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 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 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 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 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.
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.