Grain prices are mixed this morning as trade deal headlines swirl and the complex (especially soybean prices) tries to rebound from the last few down days of trading.
“It is an ironic habit of human beings to run faster when we have lost our way.” – Rollo May (American psychologist)
New Trade Deal (Ironically) Doesn’t Help Grain Prices
Grain prices are mixed this morning as trade deal headlines swirl and the complex (especially soybean prices) tries to rebound from the last few down days of trading. To the obvious eye, the trade deal signed between China and the U.S. on Wednesday should’ve been a positive for grain and commodity prices in general, but the complex as faltered with many questioning the vague language and corresponding math (more on this in a bit). 
Also in the new trade deal camp, the U.S. Senate overwhelming passed the new trade agreement between the U.S., Mexico, and Canada, or the USMCA.  Unsurprisingly, the new North American-wide trade deal was praised by most agriculture groups.  This leaves only Canada to sign the new North American trade deal, but it should be known that the Canadian Parliament is not back in session until the last week of January. 
Not really moving soybean prices was Wednesday’s NOPA crush report from December 2019, which showed 174.8M bushels of soybeans were used. That was about 3.2M bushels more than the pre-report average guesstimate from analysts and it was also good for a 1.8% over what was used in December 2018. That said, through the first 4 months of the 2019/20 marketing year, the total crush volume is about 0.6% behind last year’s pace, whereas the USDA is targeting 0.6% growth from 2018/19.
In the wheat complex, some warmer weather in the U.S. Southern Plains could inadvertently restart the growth of the winter wheat crop in the region. While this is bullish for new crop 2020/21 winter wheat prices, I’m reminded by the record carryout of wheat around the world, and how that might cap any significant rally (at least above what we’ve already seen over the last few months).
Does the U.S.-China Trade Deal Mean Much?
If we’re looking at the language of the Chinese-U.S. Phase One trade deal signed on Wednesday, it’s very ambiguous. In Chapter 6 of the deal, item 5 states that “The Parties acknowledge that purchases will be made at market prices based on commercial considerations, and that market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases within any given year.”  Basically, it’s been argued that in this trade deal, China basically agreed to buying American whenever they feel like it. While many of us can agree that this new trade deal should be bullish for soybean prices, the opposite has happened in the past few days of trading since the trade was signed. So what the heck is going on?
In my opinion, Todd Hultman of DTN has done the best job of digging into the math around the trade deals, specifically as it relates to Chinese purchasing of American soybean exports.  Mr. Hultman explains that China, in past years, has never spent more than 51% of total U.S. import spend on soybeans. That said, while current soybean prices at the port are sitting around $10 USD/bushel as per the DTN chart below , one could generously assume that as China buys more America, soybean prices could theoretically improve. If that’s the case, then U.S. soybean prices would likely trade much higher than the $10 USD/bushel they’re at now, as Mr. Hultman points out.
Higher soybean prices in the U.S. should also drive Brazilian soybean prices higher, but that’s far from a certainty. That said, if we assume a bullish increase to $11/bu for an average price in 2020 and at 51% of total spend of the suggested $36.5 Billion would mean about 1.69 billion bushels bought by China (or about 46 MMT of soybeans if converting bushels into metric tonnes). Worth noting is that U.S. 2019/20 soybean exports through Week 19 are tracking 24% higher year-over-year with 23.24 MMT sailed so far.
Mr. Hultman argues that the more likely guesstimate of the percentage of total spend that China uses on soybeans could be closer to 40%, not 51%. Theoretically, the number of bushels that China buys from the U.S. with this trade deal in place would then be likely closer to 1.33 billion bushels of soybeans (or 36.2 MMT). This would be closer to the value and tonnage of U.S. soybean exports bought by China in 2016, but still a very high number (albeit certainly more bullish than what I suggested in my 2020 soybean prices outlook!) in today’s trade environment.
The Impact of the Trade Deal on Everyone Else
All things being equal, if the Chinese start to buy more American, despite prices being cheaper elsewhere, there may be a case for a World Trade Organizatoin challenge. Brazilian or Canadian soybean exporters could arguably make a case that the U.S. has an unfair advantage for trade with China.  However, I suspect the language in the trade deal mentioned above is intentionally written vaguely so as to combat any challenges at the WTO level. SIdenote: more global trade players are even questioning the credibility of the WTO anymore thanks to the U.S. dropping funding of its Appellate Body and stalling the selection process for filling six judicial vacancies on it. 
While the signing of the trade war deal has largely been centered around soybeans, as mentioned in Wednesday’s FarmLead Breakfast Brief, soybean and canola prices are facing some challenges from its main substitute: palm oil. A recent decision by India to restrict palm oil imports from Malaysia will likely disrupt tradeflows of all vegetable oils.  Put another way, to make up for the reduction in palm oil from Malaysia, India may import more canola oil from Canada, more soy oil from the U.S., Brazil, or Argentina, or even more sunflower oil from the Black Sea. India could also just import more palm oil from Indonesia. Speaking of India, make sure to dig into my outlook for pulses in 2020 on the FarmLead Insights page!
Have a great weekend!
At 8:20 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3042 CAD, $1 CAD = $0.7668 USD)
Mar Corn: +2.8¢ (+0.75%) to $3.783 USD or $4.933 CAD
Mar Soybeans: -0.8¢ (-0.1%) to $9.233 USD or $12.041 CAD
Mar Soybean Meal (per short ton): +$0.10 (+0.05%) to $300.70 USD or $392.18 CAD
Mar Soybean Oil (cents per lbs): -0.15¢ (-0.45%) to 32.88¢ USD or 42.88¢ CAD
Mar Oats: +0.5¢ (+0.15%) to $3.06 USD or $3.991 CAD
Mar Wheat (Chicago): +1.5¢ (+0.25%) to $5.668 USD or $7.392 CAD
Mar Wheat (Kansas City): -3¢ (-0.6%) at $4.818 USD or $6.2834 CAD
Mar Wheat (Minneapolis): -0.5¢ (-0.1%) to $5.498 USD or $7.17 CAD
Mar Canola: -2¢ (-0.2%) to $10.775/bu / $475.10/MT CAD or $8.262/bu / $364.28/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.