China Rumors Spark Grain Rally as Markets Search for a Summer Bottom

After a morning rumor that China was sniffing around for bids,  double-digit rallies in beans and wheat and solid gains in corn were an interesting way to start July before a lack of confirmation saw the rally cut the gains in half before settling into a quiet but impressively positive day. After Tuesday’s no surprise USDA update and positive trade reaction, the market sentiment is significantly better that it was starting the week. Cooler US weather, the long July 4th weekend, and a lack of Chinese demand action are all capping rallies, but as was hinted in this morning’s rally, if China makes confirmable moves to begin a larger trend of US ag imports, there are plenty of bruised bulls waiting in the wings to turn the market into a demand market.

News and Notes:

• The hottest of this week’s temperatures will begin to normalize after the holiday for all but the far western Corn Belt and the retreat of the high-pressure ridge will allow more normal rains and temperatures into mid-July. The initial run of hot/dry weather probably helped the crops where they had been waterlogged, but some concern does remain that it will return after mid-July for a more negative impact.
• The daily December corn chart is on Page 2 and shows today’s follow-through from Tuesday’s post-report DOJI gains. The morning rally took prices to resistance at the 20-DMA (red line at $4.42) for the first attempt to break through since the market began to collapse on May 20th. If/when prices can push and close through the 20-DMA, there is a big bubble from $4.42 to $4.67 (black line for the 200-DMA) with no meaningful technical overhead resistance for the funds who are holding a short position in excess of 325 MBU. A technical breakout in tandem with a fundamental catalyst could easily spark a rally to run through the bubble.
• One of the more predictable and completely understandable findings in the USDA report is that farmer participation in the voluntary survey was under 40%. There is no reason for any operation to give voluntary information to an agency that no farmer trusts has their best interest at heart.
• Indian government officials have already began emergency measures for all provinces as the Super El Nino pattern dried up their June monsoon with expectations of a very dry July as well. India going from a net exporter to a net importer dramatically changes the world’s wheat balance sheet.
• Despite the morning rumors of Chinese buying interest, there were no sales announced from public or private sources. Chinese buyers are experts at playing the markets and finding buying opportunities and taking advantage of them. With the potential of the USDA report rocking the markets past and prices scraping along much closer to the bottoms than middle, the perfect buying opportunity is hopefully at hand for China. As we saw at the peak of this morning’s rumor rallies when corn was +8, beans +18 and wheat +19, the market is on a hair trigger for news. If (big if) China follows through on all commitments from the May trade meeting, the market will take on a much more bullish attitude.
• Weekly ethanol production rebounded this week to 328 Mga which is right at the number for the next 2-months for the US to use 5.6 BBU of corn for ethanol production. While year-round E15 chatter is absent this week, there remains activity behind the scenes to get it passed before the mid-term elections. At full build out, it would more than double US corn used for ethanol.

The exhale from the worried bulls after yesterday’s post-report trade could be heard all across the Corn Belt and today’s follow-through only adds credibility to the thought that prices have little downside risk with increasing upside potential. The Chinese shock rally this morning should be a good indicator of what will happen should they actually come to the market in force with purchases. Thursday will be the last trading day of the week with all grain and livestock markets closed Friday, so weekend positioning to assess the current market landscape will be a likely strategy for the trade. There has been no major news about Iran over the last 2-days with crude falling well under $70, but this administration loves weekends for big policy announcements, which will keep everyone on a slight edge.