Can China make its phase one commitments?
Exports and weather have dominated the news.
China has been an especially important cog in the U.S. soybean complex. China buys 60% of the world’s exportable soybeans. That number changed dramatically in 2018 with the reduction of China’s hog herd due to African swine fever.
But there were other reasons for the decline. China’s demand for U.S. soybeans started to slip about four years ago when China made the decision to increase their soybean purchases from South America, primarily Brazil, and reduce their dependency on U.S. soybeans. The net result was that China slowly reduced their purchases of U.S. soybeans over the next three years. In 2016, China bought 1.35 billion bushels of U.S. soybeans (total imports were at 3.44 billion bushels), 1.02 billion bushels in 2017 (out of 3.46 billion bushels imported), 521 million bushels in 2018 (out of 3.0 billion bushels imported), and with seven weeks left in the 2019 marketing year, China has bought 596 million bushels of U.S. soybeans (out of 3.46 billion bushels expected to be imported).
But what China figured out the hard way is they cannot expect to get deliveries on a timely basis from South America and that South America’s production is more volatile than U.S. production. In other words, they are almost assured to get product from the U.S. in a timely manner, not so from Brazil.
This dilemma brought China back to the U.S. in an attempt to stabilize the delivery of the soybeans and split their purchases closer to 60/40 with 60% Brazil and 40% U.S. This would also help guarantee product being consistently available to Chinese crushers.
As we close out the 2019 marketing year, China has been an overly aggressive buyer of U.S. soybeans. That has been partly due to price and partly due to availability. U.S. soybeans are the cheapest in the world at this point due to higher basis levels in South America. Basis levels in Brazil continue to be strong due to supply. Brazil was an aggressive seller of their 2019 soybeans (due to record production) and currently have very little supply left to market.
The phase one trade agreement signed by the U.S. and China in January might be part of the reason for China buying more product from the U.S., but the way the document is worded, China could have walked away from the trade deal a long time ago. The reason they are buying ag products from the U.S. is more tied to availability and price. This will likely change once Brazil’s next crop of soybeans becomes available. What has been interesting is that China has concentrated purchases of new crop 2020 soybeans and has limited the purchases of 2019 soybeans.
China is expected to import 96 million metric tons of soybeans in 2020. The increase is because of the need for protein to feed their increasing hog herd and to maintain the growth of their poultry and aquaculture production. The U.S. has the chance to supply 38.4 million metric tons of that total.
Corn is a different story though. China has sold close to 36 million metric tons of corn out of reserves in an attempt to stabilize corn prices in their country. This will result in China needing to replenish those supplies. China has also started to dip their toes into buying U.S. corn. Two weeks ago, China purchased 1.3 million metric tons of U.S. corn, followed closely by a 1.7 million metric tons purchase of U.S. corn. If they are trying to replenish their reserves, this is only the tip of the iceberg in corn purchases.
In all, China is in need of a vast amount of ag products, with soybeans, corn, ethanol, and wheat the main products. The U.S. will be the supplier of these products through the fall and winter, but rest assured that once South America’s supplies become available, demand will switch over. But until then, the U.S. should capture most of China’s imports.
As for the market this past week, exports and weather dominated the news.
July 20’s Crop Progress report brought selling pressure to the grains, as the report continues to overestimate crop development and harvest progress, but the average trade estimates for ratings were a little conservative. The average trade estimate had winter wheat harvest progress at 79% complete; it came in at 74%, so quiet a bit slower than anticipated by the trade. Rain in the northern parts of the Southern Plains has delayed harvest activity.
But on the crop rating expectations, the trade was too conservative. Spring wheat conditions came in as expected, unchanged from last week. Traders were looking for corn conditions to drop 1% to 2%, but instead corn conditions were unchanged. What was surprising in the corn rating, all of the major producing states had conditions steady to lower except one: Illinois improved by 2%, but Indiana was unchanged, Iowa slipped 3%, Minnesota slipped 2%, Nebraska slipped 4%, North Dakota slipped 1%, Ohio slipped 4%, and South Dakota was unchanged.
The same played out in the soybeans. Conditions were expected to remain steady or slip 1%, instead soybeans improved by 1%. This was also a surprise when looking at how the major states ended. Illinois did see a huge improvement of 8%, but Indiana was unchanged, Iowa dropped 4%, Minnesota dropped 3%, Nebraska dropped 2%, North Dakota improved by 1%, Ohio down 3%, and South Dakota up 4%.
Corn continues to see selling pressure from weather. Most of the Corn Belt has seen favorable rains fall, which has traders believing corn can take a little warm up in temps for a few days. Soybeans, on the other hand, have seen export interest in each of the last nine days as either China or an unknown destination has come in and bought soybeans. The strong demand for soybeans (led by strong crush margins) has helped soybeans push up against resistance. Technically soybeans are at a fork in the road. Which direction it decides to go will likely continue to influence the market for the rest of July.
Soybeans have almost managed to recover all of its recent setback while corn is at the low end of its trading range, and Minneapolis wheat hit new lows last week. Kansas City wheat is at the low end of its range while Chicago is in the middle of its range. Weather continues to be favorable for corn crop development while spring wheat harvest is right around the corner. Soybeans, on the other hand, remain vulnerable to production issues, especially if the forecasted high-pressure ridge moves in over the next two weeks when soybeans are most susceptible.
Technically, corn is holding above its support line of $3.30 in December while soybeans keep flirting with November $9. A close above $9 could result in a quick run up to recent highs.
The short-term forecast is calling for some intense heat over the weekend and early next week for the Plains and Corn Belt. But with the recent rains and short duration of the heat, traders are not worried about damage. And the six-to-10- and eight-to-14-day forecast has turned negative as well.
The six-to-10-day forecast turned friendly to the Northern Plains as temperatures are expected to be above normal and precipitation below normal. But the Corn Belt is expected to see normal temperatures and above normal precipitation. Perfect weather for the Corn Belt. The eight-to-14-day forecast cools down even more for the Corn Belt but does get drier.
Cattle have traded up to highs not seen since March on the hope and prayer that the much talked about vaccine for the virus works. U.S. food service activity is down 25% to 30% from pre-pandemic, and with 70% of the U.S. red meat having to flow through restaurants, one can see why the cattle market is volatile.
There are two important cattle reports due to be released after the deadline for this article. USDA will be releasing their Monthly Cattle On Feed report and Semiannual Cattle Inventory report on Friday, July 24. The average estimates for the Cattle On Feed report are: On Feed: 100%, Placed: 104%, and Marketed: 101%. The average estimate for the Cattle Inventory report is: All Cattle and Calves: 100%, Total Cows/Heifers Calved: 99%, Beef Cow/Heifers Calved: 99%, Heifers over 500 Pounds: 102%, Beef Heifers Over 500 Pounds: 100%, Steers Over 500 Pounds: 101%, Calves Under 500 Pounds: 102%, and 2020 Calf Crop: 99%.
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