Ahead of the Open: Choppy Trade Ahead of the U.S./China Trade Deal Signing on Wednesday

Posted on 01/13/2020 7:50 AM

Grain Calls

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

GENERAL COMMENTS: The wheat and soybean futures erased earlier followthrough gains to Friday’s strong technical closes in the face of neutral USDA data with corn adding fractionally but down from overnight highs. USDA said first quarter corn feed demand hit a record, reducing Dec. 1 inventories more than expected despite estimating a larger than expected 2019 crop. The crop may get a little smaller when USDA resurveys five states later this spring where an estimated 8% of the crop was still left to be harvested when USDA made its forecast. Wheat rebounded on smaller HRW wheat planted acreage the drop in total acreage falling less than expected. Soybean data was generally negative but prices rebounded Friday with the grains ahead of the potential impacts from China deal for the demand side of the balance sheet in 2020.

U.S. Treasury Secretary Steven Mnuchin said on Sunday that China's commitments in the Phase 1 trade deal with the United States were not changed during a lengthy translation process and will be released this week as the document is signed in Washington. Mnuchin told Fox News Channel that the deal reached on Dec. 13 still calls for China to buy $40 billion to $50 billion worth of U.S. agricultural products annually and a total of $200 billion of U.S. goods over two years.  Thus far, Beijing has not confirmed those purchase commitments, and recent government actions in the agriculture industry have raised questions over the $40 billion to $50 billion target cited repeatedly by Trump administration officials. The two sides are set to sign the new deal on Wednesday.

The trade is generally bearish on the corn and soybean price outlooks because of the expected increase in planted areas in 2020 from acres that were idled by the weather. But, traders are well aware that they could get run over on short positions if the Chinese buy substantial quantities of U.S. ag goods. The weekly CFTC Commitment of Traders report for the week ended Jan. 7 should funds trimmed corn positions 1,532 contracts to 80,887 futures and options, less than expected. In wheat, funds were buyers of 417 contracts in SRW wheat, increasing to a net-long positions of 27,687 contracts. Funds were buyers of 1,532 contracts in HRW wheat, increasing the net long potions to 2,816. Soybean funds bought 4,318 contracts, switching to a net-long position of 1,159 futures and options.

The weather forecasts haven’t changed much. There is still short-term dryness over the northeast of Brazil with longer term dryness over the south, and dry over the south of Argentina. Weekend rains were about as expected. The market will focus showers for the next week over the southwestern ag areas of Argentina and over the north, and rains over the next week over most of the Brazilian ag areas except the northeast. The second-week forecasts call for below-normal precipitation for the south of Brazil with above-normal temperatures for the northwestern ag areas. In Argentina, below-normal precipitation over the northeast of Argentina and the south with above normal temperatures.

We are seeing geopolitical events we have not seen 50 years in the Middle East. Iranian protesters denouncing Iran's clerical rulers took to the streets and riot police deployed to face them on Monday, in a third day of demonstrations after authorities acknowledged shooting down a passenger plane by accident. Demonstrations at home -- some apparently met by a violent crackdown -- have become the latest consequence of one of the most destabilising escalations between the United States and Iran since the Iranian revolution of 1979. Images emerged from the previous two days of protests showing wounded people being carried and pools of blood on the ground, while the sound of gunfire could be heard. Authorities denied that police had opened fire. U.S. President Donald Trump, who raised the stakes last week by ordering the killing of Iran's most powerful military commander, tweeted to Iran's leaders: "don't kill your protesters."

Meanwhile, tensions is Asia are rising that could have a negative impact on the U.S./China trade deal. Chinese President Xi Jinping will most likely continue to tighten the screws on Taiwan voters in a landslide re-election for President Tsai Ing-wen and her pro-independence platform.China took centre stage in the campaign after Xi sought in a major speech a year ago to get Taiwan to sign on to the same sort of "one country, two systems" model as Hong Kong. Tsai immediately rejected the idea. Six months later, Hong Kong erupted in anti-government protests, giving a huge boost to Tsai in her efforts to portray China as an existential threat to Taiwan's democracy and freedoms. But rather than recognize that its pressure on Taiwan had failed, Beijing's immediate reaction to the election was to double down on "one country, two systems" and say it would not change policy. China says Taiwan is its territory. Taiwan says it is an independent country called the Republic of China, its formal name. Widely read Chinese state-backed tabloid the Global Times said in a Monday editorial that military flexing may be the next step. "We need to plan to crack down on Tsai's new provocative actions, including imposing military pressure," it wrote.

The U.S. Department of Agriculture’s daily export sales reporting service reported private exporters  reported optional-origin sales of 137,000 metric tons of corn for delivery to South Korea during the 2019-20 marketing year. Traders will want to see daily sales increase relatively quickly after the Phase 1 deal is signed with China.

Corn: March corn futures fell to $3.76 ½ immediately after Friday’s USDA report and then closed up 2 ½ cents at $3.85 ¾. Prices pushed above the 100-day moving average at $3.86 ¾ overnight is holding near that level this morning One of the most significant take-aways for me in Friday’s USDA reports was the increase in feed usage to 5.525 billion bushels. The domestic demand base is solid. Now we need to see what China will do

Soybeans: Futures opened higher last night and failed to sustain the rally back above Thursday’s high at $9.54 ½. That’s the short-term resistance point early week and backed by strong resistance at $9.61. After reports of Chinese buying of Brazilian soybeans last week for March and April delivery, the market is focused on new U.S. sales to China.

Wheat: Wheat futures failed to climb above Friday’s high overnight, triggering some light selling. March SRW futures touched $5.68 ¾, the highest since late June on Friday. That is key resistance to sustain gains this week. Strikes over pension reform in France could slow grain exports from this month by preventing enough supplies from reaching ports and by making the French crop too expensive to compete overseas, Soufflet, one of France's top grain exporters, told Reuters. A month-old public transport strike that has crippled rail services and rolling stoppages by dock workers have left companies in the European Union's biggest grain producer struggling to get grain to ports and onto vessels during a period of strong overseas demand.  Export prices for Russian wheat reached this season's high last week in response to a stronger ruble, demand from Egypt and weather-related concerns about the 2020 Black Sea crop. Russian grain exports since July 1 were down 18% from a year earlier. The Russian winter remains unusually warm and dry for winter grain sowings as temperatures in the majority of wheat-producing regions are 3-12 Celsius (37.4-53.6 Fahrenheit) above norm, SovEcon said. Some regions had precipitation earlier in January, but the accumulated total level remains well below norm.

Livestock Calls
Cattle: Steady
Hogs: Steady

Cattle:  Futures seen steady to firmer on higher cash and beef markets last week. Cash cattle trade got underway Friday between $124 and $126 in the Iowa/Minnesota and Nebraska markets, while official reports out of the Southern Plains were lacking. This was an improvement from action early in the week and generally steady to $1 higher relative to last week’s action in the states. Choice beef rose 8 cents on Friday to $210.04 and up $1.53 for the week. Sales were moderately active last week. CFTC said funds sold 2,609 futures and options in the week ended Jan. 7, reducing the net-long position to 80,686 contracts. The bottoming signals in the beef markets could encourage renewed fund buying this week.

Hogs: Futures will be supported by expectations for increased Chinese buying of U.S. pork after the trade deal is signed this week. However, both cash markets will need to lead higher after the national average cash hog price fell 7 cents last week and the pork cutout values fell $1.72.  Funds reduced net-long positions 2,039 contracts to 9,195 futures and options.

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