- Media reports that the US and China are seeking to restart talks to avert a trade war has caused a sharp rally in Chicago soy futures this morning. Corn and wheat have followed with both pushing to new highs. Wheat has rallied above its 2017 and May highs with December corn pushing back against resistance at $3.90. A close above $5.54 in Chicago wheat would indicate a technical breakout with the next upside price target being $6.00-6.25. The next upside price target in December corn is $3.95-4.05. US cash sources indicate that there has been an increase in US old crop corn and soybean sales this morning. However, following big sales last week and today, many US farmers are getting to a “sold out” position on old crop and are more reluctant to add to new crop sales until more is known about 2018 US corn/soybean yields. We look for a higher close, but there has been some midday weakness as the GFS weather forecast is slightly cooler/wetter than what was offered overnight. The potential that the US and China will enter dialogue/discussions is a big deal for the US soybean/grain markets. Remember that if the US/China were to avert a trade war, it likely would include US corn/wheat and beef.
- We would caution that US/China talks are just exploratory in terms being able to set times/dates for face to face negotiations. However, after weeks of “no communication” the news that both sides are talking is a step forward. The markets will be closely watching discussions. The risk for the market is now the reverse of April/May in that you could wake up overnight and find that China and the US have agreed to meet face to face for negotiations. We estimate that there is some 15-20 million mt of Chinese soybean demand to be filled if the US/China could come to some sort of trade agreement.
- World wheat prices just keep rising amid a shortage of supply. Sweden announced this morning that its wheat crop will be down 40%. This normally key exporting country will be an importer in 2018/19. Sweden is just a small wheat producer in the EU, but the message is clear that shortages exist and that farmers will not easily part with their drought reduced crop. French wheat for October is trading above $247/mt with November/December at $250.00. The normally sleepy UK wheat market is priced at $266/mt or $7.25/bu. UK wheat is often more of a feed quality wheat so having a price above $7.00/bu should not be overlooked. We note that many wheat millers are short bought and are shocked by the sharp wheat rally. At some point, short bought millers will have to take extended coverage, and potentially pay even higher prices. EU 2018/19 wheat exports may be no larger than 19-21 million mt due to drought. The loss of EU, Russian and Australian wheat production is going to shift trade flows for months to come. US 2018/19 wheat exports are expected to be back loaded.
- The central US GFS weather forecast at midday is slightly cooler and wetter beyond the next five days. The GFS model added some moisture across the NC Midwest early next week with totals of 0.2-0.6”. Temperatures are also cooler through the weekend. The extended range does not offer a lasting ridge of high pressure for the Great Lakes, but rather has this ridge farther west with its position over the Plains by August 10. The midday GFS ensemble model has the ridge farther east over the Plains/W Midwest with heat building. We would argue that this model has a better handle on the pattern. The EU model will be closely watched going home vs its overnight run.
- Tightening world wheat exporter supplies and stocks will push values higher into early 2019. $5.50 Chicago is not currently producing any demand rationing. US corn will see record large exports while soybeans could leap to $9.50-10.00 with a start of US/China trade negotiations. We doubt that Chicago breaks in wheat/corn can be sustained. The US better have a corn yield of 177-179 bushels/acre to meet demand.