We are now two weeks past agreeing to what is reported by some in the administration to be the greatest boon to agriculture in a generation. Corn and soybeans have rallied off the lows but have just got us back to where we were about mid November. Wheat has done better as we are now back to the highs not seen since July. Cotton has not been able to do much. The market has fallen for headlines already too many times during this whole process and is going to need more concrete evidence before reacting now. Despite all the promises made by the US administration there are three main areas of concern/skepticism:
1) This is just an agreement at this point. It has been confirmed publicly by both sides which lends credence, but it has not been put into writing or signed yet. So not only do we (the public) not know exactly what has been agreed to, but there is also some chance that it can still fall apart as they are trying to agree on the exact text. Officials have said that the written agreement is in draft form and under review. We have been let down so many times in this process, the market is remaining skeptical until something is in writing, public and signed. Right now, the earliest we could see a signing is mid January.
2) In the first press conference to confirm the agreement, the Chinese delegation was asked point blank about the ag commitments and completely dodged the question. Since that initial press conference there have been many comments by the US side about the huge amounts of ag commodities and all goods that China has agreed to buy. There has been very little comment by the Chinese side. The market is skeptical of the level of commitments because of how big they are and also the lack of confirmation from the Chinese side. There are questions if they could actually reach those levels. The year before the trade war started, China bought around $20 billion dollars of ag goods. The highest level they ever got to was around $25 billion in 2013 and 2014 (when soybeans were $13 and corn was $7). Is it possible they can get to a level between $40 and $50 billion per year as rumored by the US side? The key may be ramping up higher value goods like meats in addition to increasing raw commodities like beans and corn. China has already lowered some trade barriers like bans on chicken and some biotechnology. It is possible to get to those levels, but in the absence of details, the market remains skeptical.
3) China has a very poor record of following through on their commitments and treaties. The key to this deal will be the enforcement mechanisms. If you were to take the most cynical view for argument’s sake, Trump just needs to get to the election and after that he no longer requires support from the public. He has publicly stated that he is working for strong enforcement mechanisms for the long term. However, if you take the cynical view than he would need as much splash as he could get for the next 12 months but not much follow through. The lack of follow through by China on previous agreements and treaties and the lack of information on the enforcement mechanisms has kept the market skeptical.
I have listed a lot of concerns and negatives but I hope it does not come across that all is hopeless. I have been asked many times over the last two weeks, if this deal is so good why has the market only moved this much and I am trying to convey the skepticism and the reasons for it. I am hopeful the agreement does contain commitments of $50 billion of ag purchases per year and an ironclad enforcement regime but we cannot bet our whole livelihood on that. We still need to manage risk. We still need to choose objectives, scale in sales and protect profit! This agreement does have the potential to remake US agriculture but we need to see more before we can count our chickens.
If you want a little more indepth thoughts, there is a WSJ article (that this chart came from). Click HERE
Even before the trade breakthrough, we were watching combines struggle to harvest the last of the crop. There are still many supply questions yet to be answered and demand is finally starting to see some bright spots, including a huge purchase by Mexico after the new NAFTA agreement. Basis is getting stronger just about everywhere, now above levels we have seen in many years and we have not even had that many train delays yet. Users are very frustrated with rail service especially the CSX. The basis reflects this frustration, but has not priced in a panic yet. Ethanol is still a dark spot as Trump’s EPA has not come through on fixing the issues they have created with the waivers. With what we know now, I think we need a problem in South America or something else as yet unknown to make a run back to the old highs from last summer.
Some homes are offering new crop basis levels premium to what we have seen the last few years. Do not forget that our new crop is still old crop in the Midwest and will come at the very end of their crop year of this short crop. Selling some at basis levels higher than we have seen the last few years is not a bad idea, but I would not recommend anyone load up and sell aggressively. New crop futures are finally back over $4. Whenever you sell some old crop, you need to be doing a little bit of new crop too!
Soybeans have seen a $0.60 rally, but just got us back to where we were mid november. This deal with China is expected to drastically change the US balance sheet for soybeans. We were projected to be sitting on record stocks and going to have to beg to give them away but mother nature changed all of that with this growing season. South America weather has turned better so there is not as much of a threat down there. No matter what is in the deal, it is very unlikely to change the world balance sheet. What may change is where China is going to buy the beans they need. A bigger crop in South America will still limit upside in price. Price will still be governed by supply and demand. We need growth in demand or loss in supply to change the range, not just a shift in demand from Brazil to us. One thing that will change is a competition for acres for next year. Right now corn is not worried because beans are not in a position to take acres. With prices where they are right now, we will plant mostly corn. But we are getting very close to the point where beans will be competitive and a fight for acres will help all commodities!
Until we know more about the deal, I think the market will struggle to gain above $9.50 old crop. If the details of the trade are as positive as rumored, I think we can make a move toward $10. With the balance sheet as it is right now, I do not see a large move above $10. In order to get that kind of move i think we need another boost whether it be a problem in South America or a problem with the US crop. If you have not made sales on this last move above $9, I would be making small sales. If you have already done some, I would have orders in around $9.50. There is huge carry to the March (10 cents), so if you do not need to move, I would wait until we get basis over the March (in two weeks). Usually they take some of the carry from us in basis but basis has been so competitive this year, I expect to see everyone jump quickly to the March and pay us better basis. Old crop basis should continue to strengthen in both export and processor markets. ADM is also offering some decent basis for new crop to try to encourage acres.
Wheat is making highs not seen since July. The extra tailwind wheat has, in addition to the trade talks, is the lack of acres in soft wheat. Wheat acres are up from last year (when we had record prevent plant), but does not look to be up significantly from the more normal year prior. Expect a return to more normal milling wheat basis. We should be back to +1.00 by next fall. Millers are offering +50 for harvest to get $6 flat. I would only sell basis right now if you know you are going to have to move a lot at harvest. Otherwise I would just hedge it so we can pick up carry to fall.
Cotton has rallied, but it just looks to be continuing its seasonal move not moving with excitement from the trade deal which is a bit puzzling. Exports have been great. USDA yields continue to drop. There is a lot being written about a drop of acres next year in cotton, but with prices where they are right now I do not agree with that. I have been writing for months that cotton has to have a deal with China to have a chance and I think the hesitation here is that we have to see some more action from them before the market will react. A lot of cotton has gone into the loan and we need to be selling some on a move above $0.70. If you are planning on planting cotton next year, we should also be selling new crop above $0.70.