Last week in the grains was a little disheartening to say the least. The trade, along with a lot of analysts, were expecting the grains to push higher after the release of the Final Crop Production report. That did not happen as production cuts were not as deep as expected.
Next up was the signing of the phase one trade deal. Surely the market would rally after we saw how much product China would be buying from the U.S. over the two years of the trade deal?
But the market had a different idea as the grains retreated after the signing due to the lack of buying interest and concerns that China would or could not honor the specifics of the trade deal.
But with the completion of the phase one China trade deal and Congress's passing of the U.S.-Mexico-Canada Agreement, President Donald Trump has turned his attention away from China and toward the European Union. The trade deal with the EU is going to be a dog fight.
The EU is willing to sit down and talk trade, but they want ag off the table. That is not acceptable to the U.S. When Trump was in Davos, he talked about how he wants a trade deal completed with EU before the election, and he is threatening tariffs on autos to get his way. While at the Economic Summit in Davos, Trump and the economic commissioner for the EU met and made a joint statement indicating a trade deal could be accomplished in a few weeks.
The biggest issue the EU sees is having tariffs placed on EU auto imports into the U.S. It would not only hurt the auto industry in the EU, but also in the U.S., as it would result in higher priced vehicles as dealerships would have to pass the extra cost onto the consumer.
In addition, putting tariffs on EU autos as you are going into an election could be an issue. As for the the EU not wanting to include ag in the talks, the U.S. and EU had already knocked out an ag trade agreement under the Obama administration and the EU does not want to open their borders to a lot of GMO products as the EU is very anti-GMO.
In other trade news, the U.S. Trade Office has filed notice in the Federal Registry to lower the 15% import tariff on $120 billion of Chinese goods to 7.5% on Feb. 14. The 25% tariff on $250 billion remains intact.
Weather has turned to be a little more bearish as good rains have continued to cover a majority of Brazil and Argentina. Forecasts are still looking for hot and dry conditions to return in the central to southern regions of Brazil and southern Argentina. This would create some production issues, but if the rains continue throughout this week, damage would be limited.
The issue is more of harvest delays for the north. The delay in soybean harvest is trickling down into the corn crop as the rain is also delaying the planting of their second corn crop (saferina).
Harvest has started in the northern regions of Brazil with 2% of the crop reported harvested. So far, early harvest results have the crop coming in average to a little lower than average, but it is early. Most analysts are expecting the yield in Brazil to improve once harvest activity moves into the central and southern regions of the country.
Soybean production might not set a new record for Brazil due to the recent dry conditions in the northern regions, but it should be a little better than average.
The biggest question in Brazil continues to be the size of the corn crop. The drought has severely reduced the potential size of the first crop corn, and the delay in the soybean harvest has resulted in a later than desired planting of the second corn crop. Brazil has been an aggressive seller of corn over the past year due to last year's above average production. Brazil's aggressive marketing of corn resulted in a major slow down in U.S. exports. That slow down has spilled over into this year, but mainly now due to quality concerns in the U.S. corn crop (low test weight).
In the U.S., rain is expected in the Southern Plains, which will certainly help the winter wheat crop improve. The U.S. winter wheat crop has had a couple strikes against it right out of the gate. Winter wheat planted acreage was estimated at 110-year lows and the second lowest on record. On top of that, winter wheat conditions continue to decline in most of the major winter wheat producing states. The declines in the "good to excellent" category have moved all the way down to the "poor to very poor" condition category.
The grains continue to waffle around as the lack of Chinese interest continues to fan the talks that China will not honor the signed trade deal. Or maybe this is all part of the plan for China to pressure prices enough to bring the U.S. soybean and wheat prices more in line with world prices.
China will likely return to the U.S. markets next week after the Chinese New Year holiday ends. But more importantly, the U.S. Department of Agriculture will start to show their hand as to the potential size of the China trade deal once the February Crop Production report is released.
Technically the grains (wheat and soybeans) are not sitting in a good spot. Both wheat and soybeans need to see firmer closes or they could be turning their sideways to up trends to a down trend.
Fundamentally the markets have more good news than bad. It might take until the February Crop Production report to see those results.