Inflation Fears, China Demand, and Technical Ceilings Set the Stage for USDA Showdown

The inflation trade continued in early trade after another Chinese bean purchase was announced with corn and beans higher before bumping into technical resistance which stopped the rallies. When crude oil reversed early gains to post late losses, additional selling pressure hit the grains and soy into the close. After the open, the volume slowed to keep today’s action from having much meaning as Monday’s USDA report looms on the horizon for both the hedge and speculative community, which both need to be carefully positioned if the USDA throws a bullish adjustment into the mix after the bearish early winter trade.

News and Notes:

• Argentina’s forecast now has rain coming in for the driest regions on Thursday which is earlier than previous forecasts. The 2-week forecasts for both Brazil and Argentina remain non-threatening with the northern Brazil early harvest conditions dry enough for a quick start and yield reports to impact bean trade in the week ahead.
• The daily December corn chart is on Page 2 and shows today’s inability to breakthrough the 50-DMA (green line) but was able to close between the 20 (blue) and 100-(purple) DMAs to keep new crop prices firmly stuck in the 10-week range from $4.60 to $4.70. The funds are holding a modest long position and could be enticed to larger scale buying if Monday’s report offers a bullish surprise to push prices over technical resistance.
• China continues to add to their recent bean purchases to push their agreed purchase total to over 90% complete of the October trade deal. If the deadline for completion is the end of February, China should reach the 12 MMT trade deal promise pretty easily.
• Other markets rallied sharply today in the inflation fear trade with gold, silver and other rare earth minerals recapturing the end of the year losses to push close or to new all-time highs. Despite the turmoil in the international political scene, the Dow made another record high with the NASDAQ moving sharply higher as the tech sector, especially companies with technology used by the military.
• Cattle continue a new leg higher as cash prices firm and retail demand shows no signs of slowing. Typically, retail beef demand and the stock market are a parallel trade as consumer confidence leads them to get their protein from beef, rather than pork or poultry. The cattle market is a great case study in an industry that intentionally (or unintentionally) was able to keep production at levels to ensure profitability. The grain and soy markets are not following this business model.

Today’s trade ultimately ended up being disappointing as no one in the trade is being compelled to buy at the higher end of the ranges to fuel breakouts. Monday’s report has the potential to provide that fuel, but the USDA will need to find a substantial yield cut if they are going to offset the expected increase in harvested corn acres and the modest cuts to exports. China’s willingness to almost satisfy the 12 MMT bean purchase agreement should have been enough to spark a larger rally, but the lofty levels hit in October are still well above current prices. The market moving input after Monday’s report will be Brazil bean harvest reports and the early US planted acreage estimates from private analysts and the USDA Ag Outlook Forum in late February. Once Brazi’s harvested supplies fill the world cash pipeline, US bean exports will slow to a trickle into the summer. Work on your breakeven calculations and make sure you take advantage of the ongoing pre-pay season for available savings.