Ahead of the Open: Grains Quietly Wait on Next Trade War Escalation and USDA's Aug. 12 Production Forecasts

Posted on 08/06/2019 8:01 AM


Corn: Down 1 to 3 cents
Soybeans: Up 1 to 2 cents
Wheat: Down 2 to 6 cents

General Comment: Corn and soybeans opened higher overnight, but corn failed to hold its small advance while soybeans are slightly higher. The markets remain on edge waiting for the next show to fall in the U.S./China trade war. Weather leans a little negative after showers and rains overnight reached some of the drier parts of Iowa, Wisconsin and Illinois with more still needed.  It’s still a waiting game for the USDA Crop Production Report on Aug. 12.

The Trump administration labeled China a “currency manipulator” after the Chinese central bank allowed the renminbi (yuan) to fall below to the lowest in almost 11 years and helping to offset the imposition of U.S. tariffs. The U.S. Treasury unveiled its decision after financial markets closed on Monday when U.S. stocks tumbled about 3%.  The Treasury department said China had a “long history of facilitating an undervalued currency” by intervening in the markets. “In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past,” it added in a statement. The decision to label China as a currency manipulator for the first time since 1994 comes just four months after the U.S. Treasury passed on an opportunity to make such a formal designation as part of its semiannual currency report. The currency manipulator label triggered a process whereby the U.S. could ask the International Monetary Fund to evaluate China’s currency policies.

Chinese authorities reacted to the Treasury Department’s currency manipulator tag by halting the decline of its currency overnight. The People’s Bank of China set the daily fixing stronger than analysts had expected and rejected accusations that it manipulates the currency. The move served to ease the worst of the market selloff, with S&P 500 Index futures reversing overnight losses of as much as 1.9% which happened in the wake of the Treasury announcement after U.S. markets closed yesterday 

U.S. and world markets are steady to higher after Monday’s plunge, as traders reassess the escalating U.S./China trade war and China’s currency move. Traders appear to be less anxious after the People's Bank of China took steps to stabilize the yuan, setting the currency's reference point higher than the key 7 per dollar level. The intensifying U.S./China trade war still pushed the Shanghai Composite down 1.6% overnight as Beijing confirmed its suspension of U.S. agricultural product purchases in response to new American tariffs.

Still, President Trump’s frustration with China’s retaliation and past currency moves is what has led to every escalation so far in the trade war. A year ago, U.S. tariffs were in place on just $50 billion in goods from China. Now, some $250 billion in annual trade is covered by a 25% tariff. Come Sept. 1, a 10% tariff will take effect on a further $300 billion in goods. Increasingly, though, that looks like it may not be the end of it. The intensifying trade war between the U.S. and China may prompt the Federal Reserve to cut interest rates again in September to counter the drag of tariffs. 

USDA’s update on topsoil moisture on Monday afternoon climbed six percentage points to 37% short to very short, including 57% in Illinois, 50% in Indiana, 38% in Ohio and 31% in Iowa.  About 74% and 69% of U.S. corn and soybeans were drier than normal over the 14-day period ending yesterday. The coverages of dryness are the greatest since the 2012 drought, but still not severe. Rain focused on Wisconsin over the last 24 hours, and light rain affected Illinois as t-storms diminished as they moved south out of Wisconsin. Widely scattered storms will dot the southeast half of the Corn Belt today. The crop continues to lag normal development by a wide margin. Seventy-eight percent of the crop was silking as of Aug. 4, a 20-point gain from last week but still 15 percentage points behind the five-year average. USDA reports 23% of the crop has reached the dough phase, which is 19 points behind the five-year average. The department reports just 37% of the bean crop is setting pods, a dramatic 26 percentage points behind average. States from Iowa eastward are running at less than half the norm in terms of pod setting.

USDA daily export announcement service said private exporters did not report any new large sales in the past 24 hours.

Corn: December futures failed to top Monday’s high overnight and is trading slightly lower this morning.  Monday’s range ($4.00 ¾ to $4.16 ¼) will be the near-term inflection points for rallies and breaks. Brazilian authorities are debating whether to yield to Washington’s request to lift ethanol-import duties while China shuns exports from the U.S.

Soybeans: November futures are higher but have failed to match Monday’s high at $8.74 ½ during the overnight session. Weakness in meal has limited follow-through buying interest.

Wheat: Futures seen on defensive after failing to build on the high-range close on Monday. After the close Monday, Egypt announced a tender to buy an unspecified amount of milling wheat from global suppliers for September delivery and a reminder of plentiful and cheaper world supplies. France’s farm ministry raised its soft wheat crop estimate 1.2 MMT to 38.2 MMT. The crop was far enough along that record-breaking heat had limited impact on the crop. That’s a 12% increase from last year’s drought-clipped crop.


Cattle: Mixed to firm
Hogs: Steady to weak

Cattle: Futures seen steady to firm. Cash cattle traded at an average price of $113.82 last week, up 14 cents from the week prior and the fourth week in a row of near-steady cash action. Market fundamentals remain supportive, with weights indicating marketings are current and the wide spread between Choice and Select boxed beef values confirming a tight supply of well-finished cattle. Recent milder temperatures have also encouraged consumers to fire up the grill. Better demand will be needed to boost market sentiment.

Hogs:  Lean hogs seen trying to build on Monday’s major reversal up action. October futures trading a $8.40 range closing $1.70 higher at $67.425. However, that was down from late-session high at $69.90 and right at key resistance. A move back above Monday’s high is needed quickly to sustain the upside momentum. The national average cash hog prices fell 90 cents on Monday, but pork cutout value rose $1.49. Some packers take a floating holiday the first Monday of August and slaughter fell to 427,000 head, down from 452,000 head a week ago but still above the 394,000 head a year ago. Rallies will be constrained by rising U.S./China trade friction despite the rising pork import needs in China from herd liquidation caused by African swine fever.   


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