Commentary

Rural Voice February 13, 2019

Recently there have been three ongoing themes that have been entering discussions about grain prices and commodities in general.  These are the US government shutdown, the China / US trade negotiations and US interest rates.   Each one of these issues brings an element of uncertainty to the marketplace.  Uncertainty can bring a lack of market participation and a generally quiet, low volatility market. 

The longest US government shutdown in history has now come and gone and the USDA is again reporting market data.  On Feb 8th they released various crop data including production and supply and demand numbers.  With the release of this data the market received clarity and measurable information in regards to various US crops.  Currently in the news headlines, there are reports that the US government may again be shut down due to a lack of co-operation between partisan law makers.  So while today we again have market data from the USDA, this may not be the situation into the future.  The USDA prospective planting report is to be released March 29th.   Hopefully this report is not delayed as market direction is likely to be tied to the planting intentions of the US farmer. 

Into the 2019/2020 crop season the soybean balance sheet shows large and likely growing inventories.  The key driver in maintaining or growing this surplus will be US planted acres.  Initial US soy plantings into this upcoming season were predicted at 82.5 million acres, down about 6.5 million acres from this past year.  Currently market participants are not expecting this dramatic of an acreage reduction in soys and expect planted acreage to be more towards the 84 to 86 million acre range.  If we assume these larger acreage estimates to be correct we will see ending stocks increase year over year, potentially reaching over 1 billion bushels, the largest carryout in history.  The increase in ending stocks between 84 million and 86 million planted acres is a difference of 100 million bushels.  To put this difference in perspective and to demonstrate the vastness of this surplus, consider this:  in 2013/2014 the total ending stocks were 92 million bushels.  Needless to say with ending stocks approaching or exceeding 1 billion bushels it is difficult to envision higher prices for beans.  Furthermore adding to the negative outlook for beans is increasing south American production.  While the Brazilian crop estimate has been lowered recently the combined soy production in Brazil and Argentina is about 13.5 million tonnes higher than last year. 

Corn, contrary to beans, has a friendlier pricing outlook potential.  Therefore we may see corn prices rally to try and buy the acres that beans will need to sell.  Heading into the Feb 8th report, many market watchers expected the USDA to drop the 2018 crop corn yields.  As expected the USDA did drop final corn yields from 178.9 bushels per acre to 176.4 bushels per acre.  China purchases continues to be an unknown, but there is much speculation that China could purchase 5 to 8 million metric tonnes of US corn and 300 million gallons of ethanol.  If these purchases do happen, their combined effect would be a reduction of about 350 million bushels of corn from the US ending stocks.  Not only would this help corn prices firm, but it would also help alleviate the oversupply in the ethanol market.  Ethanol prices are trading at the lowest value in a decade, as the industry is oversupplying the marketplace.  In 2012 the US produced 13.2 billion gallons of ethanol; comparatively they produced 16.1 billion gallons in 2018.   Overall the corn market has enough opportunities and production risks ahead that it may need to price in a weather premium into the spring. 

The China / US trade dispute is ongoing and markets seem to follow the headlines closely.  At times there are indications that a trade deal is close and at other times there are reports that a trade deal is far away.  At this stage, the whole situation is controlled by high level negotiators and their success or lack thereof will affect markets.  March 1st is the US imposed deadline for a trade deal before additional tariff levels increase.  On this date US tariffs on about $200 billion dollars of imported Chinese goods will increase from 10% to 25%.   The US President has called this a hard deadline, but as we see this date approach he has stated publicly that he could roll the deadline if a deal is imminent.  At the end of the day markets will likely rise on a deal and fall if no deal is reached.  With the no deal scenario commodity prices should see deflationary pressures due to a lack of markets.  Generally it seems most are pricing in optimism that a trade deal will be reached.

US interest rates have been viewed as generally hawkish, meaning the market direction has been for rates to become normalized at higher rates.  Recently with the uncertainty in trade deals, the drop in equity markets and a general lack of inflation, some of this expectation has been scaled back.  Various members of the US federal reserve have stated that things such as pauses in rate hikes could last for several months and that there is not much inflation in the US today.