01/08/19 — The new year 2019 is so far shaping up with positive possibilities, with the U.S. and China starting the first face-to-face negotiations in many months. These are expected to continue next week with top level officials if positive progress is being made. Also, southern Brazil crops are encountering crop stress as well, as they are only getting 1” of rain per week, only about half the 2” they normally would get. That is putting crop stress on this tropical country where soybeans, it seems, were made to thrive (warm season crop with high moisture needs at podding).
Soybeans are in an uptrend and have been since fall (although slowly rising), pushing back above the Dec. 1 gap after the ‘truce’ was announced between the U.S. and China. They actually are joined by many other commodities, helped by the recently resurgent stock market. Corn also is improving, as rumors of Chinese interest in corn and wheat is helping those markets as well. Corn is the one crop that already has strong demand, so if China does actually buy something, it further cuts the stocks back. Recent Chinese purchases of soybeans are also reducing soybean carryout prospects, an important development, indeed.
Stock markets and grains continue to rally as the Chinese and U.S. negotiators on trade continue to meet this week, starting yesterday. The Wall Street Journal is reporting that the U.S.’s primary concern is that China follow through on their trade promises as that has not been the case in the past. Specifically, the offers to buy more U.S. product to reduce the trade deficit has not really happened on a sustained basis, and that promise has already been made in the past more than once. Also, opening up Chinese markets has also been offered in the past, but when one door is opened, another method to close the next door is done. So this is becoming a big part of the negotiations. One consideration by the U.S. side is to keep tariffs on until the Chinese meet their commitments.
In another world development, Saudi Arabia is planning to cut crude oil exports to about 7.1 billion barrels a day to try to lift prices of crude above $80 per barrel. Crude oil prices are rising slowly recently, and that may be the partial reason for that increase. Whether they are successful or not is another consideration.
Coconut oil prices have dropped 50 percent in the past year, following other commodities lower but at a much higher rate of loss. Health benefits of coconut oil (which is high in saturated fat) have been challenged by U.S. doctors, hurting its demand. So this is one commodity that so far has not seen the benefits of the improved commodity outlook.
South American weather forecasts continue to be bullish, with a warm/dry forecast for southern Brazil the next two weeks (which has been a trouble spot in 2018/19). Northern Brazil and Argentina still have forecasts of normal to above normal precip and normal to below normal temps — perfect weather in these regions. But the southern half of Brazil is a huge soybean production area, and dry weather there could reduce Brazil’s soybean production further.
So the slow gains in grain prices continue, supported by the Chinese/U.S. trade negotiations and the suffering crops in southern Brazil. With grain trends just turning higher, prices could (and maybe should) rally all the way into summer. In fact, typically that would be a seasonal pattern for grains barring any other bearish developments on the supply and demand side of things. Typically, we do make our lows at harvest time, and then there is a basis and futures improvement into at least the spring of the year. Then, depending on how long there is a question of the coming year’s production capability, the market rally will continue and only end when we know an adequate supply exists for the coming year. So far, with improving demand prospects and reduced SAM production prospects, we have not hit that point yet.