What the heck happened with the trade deal?!?
I think this is the question most asked this week. Wednesday, after the signing of the deal, was the first look we were able to get at the language of the deal. Honestly at first look, the language was more contractual than I had expected. However, there was something the market did not like or believe as all the markets sold off for two days after the signing. Funds were major sellers on both negative days.
Before discussing the negatives that the market seems so concerned about, I want to mention that we are on much much better footing than we have been for the last two years. If we got Chinese demand back even close to where we were before the trade war, it would significantly help our balance sheets. The agreement states explicitly that China will buy $36.2 billion of agricultural goods in 2020 and $43.3 billion in 2021 (2017 baseline levels were at $23.8 billion). There does not seem to be any wiggle room in the text. They also agreed to (finally) honor the commitment they made on Ag purchases as a condition to their entry into the WTO. China has made a lot of agreements in the past that they did not follow through on and this one leaves the tariffs in place to help aid the enforcement of the agreement. If you believe China will follow through on those commitments, the market does not have that priced in and will need to go a lot higher. If they follow through on half the commitments in this agreement, it will be a very historic moment in history. The market is obviously skeptical so I will discuss the reasons for the skepticism but I did not want to discuss the negatives before mentioning how big this could be.
I think the biggest reason for the skepticism came soon after the actual signing when China had a press conference and said they would be making their purchases based on “market conditions and needs.” They have had to diversify their agricultural suppliers through the trade war and they seemed to be signaling those new suppliers that they were not going to be hung out to dry. They seemed to be saying they will continue to buy from multiple countries and not just from the US. Their hog herds have been decimated by disease and their demand has been reduced so how can they meet the commitments they just made with us and still be buying anything else from other countries? The math doesn’t add up. Also either party can terminate the agreement upon written notice. Both sides wrote the agreement because it is beneficial to both sides. China agreed to the ag side and other considerations because they want relief from the tariffs and the pressure we had put on them. The tariffs stay in place with breaks as an enforcement mechanism so they cannot just walk away immediately but if conditions change where they feel they have the upper hand, there is the danger they do walk away. The market is not willing to price in two years of Chinese purchases until we see some evidence of follow through, not just the paper being signed. There is also the distinct possibility that they are playing to the market to keep prices from jumping or at least trying to minimize the effect. If this is the case, we have mechanisms in place to prevent them from being able to secretly buy beans while publicly saying things to try to keep prices down (lessons learned from the Russian wheat robbery in 1972).
The funds were major sellers this week. They are adding to their short position in corn and big sellers in beans. They are all betting China does not follow through on the commitments. I think we fall victim to the “if it seems too good to be true it probably is.” I have been writing for months now that we need a trade deal. Now we have a trade deal and what we need is evidence it will be followed. We had good exports this week, we need more weeks of that to convince the market this is real.
Our objective on March corn is still $4. Have orders working up to $4! Whenever you sell 2019 crop, sell some more 2020 corn. USDA’s “Final” 2019 crop estimates still left many unanswered questions and that crop should continue to get smaller. But the market will soon start focusing more on new crop acres than reconciling the 2019 crop.
Work soybean orders above $9.50 old crop and close to $10 on new crop. We do still have upside if China follows through on commitments, but we cannot afford to bet everything on China following through on their word as we could pave a road with all the agreements they did not follow. South American weather has been non threatening. Their crops continue to grow under good conditions.
HEDGE NEW CROP WHEAT HERE! Have orders working up to $6. You have to go back before 1906 to find less wheat acres, but we have been losing demand as well as supply so the wheat balance sheet is not critical.
With acres projected to drop next year in the Midsouth and world economies growing, cotton domestic fundamentals look better for next year. New crop cotton trades above $0.72 and old crop is back above $0.71. We need to be scaling in sales above 71 in old crop.