Weekly Market Update – February 1, 2019

Markets closed out January without much of a bang. Corn fell right in the middle of the same 10 cent trading range for what feels like forever. Beans have traded a wider range than corn, but still historically a very narrow range for beans and wheat cannot catch a spark from anywhere. Cotton is trading near the top of the recent trading range as the US economy feels to be on better footing, but concerning economic indicators continue to trickle out of China. We do have a couple big things coming up that may be able to shake all the markets out of their current ranges. There is encouraging news out of Washington as the high level negotiations continue there. We keep hearing that significant progress has been made on enforcement of intellectual property rights which has previously been a big sticking point. There are still many hurdles to get through but the talks involve very high level officials and seem to be making progress. The other big news eagerly awaited is the missed USDA data will be released next friday February 8th. The market may get surprised due to the length of time since the last monthly report that came out in early December.

The market remains hopeful that any deal with China includes big purchases of Corn, DDGs and ethanol. Historically they have not been large purchasers of US corn but estimates of their balance sheet are shrinking as their ethanol usage goes up. Despite this hope, the market has traded in the same 10 cent range for a while. We had time on our side in early January, but that is becoming less true as we enter Feb. If you need to generate cash, scale in sales on moves above 380. If you can still be patient, work orders 390’s. Basis seems to have leveled out and there have been surprisingly few train issues in the southeast. Corn acreage increases are far from given for next year, especially in the western belt where less corn is historically grown. Get orders working for new crop at $4.10+ Dec!!

One concrete announcement from the trade talks was the purchase of 5 million tons of soybeans (185 mln bushels) by the Chinese. The initial report incorrectly stated 5 million tons per day but that was corrected soon after. That is similar to the amount believed to be purchased in December. The weather in South America has not changed much, still too wet in Argentina and too dry in Brazil. However, there were significantly more acres of beans planted this year due to the disparity of price between North and South America. Therefore even if we lose some yield, it can still be a large crop. Even if we get a deal announced tomorrow, we missed the window to export our beans before the South American crop. We are still going to have a burdensome balance sheet in the US. Get your orders in around $9.50 to clean up old crop beans!!

US wheat is priced competitive in the world market. We are further from a lot of destinations in the middle east though so we have not picked up all the business due to freight. USDA will give us wheat seedings as well as condition ratings which should be friendly after the bitter cold that gripped most of the country. Market is not as confident as corn that Chinese agriculture purchases will include wheat, but if they are included it would be a significant spark for wheat as the balance sheet has tightened. I feel like a broken record saying it again, but wheat just needs a spark here and it could come from any number of places. Downside feels limited, if you have new crop hedges, think hard about lifting them. Basis in the Southeast will be strong, but the lack of acres is not going to be a surprise in the spring, the mills have had lots of time to get rail on the books. 

China has already committed to purchases of soybeans and some corn. They have not done anything on cotton yet and as a result cotton has struggled. Cotton also got hit hard due to the volatility in the US equity markets at the end of the year. The market has enjoyed the relative calm of the US equity markets in the first month of 2019. There are still enough worrying economic indicators coming out of China to give us pause, but progress on trade is encouraging for cotton. Similar to soybeans, we have to get a deal worked out with China or cotton has a lot of downside. Commentary from spinners indicates they would rather wait to make purchases and risk paying more later if a deal is worked out with China, than be stuck with too much inventory if China experiences an economic slowdown.