Commentary

Weekend Commodity Wrap Up 2/16/2019

Feb 16, 1:48 pm | Weekend Commodity Wrap-Up

Commodity Indexes

The CRB/CCI index fell into a chart gap and recovered by the end of the week. The US dollar index formed a key reversal down on the daily chart on Friday while the commodity index formed a weekly reversal up from an open chart gap.   

  The CCI/CRB index is now in a bullish technical position to mount a recovery. The CCI chart pattern is interesting as the US/China prepares to hold another and potentially final round of high-level meetings heading into a Trump/Xi Trade Summit. Our hope and expectation is that President Trump will complete the biggest deal in recorded history! US ag goods should benefit greatly as should protections against US/world intellectual property.  

  ARC research maintains that a lasting top in the US dollar should be forged in Q1 of 2019 as the US Gov’t debt has surged above $22 Trillion and China prepares to put more investment inwards in their economy, rather than spending it on US Treasury purchases. The 2020 elections will also produce pause to USD buyers.

Corn

Corn futures ended flat on the week and direction awaits spring weather and US/China trade talks. End user demand continues to surface on breaks, with interior basis levels improving seasonally. The end of the US’s dominance on world trade lies ahead amid rising Argentine crop estimates and as Brazilian soil moisture will be replenished over the next 2-3 weeks. But Chinese demand lingers in the background, and optimism regarding US/Chinese relations is spreading. China buying 5+ MMTs would be a bid deal – adding to already record large world corn trade and near record large US exports. We also mention ethanol margins are improving, with spot crude oil cheap below $50/barrel.

  Spot corn stays bound to $3.70-3.95 into planting. And with major exporter stocks tight, risk premium will be maintained into early summer, when N Hemisphere weather patterns are better known. Spot CBO corn holds support below $3.70.

 

Wheat

  Wheat futures ended the week lower. KC futures led the decline amid a higher HRW stocks estimate in last week’s WASDE and a rapid decline in global high protein cash prices. Russian fob offers fell $12/MT in just 10 days. This weakness spilled into the US market and elsewhere.

  However, below $5.00 spot Chi the US looks to maintain a solid pace of export demand. And Russian interior prices have barely moved, thus sustaining negative export margins. Russian flour prices in fact hit newer all-time highs.

  The market will increasingly move its focus to new crop supply & demand. A modest boost in EU/Black Sea surpluses occurs amid favorable weather. But the actual supply of wheat will be tightening further into spring. Better pricing opportunities lie ahead. A re-test of $5.25-5.50 spot Chicago is targeted. And it remains that any weather hiccup this spring/ summer will trigger a sizable reaction in price amid the loss of exporter stocks in 18/19. A second Russia drought year appears likely

Soybeans

Soybeans were mostly lower through the week, with the market rising and falling according to the latest headlines related to US/China trade. Early week rallies over the 200-day moving average were sold, while the week’s low was set on Friday with March soybeans bouncing off key technical support near $9.00. Trade news through the week included a Brazilian crop report that slightly lower production, while the weekly export sales showed net weekly cancellations from China. Those cancellations are thought to have been optional origin sales to private crushers, who switched their purchases to Brazil.

  We expect that CBOT soy markets stay range-bound, awaiting news from China negotiations. However, AFS has curbed Chinese feed demand, and we do not expect China to become a major US soy buyer. The next significant purchases are likely to be US grains, meat/dairy, and other agriculture commodities. With US soy stocks to top 900 Mil Bu, we hold a view of using any strong China related rallies for sales.

Cattle

  Cattle futures were back and forth through the week, but the uptrend held together with April cattle marking both a higher high and a higher low for the week. An early week rally ran out of traction, but the subsequent correction ran into good demand on ideas that this week’s cash trade would be no worse than steady. The beef market has been flat for the last several weeks, but seasonally a strong rally tends to get underway in late February, lasting into the end of March. Carcass weights are still more than 10 Lbs lighter than a year ago, which has lent support to cash cattle trade. Cattle supplies are expected towards the end of the quarter, but in the near term, lighter weights and strong beef prices are keeping the cash cattle market steady. Next week’s Cattle on Feed report will only be current as of January 1st.    

Hogs

In hogs, it was a mixed week of trade with April hogs on both sides of unchanged through the week. The cash market continued to mark new lows on large weekly slaughter and heavy carcass weights, all of which weighed on nearby hog futures on an early week rally. Summer futures on the other hand were back adding premiums, as traders are not willing to give up on China optimism. Estimates from China are that 10-15% of their total hog herd has either been infected with African Swine Fever or already destroyed, which if true means that China will be turning to the world protein markets in the coming months to make up the losses. Going forward, CME hog futures will be caught between the near-term bearishness of record hog supplies and forward optimism of large exports. Funds are nearly flat in hogs and the next CME rally needs to be cash market led.

Hogs Bounce Higher Ahead Of The Weekend

Feb 15, 4:37 pm | Hogs & Pork

Early selling in the hog market found good demand, that lifted hog futures higher into late in the day. April hogs led the recovery, while June hogs traded down into, but failed to close an open chart gap left on Tuesday. The hog index ended the week down $.31 at a five-week low of $55.24, while the pork cutout gained $.27 to $63.03.

  The Commitment of Traders report showed that as of Jan 22nd, funds had cut their net long hog position to just 8,000 contracts or nearly 33,000 under the peak that was in late November. Hedgers continue to use the break to cover sales, and were net short 59,000 contracts vs. 117,000 a year ago.

  All of the speculative premium is out of the hog market, but we doubt funds are willing to take on a net short hog position amid China’s AFS outbreak. Hedgers see current prices as too cheap to sell and continue to cover their hedges on price weakness. The next hog rally needs to be led by the cash market.

 

Soybeans Close Firm Friday, Down For The Week

Feb 15, 4:36 pm | Soybeans

An early break in the soybean market uncovered demand and futures were 3-4 cents higher at the close. CBOT markets continue to struggle for direction and have ebbed and flowed due to the latest news or rumor on US/Chinese trade talks. The tone from Washington on Friday was positive, and the market rallied ahead of a long US holiday weekend.

  The Commitment of Traders report showed that for the week ending Jan 22nd, funds were net short 23,000 contracts of soybeans (-2,000), net long 7,000 contracts of soymeal (-3,800), and were net short 31,000 contracts of soyoil (+17,000). In soyoil, this was the smallest net short position since April of last year. Spot soyoil futures broke through long term chart resistance near $.30/lb three weeks ago but have drifted back to that breakout point this week.

  If support near $.30 holds this week, a further rally to $.33-34 could unfold as funds cover the remainder of their net short soyoil position.

  Key support in March soybeans held at the 100-day moving average on Friday, but the market remains caught in a range waiting on a US/Chinese trade deal.

Evening Weather Update

Feb 15, 4:36 pm | Weather

Extended Range Forecast Wetter in Brazil; Showers Still Offered to Central Argentina Next Week: The EU & GFS models have added to precip totals and coverage in Brazil in the 11-15 day period. ARC’s climate scientist hints that that this pattern of normal/above normal rainfall will be sustained into early March. Upcoming heavy precip will push seasonal accumulation in Mato Grosso much closer to last year. This moisture will also be rather timely, with safrinha corn seeding to be finished by late February.

High pressure Ridging aloft across Brazil won’t be blocking in nature in the weeks ahead. Daily showers will be recorded across the whole of Brazil into March. Accumulations are pegged in a range of 2-7”, or some 80-150% of normal.

Dryness concern in Argentina will be eased if rain falls as forecast in the 8-15 day period.

Australian Drought Worsens into Southern Hemisphere Autumn: Australia’s sorghum crop is being affected by additional adverse weather. Australia’s wheat crop will be planted during May/June. Drought will be ongoing through the next 30 days – at least- and there’s no room for fresh yield loss in Australia’s domestic feed industry

The graphic reflects rainfall accumulations since January of 2017 in New South Wales in E Australia. Below normal precip has been recorded in every month, with the combined accumulation down 43% from average.

Little to no rain is offered for Australian growing areas in the next two weeks. 16-30 day guidance maintains above normal temps and keeps meaningful rain isolated to W & S Australia.

Above normal rainfall will be needed from June onward to achieve trend wheat yields.

The excessive rains in Queensland need to push south during autumn.  

Corn Ends Flat Ahead of Long Weekend; Fund Length Liquidated

Feb 15, 4:32 pm | Corn

Corn struggled to find direction amid competing inputs. Another round of US/Chinese talks lie ahead next week. The market doesn’t want to be caught short should a US/China ag package be announced. The US suggests that China and US will be signing MOUs on the points that there is agreement. This is a likely lead up to a March Trade Summit between Trump/Xi. Unknown is whether these MOUs to be signed will become public and include specific dollar amounts?

Funds as of Jan 22 were long a net 44,000 contracts of corn. Funds this evening are estimated to be short a net 3,000 contracts. Farmer sales will be lacking at current prices. $3.70 support should hold into the start of planting.

Brazilian soil moisture will be replenished amid recent and coming rains.

Model guidance includes normal/above normal rainfall in key areas through the early part of March. Early safrinha GD/EX ratings will be much better than the previous year.

The trade is optimistic on an eventual US-Chinese trade deal, particularly with another high-level meeting scheduled in DC next week. If China pledges to secure large amounts of US ag goods annually, that will be a big deal for grain and meats.

US Soybean Crush in January

Feb 15, 4:31 pm | Soybeans

The February NOPA crush report showed a monthly soybean processing rate of 171.6 Mil Bu. The figure was near unchanged from December and was 8.5 Mil Bu larger than last year, the largest January crush total on record. On a per day basis, the NOPA crush continues to hold near all-time highs, as US capacity has expanded slightly while US crushers remain incentivized to keep plants actively running.

  Based on the NOPA crush data, we estimate a total US soy crush rate of 183 Mil Bu and hold an annual estimate of 2,075 Mil Bu. The USDA raised their estimate by 10 Mil Bu in the Feb WASDE to 2,090 Mil Bu. We see this forecast as 15 Mil Bu too high. Brazil is already crushing and exporting new crop soy products while new crop Argentine meal exports will get underway in April.   

  The world meal market looks to be highly competitive beyond April.

 

 

A year ago, the soymeal market was adding in sizable premium to balance Argentine drought losses. However, since the start of the US new crop harvest, it’s been soybeans that have led the soy complex higher, while the meal market has been flat. Compared to Sep 1, spot CBOT soybeans are trading 9% higher, soyoil is up 7%, and spot soymeal is down 3%. Those changes in the components of the crush spread have put the spot margin down 42% from September 1st.

  The spot crush margin rests at $.97/Bu, $.29 lower than a year ago, but still above the 10-year average of $.87.

  The CBOT is also offering an average margin of $.95/Bu to the end of the summer, which is also well above average. US supplies remain record large, and the CBOT continues to offer opportunities to crushers. However, the US market has become increasingly dependent on soymeal exports, which need to keep up to reach our more conservative 2018/19 crush estimate.

 

Wheat Futures Hit New Contract Lows; Russian Interior Market Little Changed

Feb 15, 4:30 pm | Wheat

US wheat futures fell another 2-5 cents led by fund selling in HRW. The European market fell similarly, and this week has been marked by a Russian rush to find export demand. French exporters were awarded the bulk of the recent Algerian tender following the break in fob offers there. We mention that the US’s discount to other origins remains sizable. Russian fob prices are down $12/MT from early February, but Gulf HRW holds a discount to Russian worth $14/MT. The US market has had to drop to maintain this position, but a string of large export sales lies ahead.

Russian flour prices shrugged off weakness elsewhere and found new all-time highs in ruble terms. Russian flour & wheat tightness won’t be solved by lower prices. Market focus is shifting to a potential build in new crop surpluses if normal weather develops, but crop-critical weather is still months away. Updated climate forecast this AM include normal and well above normal temps during Mar-May across E Europe & the Black Sea.

Spot Chicago bounces around between $5.00-5.30 near term. Non US wheat exporter stocks are tight and Northern Hemisphere weather will have real importance in 2-3 weeks. Don’t sell breaks

CBOT Recovering into US 3 Day Weekend; US/China Trade Optimism Gaining Traction

Feb 15, 12:16 pm | Mid-day Commentary

** Wheat fund selling has produced new contract lows in KC March futures. Paris wheat started the Chicago decline with March Paris wheat down $3.25 euros/MT at $195.00/MT. March Chi is back to its initial starting point at the beginning of the year at $5.01. This week’s wheat decline started on weakening Russian fob prices which has spread to the EU and US. 

  The wheat selling tugged corn/soybean futures off their opening highs. Most of the AM selling has been chart and fund related. Cash selling from US and South American producers has dried up on the CBOT decline.

  The US stock market has rallied sharply amid China/US trade optimism. The US/China delegation will be arriving early next week for a new round of talks. Its expected that if enough progress can be reached, that US President Trump and Chinese President Xi will be holding a trade summit in the US in March. President Trump offered that he may invite Democratic leadership to join.

** US President Trump indicated that US/China are making progress on trade, but it will be up Trump to decide if final pact can be achieved in face-to-face presidential negotiations – likely sometime in March. The President hinted that this would be this would be the “biggest trade deal ever”. No exact numbers were offered, but we all need to remember that China pledged $1 Trillion dollars in US purchases into 2024 back in mid-January.

 ** CBOT brokers report that funds have sold 5,000 contracts of wheat, 2,200 contracts of corn, while being flat in soybeans.   

 ** FAS reported that 205,744 MTs of US corn was sold to an unknown destination during the 2018/19 crop year.  

 ** Above normal temps and below normal rainfall has some raising their winter wheat crop concern for SW Russia. The forecast is warm/dry for another 2 weeks

 ** Seasonal trends for corn/soybeans normally bottom in mid-February and turn upwards heading into May. Amid the need for additional US corn acres, ARC suspects that this trend will be at work again this year. South American crops (outside of winter corn production in Brazil) are largely known. US farmers needing to raise cash flow for spring inputs have largely completed those sales. New sellers will be needed to push values substantially lower from current levels. A new Northern Hemisphere growing season and enlarged US export demand to China are mentioned as the bull catalysts.

** South American Weather Discussion: The midday GFS is drier across Southern Brazil and Argentina when compared to the overnight forecast solutions into February 25th. The GFS backed down on the coverage and totals of Argentine rainfall during the 8-10 day period. The GFS’s outlook is generally favorable for Brazil with widespread soil moisture improvement. Weather watchers are eyeing developing dryness in S Argentina and can this dryness march northward into Central Argentina by early March?

 

** AgResource Market Analysis: Our advice has been to avoid selling CBOT breaks or chasing rallies in this political marketplace. The corn market continues to hold the most bullish fundamentals, soybeans the most bearish with wheat caught in between. The lack of volume on the push to new wheat lows tells ARC the break is a bear trap.

  The 3-week weather forecasts for the Central US calls for considerable rain across the Delta and S Midwest. This wet trend shows no sign of abating, which could pose a March corn seeding concern.    

  The big US ag market unknown is the US/China trade deal and its impact on US demand looking forward? The potential of China pledging to reduce a good portion of the US/China trade deficit is enticing to every US ag market bull.  

 

 

Cash Cattle Trade Expected Later Today, CME In Waiting Mode; Argentine Rains Expected in 8-12 Days

Feb 15, 6:55 am | AM Weather

** AgResource Daily Cattle Analysis: Cattle futures closed higher on Thursday and a steady outlook is offered for early trade this morning. April cattle fell to new lows for the week just after the open, but that early break found good to demand that lifted the market into late in the day.

  Cash markets were largely quiet with, only light sales reported in the W Cornbelt at $124 or $1 lower. However, most of the week’s business has yet to develop. On Thursday bids were quoted at $122 with offers at $126.00.

  The weekly US Export Sales Report with data through the week ending Jan 3rd confirmed that exports and sales remained slow through the holiday season. There was a record amount of 2018 sales that were rolled forward into the current year, and outstanding 2019 sales start the year record large. The Feb WASDE report forecast annual 2019 beef exports would increase 2% in the year ahead, and the early year sales total loosely supports that idea.

  Support in April cattle is at the 50-day moving average, just under $126. ARC continues to advise summer hedges on rallies for producers.

** South American Weather Pattern Discussion: The EU/GFS models are in good agreement. The forecast calls for needed rain across the entirety of Brazil while a dry pattern holds across Argentina for the next 7-8 days. There are clear signals of Argentine rains that are being pulled forward to the 8-10 day period which raises our confidence in their ultimate development. This is a new positive development for Argentine crops. 

  The 10-day EU model rainfall forecast is attached. Rains will fall almost daily across Brazil. The Brazilian winter corn crop is being planted and the forecast is favorable with enough rain for corn seed germination. High temps range from the 80’s to the lower 90’s. Soil moisture is still low in some key crop areas; the moisture demands of the just seeded corn crop is low for another few weeks.    

  Argentina’s forecast offers a nice mix of sunshine/near normal temps over the next 8 days. The forecast is warm which will accelerate soil moisture losses. Yet the prospect for rains between February 22-25th would be ideal. These rains will be critical for Argentine crops to hold their above normal trend yield potential. Any heat is across Western Argentina.

** 10 Day South American Rainfall Estimate: Improved Rains for Argentina

 

CBOT Recovers on News that US/China Trade Teams to Meet in Washington DC Next Week

Feb 15, 6:48 am | Morning Commentary

** 6:30 AM CBOT Futures: Mar soybeans are up 4.00 cents at $9.075, Mar corn is up 1.0 cent at $3.7575 and Mar Chi wheat is unchanged at $5.07.

 ** AgResource Morning CBOT Comment/Analysis: Good Morning! Mostly higher in the summer row crops and mixed in wheat has been the overnight CBOT trade.

There has been heavy volume trade in corn with over 32,000 contracts changing hands in March futures. The US wheat market is easier on technical selling tied to Thursday’s weak close and further weakness in Paris wheat futures with their May futures contract down 2.00 euros/MT at $197.50.

  The USTR Trade delegation is heading back to Washington after fresh progress was scored in trade talks in Beijing this week. Ambassador Lighthizer and Sec Treasury Mnuchin met with China’s President Xi late Friday. The good news is that the trade talks will continue in Washington next in a sign that both sides want to reach a deal sooner than later.  

  The US wants to get negotiation framework far enough along such that President Trump can meet with Chinese President Xi in March to flesh out the remaining hard-fought structural points. In the end, the US will push on all fronts but, its up to President Trump to decide in a trade deal with China benefits the US more than the continuation of tariffs? The US nor Chinese will get everything they want in a trade deal, but US President Trump will not want to carry this trade issue forward into the ‘20 US Presidential election cycle.

  The US Gov’t is closed for the President Day holiday on Monday, but it’s expected that US/China trade negotiations will resume Tuesday and continue into Friday. Amid the long weekend and China’s trade team returning to the US, the risk is to the upside in the markets as positive President Trump comments.

  Russian fob wheat offers slid another $.50/MT on Friday with offers at $242.50/MT. The weakness in Russian fob wheat price is said to be from several longs looking for new demand amid a slumping ruble. Interior Russian wheat prices have not fallen nearly as much and replacement for the export sellers will find them losing around $10-11/MT on higher interior cash bids. This leads ARC to believe that the Russian fob wheat decline is temporary.

  A newswire is reporting that a drought and army worms could force India to grant duty free corn imports. Total Indian corn imports are estimated in a range of 500,000-1.5 MMTs in coming quarters.

  The South American weather forecast is generally favorable with the overnight models calling for better rains across Argentina in the 8-10 day period. Otherwise, Brazil will see normal rainfall and temperatures into March

  US/China trade optimism with the potential of doubling ’17 US ag demand should underpin CBOT values with new US/China talks planned next week.

** There is no change in the North American Weather Pattern For The next 3 Weeks; Flooding to Worsen in the Delta/SE US: