Market analyst: China-US deal making and more

Ray Grabanski
Special to the Farm Forum

10/15/19 — A lot has happened in the past week! USDA’s October report was every bit as bullish as the most bullish soybean trader expected, and every bit as bearish as any corn trader expected. How USDA gets such a different take on the two crops is interesting at this point. They raised corn yields 0.2 bu/acre while lowering soybean yields over 2% (1 bu/acre), quite the divergence in yield estimates! That made for a very bullish soybean report, but bearish corn. Still hanging in the balance is the prevented planting acres planted to corn, which are still reported as corn (not silage). So, the acreage estimate is still high, but by how much? Apparently that has been delayed until January, so we still are a bit in the dark. Also troubling is that FSA/RMA seems to think there are more prevented planting acres than the USDA number crunchers. Regardless, after the Oct. 10 poor performance in corn (-14c), the market rallied 17.5c Oct. 11 on Chinese-U.S. trade rumors (which proved true).

We also got the first major winter storm of the year, with 3 feet of snow dumped on parts of North Dakota Oct. 10-12, and over 1 foot of snow dumped on other parts of North Dakota and South Dakota. With virtually all of the corn and most of the soybeans still in fields, that certainly isn’t going to help the yield as harvest losses will accumulate. Also threatening is the chance the snow may not melt before the next snowstorm comes along. The cold weather that produced the snow also produced the first frost in many states, including Montana, Wyoming, Colorado, Nebraska, Kansas, Iowa, South Dakota, North Dakota, Minnesota and some light frosts in points eastward. Absent for the most part was a killing frost in Illinois, Indiana and Ohio, which would have meant large losses on late planted crops. There will be losses, though, in some of these states on late planted crops as it was.

Grains did almost nothing Monday, Oct. 14 after the U.S./China ‘truce’ was announced on Oct. 11, with China agreeing to buy “lots” of grain from the U.S. in return for not increasing $12.5 billion dollars of tariffs Oct. 15 (today) when it was scheduled. China saved more than the cost of a billion bushels in soybeans (near their max purchases) by getting the U.S. to agree not to raise tariffs 5% on $250 billion in Chinese goods. The U.S. is supposed to get increased ag exports to China in return, but so far the market acts like nothing happened. But realistically, China would be foolish not to buy U.S. ag products, as essentially they are free vs. if the tariff had gone on. And if China doesn’t follow through, there is no doubt that the tariffs will go back on.

An agreement to agree in the future to many more deals (Phase 1) is expected in a month or so, and another Phase 2 in a few more months, and phase 3 in a while longer. The agreement to get along with each other and foster new trade agreements is great news; now we just have to follow through on those commitments. While it has taken a long time to get to this point, sometimes the harder something is to accomplish, the longer it lasts, too, and the more meaning and longevity it eventually has. So hopefully this process of U.S.-China trade talks will bring similar longevity to our agreements.

What seems to move market makers (traders) more than words are actions, so until the sales are announced, the boats are loaded, and the money rolls in to pay for the soybeans, perhaps it doesn’t matter?

On the other hand, the grain markets did rally for weeks on rumors, and it didn’t really go down from those increased levels on Oct. 14 either. We note that China soybean imports for September were the largest ever. Is this a sign of good things to come? On the other hand, Chinese hog numbers are down about 40% from last year due to African swine fever, so they have some real problems but one would think that they’ve ratcheted up their poultry production to offset some of the losses.

This is turning out to be quite the difficult harvest. In the end, it seems that with winter storms, frost losses, acreage losses, and just a difficult 2019 production season we are going to see smaller production estimates as we go forward in November and January. We started with over a 1 billion-bushel carryout in soybeans in June 2019, and already in October it’s down to 460 mb (cut by more than half). What’s next? If China resumes even their existing imports of a few years ago, we will run out of soybeans! It’s once again exciting to be part of agriculture, and the outlook continues to brighten.