Markets gyrate as trade tensions rise · 2019-12-19 · April 7, 2018 • Vol. 46, No. 14 United We...

April 7, 2018 • Vol. 46, No. 14

United We Stand

Markets gyrate as trade tensions rise — The U.S. and China exchanged trade tariff threats last week, with the latest being a push by President Donald Trump late Thursday to slap another $100 billion in trade sanctions on Beijing. All things considered, the soybean and corn markets handled the news relatively well. While soybeans were lower for the week, they finished well off their weekly lows, as traders realized the world will still need U.S. soybeans even if China imposes its proposed tariffs. Corn futures were highly choppy, but showed little net change for the week. While U.S. wheat was on the list for poten-tial tariffs, traders’ attention was more on crop woes in the Southern Plains and cold, wet conditions in the Northern Plains, which pushed futures to solid weekly gains. Livestock markets reacted most violently to the trade concerns. Cattle and hog futures plunged early last week, showed signs of putting in lows around mid-week and then dropped sharply again on Friday.profarmer.com

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MPP-Dairy signup starts this week.Enrollment for the Margin Protection Program (MPP-Dairy) runs from April 9 to June 1. Dairy operations must make a new coverage election for 2018, even if you enrolled during the previous 2018 signup period. Coverage elections made for 2018 will be retroactive to Jan. 1. Dairy operations may still “opt out” by not sub-mitting a form. Producers can participate in either MPP-Dairy or the Livestock Gross Margin Insurance Plan for Dairy Cattle, but not both.‘Butterfly’ label does not mean non-GMO.The Canadian Food Inspection Agency (CFIA) now says the Non-GMO Project Verified label does not imply a non-GMO product. This opens the door for food companies to replace non-GMO labels with the so-called “butterfly” label without consequence.

Rising Brazil bean prices spur U.S. buysBrazilian soybean prices surged amid esca-lating trade tensions between the U.S. and China. The increase in Brazilian soybean prices triggered a flurry of demand for U.S. beans. USDA reported daily soybean sales last week of 522,316 metric tons (MT) for 2017-18 and 520,316 MT for 2018-19.

Farmer aid will key off CCC Charter ActUSDA has been instructed by Trump “to pro-tect our farmers and agricultural interests” during the tariff battle with China (see News page 4 for details and perspective on this sen-sitive issue). We are told if any plan is imple-mented, it will rely largely on the Commodity Credit Corporation (CCC) Charter Act, which could mean direct payments for some pro-ducers. CCC can assist through loans, pur-chases, payments and other operations.

CCC has an authorized capital stock of $100 million. Importantly, CCC has the authority to borrow up to $30 billion from the Treasury at any one time.

Blanket RFS waiver for small refiners?The Environmental Protection Agency (EPA) is greatly expanding waivers from Renewable Fuel Standard (RFS) obligations for some refiners (see News page 2). Reuters reports lawmakers wanting to reform the RFS are considering a blanket waiver for all small refineries. The draft bill, led by Senator John Cornyn (R-Texas), has low odds of passing Congress, but it shows there are increasing attacks on U.S. biofuels regulations.

Supply & Demand Report out April 10We expect carryover to increase to 2.222 bil-lion bu. for corn and 1.063 billion bu. for wheat, based on March 1 stocks. For soy-beans, we expect a cut to exports to be more than offset by a higher crush forecast, result-

ing in a slightly lower ending stocks figure.USDA’s global corn carryover forecast

should tighten, as its Argentine and Brazilian forecasts are too high. Its global soybean ending stocks should also tighten as a decline to the Argentine crop should more than off-set an increase to the Brazilian crop.

Big push to get NAFTA 2.0 talks donePositive news could be on the horizon regarding renegotiations of the North American Free Trade Agreement (NAFTA). The Trump team reportedly eased a key demand on regional car content, which has been a sticking point. Trump reportedly wants to get a “deal in principle” by the Summit of Americas meeting April 13.

House farm bill text expected this weekThe House farm bill may finally be unveiled this week, with markup tentatively slated for the following week. Key factors to watch for will be any increase of max CRP acres, changes to the PLC and ARC safety nets, and much-needed funding for livestock vaccines.

Jobs growth slows dramatically in MarchU.S. non-farm payrolls increased 103,000 in March, well below expectations for a 175,000 rise. In addition, January and February payrolls were revised down a combined 50,000 from previous reportings. Hourly earnings increased, but not enough to stir fears of wage inflation.

Investors lowered their expectations for more than three interest rate hikes this year.

U.S. trade deficit expands againThe U.S. trade deficit rose for a fourth straight month to $57.6 billion in February, up $1 bil-lion from January and the largest deficit since 2008. The deficit surged as exports rose to $204.4 billion, up 1.7%, while imports also rose 1.7%, reaching $262 billion.

News this week...Page 2: EPA increasing RFS waivers.Page 3: Hog herd record- large and growing.Page 4: U.S./China closer to trade war.

For exclusive use of Pro Farmer Members. No portion may be reproduced or shared.

April 7, 2018 / News page 2

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Strong February soy crush.

U.S. soy proces-sors crushed

164.9 million bu. of soybeans dur-

ing February, according to

USDA. That was down 9.7 million

bu. (5.6%) from January, but up 13.5 million bu. (8.9%) from last year. The crush

pace supports our ideas USDA is too low with its crush forecast of 1.960

billion bushels.

February corn ethanol grind

strong, too.USDA pegged

February corn-for-ethanol grind at

433.6 million bu., up 2.4% from last

year. During the first six months of

the 2017-18 mar-keting year, etha-nol grind was up

2.7% versus USDA’s forecast

for a 2.6% increase.

Drop in seed

corn sales hurt Monsanto’s

earnings. Monsanto’s quar-

terly seed corn business dropped

6.2%, while its soybean busi-

ness sales climbed 6.0%. Also of note,

Monsanto President Brett

Begemann says farmers are “on

their way to planting nearly 50

million acres of dicamba-tolerant

soy and corn this year, nearly dou-

ble last year’s acreage.”

Winter wheat crop ratings plunge over winterUSDA rated only 32% of the win-ter wheat crop as “good” to “excel-lent” in its first crop condition update of the spring. Over the past 30 years, the early-April rating has been lower than this year only twice — 1996 at 27% and 2002 at 31%. Meanwhile, 30% of the crop was rated “poor” to “very poor.”

When USDA’s crop ratings are plugged into the weighted Pro Farmer Crop Condition Index (0 to 500 point scale, with 500 being perfect), the HRW crop plunged 56.84 points from the final rating last fall to 274.79. The SRW crop dropped 19.56 points to 358.22. The HRW CCI rating starts spring 52.20 points below the five-year average, while the SRW CCI rating is 14.57 points below normal.

Such low crop ratings to start spring strongly suggest the HRW yield will be below trendline. Dating back to 1987, each of the previous seven years when the HRW crop rating was below average in the first report of the spring, the final HRW yield was 2 bu. or more below trendline. It is possible, however, for the other winter wheat classes to make up for a lower-than-normal HRW yield. In 2011 and 2013, the national winter wheat yield was about average, despite a below-trendline HRW yield. Therefore, we can’t rule out a trendline yield of 49.0 bu. per acre. However, yields could also drop 5 bu. to around 44 bu. per acre (see chart below). Our current national average winter wheat yield pro-jection is 46.5 bu. per acre, which would be 2.5 bu. below trendline.

EPA granting more RFS mandate waiversThe Environmental Protection Agency (EPA) confirmed last week it has granted waivers of Renewable Fuel Standard (RFS) requirements for 2017 to 25 refineries (some for 2016, too) — and that list could grow. Government data shows there are 57 refineries with capacity under the 75,000-barrel-per-day threshold for the waiver.

Andeavor reportedly received waivers for its three smallest plants, despite being one of the largest U.S. oil refining companies.

The problem with granting waivers is that “the size of a refin-ery alone does not determine operational competitiveness in the marketplace,” according to the American Petroleum Institute. More over, allowing refineries to escape annual blending quotas “fundamentally undermines” the purpose of the RFS, says Iowa Senator Chuck Grassley (R).

If EPA is going to broadly grant hardship waivers, it would weaken prices of renewable identification numbers (RINs) and greatly reduce the reason they exist. But maybe that’s what EPA is trying to achieve.

Blender hardship waivers lower RFS requirementsWhen EPA grants exemptions after setting annual biofuel quo-tas, it doesn’t redistribute require-ments to other refiners — so each waiver effectively lowers the RFS level. Geoff Cooper, executive vice president of the Renewable Fuel Association (RFA), says data from the U.S. Energy Information Administration suggests 14.4 billion gallons of corn-based ethanol were blended into gas-oline in 2017, below the man-date of 15.0 billion gallons. He says RFA believes these waiv-ers are likely the reason. He cautions, “What impact does the RFS have on actual blend-ing levels is hard to tell as long as we have these mysterious waivers being issued.”

For exclusive use of Pro Farmer Members. No portion may be reproduced or shared.Consultant keeps lowering Argentine crop estimates South American Crop Consultant Dr. Michael Cordonnier cut another 1 million metric tons (MMT) each from his Argentine soybean and corn crop estimates that now stand at 40 MMT and 32 MMT, respectively. He says while recent rains came too late for ear-ly-maturing crops, they will ben-efit late-filling corn and soybeans.

The Buenos Aires Grain Exchange lowered its Argentine soybean crop peg to 38.0 MMT and kept its corn crop estimate at 32.0 MMT.

Southern Brazil to import corn to cover shortfallsThe southern Brazilian states of Santa Catarina and Rio Grande do Sul won’t produce enough corn to meet the needs of live-stock and poultry farmers this year. It’s estimated the two states will need to import a com-bined 4.4 MMT of corn this year.

Cordonnier reports two 60,000-MT vessels from Argentina are expected to arrive in Santa Catarina soon. But with Argentina’s corn crop severely damaged by drought, and rail/truck rates making it costly to transport corn from central Brazil, this opens the door to more imports from the United States. A 100,000-MT shipment of corn from the U.S. is sched-uled to arrive in Rio Grande do Sul later this month.

Brazilian exports swing toward soybeansBrazil exported 8.814 MMT of soybeans in March, according to official ag ministry data. That was up 5.950 MMT (207.8%) from February, but down 165,368 met-ric tons (1.8%) from last year, as harvest delays slowed the arrival of new-crop beans at ports. Brazil exported 605,266 MT of corn last month, a 649,136 MT (51.7%) decline from February, but up 362,263 MT (149.1%) from last year, as the country is still ship-ping old-crop supplies.

6050

-2-4

30-6

02

Winter Wheat Yields

4020

468

9070 80% Good/Excellent first rating of the springYie

ld de

viatio

n from

norm

al (bu

. per

acre)


H&P Report one for the record books: U.S. hog herd record-large and growing The March 1 U.S. hog inventory at 72.908 million head was record-large and topped last year by 2.207 mil-lion head (3.1%) in USDA’s Quarterly Hogs & Pigs (H&P) Report. The March 1 market hog numbers rose

2.105 million head (3.3%) from last year to 66.708 million head. The breeding herd at 6.200 million head increased 102,000 head (1.5%) from March 2017. While the numbers reflect active expansion by U.S. hog producers, there weren’t any numbers that were shockingly large compared to expectations.

In contrast to recent reports, quarterly sow farrowings didn’t greatly exceed producer intentions stated in the preceding report. December-February farrowings rose 2.4% annually to 3.057 million head, but that fell short of winter farrowing inten-tions of 3.070 million head in USDA’s December H&P Report. Still, the winter pig crop at 32.341 million head was record-large, topping last year by 1.195 million head (3.8%). That was greater than anticipated, driven in part by a record number of pigs saved per litter during winter. Sows are simply becoming more efficient, with the average number of pigs saved per litter continuing to grow 1% to 2% each year. After the upward trend slowed over the previous five quarters, the 1.4% rise posted last winter suggests the trend may accelerate once again.

USDA’s market hog weight breakdowns imply constant year-over-year increases for hog supplies during the coming weeks and months. Hogs weighing over 180 lbs. at 3.9% above comparable year-ago levels matched up with hog slaughter posted during March. Thus, we can expect similar slaughter numbers rela-tive to year-ago in early April. The lighter weight categories suggest hog slaughter will average “just” 3% over 2017 rates from that point through much of June. The number of pigs weighing less than 50 lbs. indicates sum-mer hog slaughter will also top year-ago levels by 3%, but that may be a bit understated, since the winter pig crop posted a 3.8% annual gain.

USDA’s data signals producers intend to keep building their herds, as spring farrow-ings are expected to be 2.1% above year-ago, while summer farrowings are anticipated to rise 1.4%. Those figures seem rather low. We tend to think farrowings will continue to aver-age 2% to 3% above the prior year. With litter sizes record-large and rising, that would sug-gest upcoming pig crops will top year-ago by slightly more than 3%. We expect hog supplies to continue to post annual gains of 3% to 4% above year-ago through early 2019.

Demand is key to the price outlook as supplies rise. The export environment has become uncer-tain with controversies over international trade with Mexico and tariffs with China, the No. 1 and No. 5 buyers of U.S. pork by volume last year. But we anticipate domestic demand for hogs/pork will build domestically. We believe the mid-2018 outlook for the U.S. hog and pork markets is generally promising in the absence of a full-fledged trade war. But with hog numbers building, demand must stay strong.

ACTUAL DOANE FORECASTS*YearAgo

LastWeek

ThisWeek May June July-

Sept. 4/7/2017 3/30/2018 4/6/2018 (Monthly & quarterly avg.)

CORN Central IL, bushel 3.37 3.40 3.45 3.60 3.65 3.75 Omaha, NE, bushel 3.26 3.50 3.60 3.70 3.75 3.85 Dried distillers grain, IA, $/ton 92.50 152.50 -- -- -- --SOYBEANS Central IL, bushel 9.05 9.70 9.67 9.90 9.95 10.05 Memphis, TN, bushel 9.36 10.03 10.03 10.20 10.25 10.35 Soymeal, 48% Decatur, IL, ton 302.20 374.80 384.30 370.00 370.00 375.00WHEAT Kansas City, HRW, bushel 3.67 4.42 4.54 5.10 5.15 5.30 Minneapolis, 14% DNS, bushel 5.94 7.39 7.14 7.25 7.30 7.20 St. Louis, MO, SRW, bushel 4.15 4.46 4.58 4.85 4.85 4.90 Portland, OR, soft white, bushel 4.62 5.50 5.57 5.80 5.85 5.75 Northeast MT, durum, 13%, bushel 5.52 5.85 5.87 6.00 6.05 6.15SORGHUM, Kansas City, cwt. 5.55 5.62 5.76 5.90 5.95 6.00COTTON, 11/16 SLM, 7 area, ¢/lb. 71.86 77.49 76.35 77.00 78.00 72.00RICE, nearby futures, cwt. 10.18 12.44 12.42 12.60 12.65 12.00BARLEY, Montana, malting, bushel 6.00 8.25 8.27 8.30 8.35 8.25OATS, Minneapolis No. 2 heavy, bushel 2.85 2.59 2.67 2.75 2.80 2.90ALFALFA, NW Iowa, lg. sq. prem., ton -- -- -- 155.00 150.00 148.00SUNFLOWERS, Fargo, ND, cwt. 14.92 17.65 17.65 17.75 17.80 17.90HOGS, Nat’l basecost cwt. 51%-52% 59.04 49.15 45.26 68.00 83.50 75.00FEEDER PIGS, 40 lbs., nat’l avg., head 67.20 74.56 73.42 85.00 75.00 55.00CHOICE STEERS, NE feedlots, cwt. 125.09 120.93 114.74 117.50 113.00 110.00FEEDER CATTLE, Oklahoma City

Steers, 700-800 lbs./cwt. 136.56 139.21 136.30 143.00 148.00 146.00Steers, 500-550 lbs./cwt. 165.56 173.81 167.33 174.00 177.50 172.50Heifers, 450-500 lbs./cwt. 147.76 155.31 152.12 157.00 160.00 155.00

COWS, utility, Sioux Falls, SD, cwt. 71.94 59.18 63.75 62.50 62.00 60.00MILK, Class III, CME spot MO, cwt. 15.14 14.23 14.46 14.50 14.75 15.75LAMBS, Slg., San Angelo, TX, cwt. 132.66 137.00 117.50 -- -- --ENERGY

Ethanol, IA, gallon 1.58 1.42 -- -- -- --Farm diesel, U.S., gallon 1.93 2.44 2.39 2.43 2.48 2.50

*Average prices expected for the indicated time periods based on available information. Forecasts will be revised as necessary to reflect changing market conditions. Diesel prices are from Inputs Monitor.

Auto emissions revision. EPA Administrator Scott Pruitt announced his agency’s plans to revise the Obama administration’s auto emissions standards for vehi-cle model years 2022 through 2025. California is expected to defend its waiver to have more stringent standards. Ethanol groups have sup-ported the stan-dards, known as CAFE (Corporate Average Fuel Economy), saying ethanol can help meet emissions targets.

March 29 Quarterly H&P Report

USDA Trade actual expected (% of year-ago) Inventory — All Hogs & Pigs 103% 103.1% Kept for Breeding 102% 101.5% Kept for Marketing 103% 103.3% Pig Crop — Dec.-Feb. 104% 103.7% Dec.-Feb. Pigs/litter 101% 101.1% Farrowings — Dec.-Feb. 102% 102.5% March-May Intentions 102% 102.1% June-Aug. Intentions 101% 101.7% Market Hog Inventory — Under 50 lbs. 103% 103.1% 50 lbs. to 119 lbs. 103% 103.1% 120 lbs. to 179 lbs. 103% 103.0% 180 lbs. and Over 104% 103.4%



News alert and analysis exclusively for Members of Professional Farmers of America® 6612 Chancellor Dr. Ste. 300, Cedar Falls, Iowa 50613-9985CEO and President, Grey Montgomery • Editor, Brian Grete • Editor Emeritus, Chip Flory • Sr. Economist, Dan Vaught • Sr. Economist, Bill Nelson

Digital Managing Editor, Meghan Vick • Inputs Monitor Editor, Davis Michaelsen • Washington Policy Analyst, Jim WiesemeyerSubscription Services: 1-800-772-0023 • Editorial: 1-888-698-0487

©2018 Professional Farmers of America, Inc. • E-mail address: [email protected] Journal CEO, Andrew Weber

U.S./China not at a trade war yet, but rumblings of oneby Washington Policy Analyst Jim Wiesemeyer and Editor Brian Grete

Trade policy volatility and farmer/agribusiness anx-iety remain high as the U.S. and China announced

steps and counter-measures that could eventually lead to a trade war if ongoing negotiations over the next few months prove unsuccessful. But for now, the fear is more than the reality.

Tit-for-tat trade policy movesChina surprised most by quickly announcing coun-

ter-measure tariffs April 4 in response to new U.S. mea-sures by President Donald Trump for alleged Chinese theft of intellectual property and other issues. China’s potential “hit list” included 25% tariffs on U.S. soy-beans, corn, sorghum, wheat, cotton, beef and a host of other items targeted at Trump’s primary voter base.

Markets initially plunged on the news. But National Economic Council Director Larry Kudlow calmed markets by saying, “Remember, none of the tariffs have been put in place yet.”

Trump late April 5 asked his trade team to look into placing an additional $100 billion in tariffs on Chinese products in retaliation against China’s retaliation. He also instructed USDA Secretary Sonny Perdue “to use his broad authority to implement a plan to protect our farmers and agricultural interests.”

Why U.S. farmers are (and should be) concerned China buys 30% of the U.S. soybean crop annually

and accounts for 60% of U.S. bean exports, which brought in $14 billion last year. China is the No. 2 buyer of U.S. cotton. It is a $1.1-billion customer for U.S. pork (No. 5), which already faces a 25% tariff stemming from the steel and aluminum dispute with the United States. China accounts for about 80% of American sorghum exports, valued at about $957 million last year.

China is just a small buyer of corn and wheat from the U.S., so any impact to those markets if China implements its proposed tariffs would be mostly on spillover from the directly impacted markets.

Potentially big consequences if trade actions carried outA trade war could derail the global economic recov-

ery, disrupt international supply chains and destabilize the huge, yet debt-laden, Chinese economy. Chinese companies could pull back from the U.S. if they believe doing business here will become progressively difficult.

Will China make some concessions? They better, as Trump has made clear there must be changes in Chinese trade policy that prior U.S. presidents, lawmakers and the World Trade Organization let linger far too long.

Senators Chuck Grassley (R-Iowa) and Heidi Heitkamp (D-N.D.) urged Trump to reach an agreement. Other Republicans are warning him that a true trade war with China would deal an economic blow to politically important areas ahead of November’s elections.


No hard deadline from either sideNeither the U.S. nor China has yet set a firm dead-

line for the proposed tariffs to take effect. The next step is serious talks and concessions from both sides.

A key question is what the Trump administration will accept. We’re told that may include greater purchases of U.S. semiconductors by Beijing (a move reportedly under discussion); much looser joint venture or foreign ownership requirements, particularly in sectors like finance and health care; and higher Chinese payments for U.S. intellectual property. Substantive changes need to be made, not just a big purchase of products by China.

What if an agreement doesn’t occur?The fear is neither side has an incentive to blink.

Some in China think Trump “is not simply fighting major trade issues, but is trying to wipe out China’s capabilities to innovate new tech while rallying allies to contain China’s rise.” Hardliners say Chinese President Xi Jinping seems to believe that he can out-last Trump — Xi may be there for another 20 years.

Ag market impacts if no resolutionA veteran trade policy and market contact told us: “If

the tariffs from China take effect, South America then takes all the Chinese business in the near term, but the U.S. will shift to take the non-China business from South America. After South America is sold out in the fall, China will have to come to the U.S., paying much more for soybeans. This all reminds me of the Soviet Grain Embargo where the U.S. was forced to shift to other buy-ers and in the end, total exports for the year were not too adversely affected. The psychology, of course, was very negative. I think cotton and other goods would be differ-ent and certainly for the longer term. If the tariffs take effect, it will be very negative for this country.” His take is in line with what we’ve been saying since the initial trade sanctions were announced by Trump.

What’s next?A public hearing in the U.S. will be held May 15 on

the tariff plans and the public comment process will end a week later, on May 22. After that, the U.S. could start enforcing proposed tariffs. But negotiation appears to be the preferred choice of both U.S. and Chinese offi-cials. Some note negotiations could last six months.

Trump’s promise to farmersPerdue, who defended Trump’s tariffs as “the right

thing,” revealed that he talked with Trump and the president said, “Sonny, you can assure your farmers out there that we’re not going to allow them to be the casualties if this trade dispute escalates. We’re going to take care of our American farmers.” Farmers and ranch-ers need Trump to follow through on that commitment.

Game plan: Fed cattle p r o d u c e r s should con-tinue to carry all risk in the cash market. Live cattle futures are set up for a strong price recovery once the fear-laden trade eases and the cash market bottoms.

Corn II’18 0% III’18 0% IV’18 0% I’19 0%Meal II’18 0% III’18 0% IV’18 0% I’19 0%

Analysis page 1

April 7, 2018

Hogs

Cattle

FeedFeed Monitor

Game plan:You should con-tinue to carry all risk in the cash market. We believe spring- and summer-month futures are undervalued and that a pullback now could set the stage for a strong recovery later.

Position Monitor Lean Hogs

II’18 0% III’18 0% IV’18 0% I’19 0%

Corn game plan: On April 4, we advised using the price pressure to extend corn-for-feed coverage another four weeks. You should have all corn needs covered in the cash market through the end of May.Meal game plan: You should have all soy-bean meal needs covered in the cash market through mid-April. We are targeting the $370 level in May meal futures to extend coverage.

Fundamental analysisConcerns about Chinese tariffs on imported pork amplified recent hog and pork losses. Big duties on U.S. pork could certainly hurt the market, although the products potentially being tariffed (e.g., legs, heads and chopped pork) are not high-value products. Nevertheless, we view recent events as being very reminiscent of the price action of early 2015 and 2017. Early 2015 saw an extended decline sustained from record summer 2014 highs, but the CME Lean Hog Index surged from an April low at $59.58 to a late-May high at $83.20. Last year, the index leapt from a late-April low at $59.64 to a July peak at $92.84. Ultimately, big first-quarter losses tend to amplify the spring rally.

Feds Feeders II’18 0% 0% III’18 0% 0% IV’18 0% 0% I’19 0% 0%

Daily June Live CattleTrend is lower.

Daily June Lean HogsTrend is lower.The Aug. 30 low of $74.65 is initial resistance. Tougher resistance is at $77.60.

Initial support is marked by the March 26 low of $73.225. Key support is at the April 4 contract low of $70.25.

The strong price recovery turned the March 26 low at $104.70 into initial support. Stronger support is marked by the April 4 low at $97.075.

Fundamental analysisSupply concerns weighed heavily on cattle futures in early spring despite the relative currentness of feedlot marketings. The breakdown was exacerbated on April 4 by news of potential Chinese tariffs on U.S. beef imports. The real question is whether those will apply to beef trans-shipped through Hong Kong, if they are ever enacted. Mainland China imports very little U.S. beef, but Hong Kong has emerged as a major buyer. Large amounts of those products are likely being sent on to China. Tariffs on that beef could seriously affect the U.S. mar-ket. The huge rebound from the April 4 low in the face of negative demand news strongly suggests the recent drop has run its course. We expect significant short-term gains.

Initial resistance is now at the Jan. 11 low of $110.275.

Tougher resistance persists at $112.575.

Daily May MealTrend is choppy.

The 40-day moving average (green line) at $374.80 is initial support.

Initial resistance is at the Feb. 20 high at $387.90.

Position Monitor

$112.575

$74.65

$350.40

$79.70

$97.075

$387.90

$110.275

$370.30


$104.70

$399.20

’000 Metric Tons$77.60

’000 Metric Tons

$358.00

$73.225

$70.25

Weekly U.S. Beef Exports

Weekly U.S. Pork Exports

Position Monitor — All Wheat ’17 crop ’18 cropCash-only: 90% 25% Hedgers (cash sales): 90% 25% Futures/Options 0% 0%

Game plan: On April 6, we made a 5% old-crop cash sale. Get current with advised sales. The final 10% of old-crop is gambling stocks.

April 7, 2018 / Analysis page 2

Corn

Daily December Corn

Total Corn Export Bookings

Average Corn Basis

Trend is choppy.Daily SRW May Wheat

Daily May CornTrend is choppy.

Trend is choppy.

Wheat

Fundamental analysisDespite the bullish corn planting intentions estimate in USDA’s March 29 Prospective Plantings Report, the corn market struggled to sustain upward momentum last week. News China threatened to retaliate against a host of U.S. goods, including corn, zapped buyer inter-est. While the U.S. doesn’t ship China much corn, mounting trade tensions are a concern. The latest corn export numbers also disap-pointed traders. Export sales for the week ended March 29 of just 898,268 metric tons (MT) snapped a months-long string of old-crop sales in excess of 1 million MT. Despite plenty of reasons for bulls to throw in the towel, corn futures proved quite resilient. That gives us hope the mar-ket could make another push to the upside if traders can continue to look past the rising trade tensions.

Fundamental analysis

SRW: USDA’s initial crop ratings of the spring showed the Illinois crop at 46% “good” to “excellent.” That easi-ly topped Southern Plains HRW read-ings, but it still fell well short of the 10-year average at 61%. If the market is going to rally on crop concerns, HRW futures will be the leader.

Basis May futures

Position Monitor

Million metric tons

$3.95 3/4

A move above initial resistance at the June 23 low of $3.90 1/4 would have bulls targeting key

resistance at the March 13 high of $3.95 1/4.

Initial support at the Aug. 16 low of $3.81 1/2 aligns closely with the 40-day moving average (green line) at $3.80 3/4. Stouter support persists at $3.72 3/4.

Initial resistance extends fromthe April 2 high at $4.16 to

the Aug. 8 high at $4.18 1/2

The 40-day moving average (green line) near $4.72 is now acting as initial resistance. Tougher

resistance extends from $4.78 to $4.95 and to the psychologically important $5.00 level.

Initial support is now provided by the Aug. 29 low of $4.60 3/4. Stronger support remains at the Nov. 24 low of $4.44.

The March 6 high at $4.06 3/4 is now initial support. Stronger support is at $4.02 1/4.

$4.60 3/4

$4.06 3/4

$3.72 3/4

$4.95


$3.65 1/4

$3.90 1/4

Game plan: On April 2, we advised selling another 10% of 2017-crop for July delivery to get to 70% priced in the cash market. That same day, we also advised selling another 5% of expected 2018-crop production via hedge-to-arrive contracts for har-vest delivery to get to 25% forward-priced. We are willing to give the market a chance to push above the March highs before increasing sales.

Position Monitor ’17 crop ’18 cropCash-only: 70% 25% Hedgers (cash sales): 70% 25% Futures/Options 0% 0%

$4.78

$3.81 1/2

$4.02 1/4

$4.44$4.23 3/4

$3.95 1/4

$4.16

$4.18 1/2

Game plan: We are willing to wait on a price recovery before advis-ing catch-up sales or additional cash sales for either 2017 or 2018 crop. The April 4 overnight lows in reaction to proposed Chinese tariffs stand as key near-term sup-port. While we don’t believe futures will fall below that level, defensive hedges may be needed if that support is violated.


Daily November SoybeansTrend is choppy.

Average Soybean Basis

Position Monitor ’17 crop ’18 cropCash-only: 80% 20% Hedgers (cash sales): 80% 20% Futures/Options 0% 0%

Fundamental analysisNews of potential Chinese tariffs on imports of U.S. soybeans sent prices diving April 4. But futures rebound-ed well off session lows as the soy-bean market absorbed very bearish news and traders realized end-users will still need U.S. soybeans to ful-fill all of the global demand needs. While soybean futures dropped, Brazilian premiums soared. That would offset much of the impact, even if China carries through with its tariff threat. While there’s no way to gauge the short-term psy-chological damage from rising trade tensions, the price outlook seems promising given the looming short-age of Argentine beans and meal, as well as the indicated U.S. acreage cutback this year. Near-term price action is likely to be volatile. Make sure you are positioned to deal with any wild price swings.

SoybeanS

Total Soybean Export Bookings

Average Wheat Basis

Total Wheat Export Bookings

HRW: The U.S. winter wheat crop was rated just 32% “good” to “excellent” as of April 1. That fell far short of normal and industry forecasts and likely signal a short HRW crop. But harvest pressure usually dominates the markets after mid-May, so we are looking to boost sales on short-term strength. See “From the Bullpen” on Analysis page 4 for more.

HRS: Despite indications spring wheat plantings will increase sharply this year, HRS prices ral-lied along with winter wheat in the wake of the lower-than-expected crop ratings. Additional support came from cold, wet con-ditions in the Northern Plains.

Daily HRW May Wheat

Daily HRS May Wheat

Basis May futures

Basis May futures

Million metric tons

Initial support is now at the Aug. 16 low of $4.76.

Last week’s bounce again made the May 30 low of $5.83 3/4 initial support.

The Aug. 14 high at $4.98 1/2 now marks initial resistance.

Million metric tons

A close above initial resistance at the March 5 high of $10.44 would have bulls targeting the contract high at $10.60.

Initial resistance is at the June 9

low of $6.08 3/4.

$4.98 1/2

Initial support at the Feb. 20 high of $10.29 3/4 aligns closely with the 40-day

moving average (green line) at $10.29 1/4.

$6.67

$10.29 3/4

$6.39 3/4

$5.83 3/4


$4.76

$6.08 3/4

$9.80 1/2

$12.42 1/2

Trend is choppy.Daily May Soybeans

The July 7 high at $10.22 3/4 is initial support. Stronger support at the Oct. 27 low of

$10.00 1/4 looks pivotal to the spring outlook.

Initial resistance at the Dec. 5 high of $10.37 1/4 aligns with the 40-day moving average (green line) near that same level. Key resistance is now at the Feb. 26 high of $10.59 1/2.

$10.37 1/4

$10.59 1/2

$10.22 3/4

$9.78 3/4

$10.44

$10.00 1/4

$10.00 1/2

$5.17 1/2

$4.35

$4.57

$10.60


From the Bullpen

Average Cotton Basis

CottonPosition Monitor ’17 crop ’18 cropCash-only: 75% 35% Hedgers (cash sales): 75% 35% Futures/Options 0% 0%

Fundamental analysis:Cotton futures initially dove in reac-tion to potential Chinese tariffs. But demand remains strong, as exempli-fied by old-crop export sales of 367,600 bales and shipments that again topped 400,000 bales for the week ended March 29. We expect USDA to increase its export forecast April 10.

Total Cotton Export Bookings

General outlook

Game plan: On April 4, we advised lifting the 15% hedges in December futures. Our exit was 76.77¢ for a 0.98¢ profit. Wait on more cash sales.

by Senior Economist Dan Vaught

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The first national winter wheat condition rat-ing of the spring came in at just 32% “good” to “excellent.” What does this suggest about the spring price outlook?

We went back and looked at other years when the initial “good” to “excellent” rating fell below 40%. Those included 1989, 1996, 2002, 2006, 2011, 2013 and 2014. As one would expect, crop ratings remained low in all of those years. An initial rating of 38%, the 2006 rating edged up to 41% in mid-April, but fell from that point. The “good” to “excellent” rat-ings never topped 40% in the other years.

This year’s low rating is driven by a strug-gling HRW crop. Low initial HRW ratings have usually signaled relatively low winter wheat crops as well, although strong SRW and white wheat results in 2011 and 2013 helped the total winter wheat crop in those

years. That suggests prices came under pres-sure as summer loomed in those years.

In fact, seasonal pressure on winter wheat prices is quite common from mid-spring into summer. However, both SRW and HRW prices have a strong history of rallying from the first trading day in April to around May 10 in years when initial spring crop ratings are poor. July HRW futures averaged an 8.7% advance during that time, while July SRW prices rose 6.3% on average.

Based on historical price strength in poor crop years, we are looking to boost sales on a short-term July HRW rally to the $5.20 to $5.30 area. The wheat sector’s tendency to come under increasing seasonal pressure after mid-May — even in poor crop years — make that timeframe a target for complet-ing old-crop sales.

reflect the financial markets’ reaction to growing talk of tariffs and a poten-tial trade war over the past few months, with the Dow Jones Industrial Average’s drop last week marking the response to China’s retaliatory trade news. Conversely, bearish traders’ inability to force a downside break-out in response to the April 4 Chinese tariff proposals implies underlying support. Still, the outlook for stocks and the economy may suffer until the trade situation is clarified.

Equities: The stock indexes had clearly become over-extended by the post-election gains of President Donald Trump’s first year, especial-ly after the strong surge in response to the late-2017 passage of tax reform.

As a consequence, the big stock market setback that began in late January wasn’t terribly surprising, although many investors were like-ly shocked by the size and speed of the corrective pullback.

The latest losses rather obviously

Daily May CottonShort-term trend is choppy.

’000 running bales

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Key Market Items on My ‘To Watch’ List

1) USDA Crop Progress Report— Monday, April 9 3:00 p.m. CTWinter wheat conditions will remain a focal point. Spring row-crop plant-ings are slowed by cold weather.

2) USDA Supply & Demand Rpt.— Tuesday, April 10, 11:00 a.m. CTChanges will reflect the results of the March 1 stocks data. Surprisingly high corn and soybean numbers suggest larger carryouts.

3) USDA Export Sales Report— Thursday, April 12, 7:30 a.m. CTCotton exports again over 400,000 bales would likely prove supportive.

Weekly Dow Jones Industrial Average

Initial resistance is now at 82.96¢. Tougher resistance is at 84.45¢ and the contract high at 86.60¢.

The 40-day moving average (green line) at 81.20¢ is again initial

support. Last week’s action reinforced support at the Dec. 28 high at 79.39¢.

Basis May futures


82.96¢

79.39¢

Key support is marked by the Feb. 9 low at 23,360.29.

84.45¢

The Dow peaked at 26,616.71 on Jan. 26, which is strong resistance.

86.60¢

23,360.29

26,616.71

78.16¢

Markets gyrate as trade tensions rise · 2019-12-19 · April 7, 2018 • Vol. 46, No. 14 United We...

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Transcript of Markets gyrate as trade tensions rise · 2019-12-19 · April 7, 2018 • Vol. 46, No. 14 United We...