Trade conflict with China undermines confidence in US agricultural markets

Wheat

Wheat markets were higher once again last week as traders talked about disease potential in Winter Wheat crops and about dry conditions in parts of Russia. Minneapolis Spring Wheat markets were also higher but rallied less than the markets in Chicago due to ideas of better planting conditions for crops in the northern Great Plains and Canadian Prairies. There has been some talk of disease problems for the Winter Wheat crops. There have been no confirmed reports of disease in the crops yet, but the weather has been good for promoting the disease. The areas most favored for the disease are the Midwest and eastern Great Plains. The crop most affected would be the Soft Red Winter crop. Current weather forecasts call for warmer temperatures this week and more wet weather. The wet weather is also causing concerns about Winter Wheat quality as too much rain could hurt protein levels. This is a bigger problem for Hard Red Winter Wheat.

It has been very dry in central Russia and into Kazakhstan, and there is talk that the crops will be hurt. This is a developing situation that could become serious if no rain falls in the next few weeks. Demand has been the big problem for any bullish traders for the last year and demand has been better for the last few weeks. The demand in the past year has been disappointing as weaker prices have not improved sales. World prices have been stronger than those in the US due to less production in major world exporters such as Russia, Europe, and Australia. The outlook is for improved production this year from competing producers so the chances for the US to sell a lot more Wheat into the world markets are fading. The daily and weekly charts show that Wheat markets closed on very positive notes and the charts imply further significant gains are possible with any follow-through buying this week.

Corn

Corn moved higher again last week as the weather market continued. It remains a very impressive rally that was caused by another week of cold and wet weather. It has been too cold and wet for most producers to consider planting and ideas are that the total US Corn crop might not be more than half planted by the end of Sunday. Many have not even been able to do initial fieldwork to prepare the soils for planting, and soils in many cases are too cold for seeds to germinate properly. The planting pace is thought to be one of the slowest in history and traders are now starting to figure out supply and demand scenarios based on reduced planted area and yields. The slow planting progress means that lower yields are a certainty and there are increasing ideas that not all of the intended area will get planted. USDA will need to reduce production estimates at some point this Summer, although that might not happen for a couple of months.

Reduced production and static demand will lead to lower ending stocks for the US, and that implies higher prices at some point down the road. The magnitude of the rally will depend partly on production, but also on demand, and demand has been less than stellar. Even so, a big rally is possible as long as the weather remains unfavorable. It was cool over the weekend and showers and storms were seen in much of the Midwest. More rain is forecast for this week in just about all areas. There is a good crop coming in Brazil and Argentina, so the US will have competition for sales. The chart shows that the trends are changed and that higher prices are possible. Prices basis the nearby futures over $4.00 per bushel to perhaps $4.25 per bushel in the short term are possible now. The funds remain very short in the futures market, and forcing them out of these positions could push prices higher than might otherwise be expected.

Soybeans and soybean meal

Soybeans and Soybean Meal were higher last week, mostly in sympathy with the rallies in the grains markets. Soybeans trends are now mostly sideways as the market reacts to the poor planting weather in the US against the increased availability of supplies for the world market from South America. The weekly charts for Soybeans still show the potential for futures to move to about 770 basis the nearest futures contract. US weather remains poor for planting Soybeans as well as Corn and planting of both crops is well behind normal. Crop conditions for emergence and initial growth are also bad as it is too wet and too cold for best growth in much of the Midwest. Soybeans have been slower to react than Corn as most producers try to plant Corn first and because of the trade wars with China combined with increased potential for South America to take over the market at this time. The market is worried about overall Chinese Soybeans demand due to the Asian Swine Flu that has decimated the hog herd there.

The government reports that at least 20 percent of its hog herd has been lost and private estimates show much higher loss potential. In addition, hopes for a trade deal in the near term faded a couple of weeks ago as the Trump administration accused China of trying to cancel already agreed terms and imposed new sanctions. Trump moved against Huawei after that by banning the use of its components in telecommunications equipment that might be used in the US or in business trying to work in the US. China responded by saying further negotiations need not happen until the US shows some sincerity in coming to a deal. A new trade deal with China might now have to wait until the presidential elections in 2020 are over. That is very bad news for US Soybeans producers and good news for producers in other countries around the world. It means that any rallies tied to bad weather or any other reason might not go very far as supplies in the US are big now and demand is not likely to improve very much anytime soon.

Rice

Rice was higher once again last week and closed in on some longer term objectives near 1175 July before fading a bit. Futures have broken through some resistance areas on the weekly charts and the charts now show the chance for prices to move significantly higher over time. However, the market has already rallied a lot without any kind of a significant correction, so a short term move lower is possible now. Ideas for planting delays in Rice and continued good export demand have been reasons to support futures. Exports were not at all strong last week due in part to the strong rally in prices, but the lack of production in South America makes stronger demand likely even if prices stay relatively strong. Growing areas near the Gulf Coast and in Texas are mostly planted, and crop development has been reported to be uneven. Some areas look very good while others have struggled to get good stands due to excessive rains. Planting progress remains slow in Arkansas due to wet and cold weather. There are some areas that might not get planted this year as producers are starting to run out of time to get the crops in and up and then to expect good yields. The funds and other speculators have been buying to cover some huge short positions.

Palm oil and vegetable oils

World vegetable oils markets closed lower last week as demand ideas started to weaken. The EIU announced it was making changes to its biofuels policies, and Palm Oil demand should be especially hurt. The EU has said it is concerned about preserving tropical rainforests and wants to limit the amount of Palm Oil imported for biofuels. Palm Oil has been the primary beneficiary of the buying on ideas that China could cut purchases of Soybeans in the world market due to the Asian Swine Flu epidemic in the country that is killing off a large part of the hog herd. They will be producing less Soybean Oil and could increase purchases of Palm Oil to compensate. They would most likely purchase Soybean Oil from Argentina as well but will avoid buying in the US if at all possible. Canola was firm again last week after holding contract lows as supplies in the country remain high and demand has softened. It has been dry in the Prairies, and this has allowed for rapid planting but slow and uneven emergence.

The court case in which a Chinese national could be deported to the US on industrial espionage charges remains a major issue between Canada and China, and China has basically cut off purchases of Canadian Canola due to the trial. Canada is appealing to the US to help it solve the issue since the arrest was made at the request of the US government. However, trade negotiations between the US and China have blown up in the last couple of weeks and there is probably little the US can do even if it wanted to. The US is taking further action to ban the use of Huawei equipment and parts in the US on industrial espionage charges so relations are bad again. The market has tried to become more stable in recent weeks but faces strong headwinds in getting demand flowing again and avoiding big ending stocks. Worries that low production and low planted area this growing season have started to support new crop prices. Soybean Oil was lower. US Soybean Oil faces increased competition in world markets from Argentina as its Soybeans are harvested and processed. Argentina will look to reclaim its position as the largest exporter of Soybean Oil in the world.

Cotton

Cotton was higher in recovery trading last week. The export sales report was strong in reaction to the lower prices in futures markets over the last couple of weeks. Cotton planting progress has been on par with the five-year average and ideas of big crops are keeping prices weaker. Also pressuring the market are forecasts for big product4ion around the world. USDA sees no shortage of Cotton anywhere in the coming year. Trends are down on the daily and weekly charts. The lack of a deal with China means less potential to sell US Cotton there. China has bought in limited amounts from the US this year as it seeks to cover a short crop of its own. However, it has bought more from India and now can look to Brazil for supplies. The breakdown in trade negotiations between the US and China means that the US will likely have sold what it will sell to China this year and that China could even cancel some previous purchases. The stock markets have been weaker as there were some new fears about the world economic health, and that meant Cotton futures had another reason for weaker prices.

Frozen concentrated orange juice and citrus

FCOJ was higher, but prices overall remain close to recent lows. The charts show that futures had become oversold. Trends are sideways on the daily charts and still down weekly charts as the market looks at a big oranges crop and weak demand for FCOJ. USDA production estimates are above 70 million boxes and represent a remarkable recovery from the greening disease and the small crops of just a couple of years ago. That means that there should be no shortage of oranges available to the market to make FCOJ.

Inventories inside the state are significantly higher than a year ago as Florida Citrus Mutual showed a 22 percent increase in state inventories in its weekly report. The increase is coming from less demand and good imports along with the increased domestic production. Harvest progress should be strong as producers are getting the Valencias done to complete the harvest for the year. Fruit for the next crop is developing and are as big as golf balls. Production is very uniform so far this year and crop conditions are called good. Irrigation is being used a few times a week to help protect crop condition, but showers are seen several times a week. Mostly good conditions are reported in Brazil as the harvest there gets underway.

Coffee

Futures were higher for the week in both markets as forecasts for cold air were made for southern Coffee areas of Brazil. It is not likely that the air would produce much in the way of damage, but it is an important reminder of what time of year it is in Brazil and the potential for damage due to cold and freezing temperatures. Weakness in the Brazilian Real caused some speculative selling earlier in the week in New York, while reports of steady offers from Asia hurt Robusta in London. The trade is still worried about big supplies, especially from Brazil and low demand. Brazil had dominated the market, and other exporters are having a lot of trouble finding buyers. However, buyers are now more actively pursuing other origins, especially for certified or higher end coffees.

Roasters were scaling down buyers on the extended down move and now have more than ample supplies in-house or on the way. Prices are generally below to well below the cost of production for world producers, and prices are getting to that point for producers in Brazil and Vietnam. The inventory data from ICO and others shows ample supplies in the world market. Brazil had a big production year for the current crop, but the next crop should be less as it is the off year for production. Ideas are that the next crop might still be big as the weather has been good for the trees so far. Mostly dry conditions are in the forecast for this week. The charts show that both markets could trade in a sideways to up pattern for now as the market looks at weather and production potential of the next crop.

Sugar

Futures were stable last week and found some buying interest late in the week as UNICA once again showed slow harvest and processing rates. The trade thinks that there is plenty of Sugar available to meet any demand, but the low totals demonstrated by UNICA so far have created some doubts. Chart patterns on the weekly charts are sideways to down in New York and sideways to down in London. The fundamentals still suggest big supplies, and the weather in Brazil has improved to support big production ideas. Demand seems to be average and routine. Brazil weather is good in all areas as there is less rain in southern areas and more to the north. However, UNICA reported a slow start to the harvest season in the center-south area due to a lot of rain. The processing pace remains below the year-ago pace in the latest data. Brazil has been using a larger part of its Sugarcane harvest to produce ethanol this year instead of Sugar, but Thailand has shown increased production this year. There are concerns that the Indian monsoon will not be strong this year and that Sugarcane production could be hurt. Very good conditions are reported in Thailand. Demand for Sugar has been average, and demand for ethanol is reported to be increasing.

Cocoa

Futures closed higher in New York and in London. Trends are up in New York, but sideways to down in London. The main crop harvest should be about over and mid-crop harvest is still a month or more away. Ivory Coast arrivals are strong as export. The weekly arrivals pace is about 15 percent higher than a year ago and is holding this level. Arrivals were reported strong in the rest of West Africa as well. Demand appears strong and the market saw stronger than expected grind data when the quarterly grind is released in the EU, North America, and Asia in the last month. Growing conditions are generally good in West Africa. Periods of showers and cooler temperatures were beneficial, and most in West Africa expect a very good mid-crop harvest. Cameroon and Nigeria are reporting less production and prices there are reported strong. Conditions appear good in East Africa and Asia, but East Africa has been a little dry as has Malaysia.

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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.