General Overview: Precious metals continued to skyrocket and reach new highs as spot gold touched $1,983.36/oz and spot silver hit $24.60/oz intraday. Gold rallied for nine consecutive days amid safe-haven buying as investors feared that the coronavirus pandemic was getting worse and may cause significant damage to the economies worldwide. Meanwhile, the U.S. dollar continued to tumble. Analysts at investment banks raised their target ranges for gold to between $2,300 and $3,000/oz, and ranges for silver to between $25 and $30/oz.
The U.S. dollar has come under massive pressure in recent weeks against other major currencies amid growing concerns about the resurgence of the coronavirus and a rise in political uncertainty. The USD has fallen to its lowest level since June 2018 as investors fled the currency on a gloomier outlook for the U.S. economy and bought precious metals and U.S. Treasuries. The V-shape recovery seems to have plateaued, as Q2 GDP plunged 32.9 percent annualized, and initial jobless claims rose by 1.434 million while continuing claims rose to 17.018 million.
The Federal Reserve decided to leave the Fed Funds rate near zero and vowed to use all of its tools to support the U.S. economy. The Fed said that it would maintain asset buying at its current pace and would extend its currency swap facilities through March 31, 2021. The Fed also said the economy and jobs have picked up somewhat since June, but remain well below their levels at the beginning of the year. “The path of the economy will depend significantly on the course of the virus,” the Fed said.
Corn: Corn futures traded lower despite the announcement from the USDA that China purchased a historic 1.937 million tons of corn from the U.S. It was the most ever sold to China and the third-largest deal. Despite the ongoing political tension between the two nations, China has stepped up its purchases of grains and oilseeds. Some analysts are pointing to the weaker USD, while others suggest it’s a determination to meet the obligations to the phase one trade agreement. For the week, CBOT Dec corn futures fell 2.7 percent to settle at $3.26/bu.
Meanwhile, U.S. crop conditions improved as the USDA reported that corn good/excellent conditions unexpectedly rose by 3 points to 72 percent from the previous week, from 58 percent a year ago, and 5 percent ahead of its 5-year average. Weekend rains were constant throughout the Corn Belt, with solid rains in the southern Plains and Midwest. Temperatures remain below average through the 6-to-10 day forecast, with temperatures returning back to normal for the 11-to-15 day forecast.
Soybeans: It was a volatile week for soybean futures as CBOT Nov soybeans traded in a 20-cent range after the USDA announced that U.S. crop conditions improved more than expected. The agency reported that corn good/excellent conditions rose 3 points to 72 percent the previous week, from 54 percent a year ago, and 9 percent ahead of its 5-year average.
Later in the week, the USDA reported weekly net export sales of soybeans for the week ended July 23 rose 35 percent to 3.6 million tons, with China purchasing 1.92 million tons. Separately in the agency’s daily export report, Mexico stepped up and purchased 250.4 tons of soybeans, and China purchased an addition 132k tons. Despite all of the recent purchases, markets are still weighing on the supply factor as weather conditions continue to be favorable for better yields. For the week, CBOT Nov soybean futures fell 0.8 percent to settle at $8.92 ½ /bu.
Wheat: Wheat futures had its biggest monthly gain (+7.9%) in more than a year on strong U.S. exports and declining global crop forecasts. Weekly USDA export sales have beaten expectations and analysts expect more purchases of U.S. wheat from more buyers as the USD remains weak. The International Grains Council cut its wheat crop outlook this month by 6 million tons to 762 million tons for the EU, Russia, and the U.S. The council also cut its stockpile estimates to 288 million tons, still an all-time high.
Meanwhile, the USDA reported that spring wheat G/E conditions rose 2 percent to 70 percent from last week, and 73 percent from a year ago, while winter wheat harvest rose 7 points to 81 percent from last week, and 73 percent from a year ago. For the week, CBOT Sep SRW wheat futures rose 1.6 percent to settle at $5.30 ¾ /bu.
Arabica Coffee: Arabica coffee futures rallied to a three-month high and extended its gains for a third straight week amid signs of improving demand and technical buying as prices broke above the 100-DMA ($1.0790) and 200-DMA ($1.1350). Nestle’s reported revenues climbed 2.8 percent in 1H amid strong demand at home, while Starbucks Corp. sales rose better than expected by 10 percent.
Brazil, the world’s largest coffee growing area, received zero rainfall in the past week in southwest Minas Gerais, which accounts for 30 percent of Brazil’s Arabica coffee. Also, there is a slight chance of some frost in the region with temperatures in the low 40s degrees F. For the week, ICE Sep Arabica coffee futures rose 9.7 percent to settle at $1.1895/lb.
Cotton: Cotton futures gained on some profit-taking from the previous week’s loss as prices held strongly at the 50-DMA of $60.40. Support also came as growing conditions in West Texas continued to be unfavorable with little to no rainfall, and temperatures remained hot. Also, the USDA net export sales surprisingly increased to 128.2k bales from a minus 2.2k bales the previous week.
Nonetheless, demand concerns remain as the retail side is still weak as the number of coronavirus cases has grown to over 17 million worldwide, and global supplies continue to be plentiful in the short term. For the week, ICE Dec cotton futures rose 4.3 percent to settle at $0.6266/lb.
Sugar #11: Sugar futures rose to a seven-week high as the trend may be changing on fresh new buying from funds, as Indonesia announced in a surprise move to issue import licenses for 600k tons of sugar. Meanwhile, Thailand’s sugar crop is expected to fall to its lowest level in more than a decade after its worst drought in four decades.
Output could fall as much as 7.4 million tons, down about 10 percent from a year ago, and exports could fall to the lowest since 2007, according to supply chain company Czarnikow Group. For the week, ICE Oct sugar futures rose 10 percent to settle at $0.1264/lb.
Cocoa: ICE Sep cocoa futures rose to a seven-week high amid strong technical buying as prices broke above the 50- and 100-DMA, triggering stop losses all the way up. There was also a report that the quality of the cocoa crops in Nigeria were under threat from black-pod disease due to the torrential rains in the cocoa growing region. The Cocoa Research Institute of Nigeria estimated that around 40 percent of Nigeria’s cocoa production could be lost if untreated.
For the majority of July, prices were pressured on favorable weather conditions in Ivory Coast and Ghana, as cocoa trees continued to develop well ahead of October’s harvest. Also, the coronavirus resurgence had many funds worried about slowing demand and a strong supply outlook. For the week, ICE Sep cocoa futures rose 7.9 percent to settle at $2,400/MT.
Orange Juice: ICE Sep FCOJ futures fell below the 50-DMA on downside selling pressure on the lack of buying interest after futures hit a triple top of $1.2930 in mid-July. Futures appears to be trading in contagion with little direction as the range for July has traded between $1.20 and $1.30.
There has been a lack of news lately, as production is unchanged, demand from grocery stores remains strong, cold storage of FCOJ remains accommodative, and the weather in Florida remains favorable for crops. For the week, ICE Sep FCOJ futures fell 2.2 percent to settle at $1.2175/lb.
Dairy: In USDA dairy market news for the week ended July 31, milk production remained steady to lower across the nation due to higher temperatures, causing heat stress to dairy cows. Bottled milk sales are steady but leaving bottlers in a conundrum as the school year in the fall is uncertain due to the COVID-19 restrictions.
Cheese production remains stable to strong in the U.S. with plentiful supplies of milk with demand orders beginning to ebb somewhat in the East and West. But inventories are starting to tighten in the Midwest. CME cash cheese barrels closed at $2.2350/lb, and blocks closed at $2.2525/lb.
Livestock: Live cattle futures initially fell early in the week on concerns that the coronavirus resurgence could depress both domestic and export beef demand as the number of cases reached over 17 million worldwide. However, futures slowly recovered on expectations of higher prices in the cash market for slaughter-ready cattle and stronger-than-expected weekly net exports sales. For the week, CME Oct live cattle futures rose 2.7 percent to settle at $1.07925/lb.
Lean hog futures traded mixed throughout the week as traders were concerned about U.S. exports to China in the second half of the year as political tensions continue to rise and the Chinese Yuan is controlled by the Chinese government. Although export sales were surprisingly strong, markets are weighing in on the side of caution. For the week, Oct lean hog futures fell by 1.4 percent to settle at $0.4945/lb.
The weekly USDA net export sales were strong for both beef and pork as sales rose 97 percent to 30.7k tons and were up 25 percent to 40k tons, respectively. For beef, this was the most positive report of the past three months and the largest weekly net sales volume recorded since May 2018. For pork, China purchased 17.8k tons, up 129 percent from the four-week average, but analysts are worried that this pace may not be sustainable. Mexico sales were also strong at 15.4k tons, 44 percent higher than the four-week average, and have been above 10k tons for each of the past three weeks.
Sources: Bloomberg, USDA, CME, CBOT, ICE, Czarnikow Group, Cocoa Research Institute of Nigeria
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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.