Weekly Market Update – May 10, 2019

We thought we had seen some bad weeks, but this one may top them all. We started Sunday morning with a tweet from Trump saying China was jerking us around and he was going to increase the tariffs in response. China said they would not negotiate under threat and everyone feared they would not come this week. Even after the rhetoric, China did send the envoy including the Vice Premier later in the week. Yesterday in the midst of the selloff, news started circulating that the Chinese president sent Trump a “beautiful letter” with his desire to come to an agreement and immediately the equity markets and commodity markets came well off the lows indicating a lot of the weakness was due to the escalating trade dispute. This morning Trump tweeted that we were making so much money from the tariffs, he would buy all the ag commodities and send them to countries as aid.

Today we got USDA’s May supply and demand update with the first glimpses of the new crop balance sheet. It was bearish across the board. There are a lot of questions about USDA’s yield forecast with the crop as late as it is, but just about all numbers were above expectations and the market reacted. We are trading well off the lows, but still a tough day after so many before it.

With all the additional noise caused by the rhetoric of the trade war and politics, we need to remember at the end of the day this market is driven by supply and demand. Emotions can drive it in the short run, but supply and demand rule in the long run. We have flipped from a situation of not enough supply this fall to one of way too much supply now. The speed that we flipped from one extreme to the other is what has been so jarring. To name a few of the factors: South American production rebounded from last year and they made record production of corn and beans adding over a billion bushels of additional production. Ethanol margins shrunk and on top of that the EPA granted so many RFS wavers that they undermined the renewable fuels mandates. The trade war has dragged on longer than anyone expected incentivizing China to find other sources. There are many more that can be listed, but we need to focus on what we have left that can go our way.

Where do we go from here?
We have too much supply and that is why the market keeps getting pushed lower. USDA’s massive new crop carryout is assuming 92.8 million acres and a 176 bushel yield. The University of Illinois research made the case for needing to use a sub 170 bushel yield. 92.8 million acres looks like a pipe dream with only 23% of the crop planted last Monday compared to 46% five year average. The market has not panicked yet because at a 2.5 billion estimated carryout, there is a lot of margin for error. With prices where they are and insurance base price at $4, prevent plant looks like the best option for many Midwestern farmers especially since there was almost no fall field work done. Part of the weakness in beans is from fears that any acres that do not get planted in corn are automatically going to go to beans. The market is trying to discourage that and has done a good job thus far. Our best hope right now is for continued rains to get the corn acreage number down enough to absorb the excess supply. We are either going to see a massive amount of prevent plant acres or we are going to get some kind of rally between now and the end of the month as the funds begin to worry about acres to keep the prevent plant decision from being so easy for the Midwestern farmers. Please see comments below the report numbers from Allen Douglass for a more in depth prevent plant discussion.

Bottom Line
We must be ready to aggressively sell any rally we are given between now and the end of the month. We need to scale in sales and can buy calls later if the market breaks once we get past the planting window.  




Allen Douglass Comments