Trade and Weather Remain Market Drivers
Markets wasted little time on Monday moving higher on renewed optimism that the most recent round of communication between China and U.S. will lead to resolution of (what is now being termed) trade disputes.
According to the U.S. Treasury Secretary, Steven Mnuchin, at least trade issues with China have been disputes and not wars. If, in fact, the most recent round of talks/rumors centered on ideas of a positive outcome are accurate, this suggests China will be back to buying U.S. agriculture products, perhaps aggressively. If this is the case, the markets are poised to consolidate, if not move higher.
There are a few variables keeping rally potential in check: the U.S. dollar, farmers holding inventory, and weather. The dollar has gained over 4% the last two months, and farmers are still holding inventory from last year’s big crops. Yet, we feel farmer selling has been more aggressive this year than last.
As summer unfolds, the likelihood of farmers being caught with large amounts of inventory is less than it was a year ago. When farmers are light holders of inventory, it usually increases the chance for price recovery. Planting progress is in line with the five-year average, suggesting that year-to-date weather has had little impact from a big-picture perspective.
While this week is celebrating renewed optimism from the export front, weather will quickly grab attention, and weather developments will become the most dominant and important factor for price direction. The next 60 days are critical, and the next 90 days will tell the story for this year’s crop production. On one hand, if recent trade disputes are behind the market and this positive news becomes old news, prices will be vulnerable to a drop if good weather develops for the Northern Hemisphere.
Yet, with world economies growing, energy prices doubling from two years ago, and inflationary concerns mounting, business may not be as usual. It is possible that export business could be robust. China has a growing economy, and if attention focuses on increasing imports from the U.S., any weather developments will be magnified. Last week’s USDA projected 2018-19 drawdown on world carryout is a very stark and sobering reminder of the old economic adage that low prices cure low prices. Any crops less than ideal (domestic and worldwide) could send prices skyrocketing.
As a farmer, you wear two hats. One is production, and one is business manager (or marketer). You obviously will do everything in your power to maximize your production. From a business perspective, however, many fall short in creating a balanced approach when it comes to marketing. Selling enough projected inventory to make a difference, yet not too much, is challenging. At current prices, we suggest you sell the amount you are comfortable with and retain ownership with call options in case prices skyrocket. Buying puts can protect the downside on bushels you don’t intend to sell. Take time now, before summer weather, and prepare for volatility. It is possible that business will be anything but usual.
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM, ext 129.
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