The markets have seen a few letdowns over the past week. The first uneventful event came from the U.S. Department of Agriculture's January Final Crop Production report. The report was expected to bring clarity to the 2019 production year, but instead it only muddied the waters. The reports were a nonevent as although most of the estimated numbers were above trade expectations, they were close to the previous month's estimate.
After the dust settled one would have to classify the December Quarterly Grain Stocks estimate, Final Crop Production report, and Winter Wheat Seedings estimates as friendly to wheat. The quarterly grains stocks were below expectations and year ago levels (indicating better demand). The final production estimate put 2019 ending stocks close to unchanged from the previous month. Winter wheat acreage was slightly above expectations, but 1% below last year and the second lowest acreage on record. The most interesting numbers from the winter wheat acreage estimate was the breakdown by type. Hard red wheat acreage is estimated to decline 1% while soft red wheat acreage is expected to increase 8%.
As for the other crops, corn's quarterly grain stocks estimate was neutral, coming in below expectations and last year's estimate. The crop production estimate was negative as the decrease in acreage was overshadowed by the increase in yield (resulting in higher production). Soybean's quarterly grain stocks estimate was neutral, coming in above expectations but sharply below the previous year. But the friendliness of the stocks estimate was more than overshadowed by the negative production estimate. A cut in soybeans acreage was more than offset by the increase in yield, which resulted in stocks being unchanged from the previous month, but sharply higher than expectations.
The next big event for the markets was the signing of the Phase One trade deal with China. The signing was to be followed up with the release of the details of the agreement, which the market was looking forward to as up until the signing there had only been speculation of what the trade deal could encompass.
The U.S. and China signed the deal and the details were close to the rumors, maybe a little light the first year (due to late start) and a little larger in year two. One aspect that most have not addressed is that this is only a two-year agreement. What happens at the end of the two years is not defined. The mile-high view of the agreement has China agreeing to purchase an additional $200 billion of US products over 2017, which is the baseline year. In 2017, China bought $130 billion in U.S. products and $56 billion in services. The $200 billion increase is to be broken up between manufacturing ($77.7 billion), energy ($52.4 billion), services ($37.4 billion), and agriculture ($32 billion).
China has pledged to purchase $36.5 billion in ag products in 2020 and $43.5 billion in 2021. But the issues are no one believes either side will keep up their end of the bargain. There are escape clauses built into the agreement that states either party upon written notice can terminate the deal at any time.
Either way, China has the power and capacity to honor the trade deal. China imports over $150 billion of ag goods yearly. The largest amount of soybeans imported was 96 million metric tons and even last year's imports of soybeans totaled close to 88 million metric tons. Analysts have estimated that to meet the terms of the deal China would need to import close to 45 million metric tons of soybeans from the U.S., which would be slightly over half of their soybean needs for the year. The other half would come from Brazil. That would be a workable scenario.
Probably the most disappointing and likely bearish point in the agreement is that current tariffs remain in place and will remain until the Phase 2 agreement is completed. That means the U.S. still has in place a 25% tariff on $250 billion of Chinese goods and 7.5% tariff on $120 billion of goods. China continues to have a 15% tariff in place on $110 billion of U.S. goods, along with quota tariffs on soybeans and pork. This could limit the amount of product purchased by China.
Any way you look at the trade deal, it is friendly to U.S. agriculture. At worst case, if China only returned to importing at the same levels as 2017, it would be an increase from this year. In all the market has taken a "buy the rumor, sell the fact" type attitude towards the Chinese trade deal. If both countries take their commitments seriously, it has the potential to increase demand for all U.S. ag products. Once the dust settles, cooler heads will prevail. Right now the validity of the trade deal lies in China's hands. If they want to show that they are truly committed to making the deal work, coming in and buying a large jag of U.S. ag commodities would go a long way in calming the market's nerves.
On a more positive note, the U.S.-Mexico-Canada Agreement trade deal made it through the Senate and is one step closer to approval.
The cattle markets have taken a bit of a break in their rally. The lack of a cash trade and supply concerns have put pressure on the live cattle market. But it doesn't appear that the live cattle market has put in a top as of yet. The February and April contracts are flirting with contract highs. And with the stock markets (Nasdaq, S&P 500, and DOW) putting in record closes daily, it is likely domestic demand from beef will continue to remain strong. The lack of exports out of Australia (the third largest exporter of beef) will likely result in some exports to filter down to the fourth largest exporter of beef (U.S.).
The feeder cattle market outlook is not as rosy (short term) as live cattle. If the grains catch fire and continue to push higher, feeder cattle will fade. An increase in cattle movement as backgrounded calves start to filter into feedlots will add to the pressure.