The USD continues to exhibit strength against major and emerging market currencies alike with the basket trading 95.2660 this morning, the highest print since July 17th, 2017. Commodity currencies are taking the brunt of the beating this morning as the Australian dollar trades lower by 0.87%, the Loonie is down 0.48%, the British Pound and Euro are off 0.60% and the Russian Ruble is down 1.12%. Outside of a one day spike, the Russian Ruble is trading at the weakest level relative to the dollar since November of 2016. Commodities as a whole are being plunged lower with crude oil off nearly $1.00 this morning, and the Bloomberg Commodity Index settled at a new low for the move yesterday. The index should open to fresh lows later this morning.
Rain around the Midwest this morning with showers across Nebraska, Iowa, S-Minnesota, Wisconsin and a bit into N-Illinois. In the last 24-hours, most of the Upper-Midwest saw rain with best totals across the northern 90% of Wisconsin as most areas there saw 1.00-3.00”. The cold front bringing rain is also bringing a much-needed cool down in temperatures across the central and eastern corn belt. Temps from South Dakota to Ohio will see highs in the 70’s to low 80’s through Saturday with multiple rounds of rain in between. Nearly 80% of the corn belt has a chance at 0.50-1.00” this week with most areas in excess of 1.00”. There will be holes, but it is incredibly difficult to find issue with corn belt weather at the moment, even if some weather shops continue to tout vanishing heat in the 11-15 day. Extended maps show above normal temps but above normal precip along with it through July 2nd.
Heavy selling pressure at the open which accelerated at the Chinese opening and carried through the evening to keep CBOT prices on their lows this morning. The selling continues recent trends but the catalyst last night was reports from the Trump Administration they were preparing another $200 billion in tariffs on Chinese goods in retaliation to China’s latest round of tariff announcement which were in response to the $50 billion in tariffs the US announced which were in response to China’s unfair trade practices. You read that right. All of the proposed tariffs don’t go into effect until July 6th, leaving time for things to be negotiated, but it would appear the stakes have been raised to the point at least some of these tariffs will be enforced even if others are not. Ag prices have suffered the largest with soybeans continuing one of their largest weekly declines since the 1970’s as spot month prices hit the lowest level since the spring of 2016. The trade-war panic selling would be one thing, but when combined with one of the highest rated crops on record and benign corn belt weather, the combination is just too much for the managed long community. The selling has caught the majority of producers undersold, with a looming USDA report that has many anticipating bearish data adding to anxiety. Open interest changes yesterday saw corn up 16,889 contracts, soybeans down 12,990 contracts, meal up 3,955 contracts, oil up 4,948 contracts, SRW down 10,614 contracts and HRW down 4,408 contracts.
We discussed Brazilian and US soybean price discrepancies a bit yesterday, and those spreads continue to diverge this morning. Brazilian cash bids shot sharply higher again yesterday with spot up 5-20c while August was up 26-27c and September was up 23c. Spot bids are now up 18c from a week ago, while August bids are up 39c. That would put FOB offers out of Brazil at $390.97/MT vs. US-Gx at $359.72/MT. Even if one considers a quality premium for Brazilian soybeans in the neighborhood of $10/MT, US soybeans are still $20/MT cheaper than Brazilian offers. This shows the weight of China moving exclusively to Brazilian stem, and should also drive all other global demand to the United States. Chinese markets were closed yesterday, but their reaction at the open last night was strong. Dalian meal rose 3.18-4.40% to a 2-week high with the highest volume since early April. Even though their soybean contract reflects food grade soybeans, it too rose by 2.29-3.27%. As we noted yesterday, China cannot economically do without US soybeans, unless she claims 100% of available export capacity out of South America as well as 100% export capacity from Canada, Ukraine and Russia. This would be a logistical nightmare, and also result in much higher prices being paid for the same soybeans. One other tool China could utilize, however, is to draw down their reserve stocks from the rather comfortable level they’ve enjoyed the last several years. From 2014/15-2017/18, China has carried out 16.9-20.6MMT of soybeans. Prior to 2014/15, however, they commonly ended the year with 7.4-15.0MMT of soybeans. If they were to draw down ending stocks to 7-10MMT, this would free up another 10-13MMT of import demand they wouldn’t have to satisfy with US soybeans. This would put them in a precarious situation relying on a bumper South America harvest next year, but it is one avenue they could pursue. If that course of action were chosen, US export demand would likely need to be reduced under 2.00bbu and current board prices wouldn’t look so out of place.
Data yesterday included weekly crop conditions which only added to the bearish price response overnight. Corn conditions improved 1pt to 78% G/E vs. 67% G/E at this time last year. Widespread gains were seen across the WCB led by ND which climbed by 8pts. The national corn index score of 392 is now the highest since 1991. However, the correlation between week #24 condition scores and final yields is still terrible so some caution is warranted. We ran a regression analysis just to prove this point, and the r-squared is currently around 16.2% and implies a final yield around 150bpa off nothing but NASS crop conditions. Multiple states enjoying the highest ratings since the early 90’s or even on record. Soybean conditions slipped 1pt to 73% G/E vs. 67% at this time a year ago but would be the highest rated soybean crop on record. Soybean conditions are really not worth paying attention to at this point in the marketing year, and large changes w/w shouldn’t draw too much attention.
Winter wheat conditions improved 1pt to 39% G/E vs. 49% G/E at this time a year ago. Nebraska and South Dakota saw a seasonal decline in conditions, but improvements were witnessed in Kansas, Oklahoma and Texas. This is likely the result of better than expected yields as harvest wraps up in TX/OK and expands in Kansas. National winter wheat harvest progress was estimated at 27% complete vs. 19% average with Kansas at 23% harvested. We think this is a bit understated according to anecdotal reports on the ground with yields running about at expectations and protein continuing to run 12-13% on average. Spring wheat conditions shot higher by 8pts nationally to 78% G/E led by gains in ND and SD at 9pts a piece. The national spring wheat condition score stands at 388 which is the highest since 2010 and near the best ratings on record. Cool, wet weather should have conditions improving again next week. Spring wheat in the southern tier of the spring wheat belt in South Dakota is just starting to flower, and will be in full pollination by next week. 9% of the spring wheat crop is headed with South Dakota the furthest advanced at 48% vs. 34% average. This would put harvest mid to late July.
Export inspections yesterday saw wheat at 13.7mbu vs. 17.8mbu needed weekly. Corn inspections were solid at 65.7mbu vs. the 46.6mbu needed weekly. Total inspections of 1.678bbu are down just 8.5% from last year with two and half months left in the marketing year. Soybean inspections were 30.1mbu vs. the 21.4mbu needed weekly. Total inspections were 1.775bbu vs. the 1.908bbu needed weekly. The total was the second highest of the last 14-weeks and should give confidence in the current export forecast.
Bottom Line: The full weight of Wall Street money using soybeans as a macro hedge against the trade war with China is being felt across the Midwest as soybeans plunge to two-year lows. 6-months of price gains have been wiped away in 2-3 weeks, and the selling pressure will likely continue until something is resolved with China. All of our Ag commodities currently look undervalued relative to current balance sheet forecasts, but without a weather threat and as long as tariff fears persist we will continue to bludgeon these markets.
Good Luck Today.
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