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282068

Market Goes as Trade Talk Goes, Analyst Says

Is there a U.S./China trade deal on tariffs or not?

U.S. Secretary of State Mike Pompeo and U.S. Ambassador to China Terry Branstad have made their appearances in Des Moines talking up the U.S. and China trade deal that is expected to be agreed upon yet this month. 

While they didn’t want to discuss details much, Pompeo did reveal that, so far, China hasn’t agreed to reduce ag tariffs as President Trump asked over the weekend.  

Trade Talk

While soybeans seem overpriced now at 910 mb carryout and no Chinese agreement yet, let’s not forget China is the big elephant when it comes to buyers in the room. They also are out of soybean stocks, just as any businessperson would use up stocks when unable to purchase what is needed for a while.  

While its economy is suffering and its demand seems to be slowing, both China and world economies will recover with a trade agreement between the U.S. and China.  

While soybeans seem overpriced at 910 mb carryout, even USDA projected a 20¢ increase and lower carryout next year.  

I fully buy into the thought that it will take a long time to climb out of our current large carryout after five years of above-trend (and many times record-) large yields the past five years. But it’s usually darkest at the dawn (and it’s really dark right now)!   

Exports

Weekly export shipments yesterday showed 865,000 MT of corn, 843,000 MT soybeans, and 440,000 MT wheat, which were all just average numbers. For the
year, corn shipments are up 36% from last year, soybeans down 33%, and wheat  is down 12%.

So, we are still well behind normal in export shipments of the two dominant crops we export, soybeans and wheat. However, they are picking up nicely the past few months, and hope springs eternal that China will up its U.S. soybean purchases in the coming months (as promised in the trade negotiations).

Crop Weather

Weather forecasts continue to suggest wet weather in Argentina the next two weeks, especially wet in the coming seven days. Brazil will see normal precip, with temps basically normal in Brazil, and normal to above normal in Argentina the next 14 days.  If anything, the extremely wet conditions in Argentina might be more problematic for the crop. The U.S. is expected to continue to endure very wet conditions (more snow?) and very cold conditions for the next two weeks. It won’t be an early spring in the U.S. in 2019! In fact, the current forecast is calling for very cold temps to continue, much to the chagrin of many Midwesterners.    

February Crop Prices

Grains had a tough month in February, and started lower in March, too, last Friday before reversing higher. That upside reversal was important on charts, as it came at a critical time. Now, as we head into spring, there is a line in the sand that bulls will probably buy against. After all, just when it seems that grains prices can’t go up, they usually do!

Overall, it’s been an interesting few weeks in the grain markets, with prices wrapping up for the month of February on a weak note, with wheat futures dropping
significantly to end the month at or near yearly lows. Crop insurance prices were determined last month, with corn set at $4 (vs. $3.96 the last two years), soybeans $9.54 (vs. $10.16 last year), and HRS wheat $5.77 (vs. $6.31 last year). 

The only market higher than last year was corn, with both HRS wheat and soybeans suffering lower prices. That is expected to attract some corn acres, but considering that costs of production are also rising for corn, probably not much.  

Expectations by USDA and others that HRS wheat acreage will be increased (along with corn) at the expense of soybean acreage may not hold any merit.

In surveys we conducted all winter in North Dakota, South Dakota, Minnesota, and Wisconsin, very few growers intended to switch any acreage from soybeans to corn, and very few acres to HRS wheat (less now with the recent wheat break). 

Instead of a 4.0-million-acre shift that USDA predicted from soys to corn, we would predict more like 0.5 to 1 million acres based on our survey. Frankly, Corn Belt producers are less likely to switch than the four fringe states we surveyed, so the Big I states probably will switch almost zero acres. With a soybean/corn ratio at 2.40 or higher (as cited by USDA’s chief economist), there is virtually NO incentive to move away from the 50-50 rotation.  

While everyone wants to talk up the bearish tone of all markets now in February (typically not the time to be selling), here’s a bullish view.

If corn acreage doesn’t expand 3.0 million acres, that’s 528 million bushels (mb) less production. USDA only projected 1.6 billion carryout in 2019-20. So, subtracting 528 mb leaves barely 1.0 billion bushels. 

Now, add summer weather uncertainty, and we now have a bull market in corn. Add a few Chinese purchases once the U.S.-China agreement is hashed out, and we have a full-fledged bull market in corn.  


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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