Marketwatchers Play Out Trade Deal vs. No Deal
CHICAGO, Illinois— Marketwatchers are asking what the farm markets will do with a U.S., China trade deal and what they will do without a deal.
At today's cmdty Exchange meeting, a panel of grain market analysts, an economist, and researchers mostly believe that a trade deal will get done, whether for political reasons or trade reasons.
“I think we will see these trade agreements get completed for one reason and one reason alone. We have an election cycle coming up,” says Darin Newsom, Darin Newsom Analysis. And, what better way to hit the campaign trail and say, “Look what I did.”
Alan Brugler, Brugler Marketing & Management, says that timing of the trade deals is going to be key for the markets.
“I’m hearing ‘eventually’ we will get a trade agreement. But, we have to look at it from a supply/demand standpoint. When you consider an old crop balance sheet and new crop balance sheet, one of the problems is that if it (trade deal) doesn’t happen fast enough, you’re old crop balance sheet gets worse. So, whatever the benefit is from the trade deal, we just won’t get it, if it doesn’t happen soon enough.”
If a deal is done
So, if the U.S., China trade agreement gets done, the panelists preferred to address demand possibilities, not price.
The question getting the most attention is what will the Chinese begin to buy?
The panelists have mixed feelings, with some saying not much and others seeing big purchases.
“I’ve been hearing the Chinese have been doing the math trying to figure out how to buy the least amount of U.S. soybeans, under any deal,” Newsom says. We’ve lost that Chinese demand until the next weather scare in South America.
Dan Basse, AgResource, disagrees.
“This is political, not economic,” Basse says. If we do a deal, I’m still stuck on this $50 billion number, considered to be what amount of U.S. ag products China would be buying from the U.S. That’s $30 billion above what they have purchased annually, in the past. You start breaking that down, that’s 45 million metric tons of U.S. soybeans, 25 million metric tons of corn, 10 million metric tons of wheat. It’s a big big deal.”
Base adds, “Don’t forget, we have won two WTO cases against China in the last three months. The Chinese have to come to the world market, in the upcoming year. We think they will buy 7.0 million tons of corn, and 10.0 million tons of wheat from somewhere. We think it will be from the U.S., but it all depends on if we get a trade negotiation deal.”
Kent Beadle, CHS Inc. risk consultant, says any deal will most certainly impact world trade
“You can go down a list of agricultural commodities. It’s hard to get to $50 billion worth of those commodities, using only U.S. products. So, we are going to ship China a whole lot more than we ever have before. To get there, you are taking a lot of U.S. commodities and then China will be trying to fill the rest of their needs from other countries. It won’t be good for the system, but for awhile it will be great for the U.S. farmer,” Beadle says.
Tom Dosdsall, Daniels Trading broker, says that even with a deal, in the near term, we are still sitting on a 920 million bushel soybean carryout, in the U.S., and a near record-large global carryout.
“Though I think a trade deal will bring a spike in the soybean market, it will take years to work through the stockpiles that we have. On corn, I see a more immediate price opportunity.
No deal, then what?
If the U.S., China trade deal doesn’t happen, the blink concern is about a building wall of soybeans.
“If we don’t get a deal, all of the sudden the reality of a 30-40% ending stocks-to-use ratio for soybeans. What does that tell you about price, $5.00 per bushel, lower than that, Loan Deficiency Payments. We are use to dealing with low teens to single digits stocks-to-use ratios, at worst.
Historically, the U.S. soybean ending stocks-to-use ratio has only reached over 20% twice.
As the soybean market has been falling, this week, perhaps it is trying to price in no deal, Beadle says.
“There are technical points on the charts, for instance $7.75 per bushel, that makes an awful lot of sense,” Beadle says. Maybe we get cheaper than that. Regarding corn, the stocks, that stocks-to-use ratio is not as bad as soybeans. We’ve had a $3.00 per bushel low since 2007 and I don’t think that we are taking that out.”
The U.S. farmer will have to come to grips that without a trade deal, China will seek filling their needs elsewhere.
“The farmer may say that I’m not going to sell it (crop). I’m going to lock it up in the bin and not sell until the price is back above the cost of production. But, the problem is that China can feel the demand elsewhere in the world.
For instance, just this week some U.S. endusers are buying corn from Argentina, Basse says.
“I’ve got customers buying corn from Argentina, and moving it into North Carolina, because it’s cheaper. They buy wherever the best opportunity is. So, if you are a poultry feeder, pork feeder in the U.S. Southeast, you can bring corn in from Argentina at a cheaper price,” Basse says.
Funds Staying Short
The other marketing topic that is getting a lot of attention, at a meeting like this one, is how the outside investors will make the markets move.
Specifically, the market watchers explain that there is a big game of chicken developing in the grain markets, with the funds holding record-large short positions, bets that the corn market will go lower. Meanwhile, farmers are holding onto large volumes of old crop.
“The March Quarterly Stocks Report shows 8.6 billion bushels of corn on-hand, while the outside investors are holding record-large shorts. It’s a great game of chicken, at this point,” Newsom says. Both sides have access to better, real-time data and at some point this chicken game will come to a head.”
So how much would investors buyback, of their corn shorts, if a trade deal gets done?
"I think that they could unwind quite a bit, but I see them staying short," Newsom says. If you think about the U.S. possibly carrying forward 2.0 billion bushels of corn, into the next marketing year, that gives us a big cushion from the lost acreage that we might have this year. I see the Dec./March futures contract spread start to firm and when the prices get upside momentum, you will see funds cover some more."
Historically, when the market has seen these record-large shorts, a shift in position has occurred quickly, Beadle says.
"When you look back in history, we've moved from record-short to 200,000 long positions almost like clockwork. It will take a trigger, maybe crop acreage shifts or plabting delays, it could happen really fast," Beadle says.