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280611

The Winter Trade Blues Are Setting In

Not much movement in the markets so far in 2019, but what movement there has been has been mostly positive. Negotiations between the U.S. and China on trade are ongoing, a positive development for agriculture on its own. 

The market seems to have a case of the winter blues here in January.  Not much movement in the markets so far in 2019, but what movement there has been has been mostly positive. Negotiations between the U.S. and China on trade are ongoing, and that is a positive development for agriculture on its own. In fact, every little nuance of news from the negotiators about things actually agreed on, and even some things just considered at one time or another by either side are having an impact on the market. 

The reason is that there is almost no fundamental more important than reestablishing trade with our largest trade partner. Yes, South American weather (and the central Brazil drought) are important. Yes, U.S. export sales and shipments to other countries are important. But perhaps no trading relationship is more important than with China, as the world’s largest economies (the U.S. and China) try to come to some agreement.  

South American weather forecasts are similar today, but do shift some of the drier weather farther south in Brazil.  Now the southern half of the soybean belt will see below normal precipitation the next seven days, and that will likely continue in the eight- to 14-day forecast as well. The southern two thirds of Argentina, however, will see above-normal precipitation as there has been most of this year. Some are wondering if Argentina areas are too wet to the point that it will hurt yields. But typically, wet weather in January (like July here) is when the crop has peak moisture needs with rapidly growing foliage. So I doubt that this month can get too wet very easily. A bigger concern is southern Brazil, with drier-than-normal weather that is starting to become more critical and likely means that Brazil will harvest a below-average crop in 2019 – how much below average is the only question.

The Brazil crop will lose yield potential for every week that it stays dry, probably 2% to 4% yield potential per week of severe dryness from here on out, with the greatest losses in February if the dryness persists. The drought has already been in place about three weeks, but the damage will probably increase as we work through the year (especially bloom and podding).  

This week, Chinese midlevel negotiators will come to Washington to continue their discussions, and then the top trade negotiator in China, Liu, will be in Washington January 30 and 31. So far, it’s become more apparent at the end of the year that China’s economy had its worst performance in 28 years, with only a 6.6% GDP growth in 2018 and only 6.4% the last quarter. The slowing growth is giving China more incentive to solve this trade disagreement and return things to “normal” between the U.S. and China. So that might provide more incentive for a deal to be cut by March 1 and avoid additional tariffs.   

The chances that ag trade will resume between the two countries by April 1 without tariffs seems to be improving.  That will be a very positive development for U.S. agriculture as it’s likely China won’t just be buying what they used to (a lot of soybeans), but instead it will probably be even more ag products. If so, it’s possible we would bottom both grain and meat markets for perhaps years.  

Many of the other issues with U.S.-China trade may not get resolved now (or maybe even ever) due to our dramatically different worldviews (communist vs. capitalist), but it’s encouraging that now both sides are eager to get at least some agreement done, and it’s apparent that it is easy for both sides to agree on an ag trade settlement as China needs our product, and we need to sell it to them. Let’s hope that is the tie that binds, and therefore the U.S. and China will at least get along well enough to allow the ag side of trade to continue. 

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We have a number of outlook meetings the next few weeks in MN, ND and SD (including Sisseton and Aberdeen Jan. 31).  We will highlight the latest China-US news, South America crop prospects, the Farm Bill, and the market outlook as well as other risk management strategies in these interesting times.  Go to www.progressiveag.com for details; its easy registration by emailing joan@progressiveag.com, or call our office at 1-800-450-1404.  

Ray Grabanski can be reached at raygrabanski@progressiveag.com.  

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Ray Grabanski is President of Progressive Ag Marketing, Inc., a top-ranked marketing firm in the country.  See http://www.progressiveag.com for rankings. 

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