Ahead of the Open: More Sideways, Choppy Trade Amid Chinese Coronavirus Worries

Posted on 02/06/2020 7:28 AM

Grain Calls

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

GENERAL COMMENTS:  Soybean prices may extend their small corrective rally for a fourth session, recovering from a 2-month low as China demand worries ease just a bit. Grains look steady to weak to start with expectations for better demand providing underlying support on price weakness.  The coronavirus, which has killed hundreds of people in China and led to travel restrictions, remains a concern on grain markets as the disease may curb import demand after Chinese consumption of soybeans was already dented by the African swine fever epidemic.  A Chinese media report that Beijing could invoke a disaster-related clause in the trade agreement, which might allow it to avoid repercussions even if it cannot fully meet the targeted purchases of U.S. goods and services for 2020.

USDA’s weekly export sales report showed new corn sales at the high end of trade estimates, soybean sales were in line with estimates, but wheat sales and soymeal sales fell at the low end of trade forecasts.  In the week ended January 30, exporters sold 1.248 million metric tons (MMT) of corn, up 1% from a week earlier and 57% above the prior four-week average with Mexico and Japan the top buyers. Soybean sales rose 76% from a week earlier to 703,800 metric tons (MT), that was up 29% from the four-week average but no new sales were reported to China. Soybean meal sales fell 44% below the prior four-week average last week. Wheat export sales fell 48% from a week earlier to 338,600 MT last week.

The USDA daily export sales reporting services said private exporters did not report any new large U.S. grain or soybean sales this morning. That will be a mild negative factor when futures reopen.

A step by China to reduce some tariffs on U.S. goods including soybeans, as part of a recent trade agreement with Washington reassured the market. Beijing's tariff reduction, which would take the duty on U.S. soybeans to 27.5% from 30%, was limited but shifted attention back towards potential for increased Chinese purchases of U.S. supplies under a "phase 1" trade deal with Washington. However, trade talk that China has bought as much as 1.0 million metric tons (MMT) to 1.3 MMT of Brazilian soybeans this week limits buying in the soybean market. 

China on Thursday said it would halve additional tariffs levied against 1,717 U.S. goods last year, following the signing of a Phase 1 deal that brought a truce to a bruising trade war between the world's two largest economies. China is showing that tariffs can go down, as well as up, with Beijing’s announcement that the country will halve duties on $75 billion of imports from the U.S. on Feb. 14. The announcement helped boost the rally in Asian stocks, while equities in Europe hit record highs this morning. S&P 500 futures are pointing to further gains at the open and the dollar fell to a two-week low against the Chinese yuan.

Meanwhile, the situation in China continues to worsen, with over 28,000 confirmed cases and 563 deaths from the outbreak, according to the latest figures from the country’s National Health Commission. While the announcement reciprocates the U.S. commitment under the deal, it is also seen by analysts as a move by Beijing to boost confidence amid a virus outbreak that has disrupted businesses and hit investor sentiment. 
Commodity traders and agricultural economists have questioned whether Beijing will follow through on pledges in the deal to buy $36.5 billion of U.S. agricultural goods in 2020, now that the new coronavirus is threatening China's economic growth.

As widely expected, President Donald Trump will remain in office through the end of his term. The Republican-controlled Senate on Wednesday voted to acquit him of abuse of power and obstruction of Congress. Some Democrats are now second-guessing their strategy of impeaching him for seeking foreign interference with the 2020 campaign. Now Trump may shift his trade deal focus to Europe.

World Trade Organization (WTO) Director-General Roberto Azevêdo said yesterday that there is a growing realization in Geneva that structural changes are needed to respond to U.S. complaints over the operation of the dispute settlement system. “The reality is we need very significant changes,” Azevêdo said. “A few coats of paint will not be enough.”  While he did not meet with either U.S. Trade Representative Robert Lighthizer or President Donald Trump in his visit this week, Azevêdo noted he has been engaging with U.S. officials on a consistent basis. But he emphasized, “What we need to do is transform those ideas into concrete action.”

Corn: March futures traded both side of unchanged, continuing the sideway trend. The market remains supported by improving exports and ethanol production. However, the market has a long way to go to make up for the slow usage rate in the first quarter of the season. The U.S. Energy Information Administration said U.S. output of corn-based ethanol in the latest week jumped to 1.08 million barrels per day, from 1.03 million the previous week, while stocks fell to 23.47 million barrels.

Soybeans: Futures are well contained inside of Wednesday’s range with this morning’s news on Chinese tariff cuts failing to ignite strong new buying. That’s because Brazil is harvesting a record crop and China continues to buy cheaper Brazilian supplies.

Wheat: Futures will open on the defensive after European markets failed to build on Wednesday’s strong rally overnight and rains are beginning to improve dry soils in parts of eastern Europe and the Black Sea region.   

Cattle: Steady to weak
Hogs: Steady to weak

Cattle:  Futures seen steady to weak after the poor close on Wednesday. Cash cattle remain lightly tested with most trades taking placed at slightly lower values. Packers will continue to try to buy cattle cheaper as margins have contracted into February. Wholesale beef prices were mixed yesterday with Choice down 63 cents and Select up 9 cents. Sales were light. This morning’s weekly export sales report showed sales fell to 18,561 MT last week from 21,747 MT a week earlier and the smallest in three weeks. There were no new sales to China before the nation cut tariffs today to 30% from 35%.
China's appetite for Mexican steaks and other cuts of beef is expected to increase more than 40% this year, in part due to disruptions caused by the coronavirus outbreak, according to Mexico's top cattle association. Chinese buyers represent only about 4% of Mexico's foreign beef sales but the Asian market has been a steady source of growth. More than 80% of total Mexican beef exports go to U.S. customers. Brazilian beef exports rose by 9.84% in January driven by a surge in sales to China, trade group Abiec said on Wednesday. Brazil's beef exports totaled 135,375 MT in the first month of the year. Shipments to China alone were 53,200 MT, up 126% over the same period last year. China reported an outbreak of a highly pathogenic strain of H5N1 bird flu at a farm in Shaoyang city of the southern province of Hunan on Saturday.   

Hogs: Futures seen steady to weak. The national average cash hog price tumbled $3.07 on Wednesday. Slaughter this week is up 73,000 head from a year ago and remains a drag on cash and futures.  Wholesale pork cutout values fell $2.83. Prices dove on fund selling tied to worries that the coronavirus outbreak would stall U.S. exports of pork and beef into China at a time of plentiful U.S. supplies. USDA said pork export sales fell to 29,455 MT last week from 34,090 MT a week earlier. China did boost purchases to 5,100 MT and shipments remained active at 16,200 MT last week. The business probably is not enough to give much lift to futures today. China’s tariffs will be cut to 55% from 60% on Feb. 14. It may take several week before Chinese demand can be measured.

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