General Overview: The commodity and financial markets were put on alert this week as coronavirus infections outside of China rose along with new warnings by companies over the potential impact on their businesses. Goldman Sachs stated that commodities had rallied prematurely, focusing only on the planned stimulus while ignoring the immediate disruptions.
Citigroup said the oil markets had become overconfident in expecting a V-shaped rebound from the coronavirus, and prices were likely to remain weak during the first half of the year. Citigroup also said that the supply-chain recovery in China could be problematic despite the stimulus pledge from China. Total Chinese demand may fall by about 3.4 million barrels a day in February, and sit around 1.5 million barrels a day lower on average in Q1.
Bloomberg News reported that China is readying to boost purchases of U.S. agricultural products as early as March, according to people familiar with the matter. In the article, the ministry of Finance published a list of 696 American products, including soybeans, pork, beef, corn, wheat, crude oil, and liquefied natural gas (LNG), that will be eligible for relief from duties imposed by China. Chinese companies can start applying for waivers on March 2 for the tariff relief.
President Trump tweeted on Friday of a third possible support for the Market Facilitation Program (MFP) payments in 2020 to aid farmers. “IF OUR FORMALLY TARGETED FARMERS NEED ADDITIONAL AID UNTIL SUCH TIME AS THE TRADE DEALS WITH CHINA, MEXICO, CANADA AND OTHERS FULLY KICK IN, THAT AID WILL BE PROVIDED BY THE FEDERAL GOVERNMENT, PAID FOR OUT OF THE MASSIVE TARIFF MONEY COMING INTO THE USA!” he tweeted.
To help stimulate the Chinese economy, the People’s Bank of China (PBOC) cut its benchmark lending rate by 10 basis point amid the uncertainties of the coronavirus. It also vowed that it would continue to provide liquidity by using open market operations and funding to state banks. The Chinese government is also proposing a direct cash infusion or merger to help its airline industry, which has been severely impacted by the coronavirus.
As of the latest tally in China, there were more than 76,000 coronavirus cases and about 2,250 deaths, mostly in Hubei province. In South Korea, its first coronavirus death was reported and cases rose to 156, tripling over three days. In Japan, the first two fatalities from the Diamond Princess cruise ship was reported, bringing the number of infections to 726.
Corn: CBOT May20 corn futures traded in a 7 cents range last week and settled at the lower end at $3.80 ¾ /bu, as the coronavirus continues to disrupt China’s financial, agriculture, travel, and food industries. Also bearish for corn was the USDA 2020 Outlook, which reported that farmers will harvest their largest crop ever, and ending stocks will be the highest since 1988.
The report estimated that corn acreage will increase by 4.8% to 94.0 million acres (highest in four years), production will rise by 12.9% to 15.46 billion bushels, and ending stocks will increase by 39.4% to 2.637 billion bushels from a year ago. It also reported a 21.7% increase in exports to 2.1 billion bushels.
Soybeans: USDA soybean inspections surprisingly surged 55% from the prior week to 992.3k tons, but were still down from year-ago levels. The weekly (Feb.13 period) USDA Net Export Sales fell 24% to 497,700 tons from the previous week.
The annual USDA 2020 Outlook report for soybeans was slightly bullish because of the decrease in ending stocks. Estimates called for acreage to increase 11.7% to 85 million acres, production to rise by 17.9% to 4.195 billion bushels, ending stocks to fall by 24.7% to 320 million bushels. Exports are expected to increase by 12.3% to 2.05 billion bushels.
Nonetheless, CBOT May20 futures had its first weekly loss in February, as Chinese purchases of U.S. farm goods did not materialize and Brazil’s plentiful harvest continues. Futures got ahead of itself, counting on future pledges from China and not taking into consideration the demand delay today. CBOT May20 soybean futures closed below the $9 psychological level to $8.99/bu.
Wheat: The Australian government slashed its summer crop outlook for the 2019/20 season despite the recent rains that came too late to boost new plantings. Its crop planted area is estimated to have fallen by 66%, a 33% increase from the December forecast. The drought decreased production levels to the lowest since 2008 at 15.17 million tons, due to very low soil moisture and lack of irrigation water.
The annual USDA 2020 Outlook reported wheat acreage fell by 0.4% to 45.0 million acres, production fell by 4.4% to 1.836 billion bushels, ending stocks were lower by 17.3% to 777 million bushels, and exports remained flat at 1.0 billion bushels from a year ago. Even though these were bullish stats, traders decided to take profit and the CBOT SRW May20 futures ended the week higher by only 1.9% at $5.52/bu, erasing earlier gains of 3.3%.
Arabica Coffee: Arabica coffee futures sold off last week after seven straight days of gains as it failed to stay above the 200-day moving average. Also, fears of possible demand disruptions in the coffee market circulated as the coronavirus hit other selected markets.
However, coffee futures did have a nice 5% bounce on Friday, erasing the previous days’ losses as the Brazilian real strengthened, sparking some short-covering before the weekend. ICE May20 Arabica futures ended the week lower by only 1% to settle at $1.1025/lb.
Sugar #11: Sugar inventories continue to remain tight as Thailand’s worst drought in 40 years ravages more cane fields, cutting output as much as 50% from a year ago. Supplies are very limited and the Brazilian harvest is still six weeks away.
Prices are near two-year highs, which may get some traders nervous as the recent rally may prompt Brazilian millers to step up production. On the technical side, the Relative Strength Index (RSI) is at 64%, nearing “overbought” territory of 70%. Nonetheless, sugar futures had one of its best weeks in a month as the ICE May20 contract ended the week higher by 3.9% to settle at $0.1512/lb.
Cocoa: Cocoa futures traded lower last week by 1.5% to settle at $2,843/ton as the market consolidated below last week’s highs on some profit taking. Still, the fundamentals continue to remain bullish as dryness in Ivory Coast and a heat wave in Ghana continues to damage crops, and the demand outlook continues to be strong.
Dairy: The USDA released its January Milk Production report and announced that production for the U.S. rose by 0.9% to 18.785 billion pounds from a year ago. Production per cow in the U.S. averaged 2,010 pounds for January, up 1% from a year ago. The number of milk cows on farms in the U.S. was 9.348 million head, down 0.1% from a year ago. CME Mar20 Milk III futures ended the week lower by 2.3% to settle at $16.62/cwt.
Livestock: The USDA released the January Cattle on Feed Report and announced that Feedlots rose by 2.2% to 11.928 million head year-over-year (y/y), Placements fell by 0.6% y/y to 1.955 million head, and Marketing rose by 1.1% y/y to 1.931 million head. In its monthly livestock slaughter report, the USDA announced that January U.S. red meat production rose 5.5% to 4.96 billion pounds from a year ago.
Total beef production rose 3.4% y/y to 2.39 billion pounds, with cattle slaughter rising 2.4% y/y to 2.9 million head, and average live weight rising by 12 pounds y/y to 1,375 pounds. Pork production rose 7.6% y/y to total 2.55 billion pounds, with hog slaughter up 7% y/y to 11.8 million head, and average live weight rose by 2 pounds y/y to 290 pounds.
CME Apr20 live cattle futures ended the week lower by 2% to settle at $1.1825/lb. CME Apr20 lean hog futures ended the week higher by 4.2% to settle at $0.6703/lb.
Sources: Bloomberg, USDA, CME, CBOT, ICE, Citigroup, Goldman Sachs
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This document was prepared by sales and traders from Bank of the West. Bank of the West is part of the BNP Paribas group of companies. Facts and opinions expressed herein are based on a variety of sources which the author believes to be reliable, however we make no representation as to the accuracy and completeness of such information and Bank of the West does not accept any liability in this respect. The discussions and information contained in this document are the opinions of the author as of publication date and should not be construed or used as a specific recommendation for the investment of assets. None of this material is intended as an offer, or a solicitation of an offer, to purchase or sell any commodity, security or financial instrument. Nor does the information constitute advice or an expression of the Bank’s view as to whether a particular commodity, security or financial instrument is appropriate for you or meets your financial objectives. This material and its content are for information and discussion purposes only. Economic and market observations and forecasts, such as those discussed in this commentary reflect subjective judgments and assumptions, and unexpected events may occur. There can be no assurance that developments will transpire as forecasted. Nothing in this document should be interpreted to state or imply that past results are an indication of future performance. Any price information included in these materials are for information purposes only, are typically sourced from the exchange where the instruments trade and are subject to change without notice.