Howdy market watchers. August is half over and kids are back to school. The year 2020 continues to be full of surprises.
Colleges are canceling football seasons and Russia is the first to register a COVID-19 vaccine amid a mountain of safety concerns and limited testing. Let’s allow them to try it first.
The much-anticipated, six-month review of the U.S.-China Phase 1 agreement scheduled for Saturday was postponed at the last minute without any rescheduled date thus far. The Chinese have continued to buy beans this week, with new crop sales now reaching 11.9 million metric tons. Total new crop commitments now are in line with the all-time record as of early August in the 2013-14 and 2014-15 marketing years. However, what’s driving bean purchases is not, unsurprisingly, China’s attempt at satisfying President Trump’s targets for U.S. ag purchases under the Phase 1 agreement. It is economics and thankfully so. China’s soybean meal demand has continued to surge from growing animal feed demand as the economy recovers and pork production ramps up from African swine flu losses that also have increased prices for poultry. Positive margins for crushers in China will continue to drive demand for bean imports. Expectations are that Chinese importers will source around 8 million metric tons per month between October and December, according to a Reuters article this week from conversations with local crushers and traders.
Currently, December has no coverage, so we can expect further buying announcements. This optimism helped November beans rally more than 35 cents from Wednesday’s low to Thursday’s high, touching right at the 200-day moving average at $9.02½. This was despite new crop estimates in USDA’s mid-week crop report increasing 2.0 bpa to 53.3 bpa, equivalent to 290 million bushels from previous estimates and 162 million bushels above average trade estimates.
Corn production also was adjusted higher, with a yield bump of 3.3 bpa above previous estimates and 1.4 bpa higher than average trade estimates to 181.8 bpa reaching. With harvested acres held the same at 84.0 million acres, this brought total production to 15.278 billion bushels from previous estimates of 15.000 billion bushels and a 15.182 billion bushel average trade guess. Amid these increases, short covering pushed December corn up more than 20 cents in two days following the report release.
On Wednesday afternoon, the USDA also released this year’s first prevent plant report. Through July 31, 5.375 million acres of corn, more than 1.2 million acres of beans and nearly 1.2 million acres of wheat were claimed as PP acres, totaling 8.991 million acres compared to 11.4 million acres of corn alone last year. This makes 2020 another historically high PP year, with the five years leading up to 2019 averaging 3.8 million acres total. Assumptions have changed, however, since these figures were finalized. It was during the calm before Monday’s intense derecho storm that blew through midwestern states with winds up to 122 mph. This type of storm is rare, but is characterized by straight-line winds and typically occurs during the summer. The beloved state of Iowa was one of the hardest hit. The latest assessment from the Iowa Department of Agriculture was that 36 of the state’s 57 counties suffered the brunt of the storm.
Those 36 counties represent 3.57 million of Iowa’s 8.2 million acres of insured corn, or nearly 44%, and 2.5 million acres of the 5.6 million acres of insured soybeans, or nearly 45%. The extent of the damage to these acres will continue to be estimated over the coming weeks, although we will have to wait until harvest to see how many bushels of corn and beans will not be harvested. Damage to infrastructure also has been immense, which will pose challenges at harvest. We likely are to see more bagged grain, depending on how quick facilities can be rebuilt. We will continue to update clients on the crop damage. Our thoughts and prayers are with our fellow farmer friends in Iowa, Illinois and surrounding states who were impacted.
The gap remains on the corn chart, the bottom of which was nearly reached on Thursday’s spike. Friday’s Commitments of Traders report showed a slight decrease in managed fund net shorts while they were net sellers in beans, Chicago, KC and Minneapolis wheat.
Finally, the wheat market has tried to turn a corner. Chart patterns indicate a rounding bottom formation after lower winter wheat production, specifically hard red winter wheat. Last year’s world ending stocks came in higher than the previous USDA estimate. The Russian wheat crop, which has been on the up and up from several private estimates, also grew with the USDA to 78 million metric tons, but remains below the 80 million mark. However, the expectation is for this number to be revised upward. Ukraine also was increased. Argentina was slightly reduced, good news for U.S. exports, and Australia was held the same. French crop conditions also slipped sharply this past week. The USDA’s carryover estimates into next year released in Wednesday’s report was 11% lower than this year and if realized, would represent the smallest in six years. If selling wheat at these levels, consider repositioning with long call options. As we addressed last week, the month of August marked the lows last year.
The cattle market continues to push higher, with cash fat cattle trade reaching $106 this week. August live cattle futures broke above the 200-day moving average on Tuesday, reaching $107.975, right up to the gap on the chart from late February. The market remains in a bull channel and overbought, but strength continues with beef cutout prices the highest since June 23, supporting packer margins. This should lead to increases in slaughter that may tame this market, but not until supplies catch up. Feeder cattle made new recent highs this week back to early March levels, although weaker on Thursday and Friday. The $148-149 on August feeders remains unfilled. Will we get there? Hard to say. The bull channel remains intact on this chart, as well, and the path of least resistance seems higher. However, this has been a major move and we’re not short of cattle, at least overall. While there is a chance we push higher toward the gap, rolling up lower put options or adding protection for cattle to be sold October through January look prudent at these levels, which always seem difficult to push much further through. Give me a call at (580) 232-2272 or stop by our office to get your account set up and discuss strategies to protect your exposure to these markets. It is never too late to start and there is no operation too small to get a risk management and marketing plan in place.
Remember, I am on-site at the Enid Livestock Market on Thursday, sale day. Wishing everyone a successful trading week.
Sidwell is a Series 3 licensed commodity futures broker and principal of Sidwell Strategies. He can be reached at (580) 232-2272 or at firstname.lastname@example.org. Futures and options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at http://www.sidwellstrategies.com/disclaimer.