Grains ended sharply higher Monday with livestock mixed.
Grains Rally, Soybeans Explode Higher
Grain and cotton markets gapped higher Sunday night and all ended higher Monday with soybeans exploding.
Chuck Shelby with Zaner Ag Hedge says this followed China’s Commerce Ministry confirmed it plans to lower tariffs on U.S. soybeans and other grains.
China Lowering Tariffs
The U.S. will lower its 10% fentanyl tariffs with China dropping it’s 10% reciprocal tariff on agricultural products, including soybeans.
Shelby says that got the markets excited but especially soybeans because China has not been a big buyer the last few years.
“So, even if this move is politically motivated, it still matters if it leads to actual buying. The market had been under pressure, and this gave traders a reason to push prices higher. Now we need confirmation through purchases, but technically the soybean market looked much stronger today.”
This was also one of the first times China confirmed any of the details of the trade framework struck between the two countries on October 30.
How soon could the tariffs come down?
Shelby says it is difficult to know, “The Chinese are very strategic. They watch U.S. weather closely, and right now we have too much moisture in the eastern Corn Belt, drier conditions in the west and some heat in the forecast. That raises questions about yield potential. At these price levels, I think China may be looking at new-crop purchases, and there are likely several motivations behind their timing.”
Lower Tariffs Make U.S. Soybeans More Competitive
Lowering tariffs by 10% on soybean imports would certainly make U.S. soybeans more competitive with South America and Shelby says that is what is needed for China to become a larger buyer again.
“But it’s one step in a longer process,” he reminds.
The lower tariffs could also make U.S. corn and wheat a more attractive buy for China.
Weather Also Drives Yield Questions
The other factor driving the rally in soybeans and corn was weather as the market needed to add some premium.
The extended forecast is hot and dry through July 19 in especially the western Midwest and Plains, while in the east areas of northern Illinois, east and central Iowa and southern Minnesota saw too much rain. Rains of 5 to 12 inches and flooding are trimming yield potential according to Shelby.
“Some areas around Des Moines, Iowa, saw 10 to 12 inches of rain, and there were heavy totals in parts of the eastern Corn Belt as well. This is one of those years where the crop is extremely uneven. Some fields look very good, while others look very poor. When you add in dryness in the west and possible heat ahead, it becomes difficult to say we can exceed trendline yields,” he explains.
Tightening Balance Sheets
With below trend line yields of near 180 bu. per acre on corn and under 52 bu. on soybeans, he thinks that could tighten the balance sheets substantially.
“If corn comes in below trend and demand holds, carryout could move toward 1.5 to 1.6 billion bushels. In soybeans, a yield cut of a bushel and a half could pull carryout toward roughly 200 million bushels. That would be supportive for prices.”
However, USDA won’t change yield in this report because it’s too early.
European Weather
Europe has also been dealing with record heat and drought. Crop ratings in France have come down 26% on corn in the last two weeks and prices have pushed near $7.
Shelby says that story has been pushed to the background, but it still matters.
“Europe may not be the world’s largest producer, but production losses there continue to chip away at global supplies. Combine that with a potentially smaller U.S. crop and possible South American weather concerns in an El Niño year, and world supplies could decline. That could support stronger U.S. exports moving into the next marketing year,” he adds.
And U.S. corn exports are already at record levels.
Technical Picture Improving
Sep and Dec corn have moved about 20-day moving averages, while November soybeans are nearing $12.
Shelby says with the weather concerns, he sees higher prices.
“November soybeans have the ability to push through $12 and possibly move toward $12.40 to $12.60. In corn, the $4.75 area in December futures is a key level. If the market moves toward that area, it will likely pause and reassess weather forecasts. If China were to buy corn or wheat, that would be a major catalyst.”
Wheat Sees Short Covering
Wheat futures were also higher with spillover from corn and soybeans.
However, Shelby says wheat is going through harvest, and there are quality issues in parts of the eastern Corn Belt.
“I think wheat may have bottomed, but it needs to get through harvest before the market refocuses on demand and final crop size. In soft red winter wheat, quality problems could reduce usable bushels.”
Funds are still short, especially in soft red winter wheat so that could drive a stronger rally once harvest is over and he thinks deferred Chicago wheat contracts could push toward $6.75 and possibly $7.
Cattle Futures Digest Lower Cash
Cattle futures started lower Monday but live cattle pushed back higher in all but the August contract.
The market was disappointed with the lower cash as the five area weighted average steer came in at $255.12, down $4.19 from the previous week.
However, the futures discount to cash is large and the market held technical support in the deferred contracts.
Boxed beef prices were also lower at noon with Choice at $385.90. Shelby is more concerned about beef demand faltering after the July 4th holiday and the 250th celebration and thinks thinks the cattle market may need to price that it yet.
“Beef demand was very strong heading into the Fourth of July holiday, but the market is now asking whether that demand will soften in the coming weeks. Futures seem willing to wait and see if cash cattle prices ease. And I think they’re willing in the futures market to stay where they are and see if that demand holds or we see a softening in the cash market in the cattle,” he says.
Feeders Fall with Cash and Higher Corn
The feeder cattle futures have also fallen as the cash index has cooled off record highs by nearly $17 in over a week and a half and it could continue to weaken.
Corn prices are also pressuring the feeders.
Shelby says, “I mean, the cattle market has enjoyed some really cheap corn as we’ve been through these depressed prices so you know you got to be concerned if you’re feeding corn to cattle. That market’s pretty sensitive to corn running up 50 to 75 cents as it impacts their bottom line.”
Nearby Lean Hogs Lower
Despite a higher weekly close in the August lean hog futures last week the nearby contracts did not see follow through buying.
Shelby says the market has been confusing especially with the high price of beef to pork for consumers nut he thinks the market is trying to bottom.
“The funds are laying on the short side of it. So I think moving forward, there is a point out here, this hog market will bottom, funds will get out. We built a base here and we can see that hog market eventually find a point here where I’ll turn around and take off and go the other direction,” he adds.
