The markets might have gotten an early Christmas in mid-December when the U.S. and China announced they had reached at least a tentative agreement on Phase One of the trade war. The actual “deal” will likely not be signed until sometime in January, but both sides appeared to be very optimistic that the agreement will be signed.
The first salvo of trade tariffs was put in place back in July 2018. There have been countless announcements and predictions since then regarding these trade talks. The markets finally decided several months ago to basically ignore the trade rumors until something was accomplished. This time, the markets did start to respond very positively.
This can be a BIG deal if it all plays out as advertised. The problem is that no one knows many of the actual details yet. The number that has gotten much of the attention is China’s apparent pledge to purchase as much as $40 billion of ag-related goods and services per year. The bears (who didn’t believe any deal would get done) argue that China can’t buy that much each year. The previous biggest annual dollar year for China was $29 billion back in 2013. Also remember that China hasn’t yet fixed its African Swine Fever problem. That might take several years to solve, leaving doubt about China’s actual demand for soybeans and soybean meal. We also note that agriculture is about one-third of Phase One.
It is also important to consider that talking dollar volumes and actual bushel volumes can be drastically different:?$40 billion of soybeans at $9.00 a bushel is a different animal than $40 billion of soybeans at $15.00 a bushel.
The most important question to the markets, in our opinion, is how much corn and wheat will be included in the deal? China imported 8.0 MMTs (a bit over 300 million bushels) of corn in the last marketing year. None of that was from the U.S. because of the Starlink GMO issue from several years ago. They have been a very small importer of wheat, with some from the U.S.
It’s also important to remember that ag goods and products mean more than just soybeans, corn and wheat. It will include everything from pork to nuts. The world is still very uncertain what China’s “real” demand for pork and poultry could be because of the AFS problem with their pigs.
Wheat markets also started to trade better in mid- to late December for several reasons, including:
- Australia is basically “out” of the world wheat market for the next year.
- It has been very dry across much of the Ukraine. It now looks like between 10% and 20% of their winter wheat crop won’t get planted.
- That Black Sea drought extends into portions of southern Russia.
- France got only 85% to 90% of its winter wheat planted.
- U.S. winter wheat acres will be down, and there are some drought issues in western Kansas and Texas.
There are still unresolved questions about the size of the 2019 U.S. corn, soybean and sunflower crops. Differences between planted and harvested acres and prevent plant (PP) have yet to be explained by the USDA. The “final” 2019 acreage and yield numbers will be released in the January 10 series of USDA reports. These reports will include yield and production estimates, supply and demand revisions, quarterly stocks as of December and the 2020 winter wheat acreage estimate.
The January 10 USDA reports will include a revised sunflower production estimate. The only one we’ve seen so far was back in October. Weather has been awful since then, and both the oil sunflower and the confection sunflower yield and production estimates should drop sharply from the October numbers. Disease, rain, snow and wind have all combined to adversely impact production.
There are some potentially serious weather problems starting to develop across Argentina and portions of Brazil caused by ongoing dry weather. It is worse in Argentina and needs to be watched.
The Argentines also announced they are increasing the export taxes for corn, wheat and soybeans by 5%. This will make them somewhat less competitive going forward. The previous government has reduced these export taxes.
The USMCA (Mexico/Canada free trade) should be signed by now. The U.S./Japan trade deal should be signed soon. The huge victory by the Conservatives in Great Britain in mid-December was historic. The people said they were tired of messing around with the EU and are ready for Brexit. The Trump Administration is ready to consummate a trade deal with Great Britain as soon as the Brexit deal is done.
Markets feel better now than they have in the last year.
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 Sunflower assume no responsibility for its use.