Ahead of the Open: Fund Buying Continues to Drive Grains Higher, Argentina Weather, Labor Unrest Adds Support

Posted on Wed, 01/06/2021 - 07:15

 

GRAIN CALLS

Corn: Up 4 to 6 cents
Soybeans: Up 20 to 25 cents
Wheat: Up 3 to 6 cents

GENERAL COMMENTSCorn and soybeans are sharply higher with fund interest driving the trade and the same issues supporting the market until at least next Tuesday. Corn topped $5 for the first time since May 2014 and soybeans rose to the highest since July 2014.Fundamentally, trade estimates for that batch of USDA data on Jan. 12 are leaning toward shrinking U.S. production and carryover as well as lower South America crops and global ending stocks. Argentine farmers are the latest group to join in protests in the biggest global exporter of soymeal and soyoil. No one in the agricultural industry is happy with government taxes and export restrictions as dryness grips the country. Wheat held firm near a new six-year peak as a weak dollar boosted U.S. export prospects amid doubts about the availability of supplies from Russia and Argentina.

Further support for the corn complex comes from reports that the Chinese National Grains and Oilseeds Information Center, which has raised its estimate for Chinese corn imports to 15.0 MMT, up from its previous estimate of 7.0 MMT. High corn prices both domestically and internationally are also likely to result in greater imports of sorghum and barley with the Center stating that sorghum imports are expected to increase to 6.0 MMT, up by 2.3 MMT from a year ago, while barley imports are expected to increase to 7.0 MMT, an increase of 2.5 MMT from last year.

The situation in Argentina remains concerning with strikes continuing so far this week, although the Grain Inspectors’ Union has stated that it is in talks with export companies. Furthermore, reports do suggest that farmer groups in Argentina have planned to halt grains sales for three days in protest at the Government’s decision to ban exports of corn until February, putting short term strain on the Government’s intention of preserving domestic supply to meet feed demand. Argentina is also in the spotlight with respect to weather with rainfall deficits of between 5.9 to 11.8 inches in many corn and soy producing regions. The Rosario Grains exchange said that 4.7 to 5.5 inches of rainfall is needed in key crop producing regions in the next two weeks as a critical development phase of the nation’s corn crop begins.

There are some signs the rallies are changing character. In December, the markets would open steady to lower and rally to close near daily highs. To start 2021, markets have been opening very strong to start the overnight session and pare gains during the morning session. This is an important change of market personality.  Also of note, the CME raised margins by at least 10% today for wheat, corn and soybeans. Wheat margins rose $150, corn margins increased $125 and soybeans were increased $350. Rising margins after extended and sharp rallies have historically been markers near price peaks.

Brazil weather remains favorable for summer crop development. Rio Grande do Sul and a part of northeastern Brazil are still advertised to be wetter today and if that verifies summer crop conditions should improve. Other areas in Brazil will get timely rainfall to support normal crop development. Argentina’s weather overnight was wettest in southern Buenos Aires and in northwestern Santiago del Estero. The past two days of rainfall was good for western and southern parts of Argentina, but the central and east continues to dry out. Not much rain in the drier areas will occur until next week and even then the prospects do not look very good for a generalized soaking. The bottom line remains one of concern for Argentina in the long run because of additional drying expected later this month.

The flow of funds into commodities continues to be bolstered by rising fears the Federal Reserve will eventually monetize the unprecedented increase in the U.S. debt to GDP ratio. The benchmark 10-year Treasury yields touched 1% for the first time since March while investors rotated out of technology and into cyclical stocks on speculation Democrats are on the cusp of taking control of U.S. Congress. Democrat Raphael Warnock ousted Republican Kelly Loeffler in a runoff race, leaving control of the Senate hinging on the state’s other election, which remains too close to call. If the party prevails, analysts say it could usher in more stimulus spending to drive economic growth and inflation, but also lead to tougher antitrust scrutiny of the technology giants. Elsewhere in markets, oil prices steadied near a 10-month high after Saudi Arabia pledged to cut output. Bitcoin surpassed $35,000 to reach a new record.

Before the reopening this morning, USDA announced private exporters sold 102,616 MT of corn to unknown destination for delivery in 2020-21. That may add some support to corn this morning.  

Despite China ramping up purchases of U.S. farm goods in 2020 and another year of big purchases agreed to under the two-year trade deal in 2021, there are signs of simmer tensions with the U.S.  Another 4 million tons of reserve wheat will be auctioned today, but this is doing little to cool the corn market. The discount of wheat relative to corn continues to widen.

China’s unprecedented arrest of dozens of leading Hong Kong opposition figures illustrates the depth of Joe Biden’s challenges with Beijing. By the time he becomes U.S. president, there might not be much democracy left to save in the Asian financial hub. The Hong Kong police on Wednesday rounded up more than 50 activists, former lawmakers and academics, as well as an American rights lawyer, in a series of morning raids across the former British colony involving more than 1,000 officers.  The crackdown was the largest to date in a single day under a Beijing-drafted national security law that carries sentences as long as life in prison, shocking even for a city where opposition figures have increasingly found themselves facing criminal charges for attending protests, holding banners or getting into legislative chamber scuffles.  

Meanwhile, Wang Wentao is set to become China’s next commerce minister amid increasing hostility with the U.S.  He replaces Zhong Shan, who has reached the retirement age of 65 for ministerial-level officials. A philosophy graduate, Wang spent 16 years working at an aerospace training institute in Shanghai, experience that makes him a defense technocrat with “unquestionable political purity,” according to Feng Chucheng, a partner at research firm Plenum in Beijing.  Wang will likely be a key player in any trade talks with the new U.S. administration under President-elect Joe Biden -- just as his predecessor Zhong was, having taken a more prominent role in trade talks about six months prior to the signing of the phase-one agreement.

CORN: March corn trading near midrange at the break after touching $5.02 ¾ last night. A close below Monday’s low at $4.79 ½ this week would be a red flag for market bulls despite expectation for USDA to  delivery more bullish news on Jan. 12. Ingredion Inc said on Tuesday it has stopped ethanol production at its manufacturing facility in Cedar Rapids, Iowa, making it the latest company to cut ethanol output after the coronavirus pandemic choked demand for fuel. Margins to refine ethanol in the Corn Belt have fallen over the last two months, sinking to negative 10 cents, near the lowest since April.  Corn basis has backed off, not because of farmer movement but because of ethanol margins. We have seen more and more plants slow/shut down recently due to the prolonged negative margin environment

SOYBEANS: March soybeans are about dime below the overnight high at $13.78 1/4 at the break. Like corn, a close below Monday’s low at $13.01 is warning to the bulls.

WHEAT: Futures are moving higher today with beans and corn again leading the way. More talk today of HRW feeding, looking at the calcs it can work for some in the first quarter but wheat’s premium to corn is not going to result in big wheat feed use. Forecast turning back dry for the US, and more cold seen for Russia with snow cover in the Volga/Central areas but South has none, Ukraine scattered snow cover seen.  

Cattle: Steady to firm
Hogs: Steady to firm

Cattle: After plummeting to start the week, live and feeder cattle futures shot higher, retracing those losses. Strong beef movement on Tuesday on lower prices speaks to retailers’ expectations stimulus checks and continued Covid-19 restrictions will prompt consumers to stock up on beef. Early cash cattle asking prices are reportedly around $114. Sales last week took place at an average price of $111.51, according to USDA.  

Hogs: Modest gains for most lean hog futures contracts on Tuesday and some follow-through fund buying is expected. Strong pork movement on a big price break in ribs. Signals strong underlying demand among retailers on price breaks, despite the post-holiday season typically being a fairly lackluster demand period.