China tensions pressure grain markets
Tensions with China over a variety of issues could lead to the country pulling back on purchases from the U.S.
We wrapped up another month as we say goodbye to May and hello to June. May was not a bad month for the grains as we did see most markets post gains for the month.
For May Minneapolis wheat gained 2%, Chicago wheat was down 0.5%, and Kansas City wheat down 2%. Corn was up 4%, soybeans up 1% and canola unchanged. Livestock fared better, with live cattle gaining 20% while feeders were up 6% over the month. The big winner for the month was crude, up 72%, while the biggest loser was natural gas, down 13%.
In other May statistics, unemployment numbers have increased the past eight straight weeks with the number unemployed at over 40 million. Also, there are 178.8 million barrels of oil in floating storage as compared to 52 million at the start of the year.
Traders were hoping May could bring some much-needed stability to the grains and by the looks of it, that is exactly what was accomplished. The grains are having a hard time pushing higher as there are too many negative factors weighing the market down.
The biggest pressure on the grains is China and the tensions that have been brewing. Trade tensions with China went up another notch last week with the U.S. placing more sanctions on Chinese companies. On May 23, the White House put 33 more Chinese companies on the Treasury Entity List, which bars U.S. companies from dealing with these foreign companies. The Senate also passed a bill that would delist Chinese companies from the U.S. Stock Exchange if those companies did not complete and release audited financials to the exchange. The House passed a bill authorizing sanctions against China for repression of its Muslim minority. The Senate is also discussing sanctions against any person or entity that is helping to implement and enforce China’s newly released plan for Hong Kong.
China has not retaliated against the U.S. for the U.S.’s move against Huawei or the blacklisting of companies. China has threatened to put some large U.S. companies on their unreliable list, which is one step under blacklisting.
All of this posturing is starting to get under China’s skin. The final straw is coming with the new security law on Hong Kong, which China is saying is an internal affair. This action will likely result in actual sanctions being placed against China and some of its people. There is even talk of tariffs potentially being placed on Hong Kong products. This will then result in China retaliating against the U.S. for interfering. That could lead to phase one trade deal viability concerns.
China has just returned to the U.S. and has been an aggressive buyer of soybeans and pork. Wheat and ethanol were also recently added to their shopping cart. The virus and stiff competition from South American exports kept China away from importing U.S. goods at the start of the year, but China had just started to return to the U.S. market. The current tensions might result in China walking away again from the U.S., which would be devastating to U.S. ag exports. There are signs that China is positioning to halt purchases of U.S. soybeans. Last week, China bought 10 cargoes of soybeans from Brazil for fall delivery. That is the time frame that is usually dominated by U.S. soybeans.
On a positive note, soybean basis levels for harvest delivery have taken a sharp turn and are sitting at levels not seen in years. This is a signal of the need to encourage production and delivery of soybeans at harvest.
Spring wheat planting made better progress than expected by the trade as either producers pushed the envelope or just gave up planting and said they were done. As of May 24, spring wheat planting progress came in at 81% completed vs expectations for 70%. North Dakota still is posting the slowest pace, showing progress only at 70%, 18% behind average. Minnesota is only 86% planted, 6% behind average.
Corn’s planting progress was slower than expected. Planting was estimated at 88% complete versus expectations for 90%. The states that continue to lag behind in progress are North Dakota ,25% behind; Pennsylvania, 18% behind; and Tennessee 9% behind. North Dakota is reporting planting progress only at 54% completed, and May 25 was the crop insurance final plant date for a majority of the state (Sargent, Ransom, Richland, and Cass have until May 31). It is very possible that North Dakota has wrapped up corn planting with only 54% of the intended acreage getting planted. That would equate to about 1.7 million to 1.9 million acres unplanted in North Dakota as of the last planting date. Minnesota is reporting progress at 98% and South Dakota is 86% planted. Corn’s crop condition rating was also lower than expected, but within the range of the past 10 years. Conditions were estimated at 70% good/excellent versus expectations of 75%.
Soybean planting was estimated at 65% complete versus expectations of 70%, a whopping 5% less than expectations. Most states are posting good progress, expect for North Dakota, which only has 29% of the state’s soybeans planted versus 60% average. With the current weather forecasts and expectations that corn planting has wrapped up, it is likely producers will concentrate on planting soybeans next week (just ahead of its crop insurance final plant date of June 10).
Weather forecasts are starting to turn more bearish grains. May is looking to end with cool temps but dry conditions. June looks to see the return of heat. No rain is in the forecast for 10 days. The six-to-10-day forecast is also showing heat building in the entire U.S. Temperatures are expected to be much above normal for the entire U.S. except for the tips of Washington and Texas and the far East Coast, which are expected to be below normal. Precipitation is expected to be below normal in the Corn Belt and Delta region but above for North Dakota and northern Minnesota. This will help push planting progress for wheat and soybeans.
The current environment has made it tough to move much product. At a time when the grains should be seeing weather and uncertainty premium, we are seeing flat, thin trading. Martinson Ag is expecting the grains to recover and give us some marketing opportunities in June. Wheat and corn acreage will be trimmed due to poor planting conditions in the Northern Plains and that should help give those markets a slight recovery. Soybeans are the wild card. The direction of soybeans lies in the relationship with China, and if tensions escalate higher, it would be negative soybeans. But if tensions can be calmed, China will continue to be an aggressive buyer of U.S. products which would be supportive.
Cattle continue to see solid gains. Cash traded at $120 for the past two weeks, which is $20 above the June futures. This will continue to bring strength to the futures market. If cash starts to break, futures will struggle. Packers are starting to return to capacity, which is helping to work through the backlog of cattle that are ready to be slaughtered. Weights are likely to see an increase because of the slowdown, but that should be able to get pushed through to the retail level quickly. The biggest issue facing cattle is that boxed beef prices have been on a steady decline. This is a signal that either the retail level demand is slowing or that consumer buying has peaked. Cattle could see a little pressure in June as the market works through the backlog.
“The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.”