With no resolution on US-China trade dispute in sight, grain traders are focusing on planting season, says, Chad Burlet.
The whole of the agricultural marketplace has reached a point of fatigue regarding the U.S.-China trade talks. The current projection is for a conclusion sometime in June, so we are no closer to a conclusion now than we thought we were six months ago. Thankfully, U.S. planting weather has pushed the trade talks off the front page.
With the calendar turning over to May, changes in the U.S. weather forecasts have taken on major importance. A few days more or less of clear weather in the next two weeks can mean the difference between a farmer planting full season, or shorter maturity varieties. It is still too early to talk about lost acres, but yield drag has become a legitimate concern in some areas. The University of Minnesota has said there is 2% yield loss on corn planted after May 10 and 5% loss after May 15. The University of Illinois shows even steeper losses: 5% after May 10 and 9% after May 20. My experience would say that those numbers are slightly overstated, but the opportunity for optimal yields certainly comes off the table two weeks from now.
With that said, current prices are telling us that U.S. planting is still not the dominant issue. All of our markets are ending April at or near contract lows. In the case of Kansas City Wheat we are at multi-year lows. The strong dollar and the large U.S. and world carry outs have certainly created the context for these prices, but good weather outside of the U.S. is the straw that broke the camel’s back. In particular, we can point to key price setting markets where crop prospects have improved significantly in the past month. For corn and soybeans it is South America where the crops finished very well and the five-country crop estimates are 3-5 million metric tons (MMT) higher than a month ago. For wheat it is Russia where the crop has come out of dormancy in excellent condition and crop estimates have jumped 3-4 MMT from last fall.
Also contributing significantly to the current bearishness is the fact that farmers are the major long. The Commitment of Traders report shows us that commercials have very modest cash ownership. They are long both corn and soybean futures for the first time ever. This tells us that end users have more long hedges placed than warehousemen have short hedges. That leaves the farmers as the longs and they are being forced to sell into this break due to contractual terms or for financial reasons.
We Know Agriculture. There are other important factors contributing to the bearish environment. African Swine Fever (ASF) has spread from China to several other Asian countries and it has even reappeared in South Africa. On the trade front, China has their endless negotiations with the U.S. and they are also having diplomatic and trade issues with Canada and Australia. Along with the China negotiations the U.S. has a simmering dispute with the EU and stalled trade talks with Japan, neither of whom want to discuss agriculture. At the same time Congress is dragging its feet on the USMCA (NAFTA 2.0). So yield drag and prevent plant might well turn this market, but that is at least a few days away.
Our bias has been that soybeans and soybean meal had greater downside risk than corn because of ASF, the lack of an agreement with China and strong competition from South America. That market view served us well during April. Going forward we feel the market’s greatest risk is now to the upside. We are nearing an exhaustion point on the downside, but it is not yet clear which market has the greatest potential to rally. Central U.S. weather over the next two weeks should answer that question. Best regards,
