Ahead of the Open: Quietly Firm to Start 2020 after Late 2019 Rally on China Deal

Posted on 01/02/2020 7:53 AM

Grain Calls

Corn:  Steady-firm
Soybeans: Up 1 to 2 cents
Wheat: Steady to up 2 cents

GENERAL COMMENTS:  Wheat, corn and soybeans all closed higher for 2019 and the focus will remain supported ahead of the signing of the U.S./China trade deal. Trading resumes this morning at 8:30 a.m. CT after markets were closed in observance of the New Year’s holiday. Soybeans seen up 2 cents and grain markets may open steady to firm. Beans and wheat both closed strong on Friday and corn may follow. Palm oil futures surged more than 2% on the first trading day of 2020, touching a three-year high and moving to a premium to soybean oil. Palm oil futures rose nearly 44% in 2019, almost doubling the 23% Jump in CBOT soyoil futures.

Stocks in China got the year off to a strong start after the country’s central bank reduced the reserve ratio for commercial banks by 50 basis points, a move that will release about 800 billion yuan ($115 billion) for lending. It comes as liquidity concerns remain high in the world’s second-largest economy. On trade, the pressure seems to be off at the moment with President Donald Trump announcing a signing ceremony for the phase-one deal in the White House on Jan. 15, a date that China has not yet confirmed.

Stocks around the world are making a positive start to the new decade. Overnight the MSCI Asia Pacific Excluding Japan Index climbed 0.5%. Japanese markets are closed for holiday until next week. In Europe the Stoxx 600 Index was 1% higher this morning with U.S. equities pointing to a strong opening. Gold also gained but oil prices have pared overnight gains and are slightly lower as the dollar rebounded sharply after falling against most currencies is December.

2020 could be the year where emerging market stocks finally make some serious catch-up relative to the U.S. This is based on the fact that trade tensions might be quieter, China is stimulating, and the Fed does not seem inclined to hike for a while. But it also feels like there's an element of wishful thinking. Factory output data from across the world showed a brighter outlook for Asian production. Purchasing managers indexes for South Korea, Thailand and Taiwan all moved above 50 in December. China’s official manufacturing PMI remained at 50.2 for the month. There was a less rosy picture in Europe with the euro-area factory gauge weakening to 46.3, an 11th consecutive month for the reading signaling a contraction. Markit Manufacturing PMI for the U.S. economy is published at 8:45 a.m. CT this morning.

China has eased customs regulations on imports of soybean through some northern border checkpoints, the commerce ministry said, a move that could smooth the way for shipments from neighbors such as Kazakhstan, Russia and perhaps Ukraine. China has taken measures to increase farm goods purchases from Russia, amid warm diplomatic ties, aiming to cut reliance on U.S. imports. On Tuesday, U.S. President Donald Trump said the first phase of a trade deal with China would be signed on Jan. 15 at the White House, which could see removal of Beijing's hefty tariffs on U.S. farm products, including soybeans. China has imported 631,320 MT of soybeans from Russia in the first eleven months of 2019, when shipments from Kazakhstan amounted to 14,262 MT, official data show.

Weather leans negative in South America after light to moderate rains the past two days in most Brazilian corn and soybean growing regions. More is still needed in Southern Brazil and Paraguay, increasing the importance of next week’s rainfall coverages and amounts. The next five days are looking wetter for Argentina crops.

The U.S. Department of Agriculture’s daily export sales reporting service did not report any new large sales this morning, but none were expected. Traders will want to see sales increase relatively quickly after the Phase 1 deal is signed with China.

Corn: Futures have traded outside of last week’s range. That means Friday’s closed will be important near-term price direction. A close below $3.87 in March futures would be a concern especially if it is accompanied by a reversal up in the U.S. dollar after recent losses.

Soybeans: Soybeans futures reached the 2019 highs to close out last year on Tuesday. That’s has been the upside targets for fall rallies. Now the real battle begins after funds sharply reduced net-short positions during the past month. More short covering is possible ahead of the U.S./China trade deal signing and the Jan. 10 USDA final 2019 crop estimates. After the close, USDA is expected to report November crush fell to 175.9 million bushels, down from 187.2 million bu. in October and below the 178.1 million bu. a year earlier, according to survey of traders by Reuters.

Wheat:  March futures closed at the highest price since late June on Tuesday and that will help to support a firmer opening. But the market will need to see an improvement in exports to sustain gains in early 2020.  Egypt has planted about 3.1 million acres to wheat of the 3.6 million acres it intends to seed this season, an ag ministry official said Wednesday. The country is working to boost area planted to strategic crops to improve food security. Last year Egypt produced 8.5 MMT of wheat.

Livestock Calls
Cattle: Steady to weak
Hogs: Steady to firm

Cattle: Futures seen starting weak, waiting for confirmation that cash cattle will trade $2 higher this week. December cattle expired Tuesday up 60 cents at $124.70, a $2 premium to the cash markets. Little cash traded Monday and Tuesday and packers are believed to need some supplies to complete weekly schedules. However, wholesale beef prices fell again on Tuesday with Choice down 24 cents to $209.42 and down more than $30 from the mid-November high. Beef sales continued very strong on Tuesday and that is a positive underlying feature as slaughter is expected to slow into the first quarter.

Hogs: Looking for a firmer start this morning in response to higher cash bids on Tuesday. The national average hog price rose 80 cents and jumped $1.05 in Iowa-Minnesota. However, wholesale pork cutouts fell $1.73 but attractive good demand and active sales. However, negative price action on Tuesday will curb early buying until prices show enough strength to challenge early-week highs. Exports sales on Friday morning will be the key to how hogs finish the week and provide direction for early 2020.

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