Ahead of the Open: Choppy Outlook With Firm Undertone Ahead of USDA WASDE Report

Posted on 02/10/2020 7:13 AM

Grain Calls

Corn: Down 3 to 4
Soybeans: Steady to mixed
Wheat: Steady to weak

GENERAL COMMENTS:  Soybean futures are trying to rally for a sixth straight gain on Monday on expectations that Beijing will meet the purchasing targets agreed on in the Phase 1 trade deal, although concerns about a coronavirus outbreak in China capped gains. Corn is giving back most of Friday’s strong gains and wheat is seen weaker on long liquidation ahead of the Tuesday’s USDA supply and demand report. USDA chief economist said last week that its monthly supply and demand estimates would factor in the broad goals of the U.S.-Chinese trade deal but not the details of China's purchase commitments.   We do not expect big boosts for commodity exports because history shows 70% of Chinese imports of U.S. farm products come in the October-March timeframe and USDA probably wants to see some actual new business completed. USDA's first Phase 1 trade deal forecasts for 2020-21 season will be released during the Ag Outlook Forum on Feb. 20-21.

The USDA daily export sales reporting service said private exporters did not report any new large U.S. grain or soybean sales this morning. While not unexpected, that will be a mildly negative factor when futures reopen.

Prices rose Friday after White House economic adviser Larry Kudlow said Chinese President Xi Jinping told U.S. President Donald Trump that China would still meet its Phase 1 trade deal purchasing targets despite delays linked to the coronavirus.

People across China trickled back work on Monday after an extended Lunar New Year holiday as the government eased restrictions imposed to counter the coronavirus, but the World Health Organization said the number of cases outside China could be just "the tip of the iceberg". The death toll from the epidemic rose to 908, all but two in mainland China, on Sunday as 97 more fatalities were recorded - the largest number in a single day since the outbreak was detected in the Chinese city of Wuhan in December. The death toll from the outbreak has now surpassed that of another coronavirus, Severe Acute Respiratory Syndrome (SARS), which brought a global epidemic in 2002/2003.

On the economic front, stocks and oil fell in global markets while safe-haven gold rose. The dollar is slightly weaker after a big rally against major currencies and emerging market currencies.

Ahead of the Brazilian government crop report on Tuesday, which will include the agency’s first safrihna crop forecasts the weather leans mostly beneficial for soybeans but keeping corn plantings slow. For the next week forecasts call for rainfall surpluses across most of the central-west, southeast, and northeast Brazil, while Paraná and areas to the south will be drier than normal with rainfall deficits up to 1.4 in. Dryness in the south will be beneficial for ongoing soybean harvests and second crop corn sowings in Paraná but will hurt ongoing pod fill further south. Rainfall will be favorable to later-sown beans in the center-west but will also slow harvests and sowings of second crop corn. Nationally, soybean harvests are nearing 18% to 20% complete according to Refinitiv Research, while second crop sowings are likely near 12% to 15%. Favorable weather continues to maintain high yield and production outlooks for Paraguay corn and soy. Above-normal precipitation for the north of Argentina and below-normal for the south with above normal temperatures will produce some benefits and increasing stress in the south and west growing regions of Argentina.

According to the Climate Prediction Center, a new episode of La Niña is expected to influence the global climate in the second half of this year.  Now, we are still going through a climate neutral summer, with no El Niño or La Niña in the entire southern hemisphere. That may change in June through August.  The predictability of a La Niña is much more assertive than that of an El Niño.  This scenario immediately favors the American harvest and brings severe concerns to South America for the next growing season.

Speculators were big sellers of Chicago-traded corn, soybeans and soybean products in the week ended Feb. 4 amid uncertainty over the coronavirus and doubts about the Phase 1 trade deal between the United States and China roiled commodity markets. However, funds continued to buy wheat futures, extending their net-long position in SRW wheat futures and options to 52,161 contracts from 48,469 a week earlier and the most bullish position since August. 2018. But unlike in the previous few weeks, the latest wheat move resulted entirely from short-covering. Funds very slightly reduced their outright longs from last week's record high.  

Fund selling was prominent across the entire soy complex in the week ended Feb. 4 with new records set in the products. Money managers boosted their net short in soybean futures and options to 82,358 contracts from 50,955 a week earlier, bringing their three-week selling total to nearly 89,000 contracts. Open interest surged nearly 7% on the week. But China’s primary soybean supplier, Brazil, is in the early stages of harvesting what is expected to be a record crop. Brazil’s real currency hit an all-time low on Friday, which makes it favorable for Brazilian farmers to sell dollar-denominated soybeans. Money managers’ net-short position in soybean meal hit a record-large 64,377 futures and options contracts on Feb. 4, up sharply from 39,719 in the prior week. Funds increased their net short in corn futures and options to 55,990 contracts through Feb. 4 from 29,476 a week earlier, marking their first week of net selling in corn since early December. Commodity funds were pegged as slight net buyers of corn futures between Wednesday and Friday, as the most-active contract rose fractionally during that time.

Corn: March futures are heading back lower this morning after failing to build on Friday’s strong close. Prices opened slightly lower and never tested the 40-day moving average overnight, triggering light selling.

Soybeans: Futures took another shot of bad news on Friday in the form of a crashing Brazilian currency and shook it off yet again to close slightly higher and marking the first weekly gain since early January. Calendar spreads were firmer, and basis was steady to firm. Prices probably need to close above last week’s highs to trigger fund short-covering activities.

Wheat: Futures are mixed after trading higher most of last night. Wheat prices gains were capped overnight by sliding export prices of Russian wheat fell last week for the second consecutive week as competition with other major wheat exporters has intensified and mild Russian winter weather favored crops.  Russia exported 26.1 MMT of grain, including 22.5 MMT of wheat, between the start of the 2019-20 season on July 1 and Feb. 6, SovEcon said, citing customs data. Total grain exports fell 19% from a year earlier. Weather remains good for the 2020 crop with healthy amount of precipitation in most regions producing winter wheat, SovEcon said. A cold snap expected in the southern part of the Krasnodar and Stavropol regions, major producers of wheat, this week but in general temperatures in the country remain far from crop-threatening level, it said.


Cattle: Mixed to firm
Hogs: Steady to higher

Cattle:  Cattle futures closed mixed to higher last week despite the weakness in beef cutouts and cash cattle. Some underlying demand did develop at last week’s lows tied to confirmation that U.S. cattle supplies began contracting last year and will continue into 2020. Traders will be watching for improved overseas sales to put a bid back in the cash markets. Futures probably set seasonal lows last week.

Hogs: Futures seen steady to firmer after strong weekly performance and increased speculation China will boost U.S. pork purchases. Cash hogs and pork cutout values both moved lower last week, and it will be important to see prices quickly stabilize and move higher to maintain bullish momentum created last week. China will need to boost imports of U.S. pork to reduce shortages. China's coronavirus outbreak has delayed the launch of new pig breeding facilities and put even more pressure on pork supplies and prices, an official with the agriculture ministry told a briefing on Sunday. Kong Liang, deputy director at the Animal Husbandry and Veterinary Bureau of the Ministry of Agriculture and Rural Affairs, said the coronavirus outbreak has disrupted the delivery of vital feed and veterinary medicine supplies, and delayed the return of agricultural workers to farms. "Looking at it from a market perspective, due to the regional blockades, pork supplies in some places are tight, and prices have risen by a certain extent," Kong told reporters. China's pork supplies were reduced by as much as 21.3% in 2019 as a result of an African swine fever outbreak. China has released 10,000 MT of frozen pork from its strategic reserve for use in Hubei.

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