Market analyst: The China syndrome

Ray Grabanski
Special to the Farm Forum

08/06/19 — The markets recently have been plagued by two negative factors: Good weather and more China trade talk. Good weather has always hampered the market, but recently whenever China trade negotiations make headlines, ag markets go down. Sometimes it can be good news on trade, sometimes bad, but always grain markets go down. It’s almost like the grain market is reminded that China is a communist country — completely controlled by the government. There is no freedom, so whatever their government leaders decide determines trade. In contrast, in the U.S. law governs trade, and all our government can do is create law. Private individuals are still free to do what they want under the law (free from government intervention). Not true in China!

To start this week, prices for everything (stocks and commodities) were lower to start the day. But many commodities rallied after the initial break, with a number of commodities forming upside daily reversals (feeder cattle, hogs, corn). That occurred while stocks were dropping hard, with the DOW losing over 700 points Monday on China trade concerns. The reality is that agriculture has suffered the past year as China not only tariffed soybean imports, but essentially banned them. (They are a communist country, and communists have a history of killing its own citizens whose actions they don’t like!). But China only had tariffs put on half its exports to the U.S. — the U.S. didn’t do anything with $300 billion in imports (and still hasn’t). The threat is far more ominous to the stock market than ag (Ag has already suffered the worst fate possible — zero exports.) So more tariffs now on China will only force them to make a deal on trade quicker — and that would benefit ag. So to tariff the Chinese further now will only help ag’s situation — not hurt it. Extremely heavy and quickly enacted tariffs on China now would be bullish ag! Heavy stock losses in the U.S. and China will only bring both leaders to the table quicker.

So agriculture marches on, with China and the U.S. still playing a game of chicken in trade, with U.S. agriculture suffering the most (by design from China). This was a designed plot by China. The sooner the U.S. hits them back — hard — on all other exports to the U.S. (the other $300 billion), the better for ag. I’d like to see a 5% increase monthly in tariffs announced on the $300 billion from China that would continue until they make an agreement (even beyond 25%, even beyond 100%). But after agreement, the tariff level at that time would stay on for a period of one more year once the agreement is reached, and then come off 5% per month until gone. That would put maximum pressure on China to make a deal quickly, and also on U.S. business to move its supply chain from China to other Asian countries. That would put the maximum hurt on China quickly — and would be the greatest aid to agriculture to force a deal. But oh, how other U.S. business would howl (especially Apple)! But at least if announced, we can start making plans to operate properly instead of trying to guess what government will do next.

Weather is forecast a bit wetter than yesterday, with mostly normal precip forecast for the southern half of the Corn Belt, and below normal for only the northern third of the Corn Belt the next 7 days. It’s a bit drier in the 8-14 day forecast which takes us to late August, with mostly normal to below normal precip forecast. Temps remain mostly below normal for the Corn Belt the next 2 weeks (cooler in the 8-14 day), while the rest of the U.S. is mostly above normal temps (west and south U.S.). Overall, this is still a relatively non-threatening forecast even though soil moisture levels are rapidly depleting (because we started with high soil moisture).

Crop progress was released Monday afternoon and basically continues to show an improving crop after a horrible planting season. There are concerns, though, mainly immaturity and the threat of frost as well as rapid soil moisture depletion. Corn silking is 78%, 15% behind normal. Note that after tassel starts it takes about 60 days to reach maturity. Corn dough stage is 23%, 19% behind normal. Corn ratings dropped 1% to 57% G/E, well below last year’s 71% rating. But the yield model rose nearly 3 bu/acre to 171.8 bu/acre, less than 5 bu/acre below last year! Hard to imagine this horrible start to 2019 could result in nearly a trend yield, but it will take a late frost to actually achieve it.

Soybean bloom is 72%, 15% behind normal while pod setting is 37%, 25% behind normal. Soybean conditions were steady at 54% G/E, still well below last year’s 67% rating. But the soybean yield mode rose to its highest level this year, up 0.72 bu/acre to 47.8 bu/acre. USDA is still above that at 48.5 bu/acre, though.

While cotton is equal to average maturity, conditions dropped sharply on a lack of rain the past week, with G/E ratings down 7% to 54% G/E. Sorghum is well behind normal development like corn and soybeans, with only 45% headed (17% behind) and 23% coloring (7% behind). Sorghum conditions dropped 3% to 68% G/E, still a high rating for sorghum. Winter wheat is 82% harvested, 10% behind normal due to the late season. HRS wheat is only 2% harvested, 12% behind normal while conditions were steady at 73% rated G/E. Oat harvest is 32% complete (17% behind normal), while conditions were down 1% to 65% rated G/E. Barley is 3% harvested (15% behind normal), with conditions down 1% to 76% rated G/E (vs. 79% last year).

Soil moisture levels depleted rapidly, down 6% in topsoil (to 63% rated adequate/surplus), and down 6% in subsoil as well (to 71% rated adequate/surplus). These are rapid declines in just one week, but it is late in the season and ratings are still relatively high — so crop stress from drought is unlikely to claim significant yield loss now in 2019 (except for lighter soils).