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China Trade, Exports & South American Weather

Thursday, January 3, 2019
filed under: Marketing/Risk Management

      The politics of the various trade wars continue to take center stage in any market discussion.  Of course, the trade dispute with China is the most critical of all of the trade issues, and we can report that some progress is being made.  The dinner meeting between President Trump and President Xi following the G-20 meeting in Argentina went better than expected. It resulted in a 90-day truce between the two countries.  No additional import tariffs will be implemented during this truce. China also apparently agreed to purchase a substantial amount of agricultural commodities from the U.S. going forward. 
       The major problem, however, is that none of these purchase amounts have been “officially” announced or stated as of this mid-December writing. The trade rumors have been that they could include up to 5.0 million metric tons (MMT) of soybeans (185 million bushels), 2.0 to 3.0 MMTs of wheat (75-100 million bushels) and maybe even 2.0 MMTs (80 million bushels) of corn. 
       All of these rumors have left the market with many unanswered questions, such as:
  • How soon will China start buying grains and oilseeds from the U.S.?
  •  What happens to unshipped purchases if the 90-day truce window closes with no longer lasting agreement? Would these purchases be shipped?

 
       The politics of the various trade wars continue to take center stage in any market discussion.  Of course, the trade dispute with China is the most critical of all of the trade issues, and we can report that some progress is being made.  The dinner meeting between President Trump and President Xi following the G-20 meeting in Argentina went better than expected.  It resulted in a 90-day truce between the two countries.  No additional import tariffs will be implemented during this truce.  China also apparently agreed to purchase a substantial amount of agricultural commodities from the U.S. going forward. 
       The major problem, however, is that none of these purchase amounts have been “officially” announced or stated as of this mid-December writing.  The trade rumors have been that they could include up to 5.0 million metric tons (MMT) of soybeans (185 million bushels), 2.0 to 3.0 MMTs of wheat (75-100 million bushels) and maybe even 2.0 MMTs (80 million bushels) of corn. 
       All of these rumors have left the market with many unanswered questions, such as:
  • How soon will China start buying grains and oilseeds from the U.S.?
  • What happens to unshipped purchases if the 90-day truce window closes with no longer lasting agreement? Would these purchases be shipped?
       The markets’ reaction to this positive trade news with China has been rather muted. Markets were strong the Monday after the dinner meeting, but have treaded water since that time, waiting for additional details, announcements, actual purchases, etc.
       China did buy just over 1.1 MMTs (40 million bushels) of soybeans from the U.S. on December 13th.  Soybean futures closed lower that day. The market is anticipating more soybean sales announcements in the weeks ahead, perhaps as much as another 50 to 60 million bushels. Soybean basis to the Pacific Northwest had improved prior to these sales. Basis is still cheap, but 30 to 40 cents off the harvest lows.
       The problem with oilseeds markets is that U.S. and world ending supplies will approach record levels even if China returns to its historical buying practices. In addition, early soybean crop conditions in Brazil and Argentina are very good. The USDA increased Brazil’s 2019 soybean production to 122.0 MMTs. (They produced 120 MMTs last year.) Some analysts believe Brazil’s crop could exceed 125.0 MMTs if conditions stay good through January.
       The USDA’s December supply and demand estimate didn’t make any significant changes to the U.S. or world soybean, corn and wheat estimates.  They rarely make adjustments in December unless there are some really significant issues someplace. They don’t adjust the U.S. corn and soybean 2018 yield estimates in December. That will happen in their “final” row crop summary report that will be released on January 11.  They will also release the winter wheat plantings estimate and the quarterly stocks estimates on that day. Those will all be important USDA reports.
       The problem with the soybean market continues to be that U.S. ending supplies are now projected at 955 million bushels.  That compares with 438 million bushels at the end of the 2017/18 marketing year and 302 million bushels two years ago.  The current soybean export forecast is 229 million bushels (6.2 MMTs) below last year because of the China problem.  Even if China does buy as much as 150 million bushels (4.0 MMTs), U.S. soybean ending supplies would still be very large at just above 800 million bushels. That is bearish unless weather hurts crops in South America over the next two or three months.
       In the midst of all the China and soybean talk, sunflower prices have held quite firm, including out into the new-crop 2019 positions. New-crop and NuSun and high oleic new-crop prices are both right at $17.00/cwt.  Certain sunflower is profitable at these prices if 2019 yields are anything close to the last two years.
       The market is already talking about the potential decline in 2019 soybean acres and the probable increase in corn and wheat acres based on the drop in soybean prices. The USDA will release their 2019 planting intentions estimates on March 29. China trade, exports and South American weather will give markets direction until then.    
       The markets’ reaction to this positive trade news with China has been rather muted. Markets were strong the Monday after the dinner meeting, but have treaded water since that time, waiting for additional details, announcements, actual purchases, etc.
       China did buy just over 1.1 MMTs (40 million bushels) of soybeans from the U.S. on December 13th.  Soybean futures closed lower that day. The market is anticipating more soybean sales announcements in the weeks ahead, perhaps as much as another 50 to 60 million bushels. Soybean basis to the Pacific Northwest had improved prior to these sales. Basis is still cheap, but 30 to 40 cents off the harvest lows.
       The problem with oilseeds markets is that U.S. and world ending supplies will approach record levels even if China returns to its historical buying practices. In addition, early soybean crop conditions in Brazil and Argentina are very good. The USDA increased Brazil’s 2019 soybean production to 122.0 MMTs.  (They produced 120 MMTs last year.)  Some analysts believe Brazil’s crop could exceed 125.0 MMTs if conditions stay good through January.
       The USDA’s December supply and demand estimate didn’t make any significant changes to the U.S. or world soybean, corn and wheat estimates.  They rarely make adjustments in December unless there are some really significant issues someplace. They don’t adjust the U.S. corn and soybean 2018 yield estimates in December. That will happen in their “final” row crop summary report that will be released on January 11.  They will also release the winter wheat plantings estimate and the quarterly stocks estimates on that day. Those will all be important USDA reports.
       The problem with the soybean market continues to be that U.S. ending supplies are now projected at 955 million bushels.  That compares with 438 million bushels at the end of the 2017/18 marketing year and 302 million bushels two years ago.  The current soybean export forecast is 229 million bushels (6.2 MMTs) below last year because of the China problem.  Even if China does buy as much as 150 million bushels (4.0 MMTs), U.S. soybean ending supplies would still be very large at just above 800 million bushels. That is bearish unless weather hurts crops in South America over the next two or three months.
       In the midst of all the China and soybean talk, sunflower prices have held quite firm, including out into the new-crop 2019 positions. New-crop and NuSun and high oleic new-crop prices are both right at $17.00/cwt.  Certain sunflower is profitable at these prices if 2019 yields are anything close to the last two years.
       The market is already talking about the potential decline in 2019 soybean acres and the probable increase in corn and wheat acres based on the drop in soybean prices. The USDA will release their 2019 planting intentions estimates on March 29. China trade, exports and South American weather will give markets direction until then.      
 
 * Mike Krueger founded The Money Farm, and is now a senior analyst with World Perspectives, a Washington, D.C.-based consulting company.  While the information in this article is believed to be reliable, marketing involves risk, and the author and The 
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