Monthly Archives: July 2018

2 July 2018 – Update

Posted on July 3, 2018 by simon

• With no news related to international trade negotiations, and ahead of the US July 4 holiday, Chicago soy markets continued their bearish trend. Following a weekend of extreme Midwest temperatures, Chicago markets would normally be adding weather premium, but the threat of lower import demand from China has been viewed as a far greater risk. Weekly soybean export inspections were at a 6 week high of 31 million bu, with minimal exports to China. The monthly export total for June will likely be more than double last year, and record large of more than 100 million bu. However, the worry is that without a trade resolution, the US will become the seller of last resort. After the close, NASS reported a 2% decline in national good/excellent ratings to 71%. LA ratings fell 7%, the SD crop was down 6%, while AR and TN were each down 4%. On a national basis, ratings remain historically high, with just 2 years (1994 and 2014) that were higher. Tariff deadlines are fast approaching, and without a resolution, international trade relations completely determine the outlook for US soybean values.

• September corn ended 12 cents lower amid as US trade rhetoric remained protectionist. The first round of tariffs will be implemented Friday. Retaliation will be due immediately. The issue for corn is ongoing weakness in the soy/corn ratio. If prolonged more acres will be devoted to grain production. Along with modest expansion in S American acres this autumn, world corn stocks will stabilise. Good/excellent crop rating this week is pegged at 76%, vs. 77% a week ago and 68% last year. Record yield potential is intact. But models hinges upon ratings in late July. A continued decline in good/excellent condition lies ahead via sporadic heat and a lengthy period of dryness. Weather ensemble models are void of a shift to wetter conditions into July 17. Also of note, 17% of the crop is silking, vs. 8% on average. The rush to maturity is underway. Trade issues aside, Gulf corn remains globally competitive. Ethanol production/demand is record large. Unfortunately, fundamental analysis will have little impact until more is known about US trade policy. We are hopeful some level of negotiations return. Pressure from farm groups lies ahead as farm income dives.

• Wheat fell a sharp 10-20 cents on additional long liquidation ahead of the US tariff deadline. If tariffs are implemented, the USDA’s July WASDE will account for trade issues between Canada, Mexico and others. The risk is that the US’s share of wheat exports to Mexico will be downgraded. Funds sold 13,000 contracts in Chicago. Winter wheat as of Sunday was 51% harvested, vs. 49% on average. Spring wheat crop ratings are unchanged at 77% good/excellent. No news in either case. Importantly, other world markets ended higher today. Wheat futures in Paris rallied €2.25/mt, basis spot. Black Sea futures rallied $1-2/mt. Gulf HRW this evening is offered at $217/mt. This is now $3/mt below comparable German 12% origin. Recall HRW’s premium to German was $30/mt just two short weeks ago. On this break, funds have liquidated the last of their length. Hi-pro Gulf wheat is competitive with European origin. And non-US wheat production will be revised downwards in coming USDA monthly reports. The market is fundamentally undervalued, but the message is that US trade barriers take priority.

2 July 2018

Posted on July 2, 2018 by simon

• Chicago selling was heavy in the opening minutes with the funds pressing corn, soybean and wheat futures. In recent Monday’s, fund managers have been sizeable sellers of raw materials amid the hardening trade stance of the US/China/EU/ Canada and Mexico. The hardening stance of the US on trade is a growing concern with US/China trade tariffs to start on Friday. Both are promising the application of 25% tariffs on a host of goods. The Chinese tariff focus is on US ag ,which will cause fresh financial harm. Trade wars are never positive for broad asset prices. Traders hope that logic/rational thinking come to the fore. Talk that a US legislative brief is being worked on that would call for the US withdrawal from the WTO is worsening the fear. The US Congress will never let the US withdraw from the WTO, but the hardening trade rhetoric shows that the administration is not yet in a negotiating stance. Chicago prices are trading “fear” this morning..

• Chicago brokers estimate that funds have sold 8,000 contracts of wheat, 12,000 contracts of corn, and 5,000 contracts of soybeans. There has been cash connected soymeal demand that has firmed Chicago spreads and allowed the midday recovery in the marketplace. In soy products, funds have sold 900 contracts of soymeal and 3,000 contracts of soyoil.

• The only way that we envision that US/China trade tariffs can be avoided would be Presidential discussions between Xi and Trump. Any negotiations will have to occur at the highest level for any resolution/delay in Friday’s tariffs. The marketplace will be acutely focusing on the hope of negotiation, but it’s a long shot as of today.
  

• The US export pace for soybeans remains strong, even without China. The Chinese have had a meeting with their soybean crushers/importers and they told them to prepare for a 15-20% decline in soybean imports in the coming year. This would equal to 15-20 million mt decline in imports, a huge amount. China will try to do with less by cutting back on soymeal use and utilising more wheat and corn within their feed rations. Such an abrupt cut in total imports could allow for China to nearly avoid US soybeans in a trade war. The point is that China could take less world soybean imports in the crop year ahead. How much success they have will depend on how hot they run their feed rations. And China can also use their 9-11 million mt of soybean reserve stocks. These stocks plus Brazilian imports could cover their demand through to October.

• The central US midday GFS weather forecast is warm and drier than normal as a high pressure ridge transferases the Central US in the next 10 days. High temperatures in the 90s/100s will be common across the Plains/ W Midwest throughout the first half of July. Overnight lows will be warm holding in the mid to low 70s. Isolated showers will impact IA, MN and WI late week. Elsewhere, cumulative rainfall into July 13 is estimated in a range of .25-.75”. Draws in soil moisture lie ahead and crop ratings should decline in the next few weeks. Stress will be building on Midwest crops.

• All eyes are on US trade policy. No concrete progress has been made, and in fact, the lack of transparency is frustrating. The US is trying to bully other nations into accepting uncertain terms. US farmers are losing hope amid negative margins, and are uncertain as to what the end game is. Chicago markets are not following traditional fundamentals, otherwise wheat and corn would not be pacing the decline. The focus is all on trade and that avoidance of US ag products will be the net result.