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China is a Fast Learner, Analyst Says

It may be time to turn bullish grains, analyst says.

We learned a lot in the past week, about the world trade situation. China is a fast learner! 

On Friday, after imposing $5.625 billion in tariffs on the U.S. ($75B at 5% to 10%), the U.S. imposed $27.5B of tariffs on China (for China a net loss of $22B). Essentially, they have no bullets in their tariff gun, and the U.S. is still half loaded! 

Then the U.S. made a trade deal with Japan on Sunday at the G7 summit, after Pres. Trump urged all businesses to leave China for elsewhere. (Trump says we’ll sell our surplus corn to Japan.)  Now, China can finally see the light: they cannot win this trade war. After all, we import $500 billion from them, they import $130B from us. So, it is not possible to win.  

Chief Chinese negotiator Liu was quoted as saying he wants to make a deal under ‘calm’ circumstances after the Chinese contacted the U.S. Sunday night and said they want to make a trade deal.  

After stocks and commodities dropped like a rock late last week and started lower Sunday night, they have done nothing but rally since this news of China wanting to make a deal. This reinforces my statement last week that more tariffs on China are now bullish for grains because it will force the Chinese to make an agreement. The faster we put more tariffs on, the better it is for agriculture, as we’ve already suffered a ban from China on U.S. ag imports (not a tariff). Increased tariffs on ag products from China now have zero impact. 

I would like to see tariffs rise on China 5% a month until a deal is made. We should indicate to them that tariffs will stay on six to 12 months at the max level set before coming off at 5% per month. That will get a deal real quick as China has proven to be a fast learner.

Early Frost?

It may be time to turn bullish grains. Prices have sagged in corn down to the yearly lows, and we lost 20 million acres to prevented plant (probably 12 million of corn, 5 million soybeans, and 3 million other acres).  This after breaking out to the upside in May/June to rally above $4.60 corn – a five-year high – only to retrace back to yearly lows today around $3.70. Long-term charts are now pointed higher, and this could be a bull market beginning that could last two to three years. 

There’s a perception that prices can never go higher because demand is so bad, no matter how bad U.S. crops can be. But is this realistic? Don’t forget, the best cure for low prices is low prices, and we’ve had low prices for five years. We can’t sit at 15-year lows forever!

Crop Conditons

Crop conditions released Monday indicated an improving corn and soybean crop, and one that is advancing toward maturity but is still well behind normal.  

Corn conditions improved 1% to 57% rated G/E, with soybeans up 2% to 55% G/E.  

Both yield models improved as well, with soybeans up 0.41 bushel an acre to 47.92 bushels per acre, now the highest of the year but still below USDA’s 48.5-bushels-per-acre estimate.  

Corn yields are now estimated at 173.7 bushels per acre, up 1.25 bushels per acre and also the highest of 2019. That is also above USDA’s 169.5-bushels-per-acre estimate, and is almost equal to ‘trend’ yields of 174 bushels per acre – an amazing feat considering how problematic the start to the season was.  

It does indicate how good the weather has been so far. Yet, if we have an early frost, perhaps it will all be for naught?

The crop is immature, as you can imagine, since it was planted so late. USDA noted that only 27% of the corn was dented (19% behind normal) and 71% dough (16% behind).  

Soybeans are 94% blooming (5% behind) and 79% setting pods (12% behind).  

Cotton had a significant decline in conditions this week, down 6% to 43% rated G/E, with bolls opening now at 28% (+9% from normal).  

Sorghum is 86% headed (4% behind), 41% coloring (11% behind), and 22% mature (8% behind). Sorghum is 20% harvested (equal to normal), with conditions improving 1% to 66% rated G/E, so we will have an excellent sorghum crop.  

Winter wheat is 96% harvested (3% behind normal), with HRS wheat 38% harvested (27% behind normal), with HRS conditions down 1% to 69% rated G/E.  

Oats are 75% harvested (11% behind), and barley is 54% harvested (20% behind) with conditions up 3% to 76% rated G/E.  

With the relatively wet and cool summer, small grain yields so far are surprisingly good for the late planting, and it will be a decent production year for this crop (which is at least two weeks late, but at least could reach maturity).  

So, considering our horrible start to the season with extremely late planting (for what did get planted), the growing season has been remarkably good since then.  

Will that continue into the first frost (which we need to be later than normal)?  Or, will it all come to a crashing halt with an early frost?  

Weather forecasts are moderating somewhat, with temps not as cold as forecast last week and precip less likely. Now, we have a mostly normal to below-normal temp forecast for the Corn Belt the next 14 days, with precip less plentiful than before (normal the next seven days, below normal in days eight to 14).  

So, we are seeing a moderation of the forecast from the extreme cold forecast last week.  It will be interesting to see how this forecast unfolds in September, the month that could do the most damage to crops via an early freeze. We could see a 5% to 10% change in the production forecast (both up or down), based on the freeze date. 

Of course, an early frost would do significant damage in this late developing crop, but a late freeze would mean we might even get a near average trend yield if crops are allowed to mature. That’s an important determinant of the demand/supply situation the coming year.  

The recent crop tour found lower corn and soybean yield potential than USDA’s August yields in all states.  Soybeans are estimated to perform worse than corn, and already USDA is 1 bushel-per-acre higher than the Pro Ag soy yield model.

Ray can be reached at raygrabanski@progressiveag.com.  
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Ray is President of Progressive Ag Marketing, Inc., a top Ranked marketing firm
in the country.  

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