August 29 – Monday’s strength fell flat overnight, as stock traders wait for key economic data to be released later this week. Yet, the VIX is trading near two-week lows around the 15 level this morning, while the dollar index is trading firmer near 104.3, which is just below 12-week highs. Yields on 10-year Treasuries are trading near 4.23%, while yields on 2-year Treasuries are trading near 5.03%. Crude oil prices are modestly higher this morning, while grain and oilseed prices are mostly lower.
Chinese stocks rallied on rumors that China’s central bank may consider cutting its bank reserve requirement ratio soon, which would be expected to stimulate the economy. However, it could also be bearish the yuan, which would be a concern of the Chinese government, which wants the world to see it as a strong alternative to the U.S. dollar. The yuan held relatively steady near 7.29 to the dollar in today’s trade, but this is something that we need to watch, as a break to weaker exchange rates could trigger more weakness, going against China’s longer-term goals. Even so, China’s economy needs stimulating. One of the greater concerns currently is the property sector, which saw sales in the four first-tier cities fall by nearly 23% month-on-month in July, while property inventory in eight other sample cities rose a bit over 2% month-on-month. The greatest inventory pressure is seen in Shenzhen, where unsold properties increased by nearly 7% month-on-month, followed by a 5.6% increase in Shanghai. The typical consumer has three-fourths of their assets tied up in property, so a hurting property market tends to reduce consumer confidence, and therefore reduce consumer spending, and that’s what we’re seeing in China.
Yet, China continues to buy Brazilian soybeans at a time when they typically are aggressively buying U.S. soybeans. Cash sources tell us that China bought another 35 cargoes of soybeans last week, maintaining their pace from previous weeks. Weak crush demand in Brazil currently has soybeans there priced into the export market, keeping them quite competitive with U.S. soybeans. Part of that is due to ongoing problems in the Panama Canal, where persistent drought continues to keep water levels low, reducing allowed drafts for ships, and slowing movement through the canal. The current problem is expected to linger through at least November, covering the peak U.S. export season. Brazil is currently buying for September / October shipment. It currently has an estimated 5.5 million metric tons of coverage for September shipment, with 4.5 mmt of that total of Brazilian origin, and less than 1 mmt of U.S. origin. Furthermore, China is believed to have nearly 3 mmt of Brazilian soybeans booked for October shipment, with 5.2 mmt of U.S. soybeans booked for the month. Chinese buyers fear that soybeans booked out of the U.S. Gulf may have to choose an alternate route to the Panama Canal, which would add another $12.25 per metric ton, or more than 33 cents per bushel to the cost of U.S. soybeans, while also delaying their arrival. That’s in addition to higher U.S. barge rates on the Mississippi River as water levels drop there due to the current hot dry spell across the Midwest.
USDA reported late yesterday that 56% of the U.S. corn crop rates Good to Excellent this week, down 2 points on the week. The soybean crop rates 58% Good to Excellent, down 1 point from the previous week. While lower, both of these crops saw less deterioration than the market anticipated, although my expectations were a bit less than the market expectations. Nonetheless, grain and oilseed prices pulled back overnight due to the disappointment. This is the type of year that gives me lower confidence in my yield models, for reasons that I’ve previously explained, but those yield models put the corn yield at 174 bushels per acre and the soybean yield at 50.9 bpa, down 2.3 and 0.1 bushels respectively from the previous week. The market rallied yesterday on Pro Farmer’s 172 bpa corn and 49.7 bpa soybean yield estimate from Friday afternoon, but it dropped overnight on yield estimates similar to the above. That gives us an idea of what the trade expects, and what it is pricing into the market. If verified, the above yields would leave us with ample surplus corn supplies above 2 billion bushels once demand is adjusted, and the soybean stocks would be snug, but adequate. The market is content with that at this time, because it expects South America to have a big crop six months from now.
The grain and oilseed markets remain vulnerable to headlines, but the path of least resistance in the absence of those headlines is lower. The soybean balance sheet has the least amount of margin currently, but the trade shows little concern currently over tightening corn and wheat supplies, even with the Stats Canada report coming in smaller than expected this morning. I do believe that the corn and soybean crops are getting smaller, but thus far we lack data to indicate that the crops are getting small enough to justify higher prices to ration demand. Soybeans are closer to that line, but still above it in the eyes of the market, largely due to questions about export demand for both corn and soybeans in the coming year. The market expects USDA to lower its yield estimates next month after it samples fields across the Midwest, but it also expects USDA to cut demand estimates as it cuts production estimates, leaving ending stocks adequate to fill the need. Sustained rallies will require bigger yield cuts than the market currently anticipates.
