Will China live up to Phase One promises?

By Doug Tenney, Leist Mercantile

Jan. 15 was supposed to be a big deal for U.S. farmers with the Phase One trade deal signing between the U.S. and China. U.S. Ag Secretary Sonny Perdue called the signing, “A bonanza for U.S. agriculture.” The “tale of the tape,” would say otherwise. Decades ago, grain and other commodity prices were spit out via ticker tape, not a computer screen. Closes at the CBOT in the two days following the trade deal signing detail soybeans closing 18 cents lower while corn declined 13 cents. One summary suggests the market is unimpressed with the details of Phase One — not exactly what U.S. producers had envisioned in their 20 months of waiting for the trade war to end. During this period, it was an arena which often shouted declining prices and stressed margins. The words, “need and price,” stand out in this agreement. Bottom line, it means China will be buying based on their needs and not upon what the U.S. wants to sell. China will be buying U.S. agricultural goods if and only if the price is a good deal in the world market.

China last month also announced they would be dropping their 2017 plan to aggressively manufacture ethanol in an attempt to reduce pollution. This now abandoned yet aggressive plan outlined the construction of 36 plants, which would annually consume up to 45 million tons of corn in ethanol production. China found it a hard sell to local communities as those total facilities would gobble up 1.771 billion bushels of corn for fuel instead of food. In the end, food won over fuel.

Jan. 10 brought multiple USDA reports to light, which included the monthly WASDE report, Quarterly Grain Stocks as of Dec. 1, 2019, and the Winter Wheat Acres Report. Ohio and U.S. grain producers were anxious to see the corn and soybean yield and harvested acres. Corn supply bulls were extremely disappointed as the U.S. corn yield actually increased to 168 bushels per acre, up 1 bushel from November. Also, corn exports were lowered 75 million bushels, not a surprise with weak weekly export inspections. It reflects a months long trend of multiple declines. Corn fed to livestock remains at too low levels when accounting for record animal numbers in the U.S. The U.S. soybean yield was also increased, up a half bushel to 57.4 bushels per acre. Trader estimates before report release anticipated both U.S. corn and soybean yields to decrease.

While this is weeks away, there are two upcoming reports. First, is the Annual USDA Outlook Forum held mid-February. Second, is the March 31 Acres Intentions Report. The first report will detail estimates of grain acres and production for the next 10 years. Also, livestock projections would be made for cattle, hogs, and chickens. At this conference, numbers will be released over a several day period. Likely gone will be the shock value and resultant 5- to 15-cent price change for corn and soybeans often seen at the 12 noon ET USDA report release. The second report will provide a better indication of corn, soybeans, and wheat acres for crop year 2020. The March report can easily provide a quick shock value to the market.

Mid-January cash values indicate Brazil soybeans are 10 to 17 cents cheaper than those out of the U.S. In addition, Argentina corn values are 20 to 22 cents cheaper than the U.S. Corn basis levels while dimes over the March CBOT for months in many Ohio locations, have stagnated since mid-December. Numerous locations have seen corn basis declines of 5 to 10 cents or more since early December. Producers remain tight holders of corn stored on the farm.

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