Weekly Market Update – October 24, 2019

Trade Update
We have seen more confirmation from the Chinese side that we are indeed very close to hammering out the details of a “phase 1” deal that will include large US ag purchases. However, we are still not getting many firm details to be able to price in. Rumors indicate China is planning to make $20 billion dollars of agriculture purchases in the first year of the agreement (in 2017 before the trade war they bought $23.8 billion) and then possibly increase those purchases to $40-$50 billion per year later once all the punitive tariffs are removed. This would be huge if confirmed, but we need to see more than just rumors. We have been very close before only to be disappointed. One thing that keeps me optimistic is how bad both sides need this right now. I was skeptical of getting a deal when it seemed like Trump could hold out until close to the election. I am very optimistic now that both sides have a massive amount of pressure to get something done. We need details and we need continued progress though.  

This has been another boring week in corn. The market cannot get any traction because we do not have any real data to trade on. We know yield is reduced, but have only guesses of how much. The market has been focused on the demand destruction that we do have estimates on like poor exports and ethanol plants shutting down. USDA has done a good job of estimating the loss of demand. No one has done a good job of estimating the loss of supply. There are still so many unknowns. We know there was a blizzard in the Dakotas where less than half the crop was mature. The growing season is over and it cut short a lot of late planted acres. Now the task of getting the crop out will not be any easier. We started off behind this year due to the lack of fall field work and next spring will be the same due to the late harvest. We were only 30% harvested on Monday compared to 47% on average. There is a lot of corn that cannot be harvested until the ground freezes. I expect that harvest pace to fall further and further behind. This story will continue to be dragged out instead of starting to get some clarity this time of year. USDA’s Nov report is not going to know much more than the Oct report did. The bullish news is slow and that is why the market has not been able to rally. The uncertainty should keep us supported while we learn more. With the reduction of the buffer in the soybean balance sheet and the prospect of a deal with China adding even more support, we do not need to be quite as scared about the 2020 acreage as before. With a projected billion bushel carryover in beans, we could have planted the whole country in corn, still had enough beans and produced enough corn to makeup for this year. Now that beans are tightening up, they cannot give up all their acres. A rising tide raises all boats.

No matter how bullish we get, we do not need to fall asleep on marketing. When it is scary to make a sale, a lot of times that is when we need to be selling. If you have sold enough of 2019 crop to get your cash flow worked out you can be patient, but you need to be looking at 2020. Dec 2020 trades around $4.10 right now. Aug/Sept basis next year is going to be strong. That should be close to $5 corn. Take a little risk off the table! If you have not priced any 2019 corn on this run, scale in some sales around $4. The market has given us a gift, we do think it will get better but we need to be scaling in sales.

Soybeans have benefited the most from the trade talk rumors. Where soybeans currently trade, they are at a price ratio with corn that beans should not be able to go up any more without pulling corn with it. Exports were disappointing this week but South America is almost tapped out of old crop beans so if any more are needed in China, they are going to have to come from the US. Dryness seems to be easing in some areas of South America but there are still some trouble spots. That is the one spot of bearish news in soybeans. The rest of the newsflow has been bullish. Soybeans are in worse shape than corn as far as maturity and harvest progress because soybeans field store significantly worse than corn. Harvest progress was reported this week at 46% this week (compared to the average of 64%). That is a 20% advancement from the week before as everyone concentrated on getting beans out before corn due to field loss potential. Much like corn, I expect the harvest progress to continue to fall further behind the average as many areas are not getting long windows between weather events and it takes much longer to dry out between events.

Everyone needs to continue to scale in beans as we are more than $1/bushel off the lows. Much like corn, if it is scary to sell because you know it has to go higher, you probably should be selling at least a little bit. We have come a full 180 on beans from everything going against us to now looking like we have a lot in our favor with the weather, trade progress, and demand. That can turn as quickly the other way and just as unexpectedly. We do not need to sell everything here, but do not sit on your hands completely either.

Wheat has had a rare time in the spotlight but has flattened out now. Wheat is rumored to be included in the basket of commodities to be purchased by China so it is sharing the tailwind with beans and also seen some tenders by Egypt which help world price. It is also planting time for winter wheat and it cannot give up all the acres. Rumors of upwards of 500k acres of spring wheat that is going to be mowed or grazed instead of harvested after the blizzards and a fund short also contributed to bullish momentum. New crop July futures at trading around $5.30. If you are planting wheat, similar basis to last year rolled to the dec or march and shipped Nov/Dec or Jan/Feb should turn a $5.30 hedge into close to $7 cash wheat. We need to be hedging wheat rather than cash selling new crop so we can lift if we do not get it planted or like the quality.

Cotton has finally had some sustained upward movement. China has made goodwill purchases of beans and pork but had so far left cotton out. They do not seem to be buying much from South America either. That may mean there are demand concerns with the slowdown in their economy or they are holding off making purchases in anticipation of completing a deal with the US. $20 to $50 million of agriculture purchases is going to have to include a lot of cotton. Over the last week or so some buyers that have known or rumored associations with the Chinese government have been more actively bidding domestic cotton. This could be a preview of preparations being made to start bigger purchases. Most of the merchants have been aggressively bidding good recaps in the Southeast as the first cotton picked has had exceptional color grades. Everyone is a bit concerned about the quality of the Texas crop after the tough summer. Check your grades and get recaps out! We need to be thinking hard about getting some pricing done in the 68 cent range. We do not want to start below at least 70, but we may need to be scaling in before that.