Adjusting for 2019 Corn and Soybean Exports
Grain markets started 2019 without much data. That is, the U.S. government remained in shutdown and, as a result, the USDA couldn’t publish their scheduled datasets on January 11th, which included the monthly WASDE report. In this report, we would’ve been looking for updates on South American production estimates as well as an upgrade for U.S. corn exports, but a downgrade for soybean exports.
No single factor had a bigger impact on grain markets in 2018 than the trade war between the U.S. and China. Looking forward, there are less than 45 days left in the truce between Beijing and D.C. for implementing more import tariffs.
U.S. President Trump continues to tweet out optimism for a deal being found but the deal likely has to include concessions from China on things like trade imbalances and intellectual property abuse. Will they do it though? As long as there is the distance on the table between the two sides, it’s likely that grain markets will assume that a deal to end the trade war won’t get done.
Thus, if we try and shake the crystal ball to get a view on grain markets in 2019, it’s easy to conclude that direction will largely be a function of the usual players: acres planted and Mother Nature. However, the newest variable – a trade war and the potential for global economic downturn – will have more of say, especially to start the calendar year out.
This genuinely means that there is quite a lot of market uncertainty to start out the new calendar year. With uncertainty comes volatility. And with volatility comes opportunity (from a trading standpoint). However, this also means rushed risk to the downside.
Macro Headwinds Carrying Over From 2018
One of the biggest factors often overlooked in grain markets is the macroeconomic influence of monetary policy. This is the strategy implemented by a central bank – namely the U.S. Federal Reserve – to help maintain stability in markets by influencing the amount of money and credit in the U.S. economy. For 2018, this monetary policy in the U.S. was marked by several interest rate increases.
Going forward into 2019, most economists agreed that the Fed must avoid a recession by keeping inflation in check while allowing for modest growth. There are a lot of factors suggesting the U.S. economy is tracking well to start 2019, but bond yields and stock markets are suggesting a higher risk of continued to depressed growth. This is especially true as other international economies have slowed.
On this note, the Wall Street Journal recently reported the at a major economic conference held in Atlanta, “a widely held view was that a deceleration in growth is inevitable thanks to rising global threats, Washington’s instability, and a fading boost from the tax cuts.”
If you start to see economic growth slowing, then it’s very likely that the likes of the Fed won’t continue their trend of increasing interest rates. If they do ignore some of the bond and stock market indicators, and interest rates continue to rise, the impact on farmers is notable.
Re-Adjusting Expectations of Soybean Exports
Soybean prices continue to fall on the lack of fundamental data to trade off, including the news that China’s soybean imports in December dropped 40% year-over-year to just 5.72 million metric tonnes (MMT). For the full 2018 calendar year, Chinese soybean imports fell for the first time since 2011, to a little more than 88 MMT (down nearly 8% year-over-year).
The drop is obviously stark for U.S. soybean exporters and growers. The question remains is if, should the trade war waters recede, will the brand as a reliable supplier be tarnished for good? Explicitly, it’s not like China is going to start buying American soybeans the moment that the 25% import tariffs are lifted. This is especially true when you factor in that the South American harvest (and thus export campaign) is picking up steam.
Of note for Brazil though is some dryness carrying over from December into January, especially in southern parts of the country. Those beans that were planted super early (and, thus, expected to be harvested early) likely will see below-average numbers on the combine yield monitors. CONAB is already acknowledging this, downgrading their estimate of the Brazilian crop to 116.9 MMT. My gut today says that this Brazilian crop could get smaller as the harvest goes on.
Worth noting, however, is that soybean exports out of Brazil this month will eclipse the previous record for the month of January of 1.5 MMT, but it won’t eclipse 2 MMT. Brazil definitely remains as the cheapest source of soybeans for Chinese crushers, but trade wires have been relatively quiet over the past few weeks.
On that note, while Chinese and Brazilian trade data continues to be reported, we can only go off information through Week 15 of the U.S. corn and soybean crop year, through December 13th, 2018. If you’re doing the math, that’s over a month ago.
From the data available, we can tell that U.S. soybean exports (not sales, but actual shipments) are tracking 40% behind last year’s pace. However, as you can tell from the table below, the decline is completely attributed to China not being a buyer this year.
Since China doesn’t buy a lot of soybeans from America in the first half of the calendar year (instead buying from South America), even if the trade war ends, it’s unlikely that the pace of U.S. soybean exports will accelerate to significantly to meet the full-year target from the USDA. In fact, there has been some buzz that China has been buying boats of soybeans from Brazil for May-June delivery as a hedge against trade talks falling apart in Beijing this week.
Staying in China, African swine fever continues to spread and there are concerns that Beijing is not in front of the situation (or, at least not sharing information) after a dead pig washed up on a beach in Taiwan. In the past 5 months, about 100 cases of the disease across 23 Chinese provinces have been confirmed and nearly 1 million animals have had to be culled. 
While there is concern of the disease spreading across the country’s most popular meat, the industry is about 700 million animals strong and it has a long ways to go before likely putting too much of a dent in demand.
Factoring in Acres, Cycles of Corn Prices
Much like soybeans, I’m expecting the USDA to update their forecast for corn exports, albeit to the upside (versus to the downside for soybean exports). Through Week 15 of the 2018/19 U.S. corn crop year, exports are tracking 76% higher year-over-year
One of the things we should definitely be aware of for 2019 grain markets are the usually cyclical patterns. For example, in 5 of the last 6 years, the highs in corn prices have been found between mid-May and mid-July. The exact moment that high occurs is certainly a condition of Mother Nature’s provision of good or bad growing conditions.
Considering that American corn is the cheapest in the world, this is a positive, slightly-bullish table. But the market is also thinking about more corn acres planted in 2019. Currently, we’re expecting the area planted with U.S. corn in 2019 will jump up above 93.5 million acres. Conversely, we’re expecting 2019 U.S. soybean acres to drop below 84 million.
If we take the calendar year a bit further, we know that the best corn prices aren’t usually seen during harvest time. More specifically, September and October aren’t usually the best times to be contracting, but rather that’s when you should be trying to deliver on contracts made during the previous months.
The main conclusion here is that if you see the market starting to push higher in early-to-mid-May, then you should be selling into that strength! However, one has to keep in mind that, by that time, the market will also be pricing in a bigger acreage number. While it could be argued that this is already happening, it’s important to note the trends in markets not too heavily impacted by the current trade war environment.