Feb. 4 – Will the U.S.-China Trade War End this Month?

Grain markets this morning are mostly lower as the market digests no trade war talks this week, albeit is getting some fresh USDA data for the first time since mid-December!

“If you want a happy ending, that depends, of course, on where you stop your story.” – Orson Welles (American actor)

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Grain markets this morning are mostly lower as the market digests no trade war talks this week, albeit is getting some fresh USDA data for the first time since mid-December!

This Friday, we’ll finally get a WASDE report from the USDA but we’re still waiting on some export sales and shipments from the past few weeks. That being said, the government could easily shut down again on February 15th once the three-week spending bill expires and we’re back to a figurative black screen of nothingness in terms of export activity. In the meantime, worth commenting on is the fact that soybean prices saw their best prices since June thanks to newly-announced sales to China (more on this later).

One thing that’s a little bullish in the canola camp is some recent estimates from Strategie Grains for European rapeseed production. The firm is currently pegging the 2019/20 EU rapeseed harvest at 22.2 MMT, basically flat from 2018/19. This, despite the seeded area is expected to drop 11.5% year-over-year to 15M acres. So, if production is flat, why is this bullish? Quite simply, if there are fewer acres planted, then it’s less area to make up for the poor conditions in other regions.

Switching back to some of macro factors, the Wall Street Journal is reporting that oil being transported via trains in the U.S. is starting to pick up again thanks to shipments from Canada. This is a result of delays in construction (let alone approval) for a few pipeline projects, namely TransMountain and Keystone XL. [1] The most recently available data from the EIA for October 2018 suggests that an average of 718,000 barrels of crude was transported on U.S. railroads every day! This is up 88% year-over-year, albeit still below the peak of oil-by-rail in the U.S. of 1.1M barrels per day in October 2014.

The economics don’t support this process though. According to energy investment bank Tudor Pickering Hotl & Co, it costs, about $20 USD / barrel to send oil by railroad from Canada to the U.S. Gulf Coast, versus $12.50 via a pipeline. Often, this railroad price can be higher as many companies don’t like to sign long-term contracts with the likes of CP and CN, given the volatility of Canadian regulation and oil prices themselves.

Sidenote: CP Railway posted a record profit in 4Q2018. [2] CN Rail also recently beat analyst expectations for the 4Q2018 with some surprising profits on more oil movement in the quarter. [3] I shouldn’t bias you completely though as CN is also forecasting to move a record amount of grain for the 2018/19 crop year. Moreover, the blame shouldn’t be laid on the railroads here for doing well and making money – they’re just playing the game in front of them (a game that doesn’t involve pipelines!).

Wheat Prices Grinding Higher

Last Monday I talked about how wheat prices were finding more strength and that trend continued last week, as the complex continued to inch higher.

SovEcon recently raised its estimate for the 2019/20 wheat harvest in Russia to 80 MMT. This is a stark contrast to the 67 MMT that was forecasted by the Russian Ministry of Agriculture just a few days ago! The research agency says that good weather this winter, accompanied by a lot of snow cover, has helped production potential.

SovEcon also mentioned last week that available wheat stocks in Russia are now sitting at 21.7 MMT, down 27% year-over-year. [4] This is attributed to the smaller 2018/19 wheat harvest in Russia and the aggressive pace of wheat exports that I talked about last week. That being said, SovEcon is expecting the depletion of available wheat stocks to slow as they’re seeing this pace of wheat exports out of Russia slow as prices are starting to climb and become less attractive to international buyers.

On that note, Egypt’s most recent purchase of wheat did not include anything from Russia. The GASC instead bought 360,000 MT, split evenly between France and Romania-origin. The average delivered price paid was nearly $263 USD / MT, or $7.15 USD and $9.35 CAD per bushel if converting metric tonnes to bushels.

Coming back to the Black Sea, Ukraine has done a pretty healthy job of shipping grain from their record harvest this past year. Through Feb 1st, Ukraine has shipped out 23.7 MMT of all grains from their 70.1 MMT collected by their farmers. These shipments include 11.4 MMT of corn, 9.6 MMT of wheat, and 2.7 MMT of barley. Specific to wheat, we know that Ukraine is getting precariously close to the export cap set by the government earlier this crop season. The closer we get to that limit, there could be some more fireworks for wheat prices.

Finally, tomorrow morning at 8:30AM EST, we’ll get an inventory report from Statistics Canada for available grain supplies as of December 31st, 2018. The market’s average guesstimate heading into the report is for 23.4 MMT of wheat (-1% YoY) and 14.7 MMT of canola (+6% YoY).

Trade War Compromise Still Seems Unlikely

Over the weekend, China’s two state grain buyers, Sinograin and COFCO, each announced that they had bought more than 1 MMT of American soybeans. [5] They continue to use it as a sign of goodwill towards the ongoing trade war negotiations, which are supposed to continue in China in the next week or two. Nothing is really going on this week as it relates to the trade war though as this week is Chinese New Year and not much business is being done. U.S. President Trump says that he’s optimistic on finding a deal before the tariff truce expires at the end of this month. [6]

At this point though, I am less optimistic. I was wrong back in April thinking that President Trump would try and compromise with the Chinese to end the trade war. Thus, my thinking has evolved to that he’s very unlikely to cave in this round of negotiations. My gut says that these sort of soybean purchases by China’s state grain-buying agencies will only support his domestic narrative that he’s trying to get a better deal for American farmers.

US China Trade Import Exports Balance

On the flipside, I think President Trump is telling his U.S. trade negotiators to tell their Chinese counterparts that they’re going to have to do a lot more than a few million tonnes of soybeans. Trump is focusing on closing the trade deficit and IP, and from the information I’m reading from a variety of sources, the Chinese still aren’t giving up enough.

US China Trade War Deficit

Thus, I’m led to conclude that without significantly more concessions from China in the next 4 weeks, Trump will implement a 25% import tariff on the remaining $200 Billion of Chinese goods not yet taxed. [7] While my position could change before the end of February, this is what I’m seeing today in this whole trade war debacle.

On a final note, I won’t be writing the Breakfast Brief for the next week but we’ll be back to regular-scheduled programming for Wednesday, February 13th.

Have a great week!

To growth,

Brennan Turner

CEO
FarmLead
TF: 1-855-332-7653
contact@FarmLead.com
@FarmLead on Twitter

At 7:30 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3088 
CAD, $1 CAD = $0.7641 USD)

Mar Corn: -0.5¢ (-0.15%) to $3.778 USD or $4.944 CAD
Mar Soybeans: -0.8¢ (-0.1%) to $9.17 USD or $12.002 CAD
Mar Soybean Meal (per short ton): +$0.70 (+0.2%) to $312.50 USD or $409.01 CAD
Mar Soybean Oil (cents per lbs): -0.16¢ (-0.55%) at 29.73¢ USD or 38.91¢ CAD  
Mar Oats: +5.8¢ (+2%) to $2.943 USD or $3.851 CAD
Mar Wheat (Chicago): -1¢ (-0.2%) to $5.233 USD or $6.848 CAD
Mar Wheat (Kansas City): -0.5¢ (-0.1%) to $5.083 USD or $6.652 CAD
Mar Wheat (Minneapolis): -0.1¢ (-0.02%) to $5.743 USD or $7.516 CAD
Mar Canola: -0.5¢/bu (-0.05%) to $10.936/bu / $482.20/MT CAD or $8.356/bu / $368.43/MT USD

COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.

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