Weekly Market Update – December 6, 2019

I feel like a yoyo trying to keep up with where we are on a trade deal with China. After being so close to a “phase 1” deal things got ominously quiet which was not taken as a positive sign. Then Trump tweeted that he may not get a deal until after the 2020 elections. Throughout the bluster from the US side over the last month, we have not seen much retaliation from the Chinese side which is different than what we have come to expect. The Chinese side keeps making quiet but positive noise about progress. It is impossible to try to guess what Trump or the Chinese are thinking. And anyone who took both sides at their word each time an announcement is made would be driven mad by now. The only way I see to try to get a gauge of what direction we are moving is to look at incentives. Last winter after being on the “5 yard line,” things fell apart. That is the same time when economic indicators in the US as well as China were turning more positive. I think the progress fell apart because both sides thought their economies were still expanding and they did not need a deal at the time. Both thought they could outlast the other. Right now, China’s (and the rest of the world) economy does not look good. The world economy seems to be contracting. South America is out of beans and meal. Argentina’s newly elected far leftist government takes power next week to unknown consequences. China needs US ag goods and more than that they need their economy to not sputter. Trump has a domestic political fight that has gained enough steam that he cannot ignore it and wait until summer to give our economy another boost going into the elections. A victory now would be very beneficial. It seems to me that both sides have the right incentives to get something worked out. Despite what Trump tweets, I am hopeful we are still making progress toward that end. Today, China announced a significant reduction in the tariffs on soybeans and pork. The market is reading that as a good will gesture as a sign of progress behind the scenes.

We have already fallen back into the familiar pattern. We got a nice shot higher last Friday after getting past first notice day but then we spent the rest of the week giving it back a little bit each day. Volumes have been low and not much conviction as we seem to just tread water. Harvest progress was reported at 89% complete as expected (North Dakota is only 36% complete). Upwards of two billion bushels of corn remain in the field. There are still very many unknowns in this crop. USDA is not going to be able to get a handle on it any time soon. Our next report is next Tuesday. Usually the December report does not make adjustments to the supply side, only demand but this is anything but a normal year. The trade would like to see even a small cut in production to offset the expected cuts in demand. Exports were on the low end of expectations this week not helping the bullish case. Basis is at or near record levels in many areas of the country.

I continue to believe that futures will test the $4 level before March futures go into delivery. We need to be planning to sell old and new crop at those levels. It will take a problem in South America or something other than the US crop to push us to challenge the old highs from this summer. I will not be waiting for those levels with 2019 crop year corn. When we sell 2019 corn, we need to sell 2020 corn as well! Do not sell posted basis levels. Almost everyone has some push on basis!

Beans were very weak in late November on rains in South America and lack of progress on trade. They have worked hard to battle back this week to try to approach $9 on the jan contract. The far leftist government taking power in Argentina is not expected to be friendly to their agriculture. Capital and export restrictions are expected. Farmers rushed to sell as much as they could after the election before they took power. This is good for US agriculture and looks to be part of the reason China lowered tariffs on soybeans and pork today. The market is reading these actions as real progress on trade talks. As noted above, it is hard to read through all the noise, but incentives still seem to be lined up to push both sides for a deal. Beans had reached levels to compete with corn for acres next year but then gave that up. We need to see further tightening of the US balance sheet next week or on the Jan report or further weather problems in South America to give beans a reason to compete with corn.

Basis in the midwest is at near record levels. It has been many years since basis in the Southeast got stronger during harvest. Container exports have helped make the processor be more competitive with bids. Do not sell posted bids! I would be making small sales when we get above $9 vs Jan and plan to be sold out by $9.50. I do not see a reason to be aggressive on new crop below $10. We have a lot of demand that can come if we have problems in South America or a deal with China.

Cotton harvest progress looks to finish right on time. Seasonally we usually get a good rally this time of year as we have the cheapest cotton in the world coming out of our harvest. We saw a very good export number this week and need to continue that to have a chance to reach USDAs 14 year high estimate of exports. Cotton will get a good tailwind from any perceived progress on trade. It has been left out of most of the goodwill buys by China earlier in the negotiations. Trade is looking for further cuts to the US and world crop on next weeks report. I will be a seller of cotton just below $0.70.

Soft wheat acres were projected last year to be at 100 year lows and even lower this year. The late season issues in the Midwest also translate into early spring crop acreage losses. Acres will be up in the Southeast but after our wet fall last year, they could not have gone much lower. I think we will see a return to more normal rotations similar to 2017, not a massive shift to wheat across the region. With wheat acres in the country down, we should still have very good milling basis once we get past harvest. Futures should stay supported as spring acres are called into question and KC wheat continues to show strength. I would be a seller when futures hit $5.50 for new crop.


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