Daily Grain / Livestock Marketing Outlook 7/7/2021
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Daily Grain / Livestock Marketing Outlook
Written by: Jim Gerlach
7/7/2021
Early Call 8:45am EDT: Corn down 7, soybeans up 18, wheat up 1. Early Wednesday,
Dow Jones futures are up modestly with European and Asian markets slightly lower.
Grain prices closed mixed overnight with corn lower, soybeans higher and wheat near
unchanged. After rains over the next 5 days, forecasts are turning drier again, which is
seemingly supporting soybeans more so than corn as soybeans have longer to go to
make a crop.
Grains: Corn for December delivery fell 6.9% to $5.39 ¾ on the Chicago Board of
Trade on Tuesday, closing limit down as grains traders expect more wet weather to
descend on parched growing areas. Soybeans for November delivery fell 6.7% at
$13.05, while wheat for September delivery fell 4.1%, to $6.26. Coming back from a
long holiday weekend, grain futures fell hard Tuesday, with corn futures reaching their
limits of $.40 early in the trading session. The market sensed improved rainfall chances
late last week, but the forecast of rain produced additional selling pressure Tuesday.
Weather through August is considered important for row crops, informing the quality
and yields of these crops. The weather market that is dominating the trading of grains
futures in recent sessions is essentially hinged on one question…whether or not the
rainfalls that have happened and are forecast in the coming days and weeks will be
enough to secure strong yields for U.S. row crops and avert any potential shortages. Our
focus has long been on the need to produce normal crops this year due to strong global
demand for both corn and soybeans and a short Brazilian corn crop, leading to tight
world corn and soybean stocks. Large Delta soy replant and problems up the Dakotas
are making trendline soybean yields more difficult, yet not impossible as August is the
key month. Anything below a trend yield necessitates demand rationing. Export
inspections for U.S. corn and soybeans have climbed from the previous week, according
to data from the USDA. In its latest grain export inspections report, the USDA said that
corn inspections totaled 1.24mmt and soybean inspections totaled over 206,000mt for
the week ended July 1. Both of these totals are up from last week. In the case of corn,
inspections were driven largely by increased shipments to China. Corn shipments there
totaled over 405,000mt, making it the leading destination for corn. Inventories of
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ethanol in the U.S. are expected to extend their climb, according to analysts surveyed by
Dow Jones. Analysts surveyed Tuesday expect inventories to rise to as high as over 22.3
million barrels, which would be the highest that they've been at since February.
Meanwhile, production may go in either direction, according to analysts, with
production forecast between 1.04 million barrels per day and 1.068 million barrels per
day, versus 1.058 million barrels per day last week. CBOT open interest totals for
Tuesday’s trade showed a drop of 177 contracts in soybeans and 1,586 contracts in
wheat, while corn open interest rose a surprising 1,115 contracts. The sharply lower
CBOT did not spark considerable or widespread liquidation. Either end users stepped
forward and were buyers from the weak handed funds, or funds are maintaining their
corn length.
Rainfall yesterday favored the driest areas of the upper Midwest and parts of the
northern Plains (see left map). Scattered t-storms dot varying areas over the next two
days as a cool front and wave of energy pass, but the primary event will be Fri-Sat when
a strong system triggers some heavy t-storm clusters within the southern half to two-
thirds of the Corn Belt, but less-so in driest areas of the north as a cool air mass blocks
rain. 1-3” occurs for the southeast half to two-thirds of Corn Belt Fri-Mon mostly south
of MN, SD, WI (see 7-day NOAA forecast map right). Temperatures will be cool over
the next week, then turn much warmer as upper-level high pressure develops to the
south and west. Expectations of similar setups ultimately led to rain in the Corn Belt,
thus we are forecasting some rain in this region over July 14-20 but less-so in the Plains.
Argentina’s Ag Ministry reported 2020/21 corn production is poised to be a record
59mmt. That figure does run higher than other estimates, as it includes corn grown by
farmers for their own needs. The Buenos Aires Grains Exchange reported their estimate
was 48mmt (USDA 47.0mmt) of commercially available corn only, which was up
slightly citing better than expected yields. BAGE noted harvest was just over halfway
completed through Thursday 7/1.
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National condition ratings for corn and soybeans held mostly steady last week, but
good-to-excellent ratings for both crops remain the third lowest in the past 12 years,
USDA NASS said in its weekly Crop Progress report on Tuesday. Nationwide, corn
condition was rated 64% good to excellent as of Sunday, July 4, unchanged from the
previous week and down from 71% last year. That is the third-lowest good-to-excellent
rating for corn in 12 years, only higher than in 2012 and 2019. 9 of 10 corn crops rated
64% good/excellent or less this week yielded lower than 2.6bpa from trend (179.5).
Nebraska's corn crop continues to be solidly rated at 81% good-to-excellent, while
Illinois is 65% and Iowa is 62% good to excellent. South Dakota corn, at 24% good to
excellent, and North Dakota corn, at just 35% good to excellent, are poorly rated. Corn
silking was estimated at 10%, slightly ahead of 9% last year but behind the five-year
average of 14%. Nationwide, soybean conditions also held mostly steady, falling just
1% last week to reach 59% good to excellent as of Sunday vs. 71% last year. As with
corn, that puts this year's current good-to-excellent rating at the third-lowest in the past
12 years. 6 of 10 soybean crops 59% good/excellent or less this week yielded lower
than 0.1bpa from trend (50.1). NASS estimated that 29% of the crop was blooming as
of Sunday, equal to last year's pace but 5% ahead of the five-year average of 24%.
Three percent of soybeans were setting pods, equal to the five-year average.
While corn and soybean conditions have held mostly steady the past couple of weeks,
spring wheat conditions continued to slide last week as hot, dry weather continued to
roast northern and western parts of the country. As of Sunday, spring wheat was rated
just 16% in good-to-excellent condition, down another 4% from 20% the previous
week. That remains the lowest rating for the crop since 1988. Sixty-nine percent of the
spring wheat crop was headed, 7% ahead of the five-year average of 62%. Winter wheat
harvest slowed somewhat last week due to rain in parts of the southern Plains.
Nationwide, harvest progressed 12% during the week to reach 45% complete as of
Sunday. That is 8% behind the five-year average of 53%. Kansas was 62% harvested
and Nebraska is at 7%, just getting started. Illinois is ahead of its five-year average
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harvest pace, but Indiana, Ohio and Missouri are behind their usual harvest paces.
Winter wheat condition was rated 47% good to excellent, down 1% from 48% the
previous week.
Corn futures traded both sides of unchanged following Tuesday's limit down close
before settling overnight lower. Corn conditions on Tuesday's weekly crop progress
report remained unchanged at 64% good-to-excellent vs. 71% a year ago at this time.
That portion of the corn crop rated poor to very poor rose by one percentage point to
9%. Notable changes were North Dakota, which fell by 4% and Illinois down 3%.
Nebraska continued to have stellar ratings at 81%, while Iowa was at 62% and Illinois,
at 65% good-to-excellent. South Dakota, at 24% and North Dakota, at 35% are problem
spots. Just 10% of the corn crop was silking, compared to 14% on average. In Brazil,
damage from last week's freeze event is being called much worse than earlier expected,
and production estimates are gravitating toward a range of 83-88mmt. Ag Rural pegged
the crop at 85.3mmt, down 5.4mmt from their last estimate. That would be a full
13.2mmt below the June WASDE report. Weather ahead calls for from 1 to as much as
3 ½ inches of rain possible over the next 10 days for the Corn Belt, but then a return to
very warm and dry conditions, with the northern Plains and Canadian Prairies once
again returning to stressful conditions.
Soybean futures are gaining back some of Tuesday’s losses following the near limit-
down close. Veg oils are mixed, with bean oil on the rise, and canola up just slightly
after settling limit down, having plunged nearly C$60/mt on Monday and Tuesday
combined. Palm oil is down just slightly early on Wednesday. A look at the 6-10 day
EU model precip vs. normal and 11-15 day GFS precip vs. normal maps show dryness
setting back up in the drought-impacted areas of the northwest 1/3rd of the Midwest and
the northern Plains (see maps). Soybean conditions fell by 1% to just 59% good-to-
excellent vs. 71% a year ago. That portion of the crop blooming rose to 29%, ahead of
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the 24% 5-year average, and equal to last year, with just 3% of the crop setting pods,
and equal to a year ago. Once again, the problem spots are the Dakotas, with South
Dakota just 24% good/excellent with 38% of that crop rated poor to very poor, while
North Dakota is a dismal 19% good/excellent. Topsoil moisture in the northern Plains
leaves much to be desired, with Minnesota at 78% short to very short, North Dakota at
76% short/very short and South Dakota at 92% short/very. Just 8% was rated as
adequate. Subsoil moisture is lacking, with the Dakotas at 81% to 89% short to very
short. Slightly bearish is the fact that the U.S. Ag Attache pegs Brazil's soybean crop at
a record 137mmt, with exports also a record at 94mmt. Brazil's export pace is slowing
down, with the U.S. becoming more competitive as July soy exports from there are
expected to fall to just 7.6mmt, according to ANEC the exporter's association. The CME
again raised margins on soybeans and bean oil on Tuesday, with volatility remaining
very high.
USDA’s June 30th acreage reports settled one big debate about 2021 crop production.
Now the market’s attention turns to the question that historically dominates during
summer: how weather will affect yields. June drought baked crops in the northwest part
of the main corn and soybean growing region. But new crop futures last week failed to
approach earlier highs despite news that record profit potential wasn’t enough to
convince farmers to plant as much of both crops as expected. USDA said its June survey
of growers found them putting in 92.7 million acres of corn, 1.55 million more than
March intentions but less than the 93.8 million traders anticipated. The news for
soybeans was even more of a surprise: USDA reported 87.555 million acres seeded,
45,000 fewer than turned up in the end-of-March estimate. Combined with tight June 1
old crop inventories, the market would seem primed to rally. But relatively benign
forecasts for easing weather threats in July and August threaten to end the bullish
stampede almost as soon as it began. Weather forecasts are just that: educated guesses
that may or not come true. And, while a few clues suggest crop losses may be mounting,
there is also potential for decent yields when all is said and done. Indeed, without clear
signs of significant damage, highs for both December corn and November soybeans
could already be in the books.
The most prolonged drought in the Midwest since the big one of 2012 peaked in mid-
June before breaking a little. Still, virtually all of North Dakota, Minnesota and South
Dakota suffered some type of drought during the month. Preliminary rainfall totals show
just how dry it was. This June was the driest recorded since 1895 in South Dakota, with
Minnesota the eighth worst. North Dakota was not as severely dry, June there was the
36th driest, but extreme heat depleted soil moisture. The dry start to the growing season
is the cause for my bullish corn yield forecast of 173.5bpa. This estimate is based on
weekly ratings for major growing states in USDA’s Crop Progress reports. As bad as
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that sounds, it doesn’t tell the whole
story about where the crop stands.
Iowa’s yield potential is only slightly
below average and the rest of the
Midwest is actually experiencing
better than normal weather in June.
While June was bad for some, 2021
didn’t meet the threshold for being in
the top 10% of dry years over key
states. Only 2012 and 1988 earning that dubious distinction. Weather forecasts also
don’t look terribly threatening for July. European and American weather models show
the northwest Corn Belt continuing to experience above normal temperatures and below
normal precipitation, but not as severe as June. Most of the rest of the region could see
average or better conditions. If this outlook prevails, yields could come in as good as my
bearish yield forecast of 179.1bpa, very close to the normal yield USDA has used so far
in its production estimates. If we see a yield that high, average cash prices received by
farmers might not vary all that much. But the 179.1bpa yield puts the top third of the
selling range for futures at $6.16 to $6.89, the contract high for December 2021 is
$6.38, or $.14 from the midpoint of that range. By contrast, the 173.5bpa yield translates
to a range of $6.33 to $7.10, suggesting the best could be yet to come.
The outlook for soybeans shows a similar pattern. Crop Progress ratings for soybeans
last week put the crop at 51.6bpa, with state-by-state conditions with updated acreage
weightings also lagging USDA’s national rankings. The bullish version puts the yield at
50.2bpa and also includes weather
forecasts for July and August. USDA’s
current normal yield stands at 50.8bpa,
right in the middle of the range. Under
the bullish scenario, 2021 crop year
ending stocks would tighten, with a
projected futures selling range of $14.45
to $15.54. That would likely bring at
least a retest of the $14.80 contract high
for November futures reached June 7, and perhaps more. Carryout would increase under
the bearish projection, with the $14.10 top of the selling range reached again Friday. Of
course, the weather could turn out better, or worse than the forecasts. It’s worth noting
that the Vegetation Health Index for key states points to well-below-average corn yields,
though they’re normal for soybeans.
6On the demand front, palm oil ended down 1.6%, tracking weakness in soybean oil
prices on the Chicago Board of Trade. Indian buyers have resumed purchases of refined
palm oil after a gap of a year as New Delhi removed restrictions on the imports and
reduced import taxes last week. The renewed purchases come as India, the world's
biggest buyer of palm oil, is trying to augment supplies to calm near-record local edible
oil prices. Soybeans on China's Dalian Exchange were down 1% while soybean meal
was down 1%. Brazilian soybean exports dropped to 11.1mmt in June, 13% lower on
the year and 26% below volumes exported in May, as the country’s harvest ended and
Chinese buying interest subsided, official customs data showed. Cargoes bound to
China represented 64% of total Brazilian bean exports in June, down from 68% in May
and 71% in April, when the country registered record export volumes. In 2020, China
bought 70% of total Brazilian bean exports in June. Besides the end of the peak season,
the main reason behind falling exports is China's negative crush margin as well as
higher Chinese soybean, oil and meal stocks, lower crush rates, and declining hog
prices. Ukrainian official said they will decide by Aug 30th whether grain export
limits/quotas will be set. Recent ideas have indicated a record total grain crop likely this
year, leading to expectations for increases in exports from last year’s 17.5mmt for wheat
and 24.0mmt for corn. China announced they will auction 130,000mt of imported corn
on July 9th. Last week’s auction saw very limited interest with just 28,000mt auctioned
of 156,000mt offered. Russian wheat export prices were down $7/mt over the last week,
according to consultancy IKAR. Russian Ag minister estimated that Russia would
export 37.5mmt of wheat vs. USDA at 40.0mmt.
U.S. corn exports for the week ended 7/01/21 were 1.236mmt (48.7mb), up from the
previous week's 40.7mb and in line with the roughly 49.5mb/week we estimate weekly
corn exports will need to average through the end of August in order to reach the
USDA's 2.850 billion bushel export projection. Cumulative export inspections of 2.289
billion bushels are up 69% from last year's 1.353 billion. Census Bureau official May
export data was recently released putting the 2020/21 marketing year to date (Sept-May)
difference between inspections data exports and official exports at roughly 105mb,
leaving us to assume the marketing year total difference will be around 140mb. This
week's activity included 405,000mt shipped to China, leaving roughly 5.7mmt in
unshipped purchases by China still on the books. With 8 full weeks remaining in the
2020/21 marketing year, China would need to ship roughly 700,000mt of corn/week in
order to fully ship their current purchases. U.S. soybean exports last week of 206,000mt
(7.6mb) were up from the previous week's 111,000mt (4.1mb) and again met the
roughly 6.5mb/week we estimate will be needed through the end of August in order to
reach the USDA's 2.280 billion bushel export projection. Over the last 7 weeks, while
hardly exciting, soybean exports have averaged 6.9mb/week, tracking right in line with
the USDA's export estimate. Cumulative export inspections of 2.111 billion bushels are
7up 54% from last year's 1.374 billion, while official Census Bureau exports were
running 89mb higher than inspections through May data.
Livestock: Cash hogs are called steady. Packers haven't shown much interest in the
market thus far this week and it's likely they could keep the trend of only buying
minimally through the cash market through the week. USDA’s National Average base
hog price for Tuesday afternoon was $110.23 vs. $108.21 on Friday. The CME Lean
Hog Index for 7/1 was $.51 lower to $111.26. China announced a 20,000mt domestic
pork purchase. The state reserve buying from the domestic market is intended to
stabilize domestic prices. Reports of pork prices falling 65% year to date in China cite
producer liquidations driven by ASF fears during the reported outbreaks at the time.
Pork cutout futures were mostly higher on Tuesday, ending $.55 to $3.47 in the black.
October contracts were $.90 weaker at the close. USDA’s National Pork Carcass Cutout
Value was $1.58 lower to $113.61 on good movement of 321 loads. Estimated packer
margins were $-13.42/head for non-integrators and $88.09/head for integrators vs. $1.29
and $91.59 the previous day. Weekly kill is not comparable to last week or year due to
holiday week differences.
Hog futures showed significant spreading action Tuesday with July and August showing
triple-digit gains while later contracts posted losses. The spot July contract and the
August lean hog contract both closed higher Tuesday but those were the only two
contracts able to attract any interest Tuesday. July lean hogs closed $1.27 higher at
$109.92, August lean hogs closed $2.12 higher at $102.35 and October lean hogs closed
$0.25 lower at $84.45. Packers are tired of scrounging the countryside looking for hogs
and have ultimately decided it's easier to run slower processing speeds, which is evident
in Tuesday's kill. Pork cutouts could see some demand over the next two weeks,
especially as everyone aims to refill their coolers. But even with that demand, it's not
likely packers bolster their processing levels. Pork exports for May were 688 million
lbs., up 11% from last year. Exports to China were 160 million lbs., below the record of
253 million lbs. from May 2020. Exports represented 33% of total U.S. production,
which is a record. China’s national average spot pig price was down 0.25% Tuesday, are
down 5.2% for the month, 55% year to date and 57% from a year ago. China on
Tuesday said they would ensure all pig and hog farms in key production areas over the
next 3 years, which would allow producers to quickly liquidate pigs in the face of ASF
and then have the confidence and resources to rebuild quickly. I find this very
interesting as the Chinese government says their herds have been rebuilt, which make
you wonder why such a policy is necessary? As always with China, it’s far more
important to see what they do vs. what they say.
8Live cattle futures toyed with the idea of trading fully higher Tuesday and some
contracts were able to close higher before the day's end, but the market wasn't
completely sold on the idea. August live cattle closed $0.40 higher at $122.40, October
live cattle closed $0.07 higher at $128.15 and December live cattle closed $0.22 lower
at $132.55. It was surprising to see that packers bought upward of 86,000 head of cattle
last week. On holiday weeks they usually don't hustle the market, but last week's
purchases bought them the opportunity to lay low in the cash market in the weeks
ahead. The boxed beef market was able to pull off a mixed close as opposed to fully
lower, but it still is too early in the year for the market to be done with its descent.
Tuesday's slaughter is estimated at 122,000 head, 2,000 head more than a week ago and
5,000 head more than a year ago. Monday's slaughter is estimated at 8,000 head.
Saturday's cattle slaughter was revised to 36,000 head, 3,000 head more than what was
originally stated. Boxed beef prices closed mixed, with choice up $1.24 ($286.68) and
select down $1.10 ($263.31) with a movement of 120 loads. Beef cutout values through
Friday were down 17 straight sessions but is still $80 above a year ago and $65 above
were it was in 2019. Cash is called steady. With packers having bought upward of
86,000 head last week, they sit in a better position this week to be able to opt out of
relying on the cash cattle market for their immediate needs. The feeder cattle complex's
strength only grew fiercer as the day traded on and ultimately allowed the market to post
lofty $3.00 gains through nearly the entire marketplace. August feeders closed $3.57
higher at $160.62, September feeders closed $3.30 higher at $162.72 and October
feeders closed $3.17 higher at $164.65. The feeder cattle market's rally stemmed from
two major factors: the corn market's sharp deterioration and the anticipation of strong
buying interest later this week for feeder cattle. A cooler forecast and a strong chance of
rain over parts of the Midwest in the next 10 days has the entire corn complex on edge.
Meanwhile cow-calf producers are praying they're fortunate enough to catch parts of the
rain showers as drought conditions continue to plague many in the western part of the
U.S.
Pork retail feature activity for the latest holiday weekend performed much better than
beef. The total pork retail feature index for the week ending July 2 was 166,010, 83%
higher than the COVID impacted featuring activity in 2020 as well as 9% higher than in
2019 and 17% higher than the five-year average. In the four weeks ending July 2, pork
retail featuring activity averaged 9% above the five-year average. Certain pork items
presented significant value for retailers relative to other proteins and saw a significant
jump in featuring activity. Features of loin cuts were up 62% compared to the saw week
in 2019 while the average feature price was up 17%. Processed pork features were down
26%, however, while the average feature price was up 25%. Bacon prices are now at all-
time record levels although we will wait for the USDA monthly retail price data to
confirm this. For the most current week, USDA pegged bacon features (the most
9popular processed pork feature) down 19% compared to 2019 while the average feature
price was over $6/lbs. or 18% compared to 2019. Pork shoulders and ribs are popular
items during this time of year, but limited availability and lack of freezer suppliers have
caused retailers to scale back on features of these products. Features of St Louis Style
ribs were down 87% compared to 2019 while the average feature price was over $4 a
pound, 51% higher than in 2019. Bone-in butt features were down 47% at a 16% higher
price.
Weather: There is a ridge over the western U.S., a trough off the British Columbia,
Pacific Northwest U.S. coast, a shallow trough over the central U.S., and tropical system
Elsa near the Florida coast north of Tampa. Elsa will track into north/northeast Florida
today, into southeastern Georgia tonight, and up the eastern seaboard the rest of the
week. A front associated with the central U.S. trough will progress southward and
eastward the rest of this week. The trough near the North American west coast will
move eastward and become cut-off as it moves into the north-central U.S. late this
week. The U.S. and European models are in general agreement. For the outlook period,
temperatures on Monday will be below normal from the southern and central Plains to
well above normal over the Northwest, with near to slightly above normal temperatures
elsewhere. This will be the general idea through the period but the central plains and
northeast U.S. will warm to near to above normal Tuesday-Wednesday while the
California coast cools to near or below normal Tuesday-Thursday. Additional short-
wave troughs may sustain scattered showers and storms across parts of the central and
eastern U.S. next week.
North American Weather Highlights: Stress returns to the northern Plains in western
areas between rain systems the next couple of days. Widespread showers yesterday and
again later this week may keep crop conditions from worsening and some areas could
see improvement. Showers yesterday in the central/southern Plains may have paused
wheat harvest in places. Near to above normal temperatures return to the central plains
Thursday and Friday. Fronts this week and next week will give a chance for showers
and storms for many places. Fronts this week will give a chance for showers and storms
for many places in the Midwest. Too much rain will not be welcome where soils were
recently saturated, but the activity will have a chance to put dents in some of the drought
areas. Temperatures, generally around or below normal for the next several days, will
not be stressful. Developing cotton and soybeans in the Delta should continue to benefit
from showers this week and next week. Tropical system shower activity from Elsa will
progress from south to north in the Southeast this week. Frontal system shower activity
will take over late in the week and for the upcoming weekend. Overall, conditions are
favorable for developing cotton. A cut-off system will bring scattered showers this week
to the Canadian Prairies, but rain amounts are looking relatively light.
10Global Weather Highlights: Drought continues to plague corn across Brazil, with this
week also remaining dry. Above average and mostly above freezing temperatures for
the rest of the week in Argentina will be beneficial for wheat growth. Strips of areas that
see isolated showers this week get a bit of a moisture bonus, but widespread showers are
not expected. Another system keeps providing scattered showers this week in Europe,
maintaining beneficial soil moisture for developing crops. The active pattern carries into
early next week. Showers occurred the past few days for Ukraine and western Russia
which will benefit developing crops. However, the latter part of the week will see
showers mostly stopping and temperatures gradually becoming well above normal.
Scattered showers may return next week. Scattered showers will continue to move
through the FSU spring wheat region this week, favoring Kazakhstan. As this week ends
and we head into the weekend and next week, frontal systems provide additional
chances for showers and cooler temperatures. While periods of showers continue for
southwest Australia, maintaining beneficial conditions for vegetative winter crops, the
next couple of days will remain dry in eastern Australia. Showers then return to eastern
Australia for the latter part of this week. Over the weekend and into next week,
southwestern Australia and Victoria see additional shower chances, but Queensland and
New South Wales look to be on the drier side. Periods of showers and relatively stable
temperatures continue favoring developing corn and soybeans in China. Monsoon
showers should continue to be consistent in India this week, maintaining good soil
moisture for developing crops.
Macros: The macro markets were quiet as of 8:30am EDT, with Dow futures steady,
the U.S. dollar index is down 0.1%, crude oil is up 0.3% and gold is up 0.8%. The S&P
500 on Tuesday closed 0.20% lower, the DJIA lost 0.60%, while the Nasdaq 100 gained
0.40%. Bearish factors included the Chinese government's regulatory crackdown on
U.S.-listed Chinese tech stocks, and the weaker-than-expected June U.S. ISM services
index. Bullish factors included the sharp decline in the 10-year T-note yield to a 4 ½
month low of 1.35%, and the sharp 5.91% rally in Amazon.com after the U.S. Pentagon
killed its original JEDI deal with Microsoft and split the cloud deal between Microsoft
and Amazon. The 10-year T-note yield on Tuesday fell sharply by 7.6 bp to a 4 ½
month low of 1.35%, the lowest level since February. The T-note yield fell on the
weaker-than-expected June U.S. ISM services index, which fell by 3.9 points to 60.1.
The T-note yield also fell on the decline in the 10-year breakeven inflation expectations
rate by 1.3 bp to 2.33%, which was prompted by Tuesday's 2.38% plunge in August
WTI crude oil prices. The T-note yield was also pushed lower by the lack of any new
Treasury coupon auctions this week. The 10-year T-note yield was already on a
downward slide from last Friday when the June U.S. unemployment report was greeted
dovishly by the markets due to the 0.1 point increase in the June unemployment rate to
115.9%. The June payrolls report of 850,000 was stronger than expectations of 711,000,
but it wasn't a blow-out figure. The T-note market seemed to conclude that the June
unemployment report wasn't strong enough for the Fed to conclude that it has seen the
"substantial further progress" that it requires before deciding to begin QE tapering.
The U.S. labor market still has a long way to go before getting close to its pre-pandemic
level. The current unemployment rate of 5.9% is still well above the record low of 3.5%
seen in the months before the pandemic struck in early 2020. In addition, the U.S.
economy has recovered only two-thirds of the jobs lost during the pandemic. The
economy needs to produce another 6.8 million jobs to get back to the pre-pandemic
level. Despite the dovish tone seen in the past few days, today's release of the June 15-
16 FOMC meeting minutes could be construed by the markets as hawkish. FOMC
members at that meeting began discussions of QE tapering. Also, the Fed’s new dot-plot
from that meeting showed that most FOMC members turned significantly more hawkish
about rate hikes. Seven of the 18 FOMC members are now expecting at least one 25 bp
rate hike in 2022, and 11 of the 18 members are expecting at least a total of two rate
hikes by the end of 2023. The T-note market has still not displayed much concern about
a QE tapering decision. The market consensus is that the early warning of QE tapering
will not come until the August Jackson Hole conference or the following FOMC
meeting on September 21-22. In a survey taken by Bloomberg in early June, 33% of the
respondents said they expect the formal announcement of QE tapering in September,
10% in October or November, and 33% in December. The markets are expecting the
Fed's first 25 bp rate hike in late 2022, according to the federal funds futures market.
The markets are then expecting two more 25 bp rate hikes in 2023.
Global stock markets were mixed Wednesday after Wall Street declined on weaker U.S.
services activity. London, Frankfurt and Shanghai advanced while Tokyo, Hong Kong
and Seoul declined. Wall Street futures were mixed. Overnight, Wall Street's benchmark
S&P 500 index broke a seven-day streak of record closes and fell after the Institute of
Supply Management reported service industry activity grew in June at a slower rate than
forecast. The FTSE 100 in London opened 0.5% higher at 7,136.05. Frankfurt's DAX
gained 0.7% to 15,618.92 while the CAC 40 in Paris added 0.3% to 6,525.16. On Wall
Street, the S&P 500 future was up less than 0.1% while that for the Dow Jones
Industrial Average was off less than 0.1%. On Tuesday, the S&P lost 0.2% but still is up
15.6% for the year. The Dow shed 0.6% while the Nasdaq Composite rose 0.2%. In
Asia, Tokyo's Nikkei 225 in Tokyo sank 1% to 28,366.95 and the Hang Seng in Hong
Kong lost 0.4% to 27,960.62. The Shanghai Composite Index advanced 0.7% to
3,553.72 after China's Cabinet announced it would impose stricter data security and
other standards on companies that want to join foreign stock exchanges. The
announcement, at a time when Beijing is tightening control over technology industries,
12is a potential hurdle for Chinese entrepreneurs who have raised billions of dollars
abroad. The Kospi in Seoul retreated 0.6% to 3,285.34 while the S&P-ASX 200 in
Sydney gained 0.9% to 7,326.90. India's Sensex added 0.1% to 52.933.97. New
Zealand, Singapore and Jakarta declined.
Wall Street faltered after ISM reported purchasing managers' index fell to 60.1 from
May's record 64.0 on a 100-point scale on which numbers above 50 show activity
increasing. That was well below the 63.3 expected by forecasters surveyed by The Wall
Street Journal. Travel, hospitality and other services industries have enjoyed a boom as
U.S. restrictions on consumer activity ease. That pushed up U.S. prices, but the latest
measure could support the Federal Reserve's position that the inflation spike is
temporary. That could help to reassure investors the Fed and other central banks won't
feel pressure to cool price rises by rolling back economic stimulus. In energy markets,
benchmark U.S. crude gained $1.07 to $74.44 per barrel in electronic trading on the
New York Mercantile Exchange. The contract fell $1.79 to $73.37 per barrel on
Tuesday. Brent crude, the basis for pricing international oils, added 95 cents to $75.48
per barrel in London. It plunged $2.63 the previous session to $74.53. The dollar gained
to 110.76 yen from Tuesday's 110.63. The euro was little-changed at $1.1825.
Summary: Corn futures plummeted to limit losses Tuesday following some weekend
relief and forecasts for some moderate to heavy Corn Belt rains in key states over the
next 10 days. Funds as of noon were estimated to have sold close to 25,000 contracts.
Forecasts call for ½ to 2 ½ inches of rain to fall in the western and northern Midwest
over the next 10 days, including dry areas of Minnesota, Iowa and Wisconsin, with one-
inch rains expected in the Dakotas and parts of Nebraska. With those rains comes a cool
down, with both the 6 to 10-day and 8 to 14-day forecasts showing less warmth ahead of
pollination. The bulk of pollination is slated to be starting in seven to 10 days, though
parts of Illinois could go earlier. Not all is bearish in corn land, with 12% of Brazil's
safrinha now harvested, analysts continued to ratchet Brazilian production lower.
Consultancy Ag Rural was the latest to cut the crop by another 5.4mmt to just 85.3mmt,
down 13.2mmt from the June WASDE projection. The loss in production was due to the
ongoing drought and higher-than-expected freeze damage. On a bullish note, it is
possible that next week's July USDA report is likely to show increases in corn feed and
residual, exports and even ethanol usage. Funds came into Tuesday's trade still carrying
an estimated net long of close to 200,000 contracts.
Soybeans also plunged Tuesday, fueled by weekend showers in the Dakotas and
Minnesota, and by the wetter forecast ahead. Rain totals of up to 2 to 3 inches are
possible in parts of the primary Western Corn Belt, with 1-inch-plus totals likely in the
northern Plains over the next 10 days. Veg oil markets, in unison, are correcting hard to
13the downside, with bean oil and palm oil sharply lower, and new-crop November canola
locked down the limit with close to a C$60/metric ton (mt) loss in the past two days.
Weekend relief in parts of the Canadian Prairies, and a wetter 7 to 10-day outlook has
pressured the soy and veg oil markets. The sharply lower prices on Tuesday should
provide a buying opportunity. Last week's USDA acreage and stocks report came in
much lower than traders had anticipated. With 87.6 million acres of soybeans and trend
yields, that is unlikely to cover anticipated demand, with ending stocks close to a
pipeline amount for 2020-21. The incoming rains are unlikely to make up for drought
conditions and extreme temperatures that we have seen in the last few weeks and
months, but every little bit helps, and there is plenty of time for bean conditions to
improve. As of noon Tuesday, funds were credited with selling 20,000 bean contracts,
along with a combined 17,000 of products.
All three wheat markets finished sharply lower, led by new-crop Minneapolis
September wheat. Kansas City September wheat also gapped lower. Over the weekend
the northern Plains and part of the western Canadian Prairies received some moderate
rain totals and more rain is slated to fall in the coming week. The northwestern part of
the wheat belt remains parched with extreme temperatures. While rains in both
Nebraska and South Dakota could impact harvesting efforts there, Kansas looks to be
mostly dry. Some heavy rains could stall out soft red winter wheat harvest in the eastern
Midwest later this week. Egypt's GASC bought 240,000mt of wheat, with 180,000mt
from Romania and 60,000mt from Russia. Some impressive yield indications are
coming from northern Kansas and Ohio, with big soft red wheat yields being reported
there. Both Chicago and Kansas City Sep wheat each crossed below the 50-day moving
averages before recovering a bit. Although the rain relief is much needed in the northern
Plains, many feel much of the damage to spring wheat is already done.
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