Rural Voice January 15, 2020

As we came into the new year there were two key events scheduled to occur in January that could be impactful to the grain markets.  These were the long running US / China trade agreement signing and the January 10th USDA reports. 

In regard to the US / China trade agreement the new year brought media reports that were moving rather rapidly and market prices were volatile as political situations developed.  Shortly after the US military made the strike in Iraq against the Iranian military general Soleimani, it was reported that China stated that it would not sign the US trade deal because of the action taken.  From this announcement the grain markets traded lower, just to recover again when China shortly thereafter announced that they would sign the agreement nevertheless.  The agreement when ratified would be for trade of a massive volume of goods, estimated to be between 40-50 billion dollars of US products.  The details of the trade deal, once signed, will likely not be made publicly available.  The Chinese government would be hesitant to make declarations about the commodities and other goods that they are intending to purchase, as such details would rally the prices of these goods immediately in the futures markets.  While it is not expected that such details would be released, some movements within China are indicative of their future needs.  China, for many years now, has had a desire to increase ethanol production and blending in their gasoline in an attempt to lower air pollution in their citys.  Recently they announced that they are planning to delay this ethanol policy, which was to require 10% ethanol blend in gasoline if it was enacted.  The reason cited for this change is the lack of domestic corn supplies sufficient to produce such ethanol volumes.  Chinese state owned reserves are down sharply from years past when the government was a large holder of corn.  The government of China reports that it owns about 56 million tonnnes of corn, down from the about 200 million tonnes that they once owned in temporary reserves in 2017.  Total China stocks, including private corn ownership, is reported to be down about 27 million tonnes from peak inventory levels a few years ago. 

From the ethanol discussion in China, market anticipations are for China to need fewer imports of corn and potentially higher volumes of ethanol, if they are to tackle their air pollution problems in their urban centers.  Not only does China have a great need to tackle air pollution, but they remain in need of meat imports, as their hog herd has been diminished greatly due to disease, as has been well publicized.   

Finally reaching an agreement on Phase 1 between China and the US should be good longer term for market prices through trade; that is as long as the deal holds, and China sticks to the deal.  US media has reported that US tariffs on Chinese goods will remain in place until at least the US election this upcoming fall and tariffs will only be reduced as long as China complies with the terms of the accord.   Such terms include the protection of US patents which have not previously been protected in China.  Furthermore the US treasury secretary has asserted that US tariffs on Chinese goods will remain until a Phase 2 trade deal is reached.  What details Phase 2 would entail are certainly unspecified as we still don’t seem to have a clear indication of what the Phase 1 trade agreement will entail.  This uncertainty has lead some market watchers to believe that the signing of the Phase 1 may be symbolic only, and trade progress is still elusive. 

The USDA January 10th reports were widely anticipated and viewed to be potentially large market movers.  This expectation came from the thought that the USDA would recognize the effects of last fall’s late season freeze, the large amount of unharvested acres and harvest losses in their numbers, therefore lowering production estimates.  This of course was the expectation from the producers side and some farm analysts.  The report numbers came out disappointing for this bullish crowd.  Along with the report numbers, the USDA released a special note with the report, stating that the acres that were still unharvested were still anticipated to be harvested, and therefore were included in production numbers.  This procedure is in keeping with their regular policy, however they did make special mention that there were more corn and soybean acres in the field than normal.  From this the USDA did mention that they would be resurveying the 5 Northern states that had been greatest affected.  These include Michigan, Minnesota, North Dakota, South Dakota and Wisconsin. 

US ending stocks of corn were reported higher than the average trade guess in the January report, but ending stocks are still falling and are the lowest expected in 3 years.  Over the past 3 years ending stocks have been in excess of 2 billion bushels in the US and current expectations are for endings stocks to be below 1.9 billion bushels.  While this drop in stocks is not overly significant, it may be a catalyst for a move higher with increasing demand and the potential for cropping concerns this upcoming year. 





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