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Morning Market Review for Dec. 13, 2019

U.S. and China reach trade deal! (Comments are updated by 7:30 a.m. Central Time.)

Details of trade deal suggest U.S. agriculture is a big winner. Duane Lowry offers marketing insights below.

Overnight Trends:
At 6:38, cst:
March Corn= 4 3/4 higher
Jan Soybeans= 12 1/4 higher
March KC Wheat= 5 1/4 higher
March Chicago Wheat= 3 1/4 higher
Crude Oil= up $0.53
Mini-Dow= up 100
Gold= up $3.20
Dollar Index= down 56

Where are we for the week? (As of yesterday’s settlements.) Mar Chicago Wheat= up 5 3/4 cents, Mar KC Wheat= up 11 3/4 cents, Mar Corn= up 1 cent, Jan Soybeans= up 25 cents, Crude Oil= down $0.02, Gold= up $7.20, Dow Index= up 250, US Dollar Index= down 28.

Weather:
Weather offers moisture opportunities for Argentina, during the next week, with southern areas best precip seen a week from now. Temperatures are quite warm.   

Global News:
Early indications are that U.S. agriculture will be a be winner in the trade deal reached by the U.S. and China, to the extent execution actually takes place, China has committed to purchasing $50 bil per year in U.S. ag products, with this total reportedly to be fairly evenly spread through each quarter. It that is true, then we will have a good handle on the sincerity of this deal by March 31.

Dr. Michael Pillsbury, Director of Chinese Strategy at the Hudson Business Institute, and someone who has been talking directly with President Trump, said that this trade deal is “A real breakthrough.” He indicated that U.S. agriculture will quickly see benefits and that intellectual property protections in the trade deal are real and enforcement mechanisms exist. He indicated that a large signing ceremony will not take place between President Xi and President Trump until after the 2020 elections. Dr. Pillsbury suggested that this may be due to the scope of movement by China towards President Trump’s demands and that ceremonial decisions were made based on decisions to play down these movement/concessions. There might be some political spin in that last sentence, but honestly, based on what I have seen about this trade deal, I think there may well be truth in that statement also.

The U.S.-China trade deal will reduce the U.S. trade deficit with China, as it will increase broader purchases of U.S. products, including energy. Ethanol is expected to be in a favorable position with the Chinese.

It is important to see this US/China trade deal in the context of what took place this week with the Federal Reserve. Despite the strength of the U.S. economy in almost all measurements, inflation has been subdued and remains below the Fed’s target of 2%. They left interest rates unchanged and indicated/suggested that there would be no interest rate increase in 2020. It is clear by the Fed’s own statement that they have a strong desire to see inflation build. If that is true, then they will need to see sustained inflation above 2% for a period of time. When the Fed wants inflation, you best believe that they have the tools to make it happen.

As I have discussed many times during the past several months, when/if a U.S./China trade deal occurred, it would be bearish for the U.S. dollar. The U.S. Dollar Index is currently trading at the lowest levels seen since July 19. Charts appear ominous and poised to build downside momentum. As I have also discussed/warned during the past several months, the U.S. dollar is poised for a period of protracted weakness. If this is all a correct analysis and the Fed wants inflation, which a weaker U.S. dollar is one of the tools to achieve it, then large investment money will seek to move away from stocks and into dollar-denominated products, such as agriculture and energy products. When the Fed wants inflation, there is nothing better to set that in motion than 3 things—a weak U.S. dollar, agricultural prices and energy prices. Things that are produced from the ground are commodities that are relatively easy to be pushed and fuel inflation, when the Fed wants inflation—just my opinion/observation from my many orbits around the sun. My final thought on this U.S.-China trade deal—don’t underestimate its ability to build sustained influences in the price structure of agricultural products, as well as other industries. Until proven wrong, you should take this deal at face value and believe that China will follow-through, at least for the first year! Now, in judging that statement, realize that markets ebb and flow and they sometimes don’t immediately do what is expected. But, do not analyze the long-term impact of this trade deal with a 15-minute bar chart.   

bar chart
Malaysian palm oil prices reversed early session gains to finish down 38 points overnight.

Conservatives were big/historic winners in British elections. (This is an offshoot of Trumpism.)


Corn:
Today’s Support/Resistance and Expectations:

121319Corn.png

Expectations for Today> Yesterday’s price action eclipsed the previous 5 days’ trading ranges. Overnight gains, if sustained, will produce the highest settlement price since Nov 14. Large specs are major shorts here and their track record during the past year has not been good. Charts are poised to build upside momentum in the weeks ahead. Weakness below yesterday’s settlement will be difficult to build momentum and trade below yesterday’s settlement may not even occur. Longer-term upside targets are above the October highs.


Soybeans:
Today’s Support/Resistance and Expectations:

121319Soybeans.png

Expectations for Today> Impressive price action. Bears are on the run. It is important to remember that large specs just recently established a record number of short positions for a 2-week window. There is certainly ability to build upside momentum in the weeks ahead. Again, it is crucial to realize just how cheap soybeans are from a historical inter-market relationship perspective.

Wheat:
Today’s Support/Resistance and Expectations:

121319Wheat.png

Expectations for Today> Price action is constructive. KC values are near the peaks of the past 60 days. This market will not be the upside leader, but higher values will unfold during the next several weeks.  

Overall Summary/Outlook:
There will be a default setting to have skepticism towards the U.S.-China trade deal. I think that will prove to be a mistake. It is not only important as to how China reacts in different commodities, but I argue that it may initially be most important to see how both global and domestic users respond. I believe the users, globally and domestically, are very uncovered and I believe they will quickly see the need to establish ownership.  

It is possible that cash basis initially experiences some weakness from a futures rally, but in reality, it is likely that the cash market will quickly return to be the core component and actually strengthen. Producer selling interest will be limited, as reduced 2019 yields just don’t “dollar-up” at current values or close to current values. Expect the U.S. producer to be a skeptic, but not take selling action based on that skepticism.

One final observation: 

Again, the U.S. dollar developments here are a big deal. It can cause large investors to make longer-term changes to their portfolio. If there will be a loser from the U.S.-China trade deal, it will be the U.S. stock market valuations.

Duane has been involved in ag business and the futures industry since 1978. From an assistant manager at a large Iowa cooperative to a floor trader and broker in Chicago, Duane has worked with producers and grain elevators to manage futures, basis and spread risk. Duane has been writing daily market commentary since 1987 and currently works directly with producers to market their grain, manage risk and optimize their crop insurance decisions. Duane’ deep experience with basis, spreads and market analysis sets him apart as a crop insurance agent and risk management consultant, helping him to optimize producer marketing decisions.
DuaneL@netins.net
563-419-1300

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