Grain traders need to know what is in any US-China Trade deal before assessing direction in 2020, reports Chad Burlet.
The lead story for our markets in 2019 was the one that was alternately labeled “U.S.-China Trade Talks” or “U.S.-China Trade War.” Those labels were usually interchangeable and would often rotate on an hour-by-hour or a tweet-by-tweet basis.
As we open 2020 there is a high degree of confidence that a “Phase One” deal has been agreed upon and President Trump has announced a Jan. 15 signing date. Barring any last minute problems, the top question for our markets will now be one of how China implements their side of the agreement.
China has made three definitive statements which are mutually exclusive: 1) their behavior will be World Trade Organization (WTO) compliant; 2) they will only buy U.S. goods when it is economic; and 3) they will buy $40 billion of U.S. agricultural goods annually. They can only achieve that dollar target if they proceed with a strong “buy U.S.” bias, which runs contrary to their first two statements.
There are significant price differences depending on whether they prioritize statement number three or statements one and two. We will be watching their buying patterns with keen interest as we move into January. Specifically: will they buy U.S. soybeans when cheaper soybeans are offered out of Brazil? A yes will send futures prices over $10 and a no will send us back toward $9.
The other important international political story in December was the Peronists’ return to power in Argentina. As their return became more probable the farmers made record sales and the exporters made record export registrations. Sadly, the Peronists did not disappoint, quickly pushing through two increases in the export tax rates for agricultural commodities. There is talk of them creating minor relief for soy products and/or remote farmers, but those moves will have limited impact. The damage has already been done, with acreage expansion halted and the shift from grains to soybeans returning. Only their plummeting currency has kept farmers’ incomes sustainable.
The third political story is domestic, not international. The decades-long battle between Big Oil and Big Corn came to a head with the Environmental Protection Agency’s (EPA) announcement of the 2020 Renewable Volume Obligations and of how they would account for the small refinery waivers they’ve given in the past and will grant in the future. Farmers and the Renewable Fuels industry were very disappointed that it was not as favorable as the deal they negotiated with the White House in September. It would appear that the Administration concluded that two Market Facilitation Payments, a U.S. Mexico Canada Agreement (USMCA) and a U.S.-China Trade Agreement, would be sufficient to deliver the rural vote in November. It’s difficult to argue with that.
Agricultural futures prices were choppy in 2019 as contradictory assessments of the U.S.-China Trade Talks would often arrive minutes apart. The apparent Phase One agreement helped soybeans finish 6% to 7% higher for the year. In the other agricultural markets, the inter-market wheat spreads were probably the most notable. Chicago had a record year, trading more than $1.10 per bushel above Kansas City, 50¢ beyond the previous record. Balance sheets certainly played a role in that move, but so did the continued migration of trade volume and open interest from Chicago futures to Kansas City futures. Chicago continues to hold the vast majority of Index long hedges, but commercials have been steadily moving their short hedges to Kansas City.
This week we will get our monthly WASDE report and the Dec. 1 stocks report, with the latter being far more interesting than usual. Most years, 99-100% of the corn crop has been harvested before the farmers receive their surveys. This year a record 1.3 billion bushels was yet to be harvested on Dec. 1. Farmers were instructed to include their estimate of their unharvested crop as part of their estimate of their On Farm stocks. What could possibly go wrong?
We are looking forward to 2020 with great excitement. As we wrote above, the rhetoric, posturing and misinformation of the trade talks appear to be behind us, and we can now focus on China’s activities in the markets. Imagine that, a market where actions speak louder than words. How refreshing!
Chad Burlet is Co-Founder (along with Bob Otter), Chief Trading Officer, & Principal, Third Street Ag Investments, LLC
