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DFP-RonSmikth-Corn-markets - Copy.JPG Ron Smith
Expect more price weakness than strength in corn markets until fundamentals are more supportive of higher prices.

Solar minimum affects weather patterns, crop shortfalls

The great U.S./China power competition continues

This is likely to be a cautious week in the markets across the board, including currencies, bonds, equities, and commodities, but especially in the rice, grain and cotton markets.

U.S. weather patterns in 2019 have deviated significantly from the norm, leaving market participants to speculate on actual harvested acreage and yield and final production for U.S. corn, soybeans, rice and cotton. Those who follow changes in global weather patterns closely and their potential causes, like the solar minimum, will point out an increased probability of a global rice, grain and cotton production shortfall in 2019 and coming years, due to changing weather patterns. 

The Great Power Competition

Off-again and now on-again trade negotiations between the U.S. and China now appear to be back on-again the week of July 8, 2019.

The “great power competition” between the world’s two super powers, the United States and the People’s Republic of China, is extremely real and will intensify in coming years. I believe it is fair to say Republican and Democrat leadership both agree that maintaining U.S. global economic, financial, human rights, political, and military leadership is an absolute priority.

Increasingly, the “great power competition,” a Trump Administration term, will be referred to as “the new cold war” by analysts, news media, and others. The new cold war presently is not an appropriate characterization of the building economic, social, political, and military competition between the world’s two largest economies and two largest trading partners, but that could well change with time.

The Cold War (1946–1991) was a period of extreme geopolitical tension between the Soviet Union and the United States and their respective allied countries in which the U.S. goal was to maximize national security and economic activity between U.S. allies and contain Soviet territorial expansion and global influence and domination goals. Speaking broadly, the 1946 to 1991 Cold War ended with the fall of communist rule in Central and Eastern Europe in the late 1980s and the collapse of the USSR in 1991.

The Trump Administration has key concerns about:

  • Chinese economic aggression toward the U.S. and is seeking to renegotiate its relationship. The Congressional Research Service (CRS) in a recent US-China In Focus Report, says in 2018 China was the United States’ largest merchandise trading partner (with two-way trade at $660 billion), third-largest export market (at $120 billion), and largest source of imports (at $540 billion). China is also the largest foreign holder of U.S. Treasury securities (at $1.1 trillion as of April 2019).
  • Peoples Republic of China’s (PRC) policies related to technology transfer, intellectual property, and innovation or the forced technology transfer requirements, discriminatory licensing requirements, state-directed investments in and acquisitions of U.S. companies to obtain cutting-edge technologies and intellectual property (IP), and state-directed cyber-theft of U.S. trade secrets.

Market Outlook for the Week Beginning July 8, 2019

Soybeans. We continue watching the price action, given a friendly USDA U.S. acreage report and production uncertainties, but burdensome global stocks and demand uncertainties remain. Soybean prices likely remain in a sideways trading range of $7.77 to $9.39 per bushel. The July 5, 2019 close was $8.95 per bushel, down 28.50 cents on the week or -3.09 percent. Soybean prices need to close the week of July 8, 2019 above $9.39 per bushel for me to have reason to start considering a more bullish bias, Charts B10 to B13.

Long Grain Rice. Prices remaining above September’s $11.19 per cwt. or $5.04 per bushel keeps prices trending to the upside. June 28, 2019 September close $11.50 per cwt. or $5.18 per bushel. USDA’s current bearish U.S. and global fundamentals for the 2018/19 and 2019/20 marketing periods will continue providing significant headwinds to this market, Charts B18 to B20.

Corn. Bearish Bias. Expect more price weakness than strength until fundamentals are more supportive of higher prices. Corn closed the week of July 1, 2019 at $4.42 per bushel, up 10.75 cents per bushel for the week or 2.49 percent with key support at $4.39 per bushel. If corn ends the week of July 8, 2019 above $4.39, I need to consider adjusting my outlook. Charts B14 to B17

Wheat. Near-term wheat price direction remains a key function of corn prices. Wheat closed the week of July 1, 2019 at $5.15 per bushel, up 12.25 cents on the week or 2.32 percent and will likely fall below key support of $5.08 per bushel the week of July 8, 2019 but ending the week above $5.08 per bushel would be price supportive, while losing support at $5.08 and $4.76 per bushel will return wheat to a bearish footing, Charts B25 to B28.

Cotton. Price weakness remains problematic. Cotton prices need to hold above 64 cents per pound the week of July 8, 2019 or serious price weakness could emerge, July 5, 2019 close 69 cents per pound, up 0.74 cents on the week or +1.12 percent, Charts B21 to B24.

$WTIC Light Crude Oil. July 5, 2019 close $57.51 per barrel, down 0.96 cents on the week, or -1.64 percent with a trading range presently of $48.00 to $59.88 per barrel, Charts B6 to B9. Geopolitical dynamics, coupled with possible supply disruptions, make this market challenging for the world’s most talented analysts, so be highly respectful of price action.

$CRB Index. July 5, 2019 close 178, up 1.70 on the week or 0.95 percent. This index needs to close above 183 the week of July 8, 2019 for a bullish bias to be considered, otherwise the index is likely to retest its previous low at 168. The index still has a bearish bias.  With global deflationary forces remaining problematic; with many of the world’s commodities still surplus burdened; with the ongoing global realignment of the world’s currency, bond, equity, and commodity markets; and with a number of key global policy disputes, limitations remain to this index’s near-term upside, unless oil prices regain their upward advance, Charts B1 to B5.

Interest Rates. 10-Year U.S. Treasury Yield: Near-term correction of the downside move is warranted, not required. July 5, 2019 close 2.04, up 0.04 percent on the week or 2 percent with support at 1.98 and 1.87, Charts A1 to A4. Global governments and central banks are very focused on minimizing any global economic weakness and will remain accommodative in the second half of 2019, which will likely limit any significant upside.

Given time, the potential to revisit the July 2016 low of 1.43 is likely. The November 2018 high was 3.24. That said, global economic and geopolitical dynamics, coupled with global government and central bank intervention, will define the 10-Year U.S. Treasury Yield or interest rate.

U.S. Dollar Index. The U.S. Dollar Index gained 1.28 percent the week of July 1, 2019, up 1.22, which was likely due to: correcting its downside move, safe haven status for global investors, and a positive July 5th jobs report. Continued strength at this point would move the dollar index back into an uptrend, which would likely draw an aggressive response from President Trump toward the U.S. Federal Reserve, Charts A5 to A8.

The dollar is currently at 96.89 on July 5, 2019. A lower dollar would be supportive of current U.S. economic activity and global economies in general but may also be supportive of a number of building global asset bubbles.

Global Equity ETF-ACWI. This ETF is likely to continue trading in a sideways trading range of $71.50 to $75.00. Breaking above $75.00 the week of July 8, 2019 would be an interesting development and potentially bullish. The July 5, 2019 price was $74.50, up 88 cents on the week or 1.19 percent. 

Global equity market performance as measured by the All Country World Index ETF-ACWI, a broad range of international developed equity and emerging market companies, Chart A19B. Its previous all-time high was $75.94 in January 2018 and its near-term low was in December 2018 at $60.92.

Emerging Markets ETF-EEM. This global emerging market ETF remains weak in a sideways trading range between $38.53 and $44.50, July 5, 2019 close $42.93, up $0.02 for the week or 0.05 percent. Global market rebalancing, ununiform global economic momentum, debt burdened emerging economies and global geopolitical uncertainties weigh on this market.

Emerging Markets ETF-EEM, Chart A20, made a high in January 2018 of $50.98, a low in October 2018 of $37.02.

S&P 500. July5, 2019 S&P 500 at 2990, up 48.65 for the week or 1.65 percent. Big Picture the S&P 500 moves in a sideways to up range of 2800 to 3030. Current all-time high was 2996 on July 3, 2019 and recent December 2018 low was 2347. No reason not to expect a potentially broad sideways to up trading range, Chart A16.

No Crystal Ball

Since no one has a crystal ball or knows the future, always consult an investment professional or professionals before making investment decisions. The world’s most talented speculators, investors and money managers are challenged by today’s global business environment.  

Source: Bobby Coats is an economist with the Arkansas Department of Agriculture. E-mail: robert.coats@agriculture.arkansas.gov and is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.

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