Weekly Market Update – May 8, 2020

This week has been another roller coaster, but much less negative than the last few. The big negative early this week was very hawkish talk from high level administration officials that we would make China pay for all the damage the virus has done using tariffs and any other leverage we have on trade. A re-escalation of the trade war would not be helpful for the ag markets and they were rightfully very concerned by that kind of talk. As the week went on, the tone changed significantly from the US side to sound much more conciliatory. Last night, Bloomberg reported that “The top trade negotiators for China and the U.S. pledged to create favorable conditions for implementation of the bilateral trade deal and cooperate on the economy and public health.” The Chinese Ministry of Commerce reported that the Vice Premier talked directly with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin by phone and agreed to maintain communication. This was the first time these two high level officials have spoken directly by phone which is a very good sign. China is currently setting records for shipments out of Brazil and still cannot get enough to maintain their domestic usage. At this furious pace of exports, any hiccups will be extremely dangerous to the Chinese with only one supplier. Virus numbers are climbing in Brazil raising the possibility of a major logistic issue. The statements by the administration early in the week may have been a signal to the Chinese that we are starting to get some leverage back. I just hope we do not overplay our hand. Despite all the questions about if it is even possible to reach the level of purchases the Chinese agreed to, both sides have stayed very adamant they are going to. The market is still skeptical until we see a lot of cargoes shipped. They have bought some, but not enough to move the needle yet.

We will get USDA’s May supply and demand next Tuesday at 12pm. This will be a big report as it will include USDA’s 2020 crop estimates for the first time. Everyone is expecting carryouts to be big. They will use the acreage from the prospective plantings report and try to estimate the loss of demand. The market is expecting it to be ugly so the market reaction will be how it compares to those expectations.

Gasoline consumption is finally starting to rebound. It still has a very long way to go, but is finally trending in the right direction. We can paint a picture of some very positive ethanol consumption if we get a few things to fall in our direction. This is a long shot as we still have a lot to overcome in the short term but in an effort to find something positive in the future to shoot for, it is worth discussion and the thought experiment. Assuming we get a very robust economic recovery as things continue to open, I think flying and all mass transit will be much slower to come back than individual driving. Cars on the road will contribute more to ethanol demand than any other mode of transportation. The timing of the recovery is still hard to predict. I hope it will come in time to help manage the crop we have growing in the field, but that still seems like a longshot at this stage. However, many things are looking brighter each day. Hopefully that trend will accelerate.

It is forecast to be record cold in many parts of the country this weekend. The crop is being planted quickly this year so there will most likely be no major planting rally. We still have a long way to go to make a crop and planting is just one step. The market is taking note of the cold weather and pricing in a risk premium for the growing season as well as the optimism from trade progress. Our best chance for a bigger weather rally comes between now and late June when we get updated acreage.

Continue to sell small, and sell often on cleaning up old crop. $3.25-3.35 needs to be sold. It is very far from what we want to be selling, but we have to be realistic with our expectations. The potential for loss of demand and increase in supply has created significantly more downside risk than we face in normal times when demand is much more predictable. We need to be hedging new crop $3.50 and above. Basis should help us some on new crop since no matter how many acres they plant this year, we will be the first to harvest and so we have a jump on the new crop.

Soybeans still have much better fundamentals than corn, but have not traded like it very much. The record weakness in the Brazillian currency and only small purchases by the Chinese have not helped that market out. If either of those things change, beans should react explosively compared to corn. If you need cash, be scaling in old crop sales as the market has rallied more than 20 cents in two days. Be patient on new crop.

Wheat has not given us the expected pop after first notice day. Russia has been getting some rain and also the US condition ratings did not drop as much as expected from the freeze a few weeks ago. I think it is still possible to see effects from that as we approach harvest. Many that we talk to in the Midwest remain adamant the crop is not there. We have so few acres in the US this year there is little room for error. $6 was our previous target which we do need to lower, but I still believe we will see a move above $5.50. We need to be a seller there and be hedging some 2021 wheat above there too. New crop basis for harvest is getting tight, but since demand is staying strong fall bids should stay close to triple digits into the flour mills.

Cotton led us down during the panic and has tried to maintain positive trade as things look to open back up despite a few setbacks. We had huge exports again this week on cotton as China looks to try to get back rolling. Cotton continues to be a good barometer of how the trade is feeling about the recovery. Nothing to do here on cotton as we are basically growing it for the government at these levels. Acreage is going to be way down this year and a strong economic recovery could leave carryout tighter. Right now though, we need to see US shopping come back before we have a chance to trade back to exciting levels.