Jan 15 – Trade War Deal Still Has Many Doubters

Grain markets are mixed ahead of today’s historic trade war deal signing between the U.S. and China in Washington.

“I don’t reject caution, but you also have to be careful about caution because there’s a stage when it turns into paralysis.” – Yair Lapid (former Israeli Minister of Finance)

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Trade War Deal Still Has Many Doubters

Grain markets are mixed ahead of today’s historic trade war deal signing between the U.S. and China in Washington.

Wheat prices are finding support on reports that Russia will limit grain exports to 20 MMT from now until June as means to ensure domestic food security and limit food price inflation. [1] While Russia’s grain exports for the period is estimated to come in somewhere between now and the end of June, the point is that the government intervention/regulation is seen as a negative construct, creating non-supply or demand factors that could impact wheat prices.

Good rains in Brazil this past week is putting some pressure on corn and soybean prices. This is especially true for corn since the dry weather in the south is creating some serious production concerns for both the current crop and the safrinha second crop harvest. [2] Looking internationally though, Brazilian corn farmers are worried about the huge loss of a demand partner in Iran, after the country publicly severed any corn purchasing plans from Brazil after Brazilian president Bolsonaro publicly supported the recent killing of Iranian military leader (and terrorist) Qasem Soleimani. [3] Annually, Iran buys about $2.2 Billion USD of Brazilian corn, soybeans, and beef from Brazil.

Trade War Deal Cautiously Celebrated

Later today, U.S. President Trump and Chinese Vice-Premier Liu He will sign the Phase One trade war in Washington. While you might be wondering why it’s not Chinese President Xi Jinping that’s signing the document, you’d be among the many who are doubting the efficacy of said trade war deal. [4] Nonetheless, deal is worth celebrating a little bit as it market more than 18 months of embroiled global trade that impacted more than just the U.S. and China. [5]

The doubters out there though are questioning if China can really follow through on the enormous amount of American goods that they’ve committed to purchasing. [6] Many analysts only think that to reach the $200 Billion in increased purchasing of U.S. goods – including $40B – $50B of U.S. farm products – China will have to divert away from purchasing from other countries. For example, energy imports from the U.S., including crude oil, ethane, liquefied natural gas (LNG), and liquefied petroleum gas (LPG), would have to triple to meet the $25 Billion/year target.

From the Chinese perspective, the signing of this trade war deal and the subsequent increase in purchasing of U.S. goods will put negative price pressure on their domestic market for the same commodities. This is visually displayed in the chart below from JCI, a Chinese consultancy firm. On the flipside, part of the trade war deal includes that the U.S. drop the “currency manipulator” label it put on China earlier this year, which in doing so has helped the Yuan reach its strongest level since July. [7]

The trade war deal will skyrocket Chinese imports, according to JCI

Specific to agriculture, the fine print of this trade war deal is still very much unknown, which is what grain markets are being a bit cautious about getting too bullish. [8] Historically, China has bought a lot of American agricultural exports, but nothing at this level, hence the continued doubt of whether or not these large volumes can be realized. [9] Further, there will be no documentation in the Phase One trade war deal documentation of a specific price point or timeline that China has to buy the U.S. goods by.

All things being equal, Time Magazine’s headline this week may have said it best: “Trump’s ‘Phase One’ Trade War Deal with China Won’t Stop Trade Wars from Being the New Normal”. [10] That said, Europe’s new top trade negotiator, Phil Hogan, wants to avoid any trade war with the U.S., which might be a bit tough given the EU’s trade surplus with America is widening. [11]

Soybean, Canola Prices Facing Resistance

Today, we’ll get the NOPA crush report for the month of December and the average pre-report guesstimate from analysts is for 171.644M bushels of soybeans used (or 4.671 MMT if converting bushels to metric tonnes). This would be a solid improvement from the 164.91M bushels of soybeans crushed in November. However, keep in mind that this was more than 7M bushels below what analysts were expecting to see.

For canola prices, Canadian crush volumes have supported a bit of a price move of late for the oilseed, which in turn has been because of some strong canola crush margins. [12] Therein, this has helped make up for some weaker canola exports, which are now running nearly 15% behind last year’s pace through Week 22 with just 3.7 MMT sailed. [13]

However, canola prices might have been artificially supported by said crush, because said crush is actually completely wrong. The Canadian Grain Commission said this week that incorrect reporting by “primary licensees” meant the 4.86 MMT of disappearance is likely overstated by about 700,000 MT. [14] With this lower number realized, it might put 2019/20 Canadian canola ending stocks back up above 4 MMT. Frankly, this adjustment puts me more in the “break it year” from my 2020 canola prices outlook.

Thinking more globally, vegetable oil prices in general have rallied over the last 3 months, adding about $100 USD/MT depending on the type of oil. Palm oil has seen the biggest move though, reducing its spread to rapeseed oil by 50% from $360 to $180/MT while the spread to soybeans has fallen by about 75% to just $40 USD/MT.

The reason that the spread was so high to begin with was because palm oil demand had a banner year in 2019, seeing a consumption growth rate that was double the growth rate in production. As palm oil got more expensive, international buyers started to buy up substitutes (i.e. soy oil and canola or rapeseed oil). That said, the USDA said last week that the “current price strength (in vegetable oils) is expected to continue until growth in palm oil supplies exceeds demand.” [15] What this basically means is that canola oil prices and crush margins will likely remain fairly strong, albeit not as much as we once thought (and as mentioned above!).

To growth,

Brennan Turner
TF: 1-855-332-7653
@FarmLead on Twitter

At 7:50 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3075 CAD, $1 CAD = $0.7648 USD)

Mar Corn: +0.5¢ (+0.15%) to $3.895 USD or $5.093 CAD
Mar Soybeans: -2.8¢ (-0.3%) to $9.395 USD or $12.284 CAD
Mar Soybean Meal (per short ton): +$0.40 (+0.15%) to $302.40 USD or $395.40 CAD
Mar Soybean Oil (cents per lbs): -0.29¢ (-0.85%) to 33.78¢ USD or 44.17¢ CAD  
Mar Oats: -3¢ (-0.95%) to $3.10 USD or $4.053 CAD
Mar Wheat (Chicago): +5¢ (+0.9%) to $5.735 USD or $7.499 CAD
Mar Wheat (Kansas City): +2.8¢ (+0.55%) at $4.998 USD or $6.534 CAD 
Mar Wheat (Minneapolis): +0.3¢ (+0.05%) to $5.563 USD or $7.273 CAD
Mar Canola: -1.6¢ (-0.15%) to $10.904/bu / $480.80/MT CAD or $8.34/bu / $367.72/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.

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