- Chicago soy/corn rally sharply on Brazilian tax and Central US weather; Wheat futures fall on harvest yield results and liquidation.
- The provisional President Lula 29 billion Real tax package that was announced/implemented yesterday across Brazil along with warmer/drier Central US weather forecasts has ignited a strong Chicago summer row crop rally. Wheat has been a laggard on US harvest pressure and wheat/corn spread unwinding. The US Plains harvest is expanding, and high yields are being reported in TX/OK with tests weights reported to be exceptionally high. US HRW wheat production estimates are rising which has put the US futures under pressure. We note strong chart support below $6.60 KC July with Chicago/KC wheat pushing out to a 34.75 cent premium. We doubt that the spot KC/Chicago wheat spread can rise much above $0.40/bu amid a US hard wheat crop that may be as large as 725 million bu. The Kansas harvest starts in 10 days and yield results will be closely followed. Weaker wheat is acting to tug corn/soy futures off their highs. The 50% correction level in July Chicago wheat is $6.36/bu, the immediate downside target.
- Chicago brokers estimate that funds have bought 7,800 contracts of corn, 5,400 contracts of soybeans, and 2,300 contracts of wheat. In soy products, funds have bought 4,900 contracts of soyoil and 2,100 contracts of soymeal.
- The Lula Administration implemented a broad tax package yesterday that would raise $29 billion in new Brazilian Government revenue annually. The package was announced and enacted (provisionally for 120 days) with Brazil’s Lower House and Senate needing to approve by early October to maintain the same tax collection rate. The tax package increase was complex including new taxes on income, sales, and export credits. Brazilian ag agencies estimate that it could raise farm taxes by 20%. The tax package has caused producer sales to dramatically decline as farmers wish to better understand the program and weigh their options. If the tax package does not pass the Senate of the Lower House, holding grain makes good economic sense on a lower tax bill. However, farmers still need to pay for crop inputs before their next soybean planting cycle that starts September 15. Winter corn cash sales is where the biggest impact could occur with the harvest just starting.
- US weekly export sales for the week ending May 30 were 22.7 million bu of wheat (both crop years combined), 46.5 million bu of corn, and 7.0 million bu of soybeans. For their respective crop years to date, the US has sold 685 million bu of wheat, 2,018 million bu of corn (up 509 million or 27%), and 1,595 million bu of soybeans (down 285 million or 15%). We look for WASDE to adjust US soybean export estimates slightly next week to 1,685 million bu. China purchased 2 cargoes of US corn.
- The midday GFS weather forecast is wetter in the E Plains and the W Midwest than was offered overnight. The US Gulf is again forecast to have tropical activity which is likely causing distortions in the GFS forecast beyond the next 5 days. The Gulf is record warm for early June and the outbreak of tropical storm activity is expected at some point. A high pressure ridge noses northward from Mexico into the Central US, but it does not appear to be stationary. The GFS forecast places a strong ridge across the Great Basin after June 20. There are many moving parts in the North American forecast and caution on the adoption of any one run is advised.
- Chicago is unlikely to break sharply ahead of next week’s USDA WASDE report which will likely further drop Black Sea wheat production with a cut in the S American corn crop also forecast. US crop balance sheets will not change much with the trade focused on overseas crop production. US soyoil prices are fully competitive in the world marketplace which returns the US back to the chance at being a prominent exporter. Soyoil has finally scored a longer-term bottom. Wheat has additional downside risk on harvest pressure, but longer term a bull market lurks on rising Black Sea and European prices.