The first full week of trading in 2020 focused on the waiting game. The market waited patiently last week to see what the U.S. Department of Agriculture had to say in its first Final Crop Production report.
The report was expected to be friendly to grains, but it appears that maybe there was too much optimism. We are deeming this report as the first final as it is likely USDA will have an asterisk on the production estimate because of the unharvested corn and soybeans left in North Dakota, South Dakota, Minnesota, Wisconsin, and Michigan.
But the trade has not just been looking at the USDA report, it is also waiting on the China/U.S. Phase One trade deal details. On Wednesday, Jan. 15, Chinese officials, along with President Donald Trump are expected to be in Washington, D.C., for the signing of the Phase One trade deal that primarily deals with agriculture.
The talk on the street has China agreeing to buy between $40 billion and $50 billion in U.S. ag goods per year. This would be much higher than the $29 billion previous largest amount they have ever bought from the U.S. To accomplish this task, China will have to look at importing some of almost every major product the U.S. produces (wheat, corn, dried distiller's grains, ethanol, soybeans, sorghum, rice, cotton, cattle and hogs just to name a few). But that idea was somewhat squashed when China made the comment that they will not increase their quotas of low tariff imports on U.S. wheat, corn and rice. That takes large amounts of those products off the import list.
China also made the statement that they are not going to move forward with their 10% ethanol mandate because of the shortage of domestic corn supplies. This takes ethanol off that list as well.
The details of the trade agreement are expected to be released sometime after the signing. But it is likely no specific amounts or amounts of products will be mentioned in an attempt to not distort prices. This will result in a lot more speculation as to the makeup of the product mix.
Middle East concerns
There had been some selling tied to tension in the Middle East and the uncertainty as to what will happen. Over the first weekend of January, tensions flared with Iran threatening retaliation while Iraq's parliament voted to remove all U.S. military presence from the country. But cooler heads did prevail, as soybeans were the first market to firm, followed closely by Minneapolis and Kansas City wheat. Chicago wheat and corn never traded in the black. Positioning ahead of the Jan. 10 USDA reports and the Jan. 15 signing of Phase One trade deal with China added support.
The grains started off the Jan. 7 session on the defense with early selling tied to Middle East concerns as well as from reports that China will not increase the low tariff import quotes for wheat, corn and rice. That means China will only be importing 9.6 million metric tons of wheat, 7.2 million metric tons of corn, and 5.32 million metric tons of rice at low tariff levels and the rest will be at higher levels. That could limit the total amount of wheat, corn, and rice China will import from the U.S. Losses were trimmed late in the session because of profit taking and position squaring ahead of the Jan. 10 Crop Production report. Trading volume continues to be thin as most traders remain absent from the market while waiting for Friday's report and the details of the Phase One trade agreement before coming off the fence.
The grains opened the Jan. 8 overnight session mixed with Minneapolis wheat soft, the winter wheat exchanges firmer, while corn and soybeans were weaker. Early selling came from Middle East concerns. Iran staged a retaliation strike overnight, but it appears the strike was more of a show of force than one of escalation. By mid-session the markets had disregarded the strike and returned to trade current issues. Corn was stung by reports China was abandoning their 10% ethanol mandate, which was expected to kick into play this year. Late session activity returned to position squaring ahead of Friday's report.
The grains pushed higher in the Jan. 9 session, but it was only the wheat exchanges that were able to hold onto gains. Wheat continues to see light at the end of the tunnel from lower planted winter wheat acreage and from production concerns as all of the six major exporting wheat countries are seeing some sort of potential production issue. Corn and soybeans had their eye on USDA's reports and the Jan. 15 signing of the China trade deal. South America weather is also giving corn and soybeans fits; although weather forecasts do not appear to be troubling for Brazil and Argentina, there are regions in both countries that are experiencing growing concerns. Soybean harvest has started in the northern regions of Brazil and so far, results have been average to disappointing. This region is also looking at very disappointing yields in the first corn crop.
Cattle a bright spot
Cattle have been the bright spot of the commodities this week as each retracement gets met with heavy buying. Both the live cattle and feeder cattle markets are at the high end of their ranges, and although most analysts have been calling for a top, cattle keep rolling forward. Strong domestic demand (due to a strong economy) and firm cash bids continue to help the live cattle market. Tight supplies of marketable feeder cattle keep lending support to the feeder cattle market. Abundant feed supplies of low-quality grain have cow calf operators backgrounding their calves in an attempt to use up the feed. Cattle still have room to the upside, but these are very attractive levels to be taking advantage of if you have cattle ready to market.