Grain markets are in the green this morning, following Friday’s positive close on news of a trade war deal being found between the U.S. and China.
“There is joy in work. There is no happiness except in the realization that we have accomplished something.” – Henry Ford (American industrialist)
Trade War Phase One is Done (But Will it be Realized?)
Grain markets are in the green this morning, following Friday’s positive close on news of a trade war deal being found between the U.S. and China. The world’s two largest economies have agreed to end their year-and-a-half-long trade war spat by agreed to a Phase One deal. 
Before we get into the details and impact of the Phase One trade war deal agreement, there are other things happening around the agricultural world (I know; hard to believe.). In Argentina, the recently-elected federal government there has hiked export tariffs on corn, wheat and soybean exports.  Taxes on soy oil, soymeal, and soybean exports were raised 5 points to 30% and levies on corn and wheat exports were also upped by 5% to 12%. Exports of international beef sales from Argentina were bumped up 2 points to 9%. Famers and their organizations are inherently upset with the new government, who said during the campaign that they’d work with farm groups first before implementing any new taxes.
Staying in South America, higher soybean and corn prices in Brazil (as mentioned in Friday’s FarmLead Breakfast Brief) are helping international buyers look to American for supplies. Last week, Mexico bought nearly 1.1 MMT of U.S. corn in a single purchase and 1.6 MMT for the week, supporting U.S. corn prices. That said, U.S. corn prices at a port level are still about $30 USD/MT (or 76¢ USD/bushel) cheaper than Brazilian port offers.
Coming closer to home, it’s estimated that there’s over 10M acres of crops in Canada and the U.S. that have not been harvested yet this year. The USDA is no longer sharing weekly crop progress reports, so it’ll be hard to estimate how much of the needle has been moved on Harvest 2019 in the United States. Further, Canadian provincial governments have also stopped their reporting, but before that happened, we know that there was still at least 4M acres unharvested in the Canadian Prairies, including 2.5M acres in Saskatchewan!  Bottom line is that it could be an interesting spring, both in terms of field work that needs to get done and if grain markets believe it warrants additional weather premiums.
What Does the Trade War Deal Include?
Included in the terms of the Phase One deal is China’s commitment to buy at least $40 Billion of U.S. agricultural goods for the next two years, upping purchases by $16 Billion from the 2017 baseline of $24 Billion. Overall, China is planning to commit to buying $200 billion more from the U.S. across agriculture and three other industries: manufacturing, energy, and services. From a timeline perspective of these purchases, those details were not disclosed as both sides felt it would inappropriately distort markets.
On the flipside, the U.S will reduce current 15% tariffs on $120 Billion of Chinese goods introduced back in September from 15% to 7.5%. Further, the U.S. did not proceed yesterday, on Sunday, December 15th with a new set of tariffs on ~$160 Billion of Chinese goods planned. While the deal still needs to be legally vetted, head U.S. negotiator Robert Lighthizer says that the deal meets all WTO requirements. It’s expected that the deal will be officially signed in January 2020.
Some talking heads are doubtful that the amount of agricultural purchases promised will ever be realized.  Since this trade war deal doesn’t have specific timelines associated with the purchases and there’s no hard language of “you must buy, or else”, China could arguably get away with actually not buying as much as promised. The hope is that China will start buying a few more U.S. soybeans immediately and get volumes back to their pre-trade war levels (AKA the grey line in the chart below). Through Week 14 of the 2019/20 crop year, U.S. soybean exports are tracking 22% higher with 17.43 MMT shipped out.
All of the above in mind, there are plenty of players, in agriculture markets and others, who will only believe in this trade war deal once it’s signed.  Further, there’s been other analysis that points to an increased economic rivalry between the U.S. and China, with one looking to hold on to its status as global superpower, and the other being a challenger, proving “to be very skillful in manipulating the multilateral system that governs global trade.”  The doubters also point to American trade deficits with China and limited language in the Chinese state media about the $200 Billion of American goods and services purchases. 
Trade War Deal to Help Soybean, Canola Prices?
What’s hard to ignore, however, is that soybean and canola prices have been supported by domestic demand volumes. Through Week 18, Canadian canola domestic demand is running about 20% ahead of last year with 3.7 MMT spoken for. This is somewhat making up for the export column, which is running 6% behind last year’s pace with 3.25 MMT sailed so far in the 2019/20 crop year.
In the U.S., later this morning we’ll get NOPA’s crush number for the month of November. Ahead of their report, the average analyst’s guesstimate was that the NOPA facilities (which represent 95% of all soybean processed in the U.S.), used 172.032M bushels of soybeans last month (or 4.682 MMT if converting bushels into metric tonnes). If realized, it would be a new record for November, a 3% jump year-over-year, but a 1.9% dip from the 175.4M bushels used in October (which was a record number for any month, let alone October).
Also, with the trade war deal in place, fund managers were busy covering their short positions and rolling January contracts into later contracts (i.e. March 2020), helping soybean and canola prices find some legs to end the week.  That said, we’re halfway through the month of December now and seeing soybean and canola prices trying to inch their way towards some seasonal trends. While average cash canola prices for spot movement are about 50¢ CAD/bushel behind where we were at this time a year ago, through last winter, the market topped out about a $1 higher. This might suggest that canola prices have some room to run higher in the coming weeks.
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 = $1.3258 CAD, $1 CAD = $0.7543 USD)
Mar Corn: +6¢ (+1.55%) to $3.87 USD or $5.076 CAD
Mar Soybeans: +8.3¢ (+0.9%) to $9.298 USD or $12.194 CAD
Mar Soybean Meal (per short ton): +$2.70 (+0.9%) to $304 USD or $398.72 CAD
Mar Soybean Oil (cents per lbs): +0.32¢ (+0.95%) to 33.19¢ USD or 43.53¢ CAD
Mar Oats: +4.8¢ (+1.6%) to $3.02 USD or $3.961 CAD
Mar Wheat (Chicago): +9¢ (+1.7%) to $5.415 USD or $7.102 CAD
Mar Wheat (Kansas City): +8.3¢ (+1.85%) at $4.51 USD or $5.915 CAD
Mar Wheat (Minneapolis): +10.8¢ (+2.05%) to $5.365 USD or $7.037 CAD
Mar Canola: +5.2¢ (+0.5%) to $10.714/bu / $472.40/MT CAD or $8.169/bu / $360.18/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.