bail out its airline industry, which has been seriously hurt by travel restrictions caused by the coronavirus outbreak. European and U.S. equity futures also rallied on the news, which increases optimism that Chinese authorities will follow through on promises to fix the parts of its economy hit most heavily by the virus. China is considering further measures to protect the country’s economy from the worst of the fallout from the virus. Already this week has seen the People’s Bank of China provide medium term lending for banks and cut the interest rate it charges for that money. The Agriculture Bank of China said it would boost credit supplies to farmers, with those producing grain, vegetables, hogs, eggs and aquatic products given priority and will focus on clients that are in the ag industry and produce anti-virus materials, according to Xinhua.

Deaths from the coronavirus passed 2,000 with the number of confirmed cases globally rising to about 75,000. While the rate of increase seems to be slowing, there are warnings of the possibility of fresh outbreaks as the Chinese economy restarts. 
Financial leaders of the world's 20 largest economies (G20) expect a modest pick-up in global economic growth this year and next, but the coronavirus epidemic is a downside risk, a draft communique prepared for the meeting on Feb 22-23 said.  Any rapid rise in unemployment could pose a big challenge to China's stability-obsessed leaders, with growth in the world's second-largest economy already slumping to near three-decade lows.  

The USDA annual Outlook Forum starts on Thursday in Washington and carries on through Friday, and the trade is hoping for a bit more clarity on the agency’s ideas about Chinese ag buying into the 2020-21 season.  Traders surveyed by Bloomberg expected USDA to estimated 2020-21 corn planted areas till rise to 93.6 million acres on average, up from 89.7 million sown a year ago. Soybean planted acreage is expected near 85 million, up from 76.1 million a year earlier. That will lead to large increased in projected USDA carryover estimates. Corn ending stocks may rise to 2.496 billion bushels from 1.892 billion projected for this year, while soybean ending stocks may rise to 533 million bu. up from 425 million this year, the survey showed.

Corn:  March corn futures were stuck in a narrow and lower range last night after jumping away from underlying support on Tuesday. More export demand, especially from China is needed to sustain a rally above near-term resistance. South Korean importers Nonghyup Feed Inc.  and the Feed Leaders’ Committee purchased a total of about 133,000 metric tons (MT) of corn in separate deals on Tuesday without issuing international tenders. The deals continued firm demand for corn from Korean importers this week including 135,000 MT of corn bought by the Major Feedmill Group yesterday.

Soy: March beans opened steady last night but failed to sustain an early rally, slipping back below the 20-day moving average and triggering fresh selling and long liquidation. Until the markets sees some Chinese buying of U.S. soybeans, the market is stuck in its recent range. Soybean oil futures are following weakness in palm oil futures, which fell to the lowest since early November overnight. Improving crush margins towards the end of 2019 and beginning of 2020 provided a boost to U.S. soybean processing levels to a new record in January. Now the market wants more evidence of strong export demand can continue even as harvesting ramps up in South America.

Wheat: Futures are leading the weakness today, taking a breather from Tuesday’s surprisingly strong rally in prices. The buying frenzy yesterday was driven by increased worries about world crop production shrinking further after drought cut Australia’s crop fell to a 12-year low already. Increased reports about the horde of locust that has travelled from Africa across the middle east, India and Pakistan to the SE Asia and is may be set to enter China curbed selling interest. China announced nearly 700 items that are eligible for waivers beginning on applications that can be submitted on March 2 and may lead to purchases of U.S. supplies, even if it is to put into storage. Increased flooding in the U.S. is raising concerns about winter wheat across the southern region and potential to curb spring wheat seeding in the Northern Plains.   

LIVESTOCK 
CATTLE: Steady to firm
HOGS: Firm

Cattle:  Cattle futures may extend the prior four-day rally on signs of a seasonal low forming in the cash markets. Cash cattle traded at an average price of $118.90 last week, down from $120.83 a week earlier. Trade was lightly tested at $119 Tuesday, but some packers were pulling cattle forward they bought last week, suggesting a more active and stronger negotiated trade this week.  A firmer tone the next two weeks would like mark last week as the normal seasonal low and signal a cash market rally into April.  However, boxed beef prices likely need to move higher to reverse the downtrend in cash prices. Prices fell on Tuesday, with Choice down $1.13 and Select dropping $2.45. Slaughter so far this week is up 15,000 head from a year ago, a sign of good beef demand.

Hogs: Futures formed an outside day reversal on Tuesday. That’s a technical signal that should attract fresh short covering and some new light buying this morning. Two days into the week, slaughter is up 38,000 head from year-ago. But the product market delivered an encouraging performance yesterday as the pork cutout climbed $2.15 with loins, hams and bellies leading gains, and movement picked up to 365.53 loads. The national cash hog prices jumped $2.03 with Iowa/Minnesota rising $2.31. News China would waive tariffs on nearly 700 American products, including pork and beef, was also encouraging. Meat is a shelf-ready protein item at a time where some areas are dealing with shortages of such products due to outbreaks of African swine fever, coronavirus and bird flu.

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