Weekly Market Update – April 5, 2019

Trade Talk
We continue the never-ending trade news circle. We keep hearing positive news about how close we are to a deal and how great the deal is going to be, then disappointment when no official announcement is made. Yesterday several sources reported Trump would announce a date for the final meeting with the Chinese president then nothing came. The rumors persist that there are only the final points to be worked out but that has yet to be seen. If the rumors about the contents of the proposed deal are to be believed, it may be a game changer in corn due to corn exports and also a big boost to the ethanol industry. It is an absolute necessity in beans and cotton.

Corn needs some help to overcome the setback we got from USDA last week. The market would have been able to shake off the surprise acreage of 92.8 if that was the only surprise. With the record wet fall and winter and flooding that has already occurred there are still a lot of questions about acres. The surprise on corn stocks is what really caught the market off guard and changed the tone of the market. The extra stocks take some of the pressure off acres. With almost 300 million more bushels than expected, we have more room for slippage in acres. We have also made it through the growing season in South America with no major issues recovering from the massive drought last year and threatening pattern early in the growing season.

We have had a significant setback and we may need to adjust our targets but corn is not all doom and gloom. We still have a record fund short position in corn. They are going to have to cover that position at some point and if they are spooked into doing it at one time we will see a significant rally. There has been major flooding in the Midwest on top of record rainfall all fall and winter. The midpoint in planting progress for most of the corn belt occurs in early May so they still have time. The market is concerned but not panicked yet. Very little fall fieldwork has been done and there are logistical issues getting needed supplies up the Mississippi river but it is still a bit early to be considered late. With big planters not taking as much time to plant as it used to, but it still has to dry out. The market is watching all the weather forecasts closely. Throughout the winter, we have said corn does not need a deal with China, it can stand on its own fundamentals. With the extra stocks/lack of usage through the winter corn could really use a deal with China.

In light of the updated stocks number we got from USDA and that it is now spring, we must look at revising our objectives lower to reflect our new reality. We get updated USDA supply and demand next Tuesday. The market has already priced in an expected drop in usage to reflect the extra stocks. We do not look for a bullish surprise next week, just hope to get it behind us. We are looking at $3.70 May for any old crop left and $4 December for new objectives but would like to get the next report behind us before revising orders.

Soybeans have managed to hang on near the $9 level. Trade talk rumors helped support early in the week but then gave way as no announcement was made. Soybeans were not surprised nearly as badly as corn by USDA report last week and not looking for any surprises next week either. Soybeans are almost exclusively focused on the trade talks. China has made some big US purchases as a show of good faith, but not enough to make up for the missed week. The trade war started a year ago today when the first tariffs were announced. South America is near the end of their first crop growing season and has had no major port or trucker strike or any other logistical issues. Estimates of losses in the Chinese pig herd due to African Swine Fever are huge. With what we know so far, we do not expect a large reduction in feed grain or protein usage. One reason is that most of the losses came from smaller mom and pop type hog operations who generally feed whatever they can find, not the highly balanced rations of a vertically integrated operation. This will push more Chinese pork production into vertically integrated operations that have better biosecurity capabilities which will increase corn and soymeal usage. The immediate loss of available pork in China will increase demand for chicken and fish protein which will also increase meal usage. The biggest bearish threat to soybeans are the increasing world inventories, not loss of demand from China due to African Swine Fever.

November beans currently trade around $9.30. We are coming out of the South America growing season without major issues and face the prospect of more acres in the US due to wet field conditions for corn planting. An already big balance sheet looks to be getting bigger. We may need to sell the new crop soybeans a couple times to be able to find a margin on them. We are thinking of lowering hedge targets to mid $9 level with the anticipation of buying the hedges back on a big break in the growing season.

Chicago wheat has had the most support of any of the wheat classes as prospects look promising for a spring wheat crop. Chicago wheat though has not been a real winner either but we have been able to inch out gains. US exports are picking up and the winter wheat crop rating was a bit below expectations. We still have not gotten a spark to catch wheat’s attention. Basis is going to be strong in the Southeast as there is very little wheat. No changes in recommendations. 

Cotton has been a rare bright spot in the last two weeks as old crop has pushed back into the 78 cent level. Cotton exports have been strong and USDA’s acreage estimate was below what the market was expecting. Cotton still needs a deal with China for a sustained rally. Last year at this time when exports began picking up is when cotton made its biggest move of the year. A trade deal would change the narrative quickly otherwise there is more downside risk as we approach the end of the month and another delivery period.