09/12/18 — Markets are relatively stagnant as harvest begins, with a situation unlike any other I’ve seen in all my years of working in the marketing field: news out of Washington is more important now than news out of the combine, namely how big the actual crop is. While crop size is still important, in the U.S. we have an agriculture system that is highly dependent on exports. We export about half of our wheat and soybeans, and about 1/6 to 1/5 of our corn on any given year. Of course, the amounts we produce, and thus export, vary from year to year depending on the weather both in the U.S. and the rest of the world.

But this year, with President Donald Trump working to renegotiate trade deals around the world, trade seems to be dominating the news (and market direction) as much or more than the traditional market movers — namely crop sizes and export business. In the end, prices will be determined by the amount of carryout we have at the end of the year. On a normal year, those factors would include the beginning stocks, acres planted, acres harvested, yields, domestic use, and exports for the year. This time of the year, yields are the factor most often questioned and debated, and it is an important factor as well. Tomorrow, USDA will update their yield estimate in the September crop report. These numbers will be important as they always are.

But with our top single export market for soybeans, China, currently in a dispute with the U.S. over trade issues, up to 1/3 of our soybean crop (about 1.2- 1.3 billion bushels) is open to debate about where it will go. Will China pay a 25% tariff (they imposed the tariff) on our soybeans and still use some? If so, how much? How much will other countries buy from the U.S. (at a $1-$2 discount) instead of Brazil/Argentina?

The U.S. is making progress in the trade area, with a deal done with Mexico, and news that they are very close to a deal with Canada (250%+ Canadian dairy tariffs is rumored to be the stumbling block). The EU and the U.S. have a deal to work on a deal, so there aren’t many disputes left. China will soon get the full attention of the U.S. As it currently sits, the U.S. has $50 billion of tariffs on China, and China has $50 billion tariffs on the U.S. That will soon change, as the U.S. has completed the comment period on another $200 billion in 25% tariffs, and can impose it anytime. At that point, the U.S. (after almost 6 months) finally will have a stronger grip on the Chinese economic ‘neck’ than the Chinese have on ours over the trade dispute. Trump has mentioned the possibility of another $267 billion trade tariff this past week, and that would tighten the grip even more. China’s economy is stumbling, with a deep stock break so far this year since the tariff talk began while the U.S. stock market is stable or even expanding. So the noose is tightening on the Chinese economy.

I didn’t realize it, but the iPhone from Apple (the world’s largest company and first trillion dollar company) provides 2/3 of Apple’s income, and the iPhone is entirely made in China. So the interconnection between the U.S. and China is huge. So it’s likely a deal will be done — it’s just a matter of when and what it will look like? It’s likely that when the deal is done, China will be buying even more soybeans from the U.S., at no tariff. And the U.S. will still buy much more from China than they buy from us. The intellectual property issue may not ever get resolved; though, and I think it’s likely the U.S. will have to abandon some of their demands in this area to get the deal done (and agree to disagree on intellectual property).

Weather wise, very little rain is falling in the U.S. today, and the forecast is for below normal precip and above normal temps for all of the next two weeks. That will allow harvest to begin on a good note, and advance fairly rapidly across the U.S. in soybeans and corn in southern areas. There are reports of outstanding yields of corn and soybeans in many areas, and also some very disappointing yields in some areas. So the jury is still out on how the national average will be. We know it will be a near record or record large crop of both corn and soybeans, but just how big is also important as the extra yield goes right down to the bottom line carryout numbers as well.

Australia’s ABARE reduced their wheat production forecast to 19 mmt, now well below USDA’s 23 mmt. USDA will have little choice but to follow suit (at least somewhat) tomorrow in their World Agricultural Supply and Demand Estimates. That is, unless they think they know more about Australia than Australia! Russia’s Ag Minister is still giving confusing reports, as we don’t know whether he’s talking grain or just wheat in export estimates. Either way, though, projected exports seem lower than the USDA currently has their estimates.

The hurricane is bearing down on the southeast U.S. over the next few days, but just how much damage will be caused is yet to be determined. The USDA report tomorrow will project new yields for U.S. corn and soybean crops, and could have some impact on trade tomorrow. But U.S. trade relations seem to have an even more important influence on grains, so we have to continue to monitor that situation as well.

Ray Grabanski can be reached at raygrabanski@progressiveag.com.

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