Substantial trade news involving ag markets came out last week while markets focus on Coronavirus correction, reports Chad Burlet.
It’s ironic that during a month when the United States signed two major trade agreements that it was the lack of trade that dominated the headlines and set prices in a downward direction. President Trump signed both the U.S.-China Phase One Trade Agreement and the U.S./Mexico/Canada Agreement (USMCA) in January, but it was the lack of Chinese buying and the fear of what the Coronavirus would mean for world trade that captured the market’s attention.
It’s important to note that those stories and the U.S. impeachment process caused almost everyone to overlook a far bigger story, at least for agriculture. In a decision that will result in hundreds of millions of tons of additional production over the next decade, the Chinese government approved the domestic planting of genetically modified seed. In corn alone a 10% increase in yield will add 25 million metric tons (MMT) of production per year. Clearly, the total potential for corn and other crops is many multiples of that number.
At the same time, another major story with bearish long term implications has been unfolding in Brazil. New President Jair Bolsonaro is implementing a very strong pro-farmer agenda. A number of environmental laws have been relaxed or eliminated and additional acres, including some in the Amazon, are quickly being brought into production. When combined with the ongoing investments in transportation and agricultural infrastructure, these changes are ensuring that Brazil’s share of world trade will continue to grow.
While those new policies in China and Brazil will play out over years and decades, the market is trying to figure out how the Coronavirus will play out in the next few days and weeks. Analysts are struggling to determine its impact on Chinese meat consumption and what that will mean for feed demand. Prior to the outbreak China’s weekly crush rate and monthly imports of soybeans had both shown strong improvement and it appeared that the USDA’s estimate of 85 MMT of imports could have been 10% low. Now the virus has created a cloud of uncertainty.
On a positive and related note, U.S. scientists are reporting great progress on a vaccine for African Swine Fever (ASF). Optimistically, in 12-15 months the disease that wiped out nearly half of the hogs and pigs in China could become a thing of the past. That would go a long way toward offsetting some of the near-term doom and gloom.
Grain Market Report
Speaking of doom and gloom, no market has reflected that more clearly than soybeans, where CME March futures were down almost 9% in January. Currently, soybean futures have closed lower an incredible nine days in a row, from Jan. 21 to Jan. 31. The Coronavirus is certainly playing a part, but the large crop and weak currency in Brazil have been even more important. We believe the Brazil soybean crop is 127 MMT, which is 3-4 MMT above the USDA and most analysts’ estimates. At the same time the Brazilian real is making all-time lows vs. the U.S. dollar. That combination is generating excellent revenues for Brazilian farmers who are happily selling.
The corn and wheat markets fared much better than soybeans, closing only 1% to 2% lower for the month. U.S. and world wheat markets have been moving steadily higher since September, led by the Australian drought and reduced exports out of Russia.
However, all wheat markets appear to have peaked and turned lower during the last 10 days of the month. Excellent rains in the U.S. plains and in Europe may have been the primary catalyst.
In U.S. wheat futures, Chicago continues to trade at historically high levels relative to Kansas City and Minneapolis. Despite that, the soft red wheat cash market has continued to trade at record levels above the CME futures and deliverable supplies are now less than half of a year ago. Clearly soft red wheat’s core demand, both domestic and export, has proven to be very price inelastic.
The U.S. corn market has finally arrived at the point on the calendar where it is competitive in world trade. Ukraine, Brazil and Argentina have depleted most of their exportable surplus and South American new crop supplies are two to three months away. A surge in export sales has helped tighten cash markets and basis levels in most locations are 20¢ to 40¢ higher than a year ago. For the first time in over five years we are seeing the convergence of cash and futures.
That strength in nearby corn has been offset by what appears to be a very bearish new crop balance sheet. Recall that we had 18 million acres in the U.S. that didn’t get planted last spring due to record rains. Those acres are available this spring with the overwhelming majority slated for either corn or soybeans. Neither crop needs that many acres and new crop prices have been under pressure because of that. That combination of divergent old and new crop factors caused the March-December corn spread to narrow from 19¢ to 9¢ in the last two weeks of the month.
Looking ahead to February we expect the Coronavirus to dominate headlines, but in the long term we expect its impact on global demand to be limited. The USDA has said they will include the “public” information about the Phase One trade agreement in their WASDE analysis. Ten days later, at their Agricultural Outlook Forum, they will give us their first run at 2020-2021 balance sheets, and a week after that they will survey farmers about their spring planting intentions. Our opinion is that normal planting and trend yields would be very bearish and that neither corn nor soybeans can afford all of the acres that appear to be headed their way.
Chad Burlet is Co-Founder (along with Bob Otter), Chief Trading Officer, & Principal, Third Street Ag Investments, LLC
