I hope everyone had a very Merry Christmas! Let’s all have faith that 2020 is going to be the year that turns everything around for the better in agriculture! After suffering through these last few years we all need to remember that this was fun and will be again. We have to survive the tough times to be able to enjoy the good ones. 2020 is going to be a good one!!
News flow has been very quiet through the holiday week. The market seems to be getting more confident in a trade agreement being reached because it has not fallen apart. At the stage we are at, no news is good news. There is still some skepticism about how China is going to get to $40-50 billion in ag purchases per year, but most are agreed that this is going to be very good for us. When China joined the WTO, they were supposed to buy 9.64 mmts of wheat and 7.2 mmts of corn from us. When they did not, US filed suit and the WTO ruled against China. They are now finally expected to follow through on that commitment. This illustrates several things: 1) that China has a very poor record of following through on the commitments they make 2) the importance of the enforcement provisions of the deal. The enforcement is going to be more important than the purchase commitments made in the deal. Let’s hope Trump is as good of a negotiator as he has always claimed to be. I hope he cares enough about his legacy and not just getting to the election to be tough on the enforcement mechanisms.
Corn has been slowly working its way higher. With approximately 1.4 billion bushels of corn left in the field that will most likely remain until spring and no yield adjustment on the last report, USDA’s Jan report is much anticipated (Jan 10, two weeks from today). With that much corn left in the field, I think USDA will undermine their credibility even further if there is not a cut in yield. Demand is finally going the right way with more exports to Mexico after the ratification of USMCA, domestic feed demand going the right way with more meat exports to China and ethanol grind not slowing down anymore with everyone hopeful for DDG exports to China in the agreement. It feels like the tide has finally turned back in our favor!
Basis continues to ease higher. We have not seen many train emergencies but there is an overall lack of confidence in the railroad which is helping basis everywhere. Everyone needs to be scaling in sales when we hit $4 March and getting started selling 2020 crop!!
Beans have continued to march higher as the market gains confidence there is a deal done. It feels like we have been here before but every day that goes by that it does not fall apart we gain a little more confidence. Exports were at the bottom of expectations which is not bullish but not low enough to cause too many red flags. Weather in South America is very quiet. There are some trouble areas but they are not really growing or shrinking. Overall, there is a good crop growing in South America. Soybeans are approaching the price level to be competitive with corn acres in the US. We need that to continue as we get closer to spring. We need bean prices to be high enough to compete to keep us from planting 100 million acres of corn. That all depends on keeping this deal on track. A South America weather problem would be icing on the cake.
It has been many years since we have seen soybean basis in the Southeast continue to get this strong this time of year. We lost the top end of the crop with the hot dry end to summer, rail values are significantly higher than usual in the eastern corn belt, and the export market is strong. Once we get basis over the March contract, we will have picked up the easy carry and can start moving beans on basis. I would start scaling in sales at 9.50 Jan (9.60 March).
Many stories have been written that wheat may be the surprise in the China trade deal. It has shown the most strength on this light volume holiday week. Wheat has gotten a boost from headlines in the middle east as Morrocco and other countries lower import tariffs and tender for wheat. Russia lowered their export estimates for this year. Australia continues to battle record drought. US soft wheat acres are projected to be down again this year after setting hundred year lows last year. The US has managed to maintain a fairly constant carryout of around a billion bushels over the last several years despite declining acres. If there is a surprise in the trade deal, it could blow that apart.
Look for a slight adjustment lower in milling wheat basis in the Southeast if we make a crop on the acres planted. We did not set any records with planted acreage but there was a jump from last year’s record low. I would recommend hedging wheat above $5.50 (we are currently at $5.61). I do not recommend selling any basis yet until we know more about the crop.
If wheat has been the surprise in how much it has rallied, cotton has been the surprise on how little it has been able to rally on the trade news. The US and world economy looks a lot less shaky than it did last year at this time which should be friendly cotton and the trade deal should add to that. USDA report two weeks from today should help as we are looking for another downward adjustment in US yield. US demand has been strong and the trade deal seems to be on track. We are knocking at the door of $0.70 old crop and just above on new crop. Sales need to be made above $0.70 in both old and new. I do not see the drop in acreage next year that I have seen written in Farm Journal unless corn and beans really surprise all of us.