Commentary

Rural Voice April 9, 2019

Another month has come and gone and the key trade deal between China and the US is still yet to be completed.   It seems the markets are settling into a tired and weary trade, moving away from inconsistent headline news, which at times appears to be optimistic, then disappointing.  Recently President Trump announced that a China trade deal may be completed in 4 weeks.  Needless to say the market response was muted and cautionary.  It appears that market players will no longer trade “deal” rumours.  They will wait until trade progress is a fact before getting too committed to the idea that exports to China will be resuming. 

Even if a trade deal is completed, it is possible that China may have limited interest in purchasing large volumes of US beans anyway.  South American beans are priced very competitively to China, trading at prices much lower than current US offers.  Argentine production is up dramatically year over year, with local yields strong, similar to Brazil.  These strong yields increase South American production by 30 million tons over last year.  Therefore when China comes to the market they’ve got no shortage of offers.   Export competition is only part of the story about Chinese usage.   African swine flu continues to lower the Chinese hog inventory, with current estimates suggesting that the Chinese herd is down potentially 20%, even as the outbreak continues to spread.  With faltering pork production, Chinese demand for feed ingredients and therefore by extension soybeans, may also decline, further limiting their soybean purchases.  When considered as a whole, there are many factors that are weighing negatively on soybean prices.   On a positive note, the most recent USDA report showed US soybean planted acres falling this spring. 

The USDA released their prospective planting report on March 29th.  This report provides the marketplace with an early estimation of the US farmers planting intensions for the upcoming growing season.  Following up on the soybean discussion above, the report showed growers responding to market prices and the bearish bean outlook, with soy planting estimates substantially less this season.  Year over year the US farmer was forecast to plant about 4.5 million less acres of beans.  Conversely, US farmers were forecast to increase corn planting significantly, increasing acreage just shy of 4 million acres.  Most notably in the corn planting intensions, were the states of North and South Dakota, both increasing acreage by 900,000 and 700,000 acres respectively.  Interestingly, North Dakota is the state with the largest planted acreage of principle crops, with even larger planted acreage than the mighty agricultural state of Iowa.  Its prospective planting acreage is about 24.5 million acres.  North Dakota produces more than half of the US spring wheat and durum crops.  It is forecast to plant about 4 million acres of corn, 6.5 million acres of beans and 6.7 million acres of spring wheat.

Parts of the US corn belt have been hit with devastating floods.  These floods occurred after the USDA surveyed farmers for the planting intentions discussed above.  Due to these floods there are thoughts circulating that corn plantings will fall and soy acres will increase.  Regardless of how the mix might change for planted acres, the market seems indifferent today, as prices languish with little volatility.   The bearish (negative) sentiment towards grain prices is just so significant that events (such as this flooding) that once would have caused markets to rally sharply are just not impactful to market speculators at this time.  This is because:  grain inventories are high, US exports face tough export competition, it’s early in the season and there is plenty of time for fields to dry and demand has been reduced.  As mentioned Chinese demand is likely to continue to falter and US interior corn demand has been reduced as the flooding has idled 13% of the US ethanol capacity. 

So will the market eventually be concerned about production potential and add risk premiums to the grain markets?  Well the US flooding story is going to potentially surface again as of this writing.  The Dakota’s, Minnesota and Wisconsin are forecast to get some heavy snow accumulation (up to 1.5 feet) in early April.  At this time of year you would expect melt to occur rapidly and from this flooding is possible to reappear.  If this occurs are we close enough to seeding time to get the market to take notice?  Large speculative funds continue to be aggressively short grain futures and at this time they expect prices to continue to drift lower.   Producers on the other hand continue to be light sellers of grain and are very patient with their ownership.  Will the producer’s patience payoff?  First let’s get the crop planted, determine acres and from there summer weather will give us our answer.  However we all know that history tells us not to necessarily count a crop in the bin before it’s even in the ground.

Wheat crop ratings are now being presented and the US wheat crop has been improving with the warming weather.   In regards to wheat, the US ending stocks of soft wheat continue to fall dramatically and the carryover will be the lowest in many years.  Some forecasts estimate that the US SRW crop plantings are the lowest since 1984.