General Overview: Federal Reserve Chairman Jerome Powell’s two-day testimony on Capitol Hill before the Senate Banking Committee was overall dovish. Powell said the Fed was in no hurry to raise interest rates anytime soon and will continue to keep monetary policy accommodative for a very long time. Powell expects inflation to rise modestly, but it could take more than three years to achieve its 2 percent inflation goal. He also said the U.S. economy still has a long way to go to fully recovery, while stressing the importance of the vaccine, saying it is the single-best policy to restore the economy.
Crude oil rose to a fresh one-year high amid falling global inventories despite technical signs showing crude remains in overbought territory. Stockpiles at a key European storage hub fell to the lowest level since September, falling 2.7 million barrels to 56.4m bbl. Meanwhile in the U.S., the Department of Energy reported that oil production fell below 10 million barrels per day for the first time since October, and stockpiles have fallen by 40m bbl this month. The WTI and Brent futures curves remain in extreme backwardation of almost $6/bbl for the next 12 months, indicating significant tightness in the market.
Corn: Corn futures remained firm despite a weaker-than-expected U.S. export sales report amid expectation that demand from China will continue to stay strong. The nation continually needs to feed its rapidly growing hog herd as China said its pig population should return to 2017 levels by the end of June, making a complete recovery from the African swine fever that slashed its hog population since 2018. China also said that it would pursue rural land reform to balance food security, which could be a hint they may buy additional U.S. agriculture.
The market remained optimistic as the USDA’s preliminary acre report the previous week was bullish with farmers expecting to plant 92 million acres of corn and 90m acres of soybeans, a record combine harvest ever. The agency also reported that demand is up, and exports would be at a record $157B this year, including the largest exports to China of 31.5B. CBOT May corn still managed a gain of 1.1 percent for the week to settle at $5.47 ½ /bu.
Soybeans: It definitely was a volatile week for soybean futures on mixed data, causing some bulls to take a breather, while others took profit. The initial rally began as large funds extended their length on underlying technical support and expectations of tighter global supplies. In Brazil, harvesting is only at 15 percent, its slowest pace in a decade and well behind the 31 percent pace from last year. The excess rains have also caused a massive shipping backlog of agricultural products in Brazil, with ships sitting at ports empty and waiting for truckloads of cargo to arrive.
The USDA is also forecasting smaller-than-expected domestic supplies into next season while global supplies are shrinking. Demand from China remains strong, which hase depleted old crop and new crop inventories from the U.S. and Brazil. The one miscue was the bearish export sales report from the USDA. The agency reported soybean sales fell 62 percent to 238.7k tons for the week ended Feb. 18. This triggered a healthy correction as prices had risen too much and too fast. For the week, CBOT May soybeans rose 1.8 percent to settle at $14.05 ¼ /bu and still eked out a gain for February, its ninth straight month of gains.
Wheat: Wheat futures followed the same pattern as corn and soybeans, reversing some of its earlier gains after the USDA export sales report widely missed its target. Prior to the report, May futures tested new highs and edged towards $7/bu amid ongoing concerns of crop damage from the severe cold snap in Texas along with some strong technical buying. The extent of the damage won’t be known until spring, which is now becoming a global concern as it may cut deeper into supplies as Russia is also showing signs of a shortages due to freezing weather conditions.
Meanwhile, the USDA released its February selective state wheat crop ratings which showed a decline in both Hard Red Winter (HRW) and Soft Red Winter (SRW) states. Kansas saw a decline of 3 points to 40 percent good/excellent from last month, while its poor/very poor condition rose 2 points to 26 percent. Oklahoma was downgraded to 48 percent g/e from 61 percent last month, but still above 46 percent last year. Texas was lowered to 30 percent g/e from 33 percent from a week ago, and down from 31 percent last year. For the week, CBOT May SRW wheat eked out a 0.7 percent gain to settle at $6.60 ¼ /bu, but it erased a gain for February.
Arabica Coffee: Arabica coffee futures rose to the highest level since 2017 and had another sizable 6.5 percent weekly gain, on top of the previous week’s 5 percent gain. Signs of a smaller crop in Brazil and growing global demand has futures up 36 percent since the recent low in June. The rainfall in Brazil’s largest Arabica coffee growing region measured only 1.19 inches in the past week, or 61 percent of the historical average, according to Somar Meteorologia data. This comes on the heels of the previous week’s data showing an improvement in the food-service sector in January after the U.S. reported a 5.3 percent jump in retail sales.
Meanwhile, Rabobank cut its 2021-22 Brazilian Arabica coffee output by 3 percent to 36m bags because of prolonged dryness, and raised its deficit forecast to 2.6m bags, versus a 10 million surplus from a year ago. More aggressively, Commerzbank is forecasting output to drop as much as 30 percent or more because of the low-yield biennial cycle for Arabica and drought during the flowering period. For the week, ICE May Arabica coffee settled at $1.3750/lb.
Cotton: May cotton futures began the week on a strong note, rocketing to an intraday high of $0.9560/lb, then plunging by the most allowed as part of a broader sell-off across financial markets. Traders were severely long on bullish sentiment in corn and soybeans with cotton locked in a battle for acres. The USDA had projected U.S. cotton plantings would fall 90k acres from last year as farmers switch over to more profitable crops.
However, the USDA’s bearish export sales was a wake-up call for grains and oilseed futures as figures all missed their targets, pulling cotton down despite its rise of 137 percent. Cotton was also being impacted by the weak financial markets and rising dollar. Cotton’s relative strength was already in overbought territory, so this gave traders another incentive to take profit for February and lighten some of their long positions going into March. For the week, ICE May cotton fell 1.8 percent to settle at $0.8883/lb.
Sugar #11: May raw sugar reversed its earlier gains on month-end profit-taking following a broader sell-off in other commodities. Sugar got a huge boost earlier in the week, rising past the 17-cent mark and to its highest level since March 2017 before changing course. Shipping delays in Brazil, similar to soybeans, spilled into the sugar market as there is a huge bottleneck of ships at ports in the world’s top sugar and soybean producers.
The International Sugar Organization (ISO) said global sugar markets will slip into a sharp deficit this year as sugar harvest shrank, while demand remained strong despite the coronavirus pandemic. The deficit could rise by 4.782m tons in the October-September 2020-21 season compared with a largely balanced market the previous year. For the week, ICE May sugar fell 2.6 percent to settle at $0.1645/lb. The March futures contract expired on Friday.
Cocoa: May cocoa futures poked through the $2,600/MT level, its highest level since January amid sentiment that prices have bottomed out and expectations that chocolate demand will improve later this year. Futures bounced off its recent low of $2,371/MT on strong technical support and soared past the 200-DMA. Analysts are expecting short-term demand to remain weak through 1H, but will increasingly improve in 2H as falling COVID cases and increasing vaccine rollouts will improve global demand later this year. For the week, ICE May cocoa rose 6.6 percent to settle at $2,604/MT.
FCOJ: Texas Governor Greg Abbott said that his state, the No. 3 U.S. citrus state behind Florida and California, faces citrus crop losses of at least $300m due to the recent winter storm. The losses include grapefruits and oranges, which are critical to the state. But the losses were limited, as 80 percent of the state’s oranges and 66 percent of grapefruits had already been harvested before the storm. Meanwhile, the USDA’s Cold Storage report for January showed total frozen juice concentrate grew 0.6 percent to 1.057B pounds from a month ago, but fell 7.7 percent from a year ago. Frozen orange juice grew 1.4 percent to 636m pounds from a month ago, but fell 17.7 percent from a year ago.
Dairy: The USDA reported total milk production in January for the U.S. rose 1.7 percent to 19.17B pounds from a month ago and was up 1.6 percent from a year ago. The number of milk cows on U.S. farms rose 0.1 percent to 9.45 million head, and was up 0.9 percent from a year ago. Milk per cow rose 1.6 percent to 2,029 head and 0.6 percent from a year ago.
In Texas, Ag Commissioner Sid Miller said the winter storm was having a dire impact on the state’s food and agricultural supply chain with shutdowns taking place at feed mills, meat, and other processing plants. So far, up to $8 million of milk per day is being lost amid processing shutdowns caused by power shortages. The USDA confirmed a backlog of processing in Texas, New Mexico, and in the Central, Midwest, and Pacific Northwest regions as transportation came to a halt when plants were idled.
Livestock: The USDA’s Cold Storage report for January showed total red meat supplies in freezers grew 3 percent from the previous month, but were down 12 percent from a year ago. Total beef fell 3.1 percent to 519.2 million pounds, but was up 6 percent from last year. Frozen pork supplies grew 10.6 percent to 459.9m pounds, but were down 26 percent from last year. Pork bellies rose 2 percent to 31.3m pounds, but fell 56 percent from last year.
The USDA’s Red Meat Production report for January fell 3.2 percent to 4.8B pounds from a year ago, and was down 1.1 percent from the previous month. Total beef production fell 3.3 to 2.31B pounds, while cattle slaughter fell 5.3 percent to 2.75m head from a year ago. Total pork production fell 3.0 percent to 2.48B pounds, while slaughter rates fell 4.8 percent to 11.3m head from a year ago.
Beef and pork processing facilities were trying to return back to more normal levels and play catch-up to refill beef and pork pipelines after slaughters fell more than usual due to the winter freeze. Meanwhile, the USDA’s Cattle on Feed report put some pressure on live cattle future as feedlots and placements rose more than expected, while marketing fell, suggesting a larger supply of cattle than anticipated. In addition, export sales reports were very disappointing as beef sales for the week ended Feb. 18 fell 63 percent to just 8.5k tons, while pork sales slipped 23 percent to 25.6k tons.
Sources: Bloomberg, USDA, CME, CBOT, ICE, CFTC, International Sugar Association, Rabobank, Commerzbank, JPMorgan, Goldman Sachs, Morgan Stanley, Somar Meteorologia
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