Agriculture Market Trades Lower Wednesday On U.S.-China Trade Worries And Improving Weather

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Includes: CORN, SOYB, WEAT
by: Andrei Evbuoma
Summary

All three grains trade lower on Wednesday ahead of Thursday's net export sales and WASDE report.

Trade worries and improving weather conditions help lead prices lower Wednesday.

The U.S. is expected to raise tariff rates up to 25% on $200 billion of Chinese goods Friday.

CBOT wheat is sitting at a bearish 34-cent premium to KCBT wheat.

Drier, warmer weather in the coming days to support planting progress.

Investment Thesis

The sentiment on the grain markets will remain bearish as bulls have a difficult time finding a strong catalyst to the upside.

Trade, favorable weather for planting, and large old crop supply continue to weigh to the downside on the market

The U.S. July corn futures finished Wednesday's trading session lower 1.12% to $3.6268, with the U.S. July soybean futures down 0.68% to $8.2538 and the U.S. wheat futures lower 0.48% to $4.3788. For the less-volatile, unleveraged Teucrium ETF grain products, the Teucrium Corn ETF (CORN) finished down 0.72% ($0.11) to $15.12, the Teucrium Soybean Fund (SOYB) finished lower 0.74% ($0.11) to $14.76 and the Teucrium Wheat Fund (WEAT) also finished down 0.41% ($0.02) to $5.02. Figure 1 below is a price trend chart of the front-month July futures contract for corn over the past 24 hours.

(Source: Investing.com)

Figure 2 below is a price trend chart of the front-month July futures contract for soybeans over the past 24 hours.

(Source: Investing.com)

July Chicago Soft Red Winter Wheat (SRW) futures were seen down 1.6 cents to $4.376, with July Kansas City Hard Red Winter Wheat (HRW) futures down 0.6 cents to $4.032, resulting in a bearish 34-cent premium of CBOT wheat to KCBT wheat. MGEX's Hard Red Spring Wheat (HRSW) July contract was down $0.02 to $5.196.

Over the next two weeks, the weather pattern will turn drier and warmer in favor of corn, soybean, and spring wheat farmers and producers. The weather pattern over the next 5 days will be driven by a split-flow regime highlighted with an anomalously strong upper-level ridge over the northeastern Pacific just off the coast of western Canada and the northwestern U.S., and two upper-level troughing areas (one over central and eastern Canada and a second over the southwestern U.S.). This setup will result in two separate jet stream branches. The northern jet stream branch will impact the prairies of central and southern Canada with minor storm systems. Given the lack of strong moisture source, many of these systems tracking across Canada will not produce heavy rainfall. The southern branch jet stream associated with an anomalously strong upper-level trough over the southwestern U.S. will be much more active with several impulses in the form of showers and thunderstorms ejecting out of the southwestern U.S. traveling across the southern U.S. Because of its close proximity to the Gulf of Mexico, storms systems that travel across the southern U.S. during this time frame will produce heavier rainfall amounts than areas up north. In between these two jet streams, the middle of the country or the corn, soybean, and spring belts will experience quieter (drier) weather. Any storms or rain systems will be non-organized and weak. Figure 3 is a map showing the seven-day accumulated precipitation forecast across the Lower 48.

(Source: NOAA)

Figure 4 is a map from the 06z GFS ensemble depicting a drier-than-normal (in yellow) precipitation pattern over much of the corn, wheat, and soybean production centers in the 3-9 day time frame (May 10-17).

(Source: Tropical Tidbits)

Figure 5 is a map from the 06z GFS ensemble depicting a normal to wetter-than-normal (in green) precipitation pattern developing over the western corn and soybean belts, and the wheat belts with normal precipitation across the eastern corn/soybean belt in the 10-16 day timeframe (May 17-24).

(Source: Tropical Tidbits)

In the 6-11 day time frame, we will see the weather pattern begin to change and take on the form of an El Nino-like pattern. Upper level troughing over central and eastern Canada will shifting eastward and weaken/dissolve. Meanwhile, the upper level ridge will move inland over the northwestern U.S. into the north central U.S. Lower heights associated with storminess will continue to undercut ridging to the north and travel across the southern U.S. As this is taking place, a strong elongated area of upper level troughing will develop across the eastern Pacific off the U.S. west coast. This trough will extend from the Gulf of Alaska (GOA) region into the southwestern U.S. This weather feature development will allow for storms to drop out of the GOA into the southwestern U.S., and in addition to the storminess, will produce cooler-than-normal temperatures across the eastern Pacific and the western U.S. The aforementioned upper-level ridge will begin to establish itself and expand across the central U.S. This will allow for temperatures to begin moderating/warming across the central U.S.

In the 11-16 day time frame, this El Nino-like pattern (cool western U.S. vs. warm central and eastern U.S.) will continue, with warming temperatures expanding to include the central and eastern U.S.

Figure 6 is a map from the 12z GFS ensemble depicting a cool western U.S. vs. a warm central and eastern U.S. in the 11-16 day time frame.

(Source: WeatherBELL)

Figure 7 is a map from the 12z CMC ensemble depicting a cool western U.S. vs. a warm central and eastern U.S. in the 11-16 day time frame.

(Source: WeatherBELL)

Figure 8 is a map from the 12z ECMWF ensemble depicting a cool pattern across much of the country outside of the southeastern U.S. in the 11-16 day time frame.

(Source: WeatherBELL)

Trade is leading the markets lower on Wednesday. The U.S. is expected to raise tariff rates from 10% to 25% on $200 billion of Chinese goods effective Friday, after reports revealed that China had backtracked on almost all aspects of a draft trade agreement.

The three major U.S. indices Wednesday afternoon are all slightly higher after Tuesday's 1% retraction. The U.S. dollar has also firmed up.

The WASDE report is expected to show both the world and U.S. corn, soybeans, and wheat 2018/19 stocks meeting/exceeding USDA's April estimates. The 2019/20 stocks are expected to show U.S. corn stocks nearly 4% higher year over year (YoY) to 2018/19, with U.S. soybeans and wheat down (YoY) -1% and -3% to 2018/19, respectively. On a global scale, wheat and soybeans are expected to be up about 1%, with corn stocks down nearly 3.5% year over year (YoY).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.