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Friday July 6th, 2018

September corn closed up 8 at $3.60 ¼ and December closed up 8 ½ at $3.73. August soybeans closed up 38 ¼ at $8.77 ½ and November closed up 38 ¾ at $8.94 ½. September wheat closed up 9 ¾ at $5.15 ¼ and July 19 closed up 11 ¼ at $5.57 ½. Crude oil up $.91 at $71.54.

FOR THE WEEK ENDED 7-6-18

CORN – The trade war is officially on. July 6th marked the implementation of $34 billion worth of tariffs on Chinese imports.  China responded in kind with their own 25% tariff on $34 billion worth of US goods, including soybeans and pork.  Another week that began with a huge double-digit sell-off.  Weather was favorable and the tariff deadline loomed over the holiday-shortened week, pressuring prices across the board.  Corn tumbled to fresh contract lows, but regained half those losses on the short pre-4th trading session.  Nothing had significantly changed, but the forecast for the first half July for above normal temperatures and below normal precipitation is attracting attention. Spillover strength from the wheat market helped prop up prices as world production numbers slip due to dry conditions in the Black Sea region, EU, and Australia.  The US crop is far from in the bin and it feels like we’ve taken out any weather premium.  Crop conditions as of July 1 were 76% good/excellent, down 1% from the previous week, but were still the highest for this week since 1999.  Silking was 17% versus 8% on average, the second highest on July 1 since 1981.  There have been seven years when 10% or more of the crop was silked by July 1.  Of the seven, three years had poor yields, three had good yields, and one had average yields. All but one of the seven yields had warmer than normal temperatures in July and August.  The one year with nearly record cool temperatures produced outstanding yields.  The remaining two years with good yields had excellent rainfall in July and August.  Based on history, if it turns hotter during pollination, we’ll need to keep the tap open for more rainfall to push yields higher.  The early pollination doesn’t guarantee above trendline yields.

NAFTA got a shot in the arm this week when Mexico’s newly elected President appointed a new chief negotiator.  They hinted a new agreement may be possible even before the new government takes office in December. There’s trade talk that China may be re-thinking their plan to increase ethanol blending by 2020.  Only one new project has been approved for construction and three expansion plans at existing facilities are still seeking approval.

Weekly export sales were delayed a day due to the holiday and coincided with the trade tariff deadline.  Old crop sales were below estimates at 17.3 million bushels.  Total old crop exports total 2.27 billion bushels or 98.7% of the USDA’s 2.3-billion-bushel projection.  The 5-year average is 96%.  New crop sales were also smaller than expected at 9.1 million bushels.  Total new crop sales commitments are 177.9 million bushels, still well above last year’s 118.9 million bushels by this time.  Weekly ethanol production fell 5,000 bpd to 1.067 million bpd.  The USDA is expected to increase ethanol usage on the July 12th WASDE report.  Stocks were up 301,000 barrels to 21.97 million barrels.  This is the first time in the last 15 weeks that stocks are above year ago levels.

Informa Economics kicked up their corn yield to 176 BPA for a crop of 14.39 billion bushels.  The USDA is currently using 174 BPA for a crop of 14.04 billion bushels.

OUTLOOK: US corn is the cheapest in the world and demand remains firm.  The market “feels” like it would like to find a bottom in here ahead of the critical July weather, but we have now had six consecutive lower weekly closes.  Weather may be corn’s price friend if the current warmer, drier forecasts verify. Most of the bad news seems to have been priced in for now and will focus on pollination weather.  Corn posted an encouraging key reversal higher to end the week. The average trade estimates for the July 12th WASDE report: 175.1BPA with production at 14.304 billion bushels.  Ending stocks at 1.725 billion bushels.  In June, the USDA used 174 BPA, production 14.04 billion bushels, and ending stocks at 1.577 billion bushels.

SOYBEANS – Phase one of the trade war has started.  President Trump has also warned of more tariffs, maybe up to a total $500 billion worth of tariffs on Chinese goods.   Another $16 billion is set to go into effect in August. There is chatter that the tariffs will remain in place at least into next year.  It took the first volley of tariffs to be shot, and after hitting a 10-year low on the continuous chart, before soybeans finally found buyers.  After setting new contract lows before the deadline, soybeans posted a key reversal higher on the charts in post-tariff trading.  The USDA has said they will incorporate the tariff effect into the July 12th WASDE report.  If they lower next year’s exports, could 2018/2019 soybean carryout climb close to 600 million bushels versus the June forecast for 385 million bushels?  Leading up to the July 6th deadline, soybeans came under pressure and just kept going lower.  Let’s face it, the only thing the bean market was focusing on was the trade war with China and others.  Canada implemented tariffs on $12.6 billion worth of US goods July 1st.   Buyers kept to the sidelines in cautious trading.  Soybeans closed steady to lower for 8 consecutive sessions before rebounding into the weekend.  US soybeans were over $1.90 per bushel cheaper than Brazil going into China, but that’s not quite enough to make up for a 25% tariff.  Non-Chinese soybean end users haven’t been in any hurry to extend coverage.  Soybeans were rated 71% good/excellent as of July 1st, down 2% week/week.  This is tied for the third highest soybean rating for this week going back to 1986.  There were 27% of the beans blooming versus 13% on average.

There was chatter in the trade that US soybeans imported for China’s government reserve program could possibly be exempt from the 25% tariff.  There was no confirmation to the rumor.  There was also speculation that Brazil may import 500 tmt to 1 mmt of US soybeans to crush this year, according to an executive with Brazil’s exporters association, Anec.  There is some hesitation by traders to buy into that figure based on Brazil’s logistics and freight costs.

Weekly export sales were very good, despite 13.5 million bushels of Chinese cancellations. Old and new crop sales were both higher than expected at 20.6 million and 16.9 million bushels respectively.  Old crop sales continue to run 4% behind last year at 2.1 billion bushels. The USDA is forecasting y/y exports to decline 5%.   New crop sales commitments are 293.3 million bushels compared to just 129.2 million booked by this time last year.  The May NASS soybean crush was below expectations at 172.5 million bushels, but was a record for the month of May.

Informa Economics updated their US soybean crop numbers to 49.8 BPA for production of 4.425 billion bushels.  The USDA in June was using 48.5 BPA with production at 4.28 billion bushels. A little history: the only time the USDA has raised the soybean yield on the July report was in 1994.  That was the year crop ratings were the highest ever for that time of year.

OUTLOOK:  What kind of farmer support programs is the government thinking about to help the US farmer hurt by the tariffs?  We won’t know until Labor Day.  On the continuous chart, there really isn’t any decent support until $7.76 per bushel, reached back in December 2008. But on the July 6th continuous soybean chart, beans had their largest one-day higher move with a 38 ½ cent higher close since June 2016!  Have we turned the corner in “sell the rumor, buy the fact” type trading?  How high will the 2018/2019 carryout be raised?  We’ll know more after the July 12th WASDE balance sheets are published.  Technically, we closed the week on a strong note with a key reversal higher and this may encourage further fund short-covering.  After the losses sustained over the last five weeks, it will take a bigger recovery to engage farmer selling.

Estimates for the July 12th report: 48.7 BPA, production 4.324 billion bushels, carryout 498 million bushels.  In June, the USDA was using 48.5 BPA, production 4.28 billion bushels, and ending stocks at 385 million bushels.

The wheat market traded higher on world crop worries and strength in the row crops. Weekly export sales were ok at 440 tmt. The HRW harvest moves up to Colorado and Nebraska this weekend and next week.  Russia / Ukraine / France / Germany / Europe are said to have suffered crop losses from adverse weather conditions. The last USDA report pegged world ending stocks at 266 mmt (35% stocks to use).

Anna Kaverman

anna@mercerlandmark.com

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