The coronavirus is still front and center and a major concern in China, but progress is being made.
If and when traders believe the coronavirus has peaked and has started to become under control, the markets will see strong buying activity. But up until that level of comfort occurs, traders will likely remain on the safe side of the ledger.
Rumors are circulating that China has a potential vaccine, or at least one that is showing promise in cutting the duration and severity of the virus.
Monday, Feb. 3, was the first time the Chinese stock market had traded since Jan 23. The Shanghai composite opened sharply lower but did rebound to close 7.7% lower on the day. China made the hit easier to tolerate by making numerous supportive measures before the trading day started. Feb. 4’s composite opened down 2.2% but then recovered to trade steady.
Bloomberg reported China is considering asking for flexibility from the U.S. regarding the phase one trade agreement obligations due to the coronavirus. The U.S. trade representative’s office has not received any such request to date. There is a clause in the agreement that states in the event that a natural disaster or other unforeseeable event occurs that delays either party from complying with the implementation of the terms the parties need to consult.
Traders in the U.S. have been impatiently waiting for some sort of export announcement that China has come in and bought a major amount of U.S. goods. That likely is not going to happen in the short term as the country tries to get a grip on the virus. But just because they are not buying the product now doesn’t mean they won’t buy more in the near future when stocks decline even further. And when product is needed in a short period of time, importers always come to the U.S. to buy.
Now with the market impact of the black swan event declining, the market can get back to the real issues at hand. The first is slow demand. It is unlikely China will return to the U.S. export market in the short term. Although the virus is getting under control, China still has two-thirds of the country on holiday as that much of the economy remains closed through the week. Once China is back to working full days, we could expect to see an export sales announcement.
The main attention in the market has been focused on crude oil. Crude has finished with losses nine out of the last 10 sessions and is now finally starting to trade with gains. The drastic projected decline in demand in China due to the coronavirus has grabbed OPEC’s attention. They are calling a meeting and talking about cutting production by 500,000 barrels per day. Russia is against the decline, but most of the other countries seem to be behind the idea. There are reports China’s crude oil demand has already declined 20%.
With the recent sharp decline in crude oil and now that spring is hopefully right around the corner, producers should look at covering fuel needs in the short term. Consider buying the physical commodity or buy June crude oil futures to cover potential needs.
In other world news, Brexit occurred Jan. 31. Now the EU and UK will spend the rest of the year formalizing the split. This also makes it possible for the U.S. and U.K. to start official trade negotiations. But first the U.K. will lay out its demands for a trade deal with the European Union.
In South American news, Brazil’s conditions continue to be better than expected as timely rains have continued to fall over much of the country. This has led most analysts to increase the potential size of Brazil’s crop. A few more timely rains through February will likely result in further increases in estimates. Currently the U.S. Department of Agriculture is estimating Brazil’s production at 123 million metric tons with most expecting production estimates to increase to 125 million metric tons.
Argentina, on the other hand, continues to see concerns as hot and dry conditions, which has analysts questioning the potential size of the crop. Rains continue to be hit and miss over much of the region. But if forecasts hold and the forecasted rains materialize, the soybean crop in Argentina could be average. Currently their corn is rated 59% good/excellent while the soybeans are 65% good/excellent.
Rumors hit the soybean complex late in the week that China was in and bought South American soybeans at a lower price than the U.S. can offer. This news resulted in the soybean complex to fade its gains.
Reports had China importing 3.09 million metric tons of soybeans from the U.S. in December, pushing the year to date total for 2019 to 16.9 million metric tons versus 16.6 million metric tons in 2018 and 32.8 million metric tons in 2017. In total, in December, China imported 9.8 million metric tons of soybeans pushing the total for 2019 to 88.9 million metric tons, the second highest on record.
The third Market Facilitation Program payment should have or will hit your accounts soon. USDA reported the payments would go out at the end of the week of Feb. 3rd.
Speaking of the Farm Service Agency, there are numerous program sign ups taking place right now. The most important sign now is for the 2019 ARC/PLC program. If you aren’t signed up by March 15, you will automatically be enrolled in PLC and will not receive a 2019 payment. Once you are signed up for 2019, then you can the paperwork to sign up for the 2020 program. 2020 will mirror your choices for 2019. Starting in 2021, producers will have the flexibility to pick and choose programs.
FSA is also the place to sign up for WHIP+ but hold off on signing up for that program as you should be concentrating ARC and PLC first. There are also rumors that changes will be made so the WHIP+ sign up will be easier. There is also no deadline yet for WHIP+, so it would be best to wait and see the details of the program before signing.
On Feb. 11, USDA will release their monthly crop production estimate. The February report is usually a nonevent as most of the major news should have come out in the January report, and USDA waits until after the Ag Outlook forum to get deep into the new crop numbers. However, this month’s estimate is the first one after the signing of the phase one trade deal. USDA has said the trade deal will be reflected in the report. Now not all of the numbers will be released in this report, but it should show an increase in demand and a decrease in ending stocks. USDA is preparing a white paper to explain how they are going to handle the phase one trade deal details.
The U.S. grains have traded down to major support lines, with wheat and soybeans so far taking the biggest hit from the lack of China buying. Corn has started to see strong exports to Mexico, Japan and South Korea. Hopefully those destinations will continue to be aggressive buyers. U.S. corn remains the cheapest in the world. February is the perfect month to see that rally as this is the month that sets the spring revenue prices for crop insurance.
Cattle was under pressure this past week with some of the selling tied to demand concerns because of the coronavirus. Although recent cattle reports have been friendly, cattle have struggled. Cash bids remain above futures which is a sign of tight supplies, but technicals have turned negative due to heavy fund liquidation.