The CRB/CCI index slid lower this week amid weakening ag and energy prices.
The US dollar rallied to the best levels of the year, with key resistance resting at $.97 in the index. ARC research has a theme of looking for a top in the US greenback in the 1st quarter of 2019.
The US Central Bank should be on hold following one more hike in June, amid a slowing of US and world economic activity.
The US/China trade talks will be front page this week with the USTR Team traveling to Beijing this weekend. Both the US/China need to declare a win in the trade and the negotiations are expected to plow ahead. Our expectations are that enough progress will be scored to delay a new round of US tariffs with negotiations continuing into spring. However, in doing so, China will be demanded to secure additional tonnages of US ag & energy.
CRB prices fell into an open chart gap left at the end of 2018. This gap is expected to hold with a recovery into late week. ARC would use any weakness early this week to secure raw materials. A lasting top in the USD should occur by late March.
Corn futures ended the week 4 cents lower. The market waited for two months for USDA supply & demand data only to see US and world balance sheets little changed. US corn yield was lowered as expected, but so was ethanol/feed disappearance. US production losses were offset by a hike in Argentine corn production to a record 46 MMTs. Lower global domestic use was offset by higher trade. Prevailing trends will continue, and these include potential for US-China trade progress and solid US export demand into spring.
Brazilian weather needs monitoring for the next 8-12 weeks, particularly amid abnormally low soil moisture currently. Rain will be more widespread in the weeks ahead, but it’s April weather that’s critical. A strategy of buying breaks will continue until more is known about 2019 US acreage and weather. Support rests below $3.70 spot CBOT corn futures with resistance at $3.95-4.00.
Wheat futures ended the week 6-14 cents lower. World cash markets also took a pause following the surge in Black Sea/EU fob offers in January and early February. USDA data was uneventful, except for lower than expected winter wheat seedings – a new 110 year low – a rather heavy burden lies on Mother Nature this spring and summer. Assuming normal abandonment and trend yield, US end stocks will fall to 700-750 Mil Bu. There’s little room for yield error.
The 2019 US winter wheat crop was planted in some of the wettest conditions on record and condition ratings are well below the 5-year average.
ARC mentions that Russian domestic prices rallied to new record highs this week. Russian fob offers are equivalent to $5.50-5.60 basis March KC, and so the US is well positioned to maintain enlarged exports into the end of the crop year.
WASDE should have cut their EU wheat export estimate by 5 MMTs with sales/ shipments down 27%. And the job of Russia cash prices is to keep its wheat from export. ARC maintains that China books US wheat at some point. US wheat continues to creep higher in a range as 2019 production is debated.
Soybeans finished slightly lower, but little changed on the week. Much of the week was spent chopping back and forth around unchanged, as traders prepared for the USDA reports and reacted to news on US/China trade negotiations. 2018 US soybean production was down slightly from the November estimate via a slightly lower yield and fewer harvested acres. The USDA upped their crush estimate, lowered the export forecast, and US soybean end stocks were reduced – but held at a historically large 910 Mil Bu. S America is on track to produce a record large 186 MMT crop, while Chinese demand is in full retreat. All of which looks weigh on US/world soybean prices in the coming months. With the world awash in soy, our view stays bearish on rallies. ARC research doubts that China will secure more US soybeans, even if US/China trade negotiations are positive this week.
Cattle futures started with a rally and then spent the rest of the week trading back and forth – unable to hold onto the early week gains. Cattle slaughter was up for the week but has held below a year ago. Carcass weights are 10 Lbs lighter than last year. The lower production is lifting beef prices, while feedlots continue to demand higher prices to offset poor feed conversion rates. The cash market has held a narrow $1 range for the past month, while the CME has already priced in another $2-3 spring cash rally. CME traders continue to wait on the USDA to get caught up on monthly cattle & meat reports to better gauge current demand as well as forward available cattle supplies. A year ago, the cattle market topped at $130 while February cattle were near $127. On the other hand, June cattle this week at $117 are more than $16 over last year’s spring low. We favor 2nd quarter hedges on rallies. China demand is a wildcard in the outlook.
Hog futures started the week with a brief rally and ended the week at new lows. The long talked about Chinese US pork demand has yet to materialize, and the CME has spent the last month extracting premiums. Hog futures are now back to normal values relative to cash, but the current problem in the hog market is that pork demand has not kept pace with the increase in production. Both the pork cutout and cash hog market are trading sharply below a year ago, while spot futures fell back to a longer-term trendline. Meat traders are hopeful that China will become a larger pork importer of US or other world pork sometime in 2019, but the timeline keeps getting pushed backwards. CME futures are deeply oversold, but a recovery needs to be led by seasonally tightening hog supplies and a US cash market recovery.