Ahead of the Open: Choppy Trade Expected Before USDA's Jan. 10 Reports

Posted on 01/07/2020 7:25 AM

Grain Calls

Corn:  Steady to down 1 cent
Soybeans: Down 1 to 3 cents
Wheat: Down 2 to 4 cents

GENERAL COMMENTS:  Choppy price swings are expected to continue in the grain and soybean markets heading into the USDA’s Jan. 10 reports. Brazil updates its crop and export projections on Wednesday, and most will be looking for a larger soybean estimate and possibly smaller corn output forecast.

Investors seem keen to put the events in the Middle East aside this morning with stocks higher and crude oil lower. The head of Iran’s national security council said the country is assessing 13 scenarios in response to the killing of a powerful general last week by the U.S. While the rhetoric remains aggressive, the lack of any immediate military reaction is starting to ease fears of a rapid deterioration of the situation.

Traders are looking for USDA to cut its estimates for harvested acreage and yield for both corn and soybeans on Friday. Corn production is seen slipping to 13.513 billion bushels from 13.661 billion bu. estimated in November, according to the average of analysts surveyed by Reuters. Soybean production is seen falling to 3.512 billion bu. from 3.550 billion estimated in November. Smaller production will trim U.S. corn carryover to 1.757 billion bu. from 1.910 billion bu. forecasts in November. Soybean ending stocks may slide to 424 billion bu. from 475 billion bu. in November. The Pro Farmer-Doane forecast calls for a corn crop of 13.600 billion bu. and a soybean crop of 3.535 billion.

Winter wheat planted acreage may fall to 30.664 million acres, down from 31.159 million a year ago, a Reuters survey showed. The range of estimates is almost 2.3 million, from 29.9 million to 32.18 million acres. Our estimate is 31.025 based on a survey of members in December.

China will not increase its annual low-tariff import quotas for corn, wheat and rice to accommodate stepped-up purchases of farm goods from the United States, local media group Caixin quoted senior agriculture official Han Jun as saying on Tuesday. The report raises further questions about how China will meet a target of spending billions of dollars more on U.S. agricultural goods as the two countries sign the Phase 1 agreement next week. U.S. Trade Representative Robert Lighthizer said in December Beijing had committed to buy an additional $32 billion of American agricultural products over two years, or roughly $16 billion a year more than the 2017 baseline of $24 billion. He said Beijing would aim for another $5 billion in farm purchases each year on top of that. China’s annual quotas are 9.64 million metric tons (MMT) for wheat, 7.2 MMT for corn and 5.32 MMT for rice.

Funds have moved to a neutral soybean position this past week after establishing a large net-short position of more than 112,000 futures and options in mid-December. In the week ended Dec. 31, hedge funds and other money managers slashed their net short in CBOT soybean futures and options to 3,159 contracts from 33,156 in the previous week, according to data CFTC data on Monday. That’s the biggest three-week buying since March 2018 a follows a record selling pace between November and Dec. 10.  Market sentiment in the soybean market has shifted more optimistic as China and the U.S. reach the Phase 1 trade deal, which is expected to be signed next week.

Funds have plenty of firepower to go long or short. The keys to that buying or selling will be the USDA’s Jan. 10 crop production report and World Agricultural Supply and Demand Report.  The size and timing of any new Chinese buying of U.S. soybeans after the deal is signed will also steer fund positioning.

Some market participants are skeptical of whether the purchases would be substantial given that Beijing has declined to confirm any specific amounts. But the prospects of China purchasing more U.S. agricultural goods has lent support to corn, wheat and other agricultural futures markets, in addition to soybeans.

Investors ended 2019 moderately bearish toward corn, and their overall view has not significantly changed for a couple of months. Funds held a net short in corn of 82,456 futures and options contracts as of Dec. 31, down just 2,450 contracts and they have been noted sellers since. Money managers extended their net long in SRW wheat futures and options through Dec. 31 to 27,270 contracts from 19,149 a week prior, and that new stance made for funds’ most bullish start to a new year since 2011. Money managers flipped to a net long in HRW wheat futures and options of 1,284 contracts as of Dec. 31, and that is their first net long in a year. Funds’ net short in the week prior was 5,138 contracts.  

With the Federal Reserve pumping as much as $60 billion of new, inflationary liquidity into the U.S. monetary system per month, inflation may be the story that helps to bring new investment in long agricultural positions. Hedge funds on average gained 8.6% in 2019, according to an index from HFRX, compared with a 32% rise for the S&P 500. That poor performance suggest investment flows could change like they did in 2007 to 2010.

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: March futures tried to rebound overnight from a new three-week low but could not sustain the recovery and turned low

Soybeans: March futures also tried to rally last night but could not get above Monday’s high, triggering some light selling this morning.

Wheat:  March SRW futures are back near Monday’s session lows this morning. A break below that level could trigger fund long liquidation and new selling.

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

Cattle: Futures are expected to followthrough on strong gains yesterday that erased all of last week’s declines.  Producers are still in drivers’ seat, with the average cash price rising nearly $2 to $124.21 last week, according to USDA. Forecasts for colder temperatures on the Central Plains this month could work to feedlots’ advantage, especially now that packers are back to normal kill schedules and slaughter is expected to tighten into February. Choice and Select boxed beef values strengthened $1.16 and $1.41, respectively, to start the week, further narrowing the spread between the grades to just $2.85.

Hogs: Looking for a mixed trade with the stronger cash hog needed to support the premium-priced CME futures contracts. The pork cutout value edged 54 cents higher on Monday amid moderate movement. Strong gains in bellies helped to make up for a sharp drop in picnics. Cash hog bids dipped 18 cents on Monday. The market is a bit on edge about whether China rolls the nearly 70,000 MT of U.S. pork it has on the books but did not ship in 2019 to 2020 or cancels the orders. China will release another 20,000 MT of frozen pork from its state reserves on Jan. 9, the country announced yesterday. The country has released more than 100,000 MT of frozen pork from its reserves over the past month as it works to ensure adequate supplies for its Lunar New Year celebrations later this month.

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