Weekly Market Update – February 7, 2020

The markets were not able to climb much higher this week, but at least we were able to hold on and find some support. Everyone was a bit nervous Monday when the Chinese markets were opening back up after being closed for a week for Chinese New Year. The fear was another leg lower in the US markets when the Asian markets sold off. Luckily the markets realized that last week’s selloff had the panic fully priced in and even though the Asian markets traded sharply lower, the US markets were able to hold on.

We get USDA’s February Supply and Demand estimate next Tuesday Feb 11th. We should see a continuation of declining old crop carryout estimates but will be tempered by large new crop prospects. USDA released a publication yesterday to shed some light on how they will be incorporating the Phase 1 deal into their supply and demand estimates. They broadly state that the trade deal will be a factor in formulating their estimates but then spend most of the rest of the publication explaining the parts they won’t be incorporating into their estimates rather than explaining how they will. In addition to the specific dollar amounts of ag purchases outlined in the publicly released agreement, there are specific commitments for individual commodities that will not be publicly released. Without the specific commodity information, USDA will not be able to include the commitments in their estimates. Truthfully, it is probably better for all of us anyway as we all want to see action not just promises. As China starts increasing purchases, USDA will use that action to adjust our balance sheets but not until then.

We did see some action this week by the Chinese, but not as much as we had hoped. China announced Thursday morning they were rolling back the tariffs on $75 billion of US goods which is an obvious positive step. Exports were good this week relative to expectations but there was no bumper Chinese buying spree to spark the markets and neither corn nor ethanol were included in the list of tariff reductions. Goods are still struggling to move into China as many workers are still scared to come to work. Panic may have subsided in the markets, but we still have some progress to make before their economy gets back to normal.

There is a clause in the trade deal that in the event of a disaster, either side can call a conference to renegotiate. There are rumors and fears that China may use that clause in light of the virus. Sources inside China have been indicating that decision will not be made until the end of the 1st quarter of 2020.

One positive thing for us is that it seems like all the negative has now been priced in. We just need something to go in our favor: virus under control, world economy showing positive growth, Chinese starting to make the purchases they committed to, anything! However, we have lost a lot of valuable time. We have three things that are quickly approaching: South American crops, new crop planting intentions, and delivery on the March futures contracts. We need to adjust our pricing objectives with these in mind.

Corn has managed to hover around $3.80 but unable to do much either side of that all week. Corn didn’t take as much of a hit on the coronavirus and its recovery has been slower as well. There has been lots of talk about what issues lower quality corn is causing in the Midwest and how much that is going to increase usage. Wet weather in Brazil is delaying the bean harvest and also delaying the planting of second crop corn. We need this pattern to continue for a while longer to have an effect.

Everyone that has basis against March or needs to move corn nearby needs to sell some old crop corn at $3.90. Everyone needs to sell some new crop corn at $4.00 Dec. We can buy $4.50 July calls for 6 to 8 cents to participate on the old crop rally when old crop is adjusted lower.

Soybeans have closed higher four days this week so far. It does not feel that exciting because they have not been big moves higher. Soybeans seem to have found significant support after the panic. However, now we are closer to a large South American crop hitting the market. They have a large crop in the field. A crop is not made until it is in the bin and they have had excessive rainfall that is already preventing some of the early crop from being harvested. However, we cannot hang everything on that. We need to reset our objectives. Basis remains strong, but has not been increasing at the rate we had seen earlier.

Everyone needs to price some beans at $9. We do not have time on our side anymore with the South America crop coming so soon. We do not need to do the whole crop, but everyone needs to be pricing some there! New crop we can still work above $9.50.

Wheat still has the production concerns around the world it did before the virus. It is hard to see how this virus will have much impact on wheat even if it spreads more. Wheat paid more attention to the strong exports. Australia’s export pace has exceeded estimates and their domestic supplies continue to drop to and are forecasted to reach very low levels midyear. Still targeting $6 on new crop wheat. No need to change objectives right now on wheat.

New crop futures are still trading above $5.50. If you have not done any, that is not a bad place to start.

With so much of the interior of China shut down to almost all movement, the textile industry is still struggling with the effects of the virus outbreak. As long as economic growth is not derailed, cotton should recover quickly once there is a handle on it, but not until then. Cotton also has a much higher correlation to movements in the equity markets than the grains and oilseeds. We had very good exports this week, but cotton was unable to respond due to the fears about China.  

Sell old crop cotton at $0.70!