Back to reality

Published on: 18:22PM Feb 04, 2019

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It would seem that some of the “good cheer” that was inspired by the friendly meeting between the U.S. and China as well as FOMC meeting last week has begun to wear thin and commodity and equity markets are back to reality this week.  It is not that anything terrible is happening per se, but we still must confront the prospects of a contraction in the global economy and the fact that, even if settled in the next month, we will be dealing with the ill aftereffect on soy/grain trade for some time to come.  
Over the weekend, the Chinese state-owned, COFCO reported that they have recently purchased “millions of tonnes” of beans from the United States, which would seem to back up the rumors that around 3 MMT were purchased.  The only official verification thus far has been 612,000 MT to China reported in the daily system this morning.  Probably not enough to inspire additional buying, particularly if we were expecting nearly five times that quantity. Realistically, the bean market was already acting tired last Friday as we retreated into the close from the highest levels traded since early December.  Once again it appears to be suffering from buy-the-rumor-sell-the-fact-itus.  
Over the weekend INTL FCStone slashed its estimate for the Brazilian bean crop by 4 MMT, taking it down to 112.2 MMT, and I believe moving them into the position of the lowest estimate to date.  Just as when crops are expected to be large, there seem to develop a competition for who can publish the largest numbers and the same applies in reverse when crops are under duress.  We should see several more private updates this afternoon.  
There are a couple of production estimates to be released this week, beginning tomorrow with Stats Canada and then, of course, the USDA on Friday.  I suspect there will be new estimate released beginning sometime today but, in the meantime, here were the original estimates for the final report; US Corn production 14.532 billion derived from a yield of 177.7 bpa.  The carryout was expected to drop from the December estimate of 1.781 billion to 1.673 billion bushels.  Bean production was estimated to be 4.583 using a yield of 51.9 bpa.  This was projected to leave us with ending stocks of 930 million, which would have been a drop of 25 million from the December estimate.  Wheat ending stocks were expected to have remained unchanged at 974 million.
I would have anticipated weakness in the dollar after the change in attitude that was verified by the Fed last week, but the index is higher this morning.  January was a lower month overall for the dollar, and I continue to believe we have already witnessed a cycle high, but it could still require another month or so before we turn lower in earnest.  I maintain this market will be the key to commodities for the balance of 2019 and into 2020.