Grain and hog markets were lower on Wednesday with cattle higher.
Grains Disappointed With Lack of China Purchases
Grain futures were lower on geopolitical headlines and possible positioning heading into the U.S. China Summit between President Trump and Chinese President Xi.
Alan Brugler of A&N Economics says the market had anticipated some buying ahead of the meeting as a goodwill gesture and the corn and wheat markets have been especially disappointed.
“There’s that $17 billion number floating around for ag commodities other than soybeans. That’s obviously on the table for this meeting as to whether that’s real or not. The Chinese have never actually confirmed that that’s part of the previous deal. The fact that we weren’t getting any concrete purchases as, quote, goodwill gesture,s kind of made the market back off here,” he explains.
China Not Likely to Announce $17 Billion of Ag Purchases
U.S. Trade Representative Jamieson Greer said that China had already bought $4 billion of the $17 billion total. However, it is unlikely China is going to provide a list of specific commodities and amounts as they don’t want to tip their hand and drive prices higher.
Brugler says, “You know, you shouldn’t telegraph your punches, right? If you’re going to buy, if you’re saying I’m going to buy by next Tuesday, that’s for effect, okay? You’re wanting the market to see that and react to that, and you probably aren’t going to do it. If you’re not saying it, then you’ve got more freedom of action, more potential to get competing bids that aren’t up.
Plus, he points out that there are many different commodities that could be included in that $17 billion beyond corn and wheat, such as high value specialty crops.
Victory If Tariffs Are Lowered?
So will the market deem it a victory if the 10% reciprocal tariffs get lowered, to allow private crushers to buy to help China get to the 25 million metric tons on beans?
Brugler says it would help, “Tariffs are a tax. They’re economic friction. So if you take them out of the equation, theoretically, you’re making it cheaper for somebody. Buyer or seller, somebody’s going to benefit. So yes, I think that would pick up some volume.”
However, he says the Chinese buying, almost exclusively, has been for the government-controlled grain companies, that don’t have to pay the tariff.
“They’ve got their own internal structure there. So what you see is the Chinese government is selling stocks that the government-owned companies bought. They’re auctioning those off to the private sector in order to be able to bring some more in,” he adds.
Is China Already Buying Under the Radar?
Will China even buy commodities like corn or wheat and if they do will they buy futures? Rumors circulated Monday that China was buying corn futures just like they did with soybeans in October of last year.
Brugler says that is difficult to tell. “They clearly have the mechanism, they’ve got some U.S. subsidiaries that could do that, but they could also just be lifting shorts and it looks like buying, right? You don’t really know.”
Beyond that he says China historically not bought a lot of corn from the U.S.
“There’s been a couple of years where they had big purchases. They may buy some to build up their quality inventories because they had a lot of moisture damage last fall to the grains that they took in,” he adds.
Possible China Cancellations?
Brugler says there is also the political leverage that comes from buying U.S. product and the risk of China canceling.
“I’m actually happy that they haven’t bought a lot of it because I think there’s always a risk that they threaten to cancel the purchases, that’s the case in the beans right now. They’ve got a lot of beans bought but not none of them ship if they don’t like the way things are going down with Trump. They could potentially cancel or suspend or delay those purchases and the market would not take that well no,” he explains.
Black Sea Headlines Pressure Corn and Wheat
Winter wheat made new lows for the move and corn fell also seeing some profit taking and the removal of geopolitical premium with Black Sea headlines circulating about a possible ceasefire between Russia and Ukraine.
Brugler says the market has heard that story many times. “We’ve heard, okay, Putin’s amenable to a ceasefire, and then you find out, well, yeah, only if you give me the rest of Donetsk province, which I don’t have. The Ukrainians are not going to agree to that. I mean, you’re basically telling your own people you’ve got to move out because we gave your land to the bad guys. That’s not going to play.”
Any cease fire in his opinion would involve some kind of face-saving trade off but he thinks the market’s skeptical over actual resolution.
How Long to Resume Normal Black Sea Exports?
Even with a ceasefire, the key is how long would it take to get normal exports resumed in the Black Sea region?
Brugler says the facilities that haven’t sustained much damage could ramp up pretty quickly and there are vessels lined up ready to load.
However, Ukraine’s Odessa port has several of the elevators that have sustained major damage, so it may take weeks with no rockets or missiles being fire to resume operations.
Short distance hauls to Egypt could be resumed quicker but the longer shipments will take longer.
“Again, volume is going to be fairly restricted in the beginning,” he adds.
Soybean Basis Pushes in Western Corn Belt
While it isn’t reflected in the futures, there are cash basis pushes for soybeans due to harvest delays and wet weather in the Western Corn Belt. Those range from 70 cents to $1 over the board in Iowa and parts of Nebraska.
Brugler says processors are not getting new crop soybeans in and so it is cheaper for them to pay $2 more for old crop soybeans rather than deal with the expense of having to shut down plant operations.
“There was not a lot of old crop inventory in some of these plants they were counting on the new crop arriving. The rain delays have interrupted that. So they’re pushing their bids to get any remaining old crop out and get the farmer to stop harvest or divert a couple of personnel to hauling grain instead of combining, which maybe they can’t do if it’s wet,” he says.
The market is also seeing premiums to ship from other parts of the country to get soybeans in.
Soybean Meal Shortage
This has created a soybean meal shortage and so some Iowa processors were pulling offers on Wednesday as a result.
“And you’ve already got contracts for several weeks out on a big chunk of your expected meal production,” he state, “So, if you’re short on crush, you’re going to be pulling some of your offers for meal.”
Grains Test Chart Support
Technically, corn and soybeans had also rallied into resistance on Monday and could not take out those chart areas near the contract highs scored in September.
“We dropped to the 18-day moving average on the Nov beans today and bounced off of it. On the corn, we didn’t quite get down to the lower Bollinger Band. On the upside, the previous highs were also Fibonacci expansion counts on the corn, so that’s pretty tough resistance for the nearby contracts. But again, you didn’t really hit the support on the corn, the beans. I can make a pretty good case for bouncing off the support.” he says.
Cattle Rebound After ICE Raids
Cattle futures rebounded after getting spooked on Tuesday with ICE raids at meat packing plants in Kansas which took some workers off the line and reduced shifts.
Brugler says the market over reacted to the news and the fear of decreased plant capacity.
“If the plant operations are interrupted, yes, it could affect the cash cattle bid. But on the other hand, it also tightens up the beef supply or the pork supply, depending on what plant you’re looking at. And ultimately, you’d expect that to show up in higher wholesale prices, whether that’s for the choice cutouts or the pork loins or whatever. So, there’s short-term effects and long -term effects that don’t necessarily go in the same direction.”
Futures Price in Higher Cash Ideas
The futures may have also been pricing in better cash ideas for this week.
Deals were struck in the south on Saturday up to $227 and some were even passed and and that has not been reflected in the weighted average of $221.87 because of confidentiality in Kansas and Texas.
Brugler says the cattle market will go up with support from a steady to higher boxed beef market.
“We’ve got the choice cutouts comfortably above the five area cash right now on the cattle side. So if you think that the beef market’s stable at this price level, then the board probably ought to rally,” he explains.
However, he adds that the market was oversold and there was some short covering taking place.
Technically he doesn’t think the market left any strong signals with the price action.
Hogs Position Ahead of Report
The lean hogs were back down on Wednesday after two higher days where the futures saw short covering.
He says the market had gotten too cheap but contends most of the action was positioning ahead of the USDA Quarterly Hogs and Pigs Report out on Thursday afternoon.
The average trade guesses are around 99% for all hogs and for breeding stock, so Brugler says the trade is looking for a small decline in the herd. “Obviously, if we don’t get that, if USDA finds we’re over 100% a year ago, then that’s going to take some steam out of this thing,”
The other thing he’s watching is farrowing intentions with 100% to 101% in the trade estimates.
