Weekly Market Update – February 21, 2020

According to the Chinese the virus is starting to be contained there, but there are more concerns about other countries now than there were last week. However, it is estimated that 95% of the Chinese economy is back running. That is a lot better than it could be, but we need every ounce of growth we can muster to keep the world economy growing. Morgan Stanley estimated the virus could cut Chinese economic growth in half. Chinese officials have said they are making arrangements to get the backlogged imports unloaded and moved. There are still ripple effects throughout the world supply chains that the market is trying to assess. When the virus first hit, all markets and all asset classes dropped, equities, metals, energies, grains, oilseeds, everything. The stocks after dropping initially, rallied back to make new highs in most markets other than China pretty quickly after the initial shock. None of the commodities though have been able to recover. This includes energies, metals, and grains. There is not a real clear understanding of why. It is like the equities are not pricing any concern about the virus, but the commodities are all prepared for the worst. The positive thing here is that we have a very negative scenario priced in the commodities now, so we should see some upside when things start to go better.

China announced tariff exemptions on 696 US goods including pork, beef, soybeans and others. This is progress but I think the market is skeptical about the pace of progress. White House adviser Kudlow is quoted as saying Chinese President assured Trump during a recent call that China will still meet its Phase 1 trade deal purchasing targets. Despite this assurance, there are many rumors about China enacting some of the contingency provisions of the deal due to the virus outbreak. The market will remain skeptical until we see actual purchases ramping up. Trump tweeted today that if there will be more federal aid coming to farmers if the trade deals have not “fully kicked in.” This is after Sonny Perdue has made many comments rejecting the idea of another MFP payment. I do not think this tweet gives the market a lot of comfort that the Chinese are about to start buying all of our agricultural goods.

USDA released their acreage estimates and first balance sheets this morning at the Outlook conference. There were no surprises as everyone was expecting big numbers and that is what we got. They pegged corn acres at 94 million and yield at 178.5. They upped usage significantly from this year but still had carryout at 2.637 billion bushels (compared to 1.892 this year and 2.221 last year). This would be the highest ending stocks since 1987 if realized. There is a lot that can change before that is known, but this is why the new crop contracts have moved less on moves higher than old crop. Exports were very good for corn this week, well above expectations but no China.

As we quickly approach first notice day on the March contract, we have not approached our targets of $3.99 or even $3.90. Next week we are going to have to bite the bullet and get some priced. We are running out of time. We are 60 days away from US weather even being a factor and we have a South American crop that is coming along with no major issues. We can still work new crop orders close to $4 on the December, but I want to have more priced before planting intentions at the end of March.

USDA’s initial projections may have been bearish corn, but they were fairly positive for beans. We have seen a rapid drawdown to US stocks from estimates over 1 billion bushels last year down to 425 million this year and USDA’s initial projection for 2020 crop even lower at 320 million bushels. That is with a 200 million bushel increase in exports from last year to this year which is a significant increase but if the Chinese do buy as the Phase 1 agreement seems to state, there will be more. But China has made only minor progress in clearing the way for purchases, not actually buying much yet. The lack of buying by China seems to be having the biggest weight on prices. The crops in South America are big and Chinese firms are going to be buying beans from down there unless specifically directed by the government to buy from the US. However, beans do not face nearly as much pressure from the upcoming US crop as corn seems to.

Price old crop beans at $9. We have gotten close several days this week. Basis is very strong but has leveled off. Processors should be quick to jump to the May contract to stay competitive for bushels. Be patient on new crop beans.

Wheat showed some life again this week as Australia’s wheat harvest is complete. The crop totaled 15.17 mmt which is the smallest since 2008 and compared to a harvest of 32mmt only three years ago. Some analysts think the crop is actually below 15 mmt. At the outlook conference, USDA dropped planted acreage projecting ending stocks at 777 million bushels (crop planted in 2020) compared with 940 million this year (crop in the field now) and 108 million bushels last year (crop in the bin). We have been trending lower on acres for the last several years but demand has been trending lower too. Breaking this far below the billion bushel threshold will be a key level and signals a significant tightening for wheat. With additional problems elsewhere in the world, wheat has some significant potential in the long term. In the short term, for the crop we have in the field we need to be very mindful of our pricing targets. The strength in the US dollar is making it hard for wheat to find a sustained rally despite the fundamental issues. We continue to recommend working orders at $5.75 and $6 for new crop.

Cotton is usually very closely correlated with the equities, but global equities have almost all recovered from the virus scare but cotton has been unable to so far. The concerns about getting supply chains back running smoothly is creating too much uncertainty for cotton. US acres should be friendly for cotton with a big shift toward corn taking some cotton acres. USDA estimated cotton acres next year at 12.5 million acres down from 13.74 this year. Exports have been excellent, but we need to get the virus contained or at least have some more confidence in global growth. Exports were strong, but China has not been a buyer, we also need China to start buying. Be patient on cotton.